Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Adopting a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information by Designated Primary Market-Makers (“DPMs”) and Lead Market-Makers (“LMMs”), 7609-7613 [2016-02841]

Download as PDF Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Robert W. Errett, Deputy Secretary. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77081; File No. SR–CBOE– 2016–007] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Adopting a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information by Designated Primary Market-Makers (‘‘DPMs’’) and Lead Market-Makers (‘‘LMMs’’) February 8, 2016. 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 February 1, 2016, 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 Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. asabaliauskas on DSK9F6TC42PROD with NOTICES2 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change 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 43 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 1 15 17:38 Feb 11, 2016 Jkt 238001 Background The Exchange has three classes of registered Market-Makers. Pursuant to Rule 8.1, a Market-Maker is an individual TPH or TPH organization that is registered with the Exchange for the purpose of making transactions as a dealer-specialist on the Exchange. All Market-Makers are subject to the requirements of Rule 8.7, which set forth the obligations of Market-Makers, including quoting activity. Rule 8.85 outlines the obligations of DPM’s, which, in addition to the Market-Maker obligations of Rule 8.7, must fulfill a number of increased obligations including providing continuous electronic quotes, assuring that each of the displayed market quotations is honored, and complying heightened with bid/ask differential requirements.5 Rule 8.15 states that the Exchange may appoint, in an option class for which a DPM has not been appointed, one or more Market-Makers in good standing as LMMs and Supplemental Market-Makers (‘‘SMMs’’) to participate in opening rotation procedures for Hybrid 3.0 classes and/or to determine a formula for generating updated market quotations during the trading day. LMM’s in Hybrid 3.0 classes are obligated to quote a firm two-sided market of sufficient size to accommodate a relatively active opening within the bid/ask differential requirements determined by the Exchange. Rule 8.15A states the Exchange may appoint one or more Market-Makers in good standing with an appointment in a Hybrid-Trading system option class for which a DPM has not been appointed as LMMs. Much like DPMs LMMs in Hybrid Classes are subject to increased obligations that include providing continuous electronic quotes that comply with the bid/ask differential requirements determined by the Exchange. Pursuant to Rules 8.15B and 8.87, the exchange may establish participation entitlements for LMM’s and DPMs appointed pursuant to the aforementioned Rules. DPM’s and LMM’s must meet specific obligations prior to being awarded a participation entitlements [sic]. Whether operating on the CBOE Trading Floor or from a remote location, all Market-Makers, including DPMs and LMMs, have access to the same information in the Consolidated Book that is available to all other market participants. Moreover, none of the Exchange’s Market-Makers have agency obligations to the Exchange’s Order Book. As such, the primary distinctions between Market-Makers and DPMs and LMMs are the increased quoting requirements and allocation entitlements. Despite the fact that Market-Makers, DPMs and LMMs have access to the same trading information as all other market participants on the Exchange, the Exchange has distinct rules governing how DPMs and LMMs may operate. Rule 8.91(a) specifies that a DPM shall maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the DPM or act as a 5 Compare Rule 8.85(a)(i) (‘‘[Each DPM shall] provide continuous electronic quotes . . . in at least 99% of the non-adjusted options series or 100% of the non-adjusted option series minus one call-put pair . . .’’) with Rule 8.7(d)(ii)(B) (‘‘A [FR Doc. 2016–02838 Filed 2–11–16; 8:45 am] VerDate Sep<11>2014 7609 Market-Maker will be required to maintain continuous electronic quotes . . . in 60% of the non-adjusted option series of the Market-Maker’s appointed classes that have a time to expiration of less than nine months.’’). 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 adopt a principles-based approach to prohibit the misuse of material, nonpublic information by DPMs and LMMs by deleting Rule 8.91, sub-paragraph (b)(5) of Rule 8.15 and paragraph(b)(vii) of Rule 8.15A. In so doing, the Exchange would harmonize its rules related to the preventing the misuse of material, nonpublic information for every Trading Permit Holder (‘‘TPH’’). The Exchange believes that Rule 8.91, Rule 8.15(b)(5) and Rule 8.15A(b)(vii) are no longer necessary because all TPH, including DPMs and LMMs are subject to the Exchange’s general principles-based requirements governing the protection against misuse of material, nonpublic information, pursuant to Rule 4.18 (Prevention of the Misuse of Material, Nonpublic Information), which obviates the need for separately prescribed requirements for a subset of market participants on the Exchange. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 E:\FR\FM\12FEN1.SGM 12FEN1 7610 Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices asabaliauskas on DSK9F6TC42PROD with NOTICES2 specialist or market-maker in any security underlying options allocated to the DPM. Rule 8.91 also requires a DPM provide its information barriers to the Exchange and obtain prior written approval. Rule 8.15(b)(5) requires LMMs in Hybrid 3.0 classes maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the LMM or act as specialist or MarketMaker in any security underlying options allocated to the LMM. Rule 8.15A(b)(vii) similarly requires LMMs in Hybrid classes maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the LMM or act as specialist or MarketMaker in any security underlying options allocated to the LMM. Neither Rule 8.15 nor 8.15A require the prior Exchange approval of information barriers outlined in Rule 8.91. Proposed Rule Change The Exchange believes the particularized guidelines in Rules, 8.91, 8.15(b)(5) and 8.15A(b)(vii) for DPMs, LMMs in Hybrid 3.0 classes, and LMMs in Hybrid classes, respectively, are no longer necessary and proposes to delete them. Rather, the Exchange believes that Rule 4.18, governing the misuse of material, nonpublic information provides for an appropriate, principlesbased approach to prevent the type of market abuses Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) are designed to address. Specifically, Rule 4.18 requires every TPH shall establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such TPH’s business, to prevent the misuse, in violation of the Exchange Act and Exchange Rules, of material, nonpublic information by such TPH or persons associated with such TPH. For the purposes of this Rule, conduct constituting the misuse of material, nonpublic information in violation of the Exchange Act and Exchange Rules includes, but is not limited to, the following: (a) Trading in any securities issued by a corporation, partnership, Trust Issued Receipts or Units (as defined in Exchange Rules) or a trust or similar entities, or in any related securities or related options or other derivative securities, or in any related non-U.S. currency options, futures or options on futures on such currency, or any other VerDate Sep<11>2014 17:38 Feb 11, 2016 Jkt 