Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Complex Orders, 53230-53234 [2014-21250]
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Federal Register / Vol. 79, No. 173 / Monday, September 8, 2014 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72957; File No. SR–CBOE–
2014–015]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Relating to
Complex Orders
September 2, 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 August
19, 2014, Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
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 related to complex orders. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
rules related to complex orders to: (i)
Simplify the definitions of the complex
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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order types that may be made available
on a class-by-class basis and remove
references to certain specific complex
order types that will no longer be
defined; (ii) with respect to complex
orders in open outcry, set forth
applicable ratios and order ticket
requirements for an order to be eligible
for complex order priority within
applicable priority rules; and (iii) with
respect to complex orders in open
outcry, make explicit the priority
applicable when there are other
complex orders or quotes represented at
the same net price, whether such other
orders or quotes are in the complex
order book (‘‘COB’’) or being
represented in open outcry.
First, with respect to definitions, the
Exchange proposes to amend Rule 6.53
to remove the definitions of spread
order, combination order, straddle order
and ratio order and replace them with
a more general definition of a complex
order (which includes a stock-option
order and a security future-option order)
to simplify the descriptions of the
complex order types that may be made
available on a class-by-class basis. The
proposed definition of a ‘‘complex
order’’ is any order for the same account
as defined below:
• A ‘‘complex order’’ is any order
involving the execution of two or more
different options series in the same
underlying security occurring at or near
the same time within an applicable ratio
that may be determined by the Exchange
and for the purpose of executing a
particular investment strategy.
• A ‘‘stock-option order’’ is proposed
to be defined as an order to buy or sell
a stated number of units of an
underlying stock or a security
convertible into the underlying stock
(‘‘convertible security’’) coupled with
either (a) the purchase or sale of options
contract(s) on the opposite side of the
market representing either (i) the same
number of units of the underlying stock
or convertible security, or (ii) the
number of units of the underlying stock
necessary to create a delta neutral
position, but in no case in a ratio greater
than an applicable ratio that may be
determined by the Exchange (where the
ratio represents the total number of
units of the underlying stock or
convertible security in the option leg to
the total number of units of the
underlying stock or convertible security
in the stock leg) or (b) the purchase or
sale of an equal number of put and call
option contracts, each having the same
exercise price, expiration date and each
representing the same number of units
of stock as, and on the opposite side of
the market from, the underlying stock or
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convertible security portion of the
order.3
• The purposed rule change moves
the definition of a ‘‘security futureoption order’’ from Rule 1.1(zz) to Rule
6.53 so that all definitions of the various
types of complex orders are located in
the same place within the rules.4
This proposed complex order definition
is in part modeled after the definition of
a complex order (including a stockoption order) already contained in Rule
6.53C(a). The Exchange proposes
conforming changes to Rules 6.9
(including Interpretation and Policy
.03), 6.42, Interpretation and Policy .01,
6.45(e), 6.45A(b)(ii), 6.45B(b)(ii), 6.48(b),
6.73(c), 6.74(d)(iii) and 8.51 to
harmonize these rules with the
proposed changes in Rule 6.53 to
consistently reference the proposed new
3 Rule 1.1(ii) currently defines a ‘‘stock-option
order’’ as an order to buy or sell a stated number
of units of an underlying or a related security
coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market
representing either the same number of units of the
underlying or related security or the number of
units of the underlying security necessary to create
a delta neutral position or (ii) the purchase or sale
of an equal number of put and call option contracts,
each having the same exercise price, expiration date
and each representing the same number of units of
stock as, and on the opposite side of the market
from, the underlying or related security portion of
the order. The proposed rule change deletes this
definition and references the proposed definition in
Rule 6.53 to eliminate the confusion of having two
separate definitions. The current definition and
proposed definition are substantially similar.
However, the Exchange believes the language in the
proposed definition is more consistent with the
language in other rules, including Rules 6.53C
(related to electronic handling of complex orders)
and 6.80 (related to order protection, which relates
to the Options Order Protection and Locked/
Crossed Markets Plan, also commonly referred to as
the Options Distributive Linkage Plan).
4 Rule 1.1(zz) defines a ‘‘security future-option
order,’’ which is deemed a type of Inter-regulatory
Spread Order as that term is defined in Rule 1.1(ll),
as an order to buy or sell a stated number of units
of a security future or a related security convertible
into a security future (‘‘convertible security future’’)
coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market
representing either the same number of the
underlying for the security future or convertible
security future or the number of units of the
underlying for the security future or convertible
security future necessary to create a delta neutral
position or (ii) the purchase or sale of an equal
number of put and call option contracts, each
having the same exercise price, expiration date and
each representing the same number of the
underlying for the security future or convertible
security future, as and on the opposite side of the
market from, the underlying for the security future
or convertible security future portion of the order.
Rule 1.1(ll) defines an ‘‘Inter-regulatory Spread
Order’’ as an order involving the simultaneous
purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory
jurisdictions at stated limits, or at a stated
differential, or at market prices on the floor of the
Exchange. The proposed rule change deletes the
definition in Rule 1.1(zz) and references the
definition in the proposed new location in Rule
6.53.
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definition of a complex order.5 As a
result of the proposed changes to Rule
6.53, the Exchange proposes to update
related cross-references in Rules 6.53,
6.53C, Interpretation and Policy .08,
6.74(d)(iii), 7.12(b)(i)(E), 24.A.5 and
24B.5.6 The Exchange notes that the
‘‘applicable ratios’’ referenced above
that may be determined by the Exchange
are or are proposed to be further
described in various other Exchange
Rules (e.g., Rule 6.53C with respect to
electronic trading and Rules 6.45, 6.45A
and 6.45B with respect to open outcry
trading (proposed changes discussed
below)).
Second, with respect to complex
orders represented and executed in
open outcry, the Exchange is proposing
to amend Rules 6.45 (pertaining to the
priority of bids and offers and allocation
of trades in non-CBOE Hybrid System
classes), 6.45A (pertaining to the
priority of bids and offers and allocation
of trades in equity options traded on the
CBOE Hybrid System) and 6.45B
(pertaining to the priority of bids and
offers and allocation of trades in index
and ETF options traded on the CBOE
Hybrid System).7 The proposed changes
set forth applicable ratios and order
ticket requirements for complex orders
to be eligible for complex order priority
when represented and executed in open
outcry.8 Currently, Exchange and/or
5 The proposed rule change also deletes the
paragraph lettering from the order type definitions
and puts the order types in alphabetical order,
which the Exchange believes will allow investors to
more easily locate the order type definitions within
the rules. Other than proposed changes to the
definition of complex orders as described above, the
proposed rule change makes no substantive changes
to the order type definitions.
