Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change Related to Market Wide Risk Protection, 20004-20007 [2016-07834]
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20004
DATES:
Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
Comments are due: April 8,
2016.
Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
[Release No. 34–77489; File No. SR–ISE–
2016–08]
I. Introduction
II. Notice of Commission Action
III. Ordering Paragraphs
I. Introduction
On March 31, 2016, the Postal Service
filed notice that it has entered into an
additional Global Expedited Package
Services 3 (GEPS 3) negotiated service
agreement (Agreement).1
To support its Notice, the Postal
Service filed a copy of the Agreement,
a copy of the Governors’ Decision
authorizing the product, a certification
of compliance with 39 U.S.C. 3633(a),
and an application for non-public
treatment of certain materials. It also
filed supporting financial workpapers.
II. Notice of Commission Action
The Commission establishes Docket
No. CP2016–144 for consideration of
matters raised by the Notice.
The Commission invites comments on
whether the Postal Service’s filing is
consistent with 39 U.S.C. 3632, 3633, or
3642, 39 CFR part 3015, and 39 CFR
part 3020, subpart B. Comments are due
no later than April 8, 2016. The public
portions of the filing can be accessed via
the Commission’s Web site (https://
www.prc.gov).
The Commission appoints Jennaca D.
Upperman to serve as Public
Representative in this docket.
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III. Ordering Paragraphs
It is ordered:
1. The Commission establishes Docket
No. CP2016–144 for consideration of the
matters raised by the Postal Service’s
Notice.
2. Pursuant to 39 U.S.C. 505, Jennaca
D. Upperman is appointed to serve as an
officer of the Commission to represent
1 Notice of United States Postal Service of Filing
a Functionally Equivalent Global Expedited
Package Services 3 Negotiated Service Agreement
and Application for Non-Public Treatment of
Materials Filed Under Seal, March 31, 2016
(Notice).
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SECURITIES AND EXCHANGE
COMMISSION
Table of Contents
17:54 Apr 05, 2016
By the Commission.
Stacy L. Ruble,
Secretary.
BILLING CODE 7710–FW–P
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
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the interests of the general public in this
proceeding (Public Representative).
3. Comments are due no later than
April 8, 2016.
4. The Secretary shall arrange for
publication of this order in the Federal
Register.
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of Proposed Rule
Change Related to Market Wide Risk
Protection
March 31, 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 March
17, 2016, the International Securities
Exchange, LLC (the ‘‘Exchange’’ or
‘‘ISE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change, as described
in Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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 introduce
new activity based order protections as
described in more detail below. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.ise.com), at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to introduce new risk
protections for orders designed to aid
members in their risk management by
supplementing current price
reasonability checks with activity based
order protections.3 In particular, the
Exchange proposes to introduce two
activity based risk protections that will
be mandatory for all members: (1) The
‘‘Order Entry Rate Protection,’’ which
protects members against entering
orders at a rate that exceeds predefined
thresholds,4 and (2) the ‘‘Order
Execution Rate Protection,’’ which
protects members against executing
orders at a rate that exceeds their
predefined risk settings. Both of these
risk protections are detailed in Proposed
Rule 714(d), ‘‘Market Wide Risk
Protection.’’ 5 The Exchange will
announce the implementation date of
the Market Wide Risk Protection in a
circular to be distributed to members
prior to implementation.
Pursuant to the proposed Market
Wide Risk Protection rule, the
Exchange’s trading system (the
‘‘System’’) will maintain one or more
counting programs on behalf of each
member that will count the number of
orders entered, and the number of
contracts traded on ISE or, if chosen by
the member,6 across both ISE and ISE’s
affiliate, ISE Gemini, LLC (‘‘ISE
Gemini’’), which shares a trading system
with ISE. Members can use multiple
counting programs to separate risk
protections for different groups
established within the member.7 The
3 The Exchange provides members with limit
order price protections designed to prevent
erroneous executions by rejecting orders priced too
far through the market. See Rule 714(b)(2).
4 The Exchange will determine when to initiate
the Order Entry Rate Protection pre-open to allow
members time to load their orders without
inadvertently triggering the protection. The precise
time will be established by the Exchange and
communicated to members via circular prior to
implementation.