238001 derivatives based on such currency, or in any related commodity, related commodity futures or options on commodity futures or in any related commodity derivatives, while in possession of material, nonpublic information concerning that corporation, partnership, Trust Issued Receipts, or those Units, or that trust or similar entities; (b) Trading in an underlying security or related options or other derivative securities, or in any related non-U.S. currency, non-U.S. currency options, futures or options on futures on such currency, or in any related commodity, related commodity futures or options on commodity futures or any other related commodities derivatives, or any other derivatives based on such currency while in possession of material nonpublic information concerning imminent transactions in the above; and (c) Disclosing to another person or entity any material, nonpublic information involving a corporation, partnership, Trust Issued Receipts, or Units or a trust or similar entities whose shares are publicly traded or an imminent transactions in an underlying security or related securities or in the underlying non-U.S. currency of any related non-U.S. currency options, futures or options on futures on such currency, or any other derivatives based on such currency, or in any related commodity, related commodity futures or options on commodity futures or any other related commodity derivatives, for the purpose of facilitating the possible misuse of such material, nonpublic information. Because DPMs and LMMs are already subject to the requirements of Rule 4.18, the Exchange does not believe that it is necessary to separately require specific limitations on dealings between DPMs and LMMs and affiliates. Deleting Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) would provide DPMs and LMMs with the flexibility to adapt their policies and procedures as appropriate to reflect changes to their business model, business activities, or the securities market in a manner similar to how Market-Makers on the Exchange currently operate consistent with Rule 4.18. As noted above, DPMs and LMMs are distinguished under Exchange Rules from other types of Market-Makers only to the extent that they have certain heightened obligations and potential allocation entitlements. However, none of these heightened obligations provides different or greater access to nonpublic information than any other market participant on the Exchange. Specifically, whether on the CBOE PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Trading Floor or remotely, neither DPMs nor LMMs on the Exchange have access to trading information provided by the Exchange, either at, or prior to, the point of execution, that is not made available to all other market participants on the Exchange in a similar manner. Further, as noted above, DPMs and LMMs on the Exchange do not have any agency responsibilities for orders in the Order Book. Accordingly, because DPMs and LMMs do not have any trading advantages at the Exchange due to their market role, the Exchange believes that they should be subject to the same rules regarding the prevention of the misuse of material, nonpublic information, specifically Rule 4.18.6 The Exchange notes that its proposed approach to use a principles-based approach to protecting against the misuse of material nonpublic information for all of its registered Market-Makers is consistent with recently filed rule changes for NYSE MKT, LLC on behalf of NYSE Amex Options, International Securities Exchange, LLC (‘‘ISE’’) and BOX Options Exchange, LLC (‘‘BOX’’).7 The proposed approach is also consistent with approved rule changes for NYSE Arca Equities Inc. (‘‘NYSE Arca’’), BATS Exchange Inc. (‘‘BATS’’) and New York Stock Exchange, LLC (‘‘NYSE’’) rules governing cash equity Market-Makers on those respective exchanges.8 Except for 6 The Exchange notes that by deleting Rule 8.91, the Exchange would no longer require specific information barriers for DPMs or require preapproval of any information barriers that a DPM would erect for purposes of protecting against the misuse of material nonpublic information. However, as is the case today with Market-Makers, information barriers of new entrants, including new DPMs, would be subject to review as part of a new firm application. Moreover, the policies and procedures of DPMs and LMMs, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange, pursuant to a Regulatory Services Agreement. 7 See Securities Exchange Act Release Nos. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a Principles-Based Approach to Prohibit the Misuse of Material Nonpublic Information by Specialists and e-Specialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY); 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR–ISE–2015–26) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting a Principles-Based Approach to Prohibit the Misuse of Material, non-public Information by Market Makers by Deleting Rule 810); 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR–BOX–2015–31) (Notice of Filing and immediate Effectiveness of Proposed Rule Change to Adopt a Principles-based Approach to Prohibit the Misuse of Material Nonpublic Information by Market Makers). 8 See Securities Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR– NYSEArca–2009–78) (Order approving elimination of NYSE Arca rule that required market makers to establish and maintain specifically prescribed information barriers, including discussion of NYSE Arca and Nasdaq rules) (‘‘Arca Approval Order’’); E:\FR\FM\12FEN1.SGM 12FEN1 Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices asabaliauskas on DSK9F6TC42PROD with NOTICES2 prescribed rules relating to floor-based designated Market-Makers on the NYSE, who have access to specified nonpublic trading information, each of these exchanges have moved to a principlesbased approach to protecting against the misuse of material, nonpublic information. In connection with approving those rule changes, the Commission found that eliminating redundant information barrier requirements should not reduce the effectiveness of exchange rules requiring its members or participants to establish and maintain systems to supervise the activities of its members, including written procedures reasonably designed to ensure compliance with applicable federal securities law and regulations, and with the rules of the applicable exchange.9 The Exchange notes that even with this proposed rule change, pursuant to Rule 4.18, a DPM or LMM would still be obligated to ensure that its policies and procedures reflect the current state of its business and continue to be reasonably designed to prevent the misuse of material, nonpublic information. While information barriers would not specifically be required under the proposal, Rule 4.18 already requires that a TPH consider the nature of the TPH’s business in structuring its policies and procedures, which may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. The Exchange is not proposing to change what is considered to be material, non-public information and, thus does not expect there to be any changes to the types of information that an affiliated brokerage business of a market maker could share with such market maker. In that regard, the proposed rule change will not permit the brokerage unit of a TPH firm to have access to any non-public order or quote information of affiliated market maker, 61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR–BATS–2010–003) (Order approving amendments to BATS Rule 5.5 to move to a principles-based approach to protecting against the misuse of material, non-public information, and noting that the proposed change is consistent with the approaches of NYSE Arca and Nasdaq) (‘‘BATS Approval Order’’); and 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR–NYSE–2014–12) (Order approving amendments to NYSE Rule 98 governing designated market makers to move to a principlesbased approach to prohibit the misuse of material non-public information) (‘‘NYSE Approval Order’’). 