6 In addition, cross-references in Rules 6.45,
6.45A and 6.45B to ‘‘[s]tock-option orders and
security future-option orders, as defined in Rules
1.1(ii)(a) and Rule 1.1(zz)(a), respectively’’ are
proposed to be replaced with the phrase ‘‘[s]tockoption orders and security future-option orders that
include only one option series leg.’’
7 Under those rules, a complex order may be
executed at a net debit or credit price with another
TPH without giving priority to equivalent bids
(offers) in the individual series legs that are
represented in the trading crowd or in the public
customer limit order book provided at least one leg
of the order betters the corresponding bid (offer) in
the public customer limit order book by at least one
minimum trading increment as defined in Rule 6.42
(i.e., $0.10, $0.05 or $0.01, as applicable) or $0.01,
which increment is determined by the Exchange on
a class-by-class basis. Stock-option orders and
security future-option orders have priority over bids
(offers) of the trading crowd but not over bids
(offers) in the public customer limit order book.
8 To be eligible for electronic processing via the
CBOE Hybrid System’s COB and complex order
RFR auction (‘‘COA’’), the system already requires
that a complex order be entered on a single order
ticket to be electronically processed. Under existing
Rule 6.53C(a)(1) and (2), the Exchange may
determine on a class-by-class basis the applicable
number of legs of a complex order or stock-option
order that is eligible for processing via COB and
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TPH system limitations may prevent a
multi-part order with more than a
certain number of legs from being
entered on a single order ticket for
representation and execution in open
outcry as a complex order. For example,
orders entered via the Exchangesponsored PULSe workstation and Floor
Broker Workstation (‘‘FBW’’) are
currently limited to four legs. As a
result, complex orders with more than
the applicable leg limitation that are
represented in open outcry must be split
up and entered on multiple order
tickets.
For consistency in processing and in
order to enhance the Exchange’s audit
trail, the Exchange proposes to amend
Rules 6.45(e), 6.45A(b)(ii) and
6.45B(b)(ii) to require that, to be eligible
for open outcry complex order priority,
a complex order (as proposed to be
defined in Rule 6.53 and as discussed
above) must be within the applicable
ratio (discussed below) and must be for
either:
• Twelve (12) legs or less (one leg of
which may be for an underlying security
or security future, as applicable) and
entered on a single order ticket at time
of systemization; or
• more than twelve (12) legs (one leg
of which may be for an underlying
security or security future, as
applicable) and split across multiple
order tickets 9 if the Trading Permit
Holder (‘‘TPH’’) representing the
complex order identifies for the
Exchange the order tickets that are part
of the same complex order (in a form
and manner prescribed by the
Exchange). The Exchange will announce
COA. Under the same provisions, the Exchange may
determine on a class-by-class basis within certain
parameters the applicable ratio of a complex order
or stock-option order that is eligible for processing
via COB and COA . Currently, the Exchange has
limited COB and COA to orders of no more than
four (4) legs and ratios equal to or greater than oneto-three (.333) and less than or equal to three-to-one
(3.00) (and, for stock-option orders, ratios no greater
than eight-to-one (8.00)). Under this current
structure, orders with more than four (4) legs or that
do not satisfy the ratio requirements are not eligible
for electronic processing via COB or COA, but
would instead be routed for handling in open
outcry. The proposed rule change adds language to
the introductory paragraph of Rule 6.53C(a) to
explicitly state that the definitions of complex
orders contained in that rule apply only for
purposes of the electronic handling of complex
orders pursuant to that rule, notwithstanding the
proposed broader definition of complex order
contained in Rule 6.53. Because there are two
separate definitions of complex orders, the
Exchange believes this additional language will
bring clarity to the rules about when the definition
of complex orders in Rule 6.53C(a) applies, which
is in the context of electronic trading.
9 The Exchange notes that it is not imposing
requirements on how a complex order with more
than 12 legs should be split across multiple tickets,
other than the requirement discussed above that
each ticket identify the other applicable tickets.
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53231
by Regulatory Circular whether it
permits complex orders with more than
12 legs and, if so permitted, the form
and manner in which the TPH must link
the multiple order tickets.
As discussed above, complex orders
represented in open outcry must be
within an applicable ratio to be eligible
for complex order priority. The
proposed rule change amends Rules
6.45(e), 6.45A(b)(ii) and 6.45B(b)(ii) to
set forth this applicable ratio. The
Exchange proposes that the applicable
ratio be as follows:
• For a complex order involving two
or more different options series, any
ratio that is equal to or greater than oneto-three (.333) and less than or equal to
three-to-one (3.00);
• for a stock-option order, the options
leg(s) must (i) represent the same
number of units of the underlying stock
or convertible security in the stock leg,
or (ii) represent the number of units of
the underlying stock or convertible
security necessary to create a delta
neutral position, but in no case in a ratio
greater than eight-to-one (8.00), where
the ratio represents the total number of
units of the underlying stock or
convertible security in the options leg to
the total number of units of stock or
convertible security in the stock leg; and
• for a security futures-option order,
the options leg(s) must (i) represent the
same number of units of the underlying
stock in the security future leg, or (ii)
represent the number of units of the
underlying stock necessary to create a
delta neutral position, but in no case in
a ratio greater than eight-to-one (8.00),
where the ratio represents the total
number of units of the underlying stock
in the options leg to the total number of
units of stock or convertible security in
the security-futures leg.
The proposed rule change also adds to
the respective rules that, for the purpose
of applying the aforementioned ratios to
complex orders comprised of both minioption contracts and standard option
contracts, ten (10) mini-option contracts
will represent one (1) standard option
contract.
The Exchange notes that TPHs may
represent in open outcry a complex
order with any number of legs and in
any ratio. However, if a complex order
does not satisfy the applicable number
of legs, order ticket and ratio
requirements as set forth above, then it
will not be eligible for the complex
order priority set forth in Rules 6.45(e),
6.45A(b)(ii) or 6.45B(b)(ii).10 The
10 Similarly, a complex order submitted for
electronic handling must satisfy the ratio and leg
requirements set forth in Rule 6.53C(a) to receive
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Exchange also notes that it does not
propose to amend how complex orders
are allocated or the priority afforded to
complex orders in open outcry; it is
merely modifying the requirements for a
complex order to be eligible for the open
outcry complex order priority.