5 The term ‘‘Market Wide Risk Protection’’
includes both the ‘‘Order Entry Rate Protection’’
and the ‘‘Order Execution Rate Protection.’’
6 Members will have the option to set different
risk parameters for their trading activity on each
exchange, or set risk parameters that apply to their
trading across both ISE and ISE Gemini, if desired.
7 The Exchange will explain how members can go
about setting up risk protections for different groups
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counting programs will maintain
separate counts, over rolling time
periods specified by the member for
each count, of: (1) The total number of
orders entered in the regular order book;
(2) the total number of orders entered in
the complex order book with only
options legs; (3) the total number of
orders entered in the complex order
book with both stock and options legs;
(4) the total number of contracts traded
in regular orders; and (5) the total
number of contracts traded in complex
orders with only options legs.8
Members will have discretion to
establish the applicable time period for
each of the counts maintained under the
Market Wide Risk Protection, provided
that the selected period must be within
minimum and maximum parameters
established by the Exchange and
announced via circular.9 While the
Market Wide Risk Protection is
mandatory for all members, the
Exchange is not proposing to establish
minimum or maximum values for the
order entry and execution parameters
described in (1) through (5) above. The
Exchange believes that this approach
will give members the flexibility needed
to appropriately tailor the Market Wide
Risk Protection to their respective risk
management needs. In this regard, the
Exchange notes that each member is in
the best position to determine risk
settings appropriate for their firm based
on the member’s trading activity and
business needs. In the interest of
maintaining a fair and orderly market,
however, the Exchange will establish
default values for the applicable time
period and order entry and execution
parameters in a circular to be
distributed to members. Default values
established by the Exchange will apply
only to members that do not submit
their own parameters for the Market
Wide Risk Protection.
The Exchange proposes to use
separate counts for regular orders,
complex options orders, and complex
orders with a stock component as
members may want to have different
(e.g., business units) in a circular issued to
members.
8 The member’s allowable order rate for the Order
Entry Rate Protection is comprised of the
parameters defined in (1) to (3), while the allowable
contract execution rate for the Order Execution Rate
Protection is comprised of the parameters defined
in (4) and (5). As explained below, the Exchange is
not including a complex execution count for
complex orders with a stock component as the
execution counts maintained by the Order
Execution Rate Protection are based solely on
options contracts traded. See note 9 supra [sic] and
accompanying text.
9 The Exchange anticipates that the minimum and
maximum values for the applicable time period will
be initially set at one second and a full trading day,
respectively.
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risk settings for these instruments. In
order to fully protect members,
however, if the Market Wide Risk
Protection is triggered based on any
count, the triggered action will be taken
across the entire market. In particular, if
the Market Wide Risk Protection is
triggered, action will be taken with
respect to all products traded in both
simple and complex instruments, and
across ISE or, if applicable, ISE and ISE
Gemini. Contracts executed on the
agency and contra-side of a two-sided
crossing order will be counted
separately for the Order Execution Rate
Protection. In addition, the contract
execution count for complex orders will
be the sum of the number of contracts
executed with respect to each leg.
Complex instruments that contain a
stock component will not be included as
part of the complex order execution
count as the Order Execution Rate
Protection is based exclusively on
options contracts executed, and
therefore does not apply to orders that
have both stock and options
components.10
The System will trigger the Market
Wide Risk Protection when the counting
program has determined that the
member has either (1) entered during
the specified time period a number of
orders exceeding its designated
allowable order rate, or (2) executed
during the specified time period a
number of contracts exceeding its
designated allowable contract execution
rate. In particular, after a member enters
an order, or a member’s order is
executed, the System will look back
over the specified time period to
determine whether the member has
exceeded the threshold that it has set for
the total number of orders entered or the
total number of contracts traded, as
applicable. If the member’s threshold
has been exceeded in either simple or
complex instruments, the Market Wide
Risk Protection will be triggered and the
System will automatically reject all
subsequent incoming orders entered by
the member on ISE or, if applicable,
across both ISE and ISE Gemini.11 In
addition, if the member has opted in to
this functionality, the System will
automatically cancel all of the member’s
10 Stock-option orders contain both an option
component(s) executed in contracts and a stock
component executed in shares. The Exchange does
not believe that these two components can be
combined in a way that provides a meaningful
measure of risk exposure for members, and has
therefore determined not to provide the Order
Execution Rate Protection for complex orders that
contain a stock component.