9 See, e.g., BATS Approval Order, supra note 4 at 9458. VerDate Sep<11>2014 17:38 Feb 11, 2016 Jkt 238001 including hidden or undisplayed orders and quotes on the Exchange. TPHs do not expect to receive any additional order or quote information as a result of this proposed rule change. Further, the Exchange does not believe that there will be any material change to TPH information barriers as a result of removal of the Exchange’s preapproval requirements for DPMs. In fact, the Exchange anticipates that eliminating the pre-approval requirement should facilitate implementation of changes to TPH information barriers as necessary to protect against the misuse of material, non-public information. The Exchange also suggests that the pre-approval requirement is unnecessary because DPMs do not have agency responsibilities to the book. However, as is the case today with market makers, information barriers of new entrants would be subject to review as part of a new firm application. Moreover, the policies and procedures of market makers, including those relating to information barriers would be subject to review by FINRA, on behalf of the Exchange, pursuant to a Regulatory Services Agreement. The Exchange further notes that under Rule 4.18, a TPH would be able [sic] would be able to structure its firm to provide for its options DPMs or LMMs, as applicable, to be structured with its equities and customer-facing businesses, provided that any such structuring would be done in a manner reasonably designed to protect against the misuse of material, nonpublic information. For example, pursuant to Rule 4.18, a DPM on the Exchange could be in the same independent trading unit, a defined in Rule 200(f) of Regulation SHO,10 as an equities Market-Maker and other trading desks within the firm, including options trading desks, so that the firm could share post-trade information to better manage its risk across related securities. The Exchange believes it is appropriate, and consistent with Rule 4.18 and section 15(g) of the Act 11 for a firm to share options position and related hedging position information (e.g., equities, futures, and foreign currency) within a firm to better manage risk on a firm-wide basis. The Exchange notes, however, that if so structured, a firm would need to have appropriate policies and procedures, including information barriers as applicable, to protect against the misuse of material non-public information, and specifically customer information consistent with Rule 4.18. The Exchange further notes that Federal 10 17 11 15 PO 00000 CFR part 242.200(f). U.S.C. 78o(g). Frm 00115 Fmt 4703 rules supersede Exchange rules in the event of any conflicts regarding the misuse of material non-public information. The Exchange believes that the proposed reliance on the principlesbased Rule 4.18 would ensure that a TPH that operates a DPM or LMM would be required to protect against the misuse of any material nonpublic information. As noted above, Rule 4.18 already requires that firms refrain from trading while in possession of material nonpublic information concerning imminent transactions in a security or related product. The Exchange believes that moving to a principles-based approach rather than prescribing how and when to wall off a DPM or LMM from the rest of the firm would provide TPH operating DPMs or LMMs with appropriate tools to better manage risk across a firm, including integrating options positions with other positions of the firm or, as applicable, by the respective independent trading unit. Specifically, the Exchange believes that it is appropriate for risk management purposes for a TPH operating a DPM or LMM to be able to consider both DPM/ LMM traded-positions for the purposes of calculating net positions consistent with Rule 200 of Regulation SHO,12 calculating intra-day net capital positions, and managing risk both generally as well as in compliance with Rule 15c3–5 under the Act (the ‘‘Market Access Rule’’).13 The Exchange notes that any risk management operations would need to operate consistent with the requirement to protect against the misuse of material non-public information. The Exchange further notes that if DPMs or LMMs are integrated with other Market-Making operations, they would be subject to existing rules that prohibit TPH from disadvantaging their customers or other market participants by improperly capitalizing of a TPH organization’s access to the receipt of material nonpublic information. As such, a TPH organization that integrates its DPM or LMM operations together with equity Market-Making, would need to protect customer information consistent with existing obligations to protect such information. The Exchange has rules prohibiting TPHs from disadvantaging their customers or other market participants by improperly capitalizing on the TPH’s access to or receipt of material nonpublic information. For example, Rule 4.24(e) requires Each TPH shall establish, maintain, and enforce written 12 17 13 17 Sfmt 4703 7611 E:\FR\FM\12FEN1.SGM CFR part 242.200. CFR part 240.15c3–5. 12FEN1 7612 Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices asabaliauskas on DSK9F6TC42PROD with NOTICES2 supervisory procedures reasonably designed to prevent and detect violations of applicable securities laws and regulations, and applicable Exchange rules. Additionally Rule 6.9(e) prevents a TPH or person associated with a TPH, who has knowledge of all material terms and conditions of an original order and a solicited order, including a facilitation order, to enter, based on such knowledge, an order to buy or sell an option of the same class as an option that is the subject of the original order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument unless certain circumstances are met. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of section 6(b) of the Act.14 Specifically, the Exchange believes the proposed rule change is consistent with the section 6(b)(5) 15 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) 16 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market by adopting a principles-based approach to permit a TPH operating a DPM or LMM to maintain and enforce policies and procedures to, among other things, prohibit the misuse of material nonpublic information. The proposed rule change would further eliminate restrictions on how a TPH structures its DPM and LMM operations. The Exchange notes that the proposed rule change is based on an approved rule of the Exchange to which DPMs and LMMs 14 15 15 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 16 Id. VerDate Sep<11>2014 are already subject-Rule 4.18-and harmonizes the rules governing DPMs, LMMs and Market-Makers. Moreover, TPH operating DPMs and LMMs would continue to be subject to federal and Exchange requirements for protecting material nonpublic order information.17 The Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market because it would harmonize the Exchange’s approach to protecting against the misuse of material nonpublic information and no longer subject DPMs and LMMs to redundant requirements. The Exchange does not believe that the existing