With respect to the order ticket
requirements, the Exchange also
proposes to add to Rule 24.20
(pertaining to SPX Combo Orders)
Interpretation and Policy .01 to require
that an SPX Combo Order 11 for twelve
(12) legs or less be entered on a single
order ticket at time of systemization. An
SPX Combo Order that contains more
than twelve (12) legs may be
represented and executed as a single
SPX Combo Order in accordance with
Rule 24.20 if it is split across multiple
order tickets and the TPH representing
the SPX Combo Order identifies for the
Exchange the order tickets that are part
of the same SPX Combo Order (in a
manner and form prescribed by the
Exchange). The Exchange will announce
by Regulatory Circular whether it
permits SPX Combo Orders with more
than 12 legs and, if so permitted, the
form and manner in which the TPH
must link the multiple order tickets. The
Exchanges notes that a TPH may submit
an order that does not satisfy these
ticket requirements, but such order may
not be represented or executed as a
single SPX Combo Order in accordance
with Rule 24.20. The Exchange also
notes that Rules 24.20 already specifies
an applicable ratio (defined by the delta
as noted above), and it is proposing no
changes to the ratio through this rule
filing.
Third, with respect to complex orders
in classes where the COB is available,
the Exchange also proposes to make
explicit the open outcry priority
applicable when there are other
complex orders or quotes represented at
the same net price, whether such other
orders or quotes are in the COB or being
represented in open outcry. Specifically,
the Exchange proposes to amend Rules
6.45A and 6.45B 12 to provide that if a
the complex order priority set forth in that rule
(which requires at least one leg of the complex
order to better the corresponding bid (offer) in the
leg series by at least one minimum increment or
$0.01, as applicable.
11 An ‘‘SPX Combo Order’’ consists of an order to
purchase or sell one or more SPX option series and
the offsetting number of SPX combinations defined
by the delta, where an ‘‘SPX combination’’ is a
purchase (sale) of an SPX call and sale (purchase)
of an SPX put having the same expiration date and
strike price and a ‘‘delta’’ is the positive (negative)
number of SPX combinations that must be sold
(bought) to establish a market neutral hedge with
one or more SPX option series.
12 The Exchange may determine to make the COB
available on a class-by-class basis for products
trading on the CBOE Hybrid System platform.
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complex order would trade in open
outcry at the same net debit or credit
price as another complex order, priority
would go first to public customer orders
in COB (with multiple public customer
orders ranked based on time), then to
complex order bids and offers
represented in the trading crowd (with
multiple bids and offers ranked in
accordance with the allocation
principles applicable to in-crowd
market participants contained in Rule
6.45A(b)(i)(B) and (D), and Rule
6.45B(b)(i)(B) and (D), respectively), and
then to all other orders and quotes in
the COB (with multiple bids and offers
ranked in accordance with the
allocation algorithm in effect pursuant
to Rule 6.53C).13 This methodology for
prioritizing multiple complex orders for
open outcry trading is consistent with
the methodology applicable for
prioritizing multiple simple orders for
open outcry trading and how the
Exchange has interpreted and applied
complex order priority.14 The Exchange
is merely proposing to reflect this
existing interpretation within its rule
text for added clarity. The Exchange is
proposing no changes to the existing
prioritization methodology.
Finally, the proposed rule change
makes other non-substantive, technical
changes to Rules 6.45A, 6.45B, 6.53,
6.53C, 24A.5 and 24B.5, including
deleting extra spaces, adding spaces
where necessary, correction of typos
and revising rule headings to be
consistent with other headings.
The Exchange anticipates that TPHs
may desire to make enhancements to
their open outcry order management
Because the COB functionality is not available for
non-CBOE Hybrid System classes, corresponding
changes are not necessary for Rule 6.45(e).
13 The Exchange notes that, for purposes of this
provision, Voluntary Professionals and
Professionals, as defined in Rules 1.1(fff) and (ggg),
respectively, are treated in the same manner as a
broker-dealer in classes where the Voluntary
Professional and Professional designations are
available.
14 The Exchange notes that the provisions of Rule
6.45A(b)(i)(D) and 6.45B(b)(i)(D), respectively,
applicable to TPHs relying on Section 11(a)(1)(D) of
the Securities Exchange Act of 1934 (the ‘‘Act’’) and
Rule 11a1–1(T) thereunder (commonly known as
the ‘‘G’’ exemption rule’’) would apply to complex
orders in the same manner as it applies to simple
orders. Those rules provisions provide that in open
outcry, any TPH relying on the G exemption rule
as an exemption must yield priority to any bid
(offer) at the same price of public customer orders
and broker-dealer orders resting in the electronic
book, as well as any other bids and offers that have
priority over such broker-dealer orders under those
rules. Under these provisions, a TPH relying on the
G exemption rule would yield priority to simple
public customer orders and broker-dealer orders
resting in the book and complex public customer
orders and broker-dealer orders resting in the COB,
as well as any other simple and complex bids and
offers that have priority over such broker-dealer
orders under those rules.
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and execution systems to address the
ticket requirements for a multi-legged
order to be eligible for priority when
represented and executed in open
outcry.15 Therefore, upon approval of
this rule change filing, the Exchange
will announce the implementation date
of the proposed rule change in a
Regulatory Circular to be published no
later than 90 days following the
approval date. The implementation date
will be no later than 180 days following
the approval date.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.16 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 17 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 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 18 requirement that
the rules of an exchange not be designed
15 The Exchange notes that it intends to enhance
the Exchange-sponsored PULSe workstation and
FBW to support the entry of complex orders with
up to twelve (12) legs on a single order ticket. The
Exchange notes that TPHs will not be required to
make changes to their own or third-party vendor’s
order entry and execution systems. However, to the
extent a TPH wants to represent and execute a
multi-part order in open outcry as a complex order,
the order must be entered on a single order ticket
and cannot exceed twelve (12) legs (or, if the
Exchange has determined to make it available, an
order for more than twelve (12) legs that is entered
on multiple order tickets, which tickets are linked
in a form and manner prescribed by the Exchange).
For example, if a TPH’s order entry and execution
system currently only supports the open outcry
processing of a complex order with up to four (4)
legs, the system would not need to be enhanced if
the TPH does not intend to represent and execute
complex orders with more than four (4) legs. If the
TPH intends to represent and execute complex
orders with more than four (4) legs (i.e., complex
orders with five (5) to twelve (12) legs), then the
TPH may need to enhance its existing system or
utilize another order entry and execution system
that supports the open outcry processing of such
orders on a single order ticket.