11 Members that set different risk parameters for
ISE and ISE Gemini will only have their orders
rejected on the exchange whose threshold was
exceeded.
PO 00000
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20005
existing orders. The Market Wide Risk
Protection will remain engaged until the
member manually (e.g., via email)
notifies the Exchange to enable the
acceptance of new orders; however, the
System will still allow members to
interact with existing orders entered
before the protection was triggered,
including sending cancel order
messages and receiving trade executions
for those orders.
The Exchange believes that the
proposed Market Wide Risk Protection
will assist members in better managing
their risk when trading on the [sic] ISE.
In particular, the proposed rule change
provides functionality that allows
members to set risk management
thresholds for the number of orders
entered or contracts executed on the
Exchange during a specified period.
This is similar to how other options
exchanges have implemented activitybased risk management protections,12
and the Exchange believes this
functionality will likewise be beneficial
for ISE members.
The examples below illustrate how
the Market Wide Risk Protection would
work both for order entry and order
execution protections:
Example 1, Order Entry Rate
Protection:
Broker Dealer 1 (‘‘BD1’’) designates an
allowable order rate of 499 orders/1
second in simple instruments, 299
orders/1 second in complex options
orders, and 199 orders/1 second in
complex orders with a stock component.
@0 milliseconds, BD1 enters 200 regular
orders. (Regular order total: 200
orders)
@150 milliseconds, BD1 enters 50
complex options orders. (Complex
options order total: 50 orders)
@250 milliseconds, BD1 enters 100
complex orders with a stock
component. (Complex order with
stock total: 100 orders)
@450 milliseconds, BD1 enters 250
regular orders. (Regular order total:
450 orders)
@950 milliseconds, BD1 enters 50
regular orders. (Regular order total:
500 orders)
Market Wide Risk Protection is
triggered on ISE, and, if applicable, ISE
Gemini 13 due to exceeding 499 regular
orders in 1 second. All subsequent
orders in both simple and complex
12 See Securities Exchange Act Release Nos.
74118 (January 22, 2015), 80 FR 4605 (January 28,
2015) (Notice); 74496 (March 13, 2015), 80 FR
14421 (March 19, 2015) (Approval) (SR–MIAX–
2015–03).
13 Members that share risk settings across both
ISE and ISE Gemini will have the Market Wide Risk
Protection triggered on both markets.
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instruments are rejected, and if BD1 has
opted in to this functionality, all
existing orders are cancelled. BD1 must
contact Market Operations to resume
trading.
Example 2, Order Execution Rate
Protection:
BD1 designates an allowable
execution rate of 15,000 contracts/2
seconds in simple instruments and
10,000 contracts/2 seconds in complex
options orders.
@0 milliseconds, BD1 receives
executions for 5,000 contracts from
regular orders. (Regular execution
total: 5,000 contracts)
@500 milliseconds, BD1 receives an
execution for 2,500 contracts from a
complex options order. (Complex
execution total: 2,500 contracts)
@600 milliseconds, BD1 receives
executions for 10,000 contracts from
regular orders. (Regular execution
total: 15,000 contracts)
@650 milliseconds, BD1 receives an
execution for 1,500 contracts from a
stock-option order. (Complex
execution total: 2,500 contracts) 14
@850 milliseconds, BD1 receives an
execution for 3,000 contracts from a
complex options order. (Complex
execution total: 5,500 contracts)
@1150 milliseconds, BD1 receives an
execution for 3,000 contracts from a
complex options order. (Complex
execution total: 8,500 contracts)
@1700 milliseconds, BD1 receives an
execution for 2,000 contracts from a
complex options order. (Complex
execution total: 10,500 contracts)
Market Wide Risk Protection is
triggered on ISE, and, if applicable, ISE
Gemini 15 due to exceeding 10,000
contracts in 2 seconds for complex
options orders. All subsequent orders in
both simple and complex instruments
are rejected, and if BD1 has opted in to
this functionality, all existing orders are
cancelled. BD1 must contact Market
Operations to resume trading.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder that
are applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.16 Specifically, the proposed rule
change is consistent with Section 6(b)(5)
of the Act,17 because it is designed to
14 Complex orders with a stock component are
not included in the order execution count.