requirements applicable to DPMs and LMMs are narrowly tailored to their respective roles because neither market participant has access to Exchange trading information in a manner different from any other market participant on the Exchange and they do not have agency responsibilities to the Order Book. The Exchange further believes the proposal is designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade because existing rules make clear to all TPH the type of conduct that is prohibited by the Exchange. While the proposal eliminates certain requirements relating to the misuse of material nonpublic information, DPMs, LMMs and all other TPH would remain subject to existing Exchange rules requiring them to establish and maintain systems to supervise their activities, and to create, implement, and maintain written procedures that are reasonably designed to comply with applicable securities laws and Exchange rules, including the prohibition on the misuse of material nonpublic information. The Exchange notes that the proposed rule change would still require that a TPH operating DPMs and LMMs maintain and enforce policies and procedures designed to ensure compliance with applicable federal securities laws and regulations and with Exchange rules. Even thought there would no longer be pre-approval of DPM information barriers, and DPM or LMM written policies and procedures would continue to be subject to oversight by the Exchange and therefore the elimination of specific restrictions should not reduce the effectiveness of the Exchange rules to protect against the misuse of material nonpublic information. Rather, TPH will be able to utilize a flexible, principles-based approach to modify their policies and 17 See 17:38 Feb 11, 2016 Jkt 238001 PO 00000 15 U.S.C. 78o(g) and Rule 4.18. Frm 00116 Fmt 4703 Sfmt 4703 procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. Moreover, while specified information barriers may no longer be required, a TPH’s business model or business activities may dictate that an information barrier or functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Exchange rules. The Exchange therefore believes that the proposed rule change will maintain the existing protection of investors and the public interest that is currently applicable to DPM’s and LMM’s, while at the same time removing impediments to and perfecting a free and open market by moving to a principles-based approach to protect against the misuse of material nonpublic information. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE 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. To the contrary, the Exchange believes that the proposal will enhance competition by allowing DPMs and LMMs to comply with applicable Exchange rules in a manner best suited to their business models, business activities and the securities markets, thus reducing regulatory burdens while still ensuring compliance with applicable securities laws and regulations and Exchange rules. The Exchange believes that the proposal will foster a fair and orderly marketplace without being overly burdensome upon DPMs and LMMs. Moreover, the Exchange believes that the proposed rule change would eliminate a burden on competition for TPH which currently exists as a result of disparate rule treatment between the options and equities markets regarding how to protect against the misuse of material, nonpublic information. For those TPH that are also members of equities exchanges their respective equity Market-Maker operations are now subject to a principles-based approach to protecting against the misuse of material nonpublic information. The Exchange believes it would remove a burden on competition to enable TPH to similarly apply a principles-based approach to protecting against the misuse of material nonpublic information in the options space. To this end, the Exchange notes that Rule 4.18 still requires a TPH that operates as a Market-Maker on the Exchange, E:\FR\FM\12FEN1.SGM 12FEN1 Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices including a DPM or LMM, to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material, non-public information. However, with this proposed rule change, a TPH that trades equities and options could look at its firm more holistically to structure its operations in a manner that provides it with better tools to manage risks across multiple security classes, while at the same time protecting against the misuse of material nonpublic information. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: A. Significantly affect the protection of investors or the public interest; B. impose any significant burden on competition; and C. become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to section 19(b)(3)(A) of the Act 18 and Rule 19b–4(f)(6) 19 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. asabaliauskas on DSK9F6TC42PROD with NOTICES2 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: • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2016–007 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–2016–007. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE– 2016–007 and should be submitted on or before March 4, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–02841 Filed 2–11–16; 8:45 am] BILLING CODE 8011–01–P Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or 18 15 19 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). VerDate Sep<11>2014 17:38 Feb 11, 2016 Jkt 238001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77079; File No. SR–ICC– 2016–002] Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing, as Modified by Amendment No. 1 Thereto, of Proposed Rule Change To Provide for the Clearance of Certain AsiaPacific Credit Default Swap Contracts February 8, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 27, 2016, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to adopt new rules that will provide the basis for ICC to clear certain Asia-Pacific credit default swap (‘‘CDS’’) contracts, as described in Items I, II, and III below, which Items have been prepared primarily by ICC. On January 29, 2016, ICC filed Amendment No. 1 to the proposal.3 The Commission is publishing this notice, as modified by Amendment No. 1, 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 ICC is proposing an amendment to its previously submitted proposed rule change to adopt new rules that will provide the basis for ICC to clear certain Asia-Pacific CDS contracts. Specifically, ICC proposed to amend Chapter 26 of the ICC Rulebook (‘‘ICC Rules’’) to add Subchapters 26J and 26L to provide for the clearance of iTraxx Asia/Pacific CDS contracts (‘‘iTraxx Asia/Pacific Contracts’’) and Standard Asia/Pacific Sovereign CDS contracts (‘‘SAS Contracts’’, collectively with iTraxx Asia/Pacific Contracts ‘‘Asia-Pacific CDS Contracts’’). Additionally, ICC proposed to amend the ICC End-of-Day Price Discovery Policies and Procedures to add two additional pricing windows to accommodate the submission of endof-day prices relating to such AsiaPacific CDS Contracts. Finally, ICC proposed to amend the ICC Risk Management Framework to include the risk horizon utilized for instruments traded during Asia-Pacific hours and to 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 In Amendment No. 1, ICC deleted a factual error in the originally filed proposal that stated that no changes would be made to ICC’s Risk Management Framework. Amendment No. 1 amends and replaces the original filing in its entirety. 2 17 20 17 PO 00000 CFR 200.30–3(a)(12). Frm 00117 Fmt 4703 Sfmt 4703 7613 E:\FR\FM\12FEN1.SGM 12FEN1