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
18 Id.
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to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
that (1) removing the definitions of
spread order, combination order,
straddle order and ratio order from Rule
6.53 and incorporating the more general
definition of a complex order (including
a stock-option order (and the
elimination of a redundant definition of
stock-option order) and a security
future-option order) into the Rule and
(2) harmonizing rules that reference
such definitions simplifies and provides
more clarity and uniformity to the rules,
which ultimately benefits investors. The
Exchange believes the proposed
nonsubstantive changes to the rules,
include the alphabetization of the order
type definitions, further benefits
investors, as they improve the
readability of and further simplify the
rules.
Additionally, the Exchange believes
the proposed rule change to limit the
eligibility of orders represented and
executed in open outcry for complex
order priority to orders that satisfy the
order ticket and applicable ratio
requirements will enhance the
Exchange’s audit trail. An enhanced
audit trail promotes transparency and
aids in surveillance, thereby protecting
investors. In addition, making explicit
the open outcry priority applicable
when there are other complex orders or
quotes represented at the same net
price, whether such other orders or
quotes are in the COB or being
represented in open outcry, provides
added clarity to the rule text in a
manner that is consistent with the
existing methodology applicable for
prioritizing multiple simple orders for
open outcry trading and how the
Exchange has interpreted and applied
complex order priority.
The Exchange notes that TPHs may
continue to represent and execute in
open outcry a complex order with any
number of legs and in any ratio.
However, if a complex order does not
satisfy the applicable ratio and order
ticket requirements as set forth above,
then it will not be eligible for the
complex order priority set forth in Rules
6.45(e), 6.45A(b)(ii) or 6.45B(b)(ii) (as
proposed). The Exchange also notes that
it does not propose to amend how
complex orders are allocated or the
priority afforded to complex orders in
open outcry; it is merely modifying the
requirements for a complex order to be
eligible for the existing open outcry
complex order priority (which the
Exchange is not proposing to change).
The Exchange believes the proposed
changes will increase opportunities for
execution of complex orders and lead to
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tighter spreads on CBOE, which will
benefit investors. The Exchange also
believes that the proposed rule change
is designed to not permit unfair
discrimination among market
participants, as all market participants
may trade complex orders, and the
priority eligibility requirements apply to
complex orders of all market
participants.
In addition, the Exchange believes the
proposed rule change is consistent with
Section 6(b)(1) of the Act,19 which
provides that the Exchange be organized
and have the capacity to be able to carry
out the purposes of the Act and to
enforce compliance by the Exchange’s
TPHs (and persons associated with its
TPHs) with the Act, the rules and
regulations thereunder and the rules of
the Exchange. Enhancing the audit trail
with respect to open outcry complex
order processing will further improve
the Exchange’s ability to better enforce
compliance by the Exchange’s TPHs
(and persons associated with its TPHs)
with the Act, the rules and regulations
thereunder and the rules of the
Exchange.
The Exchange also believes the
proposed rule change furthers the
objectives of Section 6(c)(3) of the Act,
which authorizes the Exchange to,
among other things, prescribe standards
of operational capability for its TPHs.
The Exchange believes the provisions
imposing order ticket requirements in
order for a complex order to be eligible
for complex order priority is reasonable
and sets forth appropriate system
requirements for supporting complex
order processing for open outcry trades.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Paper Comments
The Exchange 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 believes that simplifying its
rules related to complex orders
promotes fair and orderly markets, as
well as assists the Exchange in its ability
to effectively attract order flow and
liquidity to its market, and ultimately
benefits all TPHs and all investors.
Complex orders are available to all
TPHs (and all non-TPH market
participants through TPHs), and the
proposed rule change, including the
complex order priority eligibility
requirements, apply to all complex
orders in the same manner.
19 15
PO 00000
U.S.C. 78f(b)(1).
Frm 00072
Fmt 4703
Sfmt 4703
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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2014–015 on the
subject line.
• 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–CBOE–2014–015. 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
E:\FR\FM\08SEN1.SGM
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53234
Federal Register / Vol. 79, No. 173 / Monday, September 8, 2014 / Notices
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2014–015 and should be submitted on
or before September 29, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–21250 Filed 9–5–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72959; File No. SR–CME–
2014–28]
Self-Regulatory Organizations;
Chicago Mercantile Exchange Inc.;
Notice of Filing of Proposed Rule
Change, as Modified by Amendment
No. 2 Thereto, Related to
Enhancements to Its Risk Model for
Credit Default Swaps
rmajette on DSK2TPTVN1PROD with NOTICES
September 2, 2014.
Pursuant to the Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule
19b–4 thereunder,2 notice is hereby
given that on September 2, 2014,
Chicago Mercantile Exchange Inc.
(‘‘CME’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
Amendment No. 2 to its previously
submitted proposed rule change related
to proposed enhancements to its risk
model for broad-based index credit
default swap (‘‘CDS’’) products.3
Amendment No. 2 is intended to
describe CME’s proposed CDS specific
risk model framework applicable only to
broad-based index CDS and also provide
further description and detail of certain
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 34–
72834 (Aug. 13, 2014), 79 FR 48805 (Aug. 18, 2014)
(SR–CME–2014–28) (hereinafter referred to as the
‘‘CDS Risk Model Filing’’).
aspects of the proposed rule change as
described in Items I, II and III below,
which Items have been prepared
primarily by CME (the ‘‘CDS Risk Model
Filing Amendment’’).4 The Commission
is publishing this notice to solicit
comments on the CDS Risk Model Filing
Amendment from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
On August 8, 2014, CME submitted to
the Commission the CDS Risk Model
Filing pursuant to which CME proposes
to enhance its risk model for CDS (the
‘‘CDS Risk Model’’ and such enhanced
model, the ‘‘Proposed CDS Risk Model’’)
to enable CME to offer clearing of
additional CDS instruments.5 The CDS
Risk Model Filing is currently pending
regulatory approval by the Commission.
The purpose of the CDS Risk Model
Filing Amendment is to propose the
adoption of a CDS specific risk model
framework applicable only to broadbased index CDS (the ‘‘CME CDS Risk
Model Framework’’) and also provide
further description and detail of certain
aspects of the Proposed CDS Risk Model
contained within the CDS Risk Model
Filing. The CDS Risk Model Filing
Amendment should be read in
conjunction with the CDS Risk Model
Filing. All capitalized terms not defined
herein shall have the meaning given to
them in the CDS Risk Model Filing.