15 Members that share risk settings across both
ISE and ISE Gemini will have the Market Wide Risk
Protection triggered on both markets.
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
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17:54 Apr 05, 2016
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promote just and equitable principles of
trade, remove impediments to and
perfect the mechanisms of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
The Exchange believes that the
proposed rule change would assist with
the maintenance of a fair and orderly
market by establishing new activity
based risk protections for orders. The
Exchange currently offers a risk
protection mechanism for market maker
quotes that removes the member’s
quotes if a specified number of
curtailment events occur during a set
time period (‘‘Market Wide Speed
Bump’’).18 The Exchange believes that
this Market Wide Speed Bump
functionality has been successful in
reducing market maker risk and now
proposes to adopt risk protections for
orders that would allow other members
to properly manage their exposure to
excessive risk. In particular, the
proposed rule change would implement
two new risk protections based on the
rate of order entry and order execution,
respectively. The Exchange believes that
both of these new protections, which
together encompass the proposed
Market Wide Risk Protection, would
enable members to better manage their
risk when trading options on the
Exchange by limiting the member’s risk
exposure when systems or other issues
result in orders being entered or
executed at a rate that exceeds
predefined thresholds. In today’s market
the Exchange believes that robust risk
management is becoming increasingly
more important for all members. The
proposed rule change would provide an
additional layer of risk protection for
market participants that trade on the
Exchange.
The proposed Market Wide Risk
Protection is similar to risk management
functionality provided by other options
exchanges, including, for example, the
MIAX Options Exchange (‘‘MIAX’’),
which recently received Commission
approval for its ‘‘Risk Protection
Monitor’’ for orders.19 In particular, the
Market Wide Risk Protection is designed
to reduce risk associated with system
errors or market events that may cause
members to send a large number of
orders, or receive multiple, automatic
executions, before they can adjust their
exposure in the market. Without
adequate risk management tools, such as
those proposed in this filing, members
could reduce the amount of order flow
and liquidity that they provide. Such
actions may undermine the quality of
18 See
19 See
PO 00000
Rule 804(g)(2).
supra note 10 [sic].
Frm 00056
Fmt 4703
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the markets available to customers and
other market participants. Accordingly,
the proposed rule change is designed to
encourage members to submit
additional order flow and liquidity to
the Exchange, thereby removing
impediments to and perfect [sic] the
mechanisms of a free and open market
and a national market system and, in
general, protecting investors and the
public interest. In addition, providing
members with more tools for managing
risk will facilitate transactions in
securities because, as noted above, the
members will have more confidence
that protections are in place that reduce
the risks from potential system errors
and market events. As a result, the new
functionality has the potential to
promote just and equitable principles of
trade.
The Exchange also believes that it is
consistent with the protection of
investors and the public interest to offer
the Market Wide Risk Protection to
members across both ISE and ISE
Gemini as this will permit members to
more effectively manage their risk
simultaneously on both markets if
desired. The Exchange already offers
cross market risk protections for market
makers [sic] quotes,20 and is now
proposing to similarly offer a cross
market risk protection for orders in
order to reduce the risk that members
face when entering orders on multiple
exchanges. The Exchange notes that
issues that would trigger the Market
Wide Risk Protection are not normally
confined to a member’s activity on a
single exchange. Accordingly, the
Exchange believes that offering the
Market Wide Risk Protection on a crossmarket basis would help members to
more effectively manage their risk when
trading on multiple markets, and reduce
disruptive trading events to the benefit
of all members and investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,21 the Exchange does not believe
that the proposed rule change would
impose any burden on intermarket or
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed Market Wide Risk Protection
is similar to risk protections already
available on other options exchanges,22
and is designed to be a competitive
20 See Securities Exchange Act Release Nos.
71759 (March 20, 2014), 79 FR 16850 (March 26,
2014) (‘‘Notice’’); 73147 (September 19, 2014), 79
FR 57639 (September 25, 2014) (Approval) (SR–
ISE–2014–09).
21 15 U.S.C. 78f(b)(8).