Agencies

[Federal Register Volume 81, Number 29 (Friday, February 12, 2016)]
[Notices]
[Pages 7609-7613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02841]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77081; File No. SR-CBOE-2016-007]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating To Adopting a Principles-Based Approach 
To Prohibit the Misuse of Material Nonpublic Information by Designated 
Primary Market-Makers (``DPMs'') and Lead Market-Makers (``LMMs'')

February 8, 2016.
    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 February 1, 2016, 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 Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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

    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 adopt a principles-based approach to 
prohibit the misuse of material, nonpublic information by DPMs and LMMs 
by deleting Rule 8.91, sub-paragraph (b)(5) of Rule 8.15 and 
paragraph(b)(vii) of Rule 8.15A. In so doing, the Exchange would 
harmonize its rules related to the preventing the misuse of material, 
nonpublic information for every Trading Permit Holder (``TPH''). The 
Exchange believes that Rule 8.91, Rule 8.15(b)(5) and Rule 
8.15A(b)(vii) are no longer necessary because all TPH, including DPMs 
and LMMs are subject to the Exchange's general principles-based 
requirements governing the protection against misuse of material, 
nonpublic information, pursuant to Rule 4.18 (Prevention of the Misuse 
of Material, Nonpublic Information), which obviates the need for 
separately prescribed requirements for a subset of market participants 
on the Exchange.
Background
    The Exchange has three classes of registered Market-Makers. 
Pursuant to Rule 8.1, a Market-Maker is an individual TPH or TPH 
organization that is registered with the Exchange for the purpose of 
making transactions as a dealer-specialist on the Exchange. All Market-
Makers are subject to the requirements of Rule 8.7, which set forth the 
obligations of Market-Makers, including quoting activity.
    Rule 8.85 outlines the obligations of DPM's, which, in addition to 
the Market-Maker obligations of Rule 8.7, must fulfill a number of 
increased obligations including providing continuous electronic quotes, 
assuring that each of the displayed market quotations is honored, and 
complying heightened with bid/ask differential requirements.\5\
---------------------------------------------------------------------------

    \5\ Compare Rule 8.85(a)(i) (``[Each DPM shall] provide 
continuous electronic quotes . . . in at least 99% of the non-
adjusted options series or 100% of the non-adjusted option series 
minus one call-put pair . . .'') with Rule 8.7(d)(ii)(B) (``A 
Market-Maker will be required to maintain continuous electronic 
quotes . . . in 60% of the non-adjusted option series of the Market-
Maker's appointed classes that have a time to expiration of less 
than nine months.'').
---------------------------------------------------------------------------

    Rule 8.15 states that the Exchange may appoint, in an option class 
for which a DPM has not been appointed, one or more Market-Makers in 
good standing as LMMs and Supplemental Market-Makers (``SMMs'') to 
participate in opening rotation procedures for Hybrid 3.0 classes and/
or to determine a formula for generating updated market quotations 
during the trading day. LMM's in Hybrid 3.0 classes are obligated to 
quote a firm two-sided market of sufficient size to accommodate a 
relatively active opening within the bid/ask differential requirements 
determined by the Exchange.
    Rule 8.15A states the Exchange may appoint one or more Market-
Makers in good standing with an appointment in a Hybrid-Trading system 
option class for which a DPM has not been appointed as LMMs. Much like 
DPMs LMMs in Hybrid Classes are subject to increased obligations that 
include providing continuous electronic quotes that comply with the 
bid/ask differential requirements determined by the Exchange.
    Pursuant to Rules 8.15B and 8.87, the exchange may establish 
participation entitlements for LMM's and DPMs appointed pursuant to the 
aforementioned Rules. DPM's and LMM's must meet specific obligations 
prior to being awarded a participation entitlements [sic].
    Whether operating on the CBOE Trading Floor or from a remote 
location, all Market-Makers, including DPMs and LMMs, have access to 
the same information in the Consolidated Book that is available to all 
other market participants. Moreover, none of the Exchange's Market-
Makers have agency obligations to the Exchange's Order Book. As such, 
the primary distinctions between Market-Makers and DPMs and LMMs are 
the increased quoting requirements and allocation entitlements.
    Despite the fact that Market-Makers, DPMs and LMMs have access to 
the same trading information as all other market participants on the 
Exchange, the Exchange has distinct rules governing how DPMs and LMMs 
may operate. Rule 8.91(a) specifies that a DPM shall maintain 
information barriers that are reasonably designed to prevent the misuse 
of material, nonpublic information with any affiliates that may conduct 
a brokerage business in option classes allocated to the DPM or act as a

[[Page 7610]]