The text of the proposed amendment
is also available at the CME’s Web site
at https://www.cmegroup.com, at the
principal office of CME, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organizations
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CME included statements concerning
the purpose and basis for the proposed
amendment and discussed any
comments it received on the proposed
amendment. The text of these
statements may be examined at the
places specified in Item IV below. CME
has prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
20 17
1 15
VerDate Mar<15>2010
15:14 Sep 05, 2014
Jkt 232001
4 On August 18, 2014, CME filed Amendment No.
1 to the proposed rule change. CME withdrew
Amendment No. 1 on August 29, 2014.
5 See supra note 3.
PO 00000
Frm 00073
Fmt 4703
Sfmt 4703
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
(1) Purpose
Pursuant to this CDS Risk Model
Filing Amendment, CME proposes to
adopt a CME CDS Risk Model
Framework for broad-based index CDS
and also intends to provide further
description and detail of certain aspects
of the Proposed CDS Risk Model
described in the CDS Risk Model Filing
as further discussed below. CME also
proposes to make changes to the Manual
of Operations for CME Cleared Credit
Default Swaps (the ‘‘CDS Manual’’) in
connection with the proposed CME CDS
Risk Model Framework.
1. CME CDS Risk Model Framework
In connection with the adoption of
the Proposed CDS Risk Model, CME also
proposes to adopt the CME CDS Risk
Model Framework. The proposed CME
CDS Risk Model Framework would
apply only to broad-based index CDS
products cleared by CME and would not
apply to security-based swaps. CME will
file a proposed rule change with the
SEC in the future to implement any
proposed CDS risk model applicable to
the clearing of security-based swaps.
The proposed CME CDS Risk Model
Framework contains the details of the
Proposed CDS Risk Model and existing
policies relating to governance, back
testing and stress testing for CDS
products.
1.1 Governance
The proposed CME CDS Risk Model
Framework would be governed by the
CDS Risk Committee, the Stress Testing
Committee and senior risk management
of CME. CDS Risk Committee approval
is required for all material changes to
the CDS Risk Model Framework, CDS
stress testing framework, and CDS backtesting framework. Any changes to the
parameters of the CDS Margin Model or
CDS stress tests are approved by the
Stress Testing Committee or a senior
member of the Stress Testing
Committee.
1.2 CDS Risk Model Framework for
Cleared CDS
The proposed CME CDS Risk Model
Framework includes CME’s proposed
enhancements to the CDS Risk Model
for CDS as set forth in the CDS Risk
Model Filing. In addition, CME notes
that the Post Credit Risk Requirement
within the Proposed CDS Risk Model is
the same as the post-default charge in
the current CDS Risk Model, but also
applies to additional credit events such
E:\FR\FM\08SEN1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 173 (Monday, September 8, 2014)]
[Notices]
[Pages 53230-53234]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21250]
[[Page 53230]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72957; File No. SR-CBOE-2014-015]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Complex Orders
September 2, 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 August 19, 2014, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The 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 related to complex orders.
The text of the proposed rule change is available on the Exchange's Web
site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at
the Exchange's Office of the Secretary, 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its rules related to complex orders
to: (i) Simplify the definitions of the complex order types that may be
made available on a class-by-class basis and remove references to
certain specific complex order types that will no longer be defined;
(ii) with respect to complex orders in open outcry, set forth
applicable ratios and order ticket requirements for an order to be
eligible for complex order priority within applicable priority rules;
and (iii) with respect to complex orders in open outcry, make explicit
the priority applicable when there are other complex orders or quotes
represented at the same net price, whether such other orders or quotes
are in the complex order book (``COB'') or being represented in open
outcry.
First, with respect to definitions, the Exchange proposes to amend
Rule 6.53 to remove the definitions of spread order, combination order,
straddle order and ratio order and replace them with a more general
definition of a complex order (which includes a stock-option order and
a security future-option order) to simplify the descriptions of the
complex order types that may be made available on a class-by-class
basis. The proposed definition of a ``complex order'' is any order for
the same account as defined below:
A ``complex order'' is any order involving the execution
of two or more different options series in the same underlying security
occurring at or near the same time within an applicable ratio that may
be determined by the Exchange and for the purpose of executing a
particular investment strategy.
A ``stock-option order'' is proposed to be defined as an
order to buy or sell a stated number of units of an underlying stock or
a security convertible into the underlying stock (``convertible
security'') coupled with either (a) the purchase or sale of options
contract(s) on the opposite side of the market representing either (i)
the same number of units of the underlying stock or convertible
security, or (ii) the number of units of the underlying stock necessary
to create a delta neutral position, but in no case in a ratio greater
than an applicable ratio that may be determined by the Exchange (where
the ratio represents the total number of units of the underlying stock
or convertible security in the option leg to the total number of units
of the underlying stock or convertible security in the stock leg) or
(b) the purchase or sale of an equal number of put and call option
contracts, each having the same exercise price, expiration date and
each representing the same number of units of stock as, and on the
opposite side of the market from, the underlying stock or convertible
security portion of the order.\3\
---------------------------------------------------------------------------
\3\ Rule 1.1(ii) currently defines a ``stock-option order'' as
an order to buy or sell a stated number of units of an underlying or
a related security coupled with either (i) the purchase or sale of
option contract(s) on the opposite side of the market representing
either the same number of units of the underlying or related
security or the number of units of the underlying security necessary
to create a delta neutral position or (ii) the purchase or sale of
an equal number of put and call option contracts, each having the
same exercise price, expiration date and each representing the same
number of units of stock as, and on the opposite side of the market
from, the underlying or related security portion of the order. The
proposed rule change deletes this definition and references the
proposed definition in Rule 6.53 to eliminate the confusion of
having two separate definitions. The current definition and proposed
definition are substantially similar. However, the Exchange believes
the language in the proposed definition is more consistent with the
language in other rules, including Rules 6.53C (related to
electronic handling of complex orders) and 6.80 (related to order
protection, which relates to the Options Order Protection and
Locked/Crossed Markets Plan, also commonly referred to as the
Options Distributive Linkage Plan).
---------------------------------------------------------------------------
The purposed rule change moves the definition of a
``security future-option order'' from Rule 1.1(zz) to Rule 6.53 so that
all definitions of the various types of complex orders are located in
the same place within the rules.\4\
---------------------------------------------------------------------------
\4\ Rule 1.1(zz) defines a ``security future-option order,''
which is deemed a type of Inter-regulatory Spread Order as that term
is defined in Rule 1.1(ll), as an order to buy or sell a stated
number of units of a security future or a related security
convertible into a security future (``convertible security future'')
coupled with either (i) the purchase or sale of option contract(s)
on the opposite side of the market representing either the same
number of the underlying for the security future or convertible
security future or the number of units of the underlying for the
security future or convertible security future necessary to create a
delta neutral position or (ii) the purchase or sale of an equal
number of put and call option contracts, each having the same
exercise price, expiration date and each representing the same
number of the underlying for the security future or convertible
security future, as and on the opposite side of the market from, the
underlying for the security future or convertible security future
portion of the order. Rule 1.1(ll) defines an ``Inter-regulatory
Spread Order'' as an order involving the simultaneous purchase and/
or sale of at least one unit in contracts each of which is subject
to different regulatory jurisdictions at stated limits, or at a
stated differential, or at market prices on the floor of the
Exchange. The proposed rule change deletes the definition in Rule
1.1(zz) and references the definition in the proposed new location
in Rule 6.53.
This proposed complex order definition is in part modeled after the
definition of a complex order (including a stock-option order) already
contained in Rule 6.53C(a). The Exchange proposes conforming changes to
Rules 6.9 (including Interpretation and Policy .03), 6.42,
Interpretation and Policy .01, 6.45(e), 6.45A(b)(ii), 6.45B(b)(ii),
6.48(b), 6.73(c), 6.74(d)(iii) and 8.51 to harmonize these rules with
the proposed changes in Rule 6.53 to consistently reference the
proposed new
[[Page 53231]]
definition of a complex order.\5\ As a result of the proposed changes
to Rule 6.53, the Exchange proposes to update related cross-references
in Rules 6.53, 6.53C, Interpretation and Policy .08, 6.74(d)(iii),
7.12(b)(i)(E), 24.A.5 and 24B.5.\6\ The Exchange notes that the
``applicable ratios'' referenced above that may be determined by the
Exchange are or are proposed to be further described in various other
Exchange Rules (e.g., Rule 6.53C with respect to electronic trading and
Rules 6.45, 6.45A and 6.45B with respect to open outcry trading
(proposed changes discussed below)).
---------------------------------------------------------------------------
\5\ The proposed rule change also deletes the paragraph
lettering from the order type definitions and puts the order types
in alphabetical order, which the Exchange believes will allow
investors to more easily locate the order type definitions within
the rules. Other than proposed changes to the definition of complex
orders as described above, the proposed rule change makes no
substantive changes to the order type definitions.
\6\ In addition, cross-references in Rules 6.45, 6.45A and 6.45B
to ``[s]tock-option orders and security future-option orders, as
defined in Rules 1.1(ii)(a) and Rule 1.1(zz)(a), respectively'' are
proposed to be replaced with the phrase ``[s]tock-option orders and
security future-option orders that include only one option series
leg.''
---------------------------------------------------------------------------
Second, with respect to complex orders represented and executed in
open outcry, the Exchange is proposing to amend Rules 6.45 (pertaining
to the priority of bids and offers and allocation of trades in non-CBOE
Hybrid System classes), 6.45A (pertaining to the priority of bids and
offers and allocation of trades in equity options traded on the CBOE
Hybrid System) and 6.45B (pertaining to the priority of bids and offers
and allocation of trades in index and ETF options traded on the CBOE
Hybrid System).\7\ The proposed changes set forth applicable ratios and
order ticket requirements for complex orders to be eligible for complex
order priority when represented and executed in open outcry.\8\
Currently, Exchange and/or TPH system limitations may prevent a multi-
part order with more than a certain number of legs from being entered
on a single order ticket for representation and execution in open
outcry as a complex order. For example, orders entered via the
Exchange-sponsored PULSe workstation and Floor Broker Workstation
(``FBW'') are currently limited to four legs. As a result, complex
orders with more than the applicable leg limitation that are
represented in open outcry must be split up and entered on multiple
order tickets.
---------------------------------------------------------------------------
\7\ Under those rules, a complex order may be executed at a net
debit or credit price with another TPH without giving priority to
equivalent bids (offers) in the individual series legs that are
represented in the trading crowd or in the public customer limit
order book provided at least one leg of the order betters the
corresponding bid (offer) in the public customer limit order book by
at least one minimum trading increment as defined in Rule 6.42
(i.e., $0.10, $0.05 or $0.01, as applicable) or $0.01, which
increment is determined by the Exchange on a class-by-class basis.
Stock-option orders and security future-option orders have priority
over bids (offers) of the trading crowd but not over bids (offers)
in the public customer limit order book.
\8\ To be eligible for electronic processing via the CBOE Hybrid
System's COB and complex order RFR auction (``COA''), the system
already requires that a complex order be entered on a single order
ticket to be electronically processed. Under existing Rule
6.53C(a)(1) and (2), the Exchange may determine on a class-by-class
basis the applicable number of legs of a complex order or stock-
option order that is eligible for processing via COB and COA. Under
the same provisions, the Exchange may determine on a class-by-class
basis within certain parameters the applicable ratio of a complex
order or stock-option order that is eligible for processing via COB
and COA . Currently, the Exchange has limited COB and COA to orders
of no more than four (4) legs and ratios equal to or greater than
one-to-three (.333) and less than or equal to three-to-one (3.00)
(and, for stock-option orders, ratios no greater than eight-to-one
(8.00)). Under this current structure, orders with more than four
(4) legs or that do not satisfy the ratio requirements are not
eligible for electronic processing via COB or COA, but would instead
be routed for handling in open outcry. The proposed rule change adds
language to the introductory paragraph of Rule 6.53C(a) to
explicitly state that the definitions of complex orders contained in
that rule apply only for purposes of the electronic handling of
complex orders pursuant to that rule, notwithstanding the proposed
broader definition of complex order contained in Rule 6.53. Because
there are two separate definitions of complex orders, the Exchange
believes this additional language will bring clarity to the rules
about when the definition of complex orders in Rule 6.53C(a)
applies, which is in the context of electronic trading.
---------------------------------------------------------------------------
For consistency in processing and in order to enhance the
Exchange's audit trail, the Exchange proposes to amend Rules 6.45(e),
6.45A(b)(ii) and 6.45B(b)(ii) to require that, to be eligible for open
outcry complex order priority, a complex order (as proposed to be
defined in Rule 6.53 and as discussed above) must be within the
applicable ratio (discussed below) and must be for either:
Twelve (12) legs or less (one leg of which may be for an
underlying security or security future, as applicable) and entered on a
single order ticket at time of systemization; or
more than twelve (12) legs (one leg of which may be for an
underlying security or security future, as applicable) and split across
multiple order tickets \9\ if the Trading Permit Holder (``TPH'')
representing the complex order identifies for the Exchange the order
tickets that are part of the same complex order (in a form and manner
prescribed by the Exchange). The Exchange will announce by Regulatory
Circular whether it permits complex orders with more than 12 legs and,
if so permitted, the form and manner in which the TPH must link the
multiple order tickets.