specialist or market-maker in any security underlying options allocated 
to the DPM. Rule 8.91 also requires a DPM provide its information 
barriers to the Exchange and obtain prior written approval.
    Rule 8.15(b)(5) requires LMMs in Hybrid 3.0 classes maintain 
information barriers that are reasonably designed to prevent the misuse 
of material, nonpublic information with any affiliates that may conduct 
a brokerage business in option classes allocated to the LMM or act as 
specialist or Market-Maker in any security underlying options allocated 
to the LMM. Rule 8.15A(b)(vii) similarly requires LMMs in Hybrid 
classes maintain information barriers that are reasonably designed to 
prevent the misuse of material, nonpublic information with any 
affiliates that may conduct a brokerage business in option classes 
allocated to the LMM or act as specialist or Market-Maker in any 
security underlying options allocated to the LMM. Neither Rule 8.15 nor 
8.15A require the prior Exchange approval of information barriers 
outlined in Rule 8.91.
Proposed Rule Change
    The Exchange believes the particularized guidelines in Rules, 8.91, 
8.15(b)(5) and 8.15A(b)(vii) for DPMs, LMMs in Hybrid 3.0 classes, and 
LMMs in Hybrid classes, respectively, are no longer necessary and 
proposes to delete them. Rather, the Exchange believes that Rule 4.18, 
governing the misuse of material, nonpublic information provides for an 
appropriate, principles-based approach to prevent the type of market 
abuses Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) are designed to 
address. Specifically, Rule 4.18 requires every TPH shall establish, 
maintain and enforce written policies and procedures reasonably 
designed, taking into consideration the nature of such TPH's business, 
to prevent the misuse, in violation of the Exchange Act and Exchange 
Rules, of material, nonpublic information by such TPH or persons 
associated with such TPH. For the purposes of this Rule, conduct 
constituting the misuse of material, nonpublic information in violation 
of the Exchange Act and Exchange Rules includes, but is not limited to, 
the following:
    (a) Trading in any securities issued by a corporation, partnership, 
Trust Issued Receipts or Units (as defined in Exchange Rules) or a 
trust or similar entities, or in any related securities or related 
options or other derivative securities, or in any related non-U.S. 
currency options, futures or options on futures on such currency, or 
any other derivatives based on such currency, or in any related 
commodity, related commodity futures or options on commodity futures or 
in any related commodity derivatives, while in possession of material, 
nonpublic information concerning that corporation, partnership, Trust 
Issued Receipts, or those Units, or that trust or similar entities;
    (b) Trading in an underlying security or related options or other 
derivative securities, or in any related non-U.S. currency, non-U.S. 
currency options, futures or options on futures on such currency, or in 
any related commodity, related commodity futures or options on 
commodity futures or any other related commodities derivatives, or any 
other derivatives based on such currency while in possession of 
material nonpublic information concerning imminent transactions in the 
above; and
    (c) Disclosing to another person or entity any material, nonpublic 
information involving a corporation, partnership, Trust Issued 
Receipts, or Units or a trust or similar entities whose shares are 
publicly traded or an imminent transactions in an underlying security 
or related securities or in the underlying non-U.S. currency of any 
related non-U.S. currency options, futures or options on futures on 
such currency, or any other derivatives based on such currency, or in 
any related commodity, related commodity futures or options on 
commodity futures or any other related commodity derivatives, for the 
purpose of facilitating the possible misuse of such material, nonpublic 
information.
    Because DPMs and LMMs are already subject to the requirements of 
Rule 4.18, the Exchange does not believe that it is necessary to 
separately require specific limitations on dealings between DPMs and 
LMMs and affiliates. Deleting Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) 
would provide DPMs and LMMs with the flexibility to adapt their 
policies and procedures as appropriate to reflect changes to their 
business model, business activities, or the securities market in a 
manner similar to how Market-Makers on the Exchange currently operate 
consistent with Rule 4.18.
    As noted above, DPMs and LMMs are distinguished under Exchange 
Rules from other types of Market-Makers only to the extent that they 
have certain heightened obligations and potential allocation 
entitlements. However, none of these heightened obligations provides 
different or greater access to nonpublic information than any other 
market participant on the Exchange. Specifically, whether on the CBOE 
Trading Floor or remotely, neither DPMs nor LMMs on the Exchange have 
access to trading information provided by the Exchange, either at, or 
prior to, the point of execution, that is not made available to all 
other market participants on the Exchange in a similar manner. Further, 
as noted above, DPMs and LMMs on the Exchange do not have any agency 
responsibilities for orders in the Order Book. Accordingly, because 
DPMs and LMMs do not have any trading advantages at the Exchange due to 
their market role, the Exchange believes that they should be subject to 
the same rules regarding the prevention of the misuse of material, 
nonpublic information, specifically Rule 4.18.\6\
---------------------------------------------------------------------------

    \6\ The Exchange notes that by deleting Rule 8.91, the Exchange 
would no longer require specific information barriers for DPMs or 
require pre-approval of any information barriers that a DPM would 
erect for purposes of protecting against the misuse of material 
nonpublic information. However, as is the case today with Market-
Makers, information barriers of new entrants, including new DPMs, 
would be subject to review as part of a new firm application. 
Moreover, the policies and procedures of DPMs and LMMs, including 
those relating to information barriers, would be subject to review 
by FINRA, on behalf of the Exchange, pursuant to a Regulatory 
Services Agreement.
---------------------------------------------------------------------------

    The Exchange notes that its proposed approach to use a principles-
based approach to protecting against the misuse of material nonpublic 
information for all of its registered Market-Makers is consistent with 
recently filed rule changes for NYSE MKT, LLC on behalf of NYSE Amex 
Options, International Securities Exchange, LLC (``ISE'') and BOX 
Options Exchange, LLC (``BOX'').\7\ The proposed approach is also 
consistent with approved rule changes for NYSE Arca Equities Inc. 
(``NYSE Arca''), BATS Exchange Inc. (``BATS'') and New York Stock 
Exchange, LLC (``NYSE'') rules governing cash equity Market-Makers on 
those respective exchanges.\8\ Except for

[[Page 7611]]