---------------------------------------------------------------------------
\9\ The Exchange notes that it is not imposing requirements on
how a complex order with more than 12 legs should be split across
multiple tickets, other than the requirement discussed above that
each ticket identify the other applicable tickets.
---------------------------------------------------------------------------
As discussed above, complex orders represented in open outcry must
be within an applicable ratio to be eligible for complex order
priority. The proposed rule change amends Rules 6.45(e), 6.45A(b)(ii)
and 6.45B(b)(ii) to set forth this applicable ratio. The Exchange
proposes that the applicable ratio be as follows:
For a complex order involving two or more different
options series, any ratio that is equal to or greater than one-to-three
(.333) and less than or equal to three-to-one (3.00);
for a stock-option order, the options leg(s) must (i)
represent the same number of units of the underlying stock or
convertible security in the stock leg, or (ii) represent the number of
units of the underlying stock or convertible security necessary to
create a delta neutral position, but in no case in a ratio greater than
eight-to-one (8.00), where the ratio represents the total number of
units of the underlying stock or convertible security in the options
leg to the total number of units of stock or convertible security in
the stock leg; and
for a security futures-option order, the options leg(s)
must (i) represent the same number of units of the underlying stock in
the security future leg, or (ii) represent the number of units of the
underlying stock necessary to create a delta neutral position, but in
no case in a ratio greater than eight-to-one (8.00), where the ratio
represents the total number of units of the underlying stock in the
options leg to the total number of units of stock or convertible
security in the security-futures leg.
The proposed rule change also adds to the respective rules that, for
the purpose of applying the aforementioned ratios to complex orders
comprised of both mini-option contracts and standard option contracts,
ten (10) mini-option contracts will represent one (1) standard option
contract.
The Exchange notes that TPHs may represent in open outcry a complex
order with any number of legs and in any ratio. However, if a complex
order does not satisfy the applicable number of legs, order ticket and
ratio requirements as set forth above, then it will not be eligible for
the complex order priority set forth in Rules 6.45(e), 6.45A(b)(ii) or
6.45B(b)(ii).\10\ The
[[Page 53232]]
Exchange also notes that it does not propose to amend how complex
orders are allocated or the priority afforded to complex orders in open
outcry; it is merely modifying the requirements for a complex order to
be eligible for the open outcry complex order priority.
---------------------------------------------------------------------------
\10\ Similarly, a complex order submitted for electronic
handling must satisfy the ratio and leg requirements set forth in
Rule 6.53C(a) to receive the complex order priority set forth in
that rule (which requires at least one leg of the complex order to
better the corresponding bid (offer) in the leg series by at least
one minimum increment or $0.01, as applicable.
---------------------------------------------------------------------------
With respect to the order ticket requirements, the Exchange also
proposes to add to Rule 24.20 (pertaining to SPX Combo Orders)
Interpretation and Policy .01 to require that an SPX Combo Order \11\
for twelve (12) legs or less be entered on a single order ticket at
time of systemization. An SPX Combo Order that contains more than
twelve (12) legs may be represented and executed as a single SPX Combo
Order in accordance with Rule 24.20 if it is split across multiple
order tickets and the TPH representing the SPX Combo Order identifies
for the Exchange the order tickets that are part of the same SPX Combo
Order (in a manner and form prescribed by the Exchange). The Exchange
will announce by Regulatory Circular whether it permits SPX Combo
Orders with more than 12 legs and, if so permitted, the form and manner
in which the TPH must link the multiple order tickets. The Exchanges
notes that a TPH may submit an order that does not satisfy these ticket
requirements, but such order may not be represented or executed as a
single SPX Combo Order in accordance with Rule 24.20. The Exchange also
notes that Rules 24.20 already specifies an applicable ratio (defined
by the delta as noted above), and it is proposing no changes to the
ratio through this rule filing.
---------------------------------------------------------------------------
\11\ An ``SPX Combo Order'' consists of an order to purchase or
sell one or more SPX option series and the offsetting number of SPX
combinations defined by the delta, where an ``SPX combination'' is a
purchase (sale) of an SPX call and sale (purchase) of an SPX put
having the same expiration date and strike price and a ``delta'' is
the positive (negative) number of SPX combinations that must be sold
(bought) to establish a market neutral hedge with one or more SPX
option series.
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Third, with respect to complex orders in classes where the COB is
available, the Exchange also proposes to make explicit the open outcry
priority applicable when there are other complex orders or quotes
represented at the same net price, whether such other orders or quotes
are in the COB or being represented in open outcry. Specifically, the
Exchange proposes to amend Rules 6.45A and 6.45B \12\ to provide that
if a complex order would trade in open outcry at the same net debit or
credit price as another complex order, priority would go first to
public customer orders in COB (with multiple public customer orders
ranked based on time), then to complex order bids and offers
represented in the trading crowd (with multiple bids and offers ranked
in accordance with the allocation principles applicable to in-crowd
market participants contained in Rule 6.45A(b)(i)(B) and (D), and Rule
6.45B(b)(i)(B) and (D), respectively), and then to all other orders and
quotes in the COB (with multiple bids and offers ranked in accordance
with the allocation algorithm in effect pursuant to Rule 6.53C).\13\
This methodology for prioritizing multiple complex orders for open
outcry trading is consistent with the methodology applicable for
prioritizing multiple simple orders for open outcry trading and how the
Exchange has interpreted and applied complex order priority.\14\ The
Exchange is merely proposing to reflect this existing interpretation
within its rule text for added clarity. The Exchange is proposing no
changes to the existing prioritization methodology.
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\12\ The Exchange may determine to make the COB available on a
class-by-class basis for products trading on the CBOE Hybrid System
platform. Because the COB functionality is not available for non-
CBOE Hybrid System classes, corresponding changes are not necessary
for Rule 6.45(e).
\13\ The Exchange notes that, for purposes of this provision,
Voluntary Professionals and Professionals, as defined in Rules
1.1(fff) and (ggg), respectively, are treated in the same manner as
a broker-dealer in classes where the Voluntary Professional and
Professional designations are available.
\14\ The Exchange notes that the provisions of Rule
6.45A(b)(i)(D) and 6.45B(b)(i)(D), respectively, applicable to TPHs
relying on Section 11(a)(1)(D) of the Securities Exchange Act of
1934 (the ``Act'') and Rule 11a1-1(T) thereunder (commonly known as
the ``G'' exemption rule'') would apply to complex orders in the
same manner as it applies to simple orders. Those rules provisions
provide that in open outcry, any TPH relying on the G exemption rule
as an exemption must yield priority to any bid (offer) at the same
price of public customer orders and broker-dealer orders resting in
the electronic book, as well as any other bids and offers that have
priority over such broker-dealer orders under those rules. Under
these provisions, a TPH relying on the G exemption rule would yield
priority to simple public customer orders and broker-dealer orders
resting in the book and complex public customer orders and broker-
dealer orders resting in the COB, as well as any other simple and
complex bids and offers that have priority over such broker-dealer
orders under those rules.
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Finally, the proposed rule change makes other non-substantive,
technical changes to Rules 6.45A, 6.45B, 6.53, 6.53C, 24A.5 and 24B.5,
including deleting extra spaces, adding spaces where necessary,
correction of typos and revising rule headings to be consistent with
other headings.
The Exchange anticipates that TPHs may desire to make enhancements
to their open outcry order management and execution systems to address
the ticket requirements for a multi-legged order to be eligible for
priority when represented and executed in open outcry.\15\ Therefore,
upon approval of this rule change filing, the Exchange will announce
the implementation date of the proposed rule change in a Regulatory
Circular to be published no later than 90 days following the approval
date. The implementation date will be no later than 180 days following
the approval date.
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\15\ The Exchange notes that it intends to enhance the Exchange-
sponsored PULSe workstation and FBW to support the entry of complex
orders with up to twelve (12) legs on a single order ticket. The
Exchange notes that TPHs will not be required to make changes to
their own or third-party vendor's order entry and execution systems.
However, to the extent a TPH wants to represent and execute a multi-
part order in open outcry as a complex order, the order must be
entered on a single order ticket and cannot exceed twelve (12) legs
(or, if the Exchange has determined to make it available, an order
for more than twelve (12) legs that is entered on multiple order
tickets, which tickets are linked in a form and manner prescribed by
the Exchange). For example, if a TPH's order entry and execution
system currently only supports the open outcry processing of a
complex order with up to four (4) legs, the system would not need to
be enhanced if the TPH does not intend to represent and execute
complex orders with more than four (4) legs. If the TPH intends to
represent and execute complex orders with more than four (4) legs
(i.e., complex orders with five (5) to twelve (12) legs), then the
TPH may need to enhance its existing system or utilize another order
entry and execution system that supports the open outcry processing
of such orders on a single order ticket.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\16\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \17\ 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
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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \18\ requirement that the rules of
an exchange not be designed
[[Page 53233]]
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
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In particular, the Exchange believes that (1) removing the
definitions of spread order, combination order, straddle order and
ratio order from Rule 6.53 and incorporating the more general
definition of a complex order (including a stock-option order (and the
elimination of a redundant definition of stock-option order) and a
security future-option order) into the Rule and (2) harmonizing rules
that reference such definitions simplifies and provides more clarity
and uniformity to the rules, which ultimately benefits investors. The
Exchange believes the proposed nonsubstantive changes to the rules,
include the alphabetization of the order type definitions, further
benefits investors, as they improve the readability of and further
simplify the rules.
Additionally, the Exchange believes the proposed rule change to
limit the eligibility of orders represented and executed in open outcry
for complex order priority to orders that satisfy the order ticket and
applicable ratio requirements will enhance the Exchange's audit trail.
An enhanced audit trail promotes transparency and aids in surveillance,
thereby protecting investors. In addition, making explicit the open
outcry priority applicable when there are other complex orders or
quotes represented at the same net price, whether such other orders or
quotes are in the COB or being represented in open outcry, provides
added clarity to the rule text in a manner that is consistent with the
existing methodology applicable for prioritizing multiple simple orders
for open outcry trading and how the Exchange has interpreted and
applied complex order priority.
The Exchange notes that TPHs may continue to represent and execute
in open outcry a complex order with any number of legs and in any
ratio. However, if a complex order does not satisfy the applicable
ratio and order ticket requirements as set forth above, then it will
not be eligible for the complex order priority set forth in Rules
6.45(e), 6.45A(b)(ii) or 6.45B(b)(ii) (as proposed). The Exchange also
notes that it does not propose to amend how complex orders are
allocated or the priority afforded to complex orders in open outcry; it
is merely modifying the requirements for a complex order to be eligible
for the existing open outcry complex order priority (which the Exchange
is not proposing to change). The Exchange believes the proposed changes
will increase opportunities for execution of complex orders and lead to
tighter spreads on CBOE, which will benefit investors. The Exchange
also believes that the proposed rule change is designed to not permit
unfair discrimination among market participants, as all market
participants may trade complex orders, and the priority eligibility
requirements apply to complex orders of all market participants.
In addition, the Exchange believes the proposed rule change is
consistent with Section 6(b)(1) of the Act,\19\ which provides that the
Exchange be organized and have the capacity to be able to carry out the
purposes of the Act and to enforce compliance by the Exchange's TPHs
(and persons associated with its TPHs) with the Act, the rules and
regulations thereunder and the rules of the Exchange. Enhancing the
audit trail with respect to open outcry complex order processing will
further improve the Exchange's ability to better enforce compliance by
the Exchange's TPHs (and persons associated with its TPHs) with the
Act, the rules and regulations thereunder and the rules of the
Exchange.
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\19\ 15 U.S.C. 78f(b)(1).
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The Exchange also believes the proposed rule change furthers the
objectives of Section 6(c)(3) of the Act, which authorizes the Exchange
to, among other things, prescribe standards of operational capability
for its TPHs. The Exchange believes the provisions imposing order
ticket requirements in order for a complex order to be eligible for
complex order priority is reasonable and sets forth appropriate system
requirements for supporting complex order processing for open outcry
trades.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
simplifying its rules related to complex orders promotes fair and
orderly markets, as well as assists the Exchange in its ability to
effectively attract order flow and liquidity to its market, and
ultimately benefits all TPHs and all investors. Complex orders are
available to all TPHs (and all non-TPH market participants through
TPHs), and the proposed rule change, including the complex order
priority eligibility requirements, apply to all complex orders in the
same manner.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2014-015 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-CBOE-2014-015. 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
[[Page 53234]]
public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549 on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2014-015 and should be submitted on or before
September 29, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21250 Filed 9-5-14; 8:45 am]
BILLING CODE 8011-01-P