prescribed rules relating to floor-based designated Market-Makers on 
the NYSE, who have access to specified nonpublic trading information, 
each of these exchanges have moved to a principles-based approach to 
protecting against the misuse of material, nonpublic information. In 
connection with approving those rule changes, the Commission found that 
eliminating redundant information barrier requirements should not 
reduce the effectiveness of exchange rules requiring its members or 
participants to establish and maintain systems to supervise the 
activities of its members, including written procedures reasonably 
designed to ensure compliance with applicable federal securities law 
and regulations, and with the rules of the applicable exchange.\9\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release Nos. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a 
Principles-Based Approach to Prohibit the Misuse of Material 
Nonpublic Information by Specialists and e-Specialists by Deleting 
Rule 927.3NY and Section (f) of Rule 927.5NY); 75792 (August 31, 
2015), 80 FR 53606 (September 4, 2015) (SR-ISE-2015-26) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Adopting 
a Principles-Based Approach to Prohibit the Misuse of Material, non-
public Information by Market Makers by Deleting Rule 810); 75916 
(September 14, 2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015-
31) (Notice of Filing and immediate Effectiveness of Proposed Rule 
Change to Adopt a Principles-based Approach to Prohibit the Misuse 
of Material Nonpublic Information by Market Makers).
    \8\ See Securities Exchange Act Release Nos. 60604 (Sept. 2, 
2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order 
approving elimination of NYSE Arca rule that required market makers 
to establish and maintain specifically prescribed information 
barriers, including discussion of NYSE Arca and Nasdaq rules) 
(``Arca Approval Order''); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 
2, 2010) (SR-BATS-2010-003) (Order approving amendments to BATS Rule 
5.5 to move to a principles-based approach to protecting against the 
misuse of material, non-public information, and noting that the 
proposed change is consistent with the approaches of NYSE Arca and 
Nasdaq) (``BATS Approval Order''); and 72534 (July 3, 2014), 79 FR 
39440 (July 10, 2014), SR-NYSE-2014-12) (Order approving amendments 
to NYSE Rule 98 governing designated market makers to move to a 
principles-based approach to prohibit the misuse of material non-
public information) (``NYSE Approval Order'').
    \9\ See, e.g., BATS Approval Order, supra note 4 at 9458.
---------------------------------------------------------------------------

    The Exchange notes that even with this proposed rule change, 
pursuant to Rule 4.18, a DPM or LMM would still be obligated to ensure 
that its policies and procedures reflect the current state of its 
business and continue to be reasonably designed to prevent the misuse 
of material, nonpublic information. While information barriers would 
not specifically be required under the proposal, Rule 4.18 already 
requires that a TPH consider the nature of the TPH's business in 
structuring its policies and procedures, which may dictate that an 
information barrier or a functional separation be part of the 
appropriate set of policies and procedures that would be reasonably 
designed to achieve compliance with applicable securities law and 
regulations, and with applicable Exchange rules.
    The Exchange is not proposing to change what is considered to be 
material, non-public information and, thus does not expect there to be 
any changes to the types of information that an affiliated brokerage 
business of a market maker could share with such market maker. In that 
regard, the proposed rule change will not permit the brokerage unit of 
a TPH firm to have access to any non-public order or quote information 
of affiliated market maker, including hidden or undisplayed orders and 
quotes on the Exchange. TPHs do not expect to receive any additional 
order or quote information as a result of this proposed rule change.
    Further, the Exchange does not believe that there will be any 
material change to TPH information barriers as a result of removal of 
the Exchange's pre-approval requirements for DPMs. In fact, the 
Exchange anticipates that eliminating the pre-approval requirement 
should facilitate implementation of changes to TPH information barriers 
as necessary to protect against the misuse of material, non-public 
information. The Exchange also suggests that the pre-approval 
requirement is unnecessary because DPMs do not have agency 
responsibilities to the book. However, as is the case today with market 
makers, information barriers of new entrants would be subject to review 
as part of a new firm application. Moreover, the policies and 
procedures of market makers, including those relating to information 
barriers would be subject to review by FINRA, on behalf of the 
Exchange, pursuant to a Regulatory Services Agreement.
    The Exchange further notes that under Rule 4.18, a TPH would be 
able [sic] would be able to structure its firm to provide for its 
options DPMs or LMMs, as applicable, to be structured with its equities 
and customer-facing businesses, provided that any such structuring 
would be done in a manner reasonably designed to protect against the 
misuse of material, nonpublic information. For example, pursuant to 
Rule 4.18, a DPM on the Exchange could be in the same independent 
trading unit, a defined in Rule 200(f) of Regulation SHO,\10\ as an 
equities Market-Maker and other trading desks within the firm, 
including options trading desks, so that the firm could share post-
trade information to better manage its risk across related securities. 
The Exchange believes it is appropriate, and consistent with Rule 4.18 
and section 15(g) of the Act \11\ for a firm to share options position 
and related hedging position information (e.g., equities, futures, and 
foreign currency) within a firm to better manage risk on a firm-wide 
basis. The Exchange notes, however, that if so structured, a firm would 
need to have appropriate policies and procedures, including information 
barriers as applicable, to protect against the misuse of material non-
public information, and specifically customer information consistent 
with Rule 4.18. The Exchange further notes that Federal rules supersede 
Exchange rules in the event of any conflicts regarding the misuse of 
material non-public information.
---------------------------------------------------------------------------

    \10\ 17 CFR part 242.200(f).
    \11\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------

    The Exchange believes that the proposed reliance on the principles-
based Rule 4.18 would ensure that a TPH that operates a DPM or LMM 
would be required to protect against the misuse of any material 
nonpublic information. As noted above, Rule 4.18 already requires that 
firms refrain from trading while in possession of material nonpublic 
information concerning imminent transactions in a security or related 
product. The Exchange believes that moving to a principles-based 
approach rather than prescribing how and when to wall off a DPM or LMM 
from the rest of the firm would provide TPH operating DPMs or LMMs with 
appropriate tools to better manage risk across a firm, including 
integrating options positions with other positions of the firm or, as 
applicable, by the respective independent trading unit. Specifically, 
the Exchange believes that it is appropriate for risk management 
purposes for a TPH operating a DPM or LMM to be able to consider both 
DPM/LMM traded-positions for the purposes of calculating net positions 
consistent with Rule 200 of Regulation SHO,\12\ calculating intra-day 
net capital positions, and managing risk both generally as well as in 
compliance with Rule 15c3-5 under the Act (the ``Market Access 
Rule'').\13\ The Exchange notes that any risk management operations 
would need to operate consistent with the requirement to protect 
against the misuse of material non-public information.
---------------------------------------------------------------------------

    \12\ 17 CFR part 242.200.
    \13\ 17 CFR part 240.15c3-5.
---------------------------------------------------------------------------

    The Exchange further notes that if DPMs or LMMs are integrated with 
other Market-Making operations, they would be subject to existing rules 
that prohibit TPH from disadvantaging their customers or other market 
participants by improperly capitalizing of a TPH organization's access 
to the receipt of material nonpublic information. As such, a TPH 
organization that integrates its DPM or LMM operations together with 
equity Market-Making, would need to protect customer information 
consistent with existing obligations to protect such information. The 
Exchange has rules prohibiting TPHs from disadvantaging their customers 
or other market participants by improperly capitalizing on the TPH's 
access to or receipt of material nonpublic information. For example, 
Rule 4.24(e) requires Each TPH shall establish, maintain, and enforce 
written

[[Page 7612]]

supervisory procedures reasonably designed to prevent and detect 
violations of applicable securities laws and regulations, and 
applicable Exchange rules. Additionally Rule 6.9(e) prevents a TPH or 
person associated with a TPH, who has knowledge of all material terms 
and conditions of an original order and a solicited order, including a 
facilitation order, to enter, based on such knowledge, an order to buy 
or sell an option of the same class as an option that is the subject of 
the original order, or an order to buy or sell the security underlying 
such class, or an order to buy or sell any related instrument unless 
certain circumstances are met.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of section 6(b) of the Act.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that the proposed rule change 
would remove impediments to and perfect the mechanism of a free and 
open market by adopting a principles-based approach to permit a TPH 
operating a DPM or LMM to maintain and enforce policies and procedures 
to, among other things, prohibit the misuse of material nonpublic 
information. The proposed rule change would further eliminate 
restrictions on how a TPH structures its DPM and LMM operations. The 
Exchange notes that the proposed rule change is based on an approved 
rule of the Exchange to which DPMs and LMMs are already subject-Rule 
4.18-and harmonizes the rules governing DPMs, LMMs and Market-Makers. 
Moreover, TPH operating DPMs and LMMs would continue to be subject to 
federal and Exchange requirements for protecting material nonpublic 
order information.\17\ The Exchange believes that the proposed rule 
change would remove impediments to and perfect the mechanism of a free 
and open market because it would harmonize the Exchange's approach to 
protecting against the misuse of material nonpublic information and no 
longer subject DPMs and LMMs to redundant requirements. The Exchange 
does not believe that the existing requirements applicable to DPMs and 
LMMs are narrowly tailored to their respective roles because neither 
market participant has access to Exchange trading information in a 
manner different from any other market participant on the Exchange and 
they do not have agency responsibilities to the Order Book.
---------------------------------------------------------------------------

    \17\ See 15 U.S.C. 78o(g) and Rule 4.18.
---------------------------------------------------------------------------

    The Exchange further believes the proposal is designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade because existing rules make clear to all 
TPH the type of conduct that is prohibited by the Exchange. While the 
proposal eliminates certain requirements relating to the misuse of 
material nonpublic information, DPMs, LMMs and all other TPH would 
remain subject to existing Exchange rules requiring them to establish 
and maintain systems to supervise their activities, and to create, 
implement, and maintain written procedures that are reasonably designed 
to comply with applicable securities laws and Exchange rules, including 
the prohibition on the misuse of material nonpublic information.
    The Exchange notes that the proposed rule change would still 
require that a TPH operating DPMs and LMMs maintain and enforce 
policies and procedures designed to ensure compliance with applicable 
federal securities laws and regulations and with Exchange rules. Even 
thought there would no longer be pre-approval of DPM information 
barriers, and DPM or LMM written policies and procedures would continue 
to be subject to oversight by the Exchange and therefore the 
elimination of specific restrictions should not reduce the 
effectiveness of the Exchange rules to protect against the misuse of 
material nonpublic information. Rather, TPH will be able to utilize a 
flexible, principles-based approach to modify their policies and 
procedures as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. Moreover, 
while specified information barriers may no longer be required, a TPH's 
business model or business activities may dictate that an information 
barrier or functional separation be part of the appropriate set of 
policies and procedures that would be reasonably designed to achieve 
compliance with applicable securities laws and regulations, and with 
applicable Exchange rules. The Exchange therefore believes that the 
proposed rule change will maintain the existing protection of investors 
and the public interest that is currently applicable to DPM's and 
LMM's, while at the same time removing impediments to and perfecting a 
free and open market by moving to a principles-based approach to 
protect against the misuse of material nonpublic information.

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

    CBOE 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. To the contrary, the Exchange 
believes that the proposal will enhance competition by allowing DPMs 
and LMMs to comply with applicable Exchange rules in a manner best 
suited to their business models, business activities and the securities 
markets, thus reducing regulatory burdens while still ensuring 
compliance with applicable securities laws and regulations and Exchange 
rules. The Exchange believes that the proposal will foster a fair and 
orderly marketplace without being overly burdensome upon DPMs and LMMs.
    Moreover, the Exchange believes that the proposed rule change would 
eliminate a burden on competition for TPH which currently exists as a 
result of disparate rule treatment between the options and equities 
markets regarding how to protect against the misuse of material, 
nonpublic information. For those TPH that are also members of equities 
exchanges their respective equity Market-Maker operations are now 
subject to a principles-based approach to protecting against the misuse 
of material nonpublic information. The Exchange believes it would 
remove a burden on competition to enable TPH to similarly apply a 
principles-based approach to protecting against the misuse of material 
nonpublic information in the options space. To this end, the Exchange 
notes that Rule 4.18 still requires a TPH that operates as a Market-
Maker on the Exchange,

[[Page 7613]]

including a DPM or LMM, to evaluate its business to assure that its 
policies and procedures are reasonably designed to protect against the 
misuse of material, non-public information. However, with this proposed 
rule change, a TPH that trades equities and options could look at its 
firm more holistically to structure its operations in a manner that 
provides it with better tools to manage risks across multiple security 
classes, while at the same time protecting against the misuse of 
material nonpublic information.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \18\ and 
Rule 19b-4(f)(6) \19\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2016-007 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-2016-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2016-007 and should be 
submitted on or before March 4, 2016.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02841 Filed 2-11-16; 8:45 am]
BILLING CODE 8011-01-P
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