22 See supra notes 10 [sic] and 19.
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offering that would mitigate the risk
associated with trading on the
Exchange. Market makers already
benefit from Market Wide Speed Bump
functionality available for quotes. The
proposed change would extend new risk
protections to orders so that additional
market participants can benefit from
risk mitigating functionality. Like the
Exchange’s Market Wide Speed Bump,
the proposed rule change would also be
offered cross-market to members that
want to be protected from inadvertent
exposure to excessive risk when trading
on both ISE and ISE Gemini. Permitting
this functionality to be cross-market will
not have any impact on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
In addition, the proposed functionality
would be mandatory for all members,
and would be made available on an
equal and non-discriminatory basis. As
such, the Exchange does not believe that
the proposed rule change would impose
any unnecessary burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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Within 45 days of the publication date
of this notice or within such longer
period (1) as the Commission may
designate up to 45 days of such date if
it finds such longer period to be
appropriate and publishes its reasons
for so finding or (2) as to which the selfregulatory organization 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:
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17:54 Apr 05, 2016
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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–
ISE–2016–08 on the subject line.
Paper Comments
All submissions should refer to File
Number SR–ISE–2016–08. 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–ISE–
2016–08 and should be submitted on or
before April 27, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–07834 Filed 4–5–16; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32063; 812–14537]
Advisors Asset Management, Inc. and
AAM ETF Trust; Notice of Application
March 31, 2016.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act.
AGENCY:
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
23 17
20007
Sfmt 4703
Summary of Application:
Applicants request an order that would
permit (a) series of certain open-end
management investment companies to
issue shares (‘‘Shares’’) redeemable in
large aggregations only (‘‘Creation
Units’’); (b) secondary market
transactions in Shares to occur at
negotiated market prices rather than at
net asset value (‘‘NAV’’); (c) certain
series to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of Shares for
redemption; (d) certain affiliated
persons of the series to deposit
securities into, and receive securities
from, the series in connection with the
purchase and redemption of Creation
Units; and (e) certain registered
management investment companies and
unit investment trusts (‘‘UITs’’) outside
of the same group of investment
companies as the series to acquire
Shares.
Applicants: Advisors Asset
Management Inc. (the ‘‘Initial Adviser’’)
and AAM ETF Trust (the ‘‘Trust’’).
DATES: Filing Dates: The application was
filed on August 20, 2015, and amended
on January 13, 2016.
Hearing or Notification of Hearing: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on April 25, 2016, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit, or for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
SUMMARY:
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Agencies
[Federal Register Volume 81, Number 66 (Wednesday, April 6, 2016)]
[Notices]
[Pages 20004-20007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07834]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77489; File No. SR-ISE-2016-08]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change Related to Market Wide
Risk Protection
March 31, 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 March 17, 2016, the International Securities Exchange, LLC
(the ``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change, as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to introduce new activity based order
protections as described in more detail below. The text of the proposed
rule change is available on the Exchange's Web site (https://www.ise.com), at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to introduce new risk
protections for orders designed to aid members in their risk management
by supplementing current price reasonability checks with activity based
order protections.\3\ In particular, the Exchange proposes to introduce
two activity based risk protections that will be mandatory for all
members: (1) The ``Order Entry Rate Protection,'' which protects
members against entering orders at a rate that exceeds predefined
thresholds,\4\ and (2) the ``Order Execution Rate Protection,'' which
protects members against executing orders at a rate that exceeds their
predefined risk settings. Both of these risk protections are detailed
in Proposed Rule 714(d), ``Market Wide Risk Protection.'' \5\ The
Exchange will announce the implementation date of the Market Wide Risk
Protection in a circular to be distributed to members prior to
implementation.
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\3\ The Exchange provides members with limit order price
protections designed to prevent erroneous executions by rejecting
orders priced too far through the market. See Rule 714(b)(2).
\4\ The Exchange will determine when to initiate the Order Entry
Rate Protection pre-open to allow members time to load their orders
without inadvertently triggering the protection. The precise time
will be established by the Exchange and communicated to members via
circular prior to implementation.
\5\ The term ``Market Wide Risk Protection'' includes both the
``Order Entry Rate Protection'' and the ``Order Execution Rate
Protection.''
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Pursuant to the proposed Market Wide Risk Protection rule, the
Exchange's trading system (the ``System'') will maintain one or more
counting programs on behalf of each member that will count the number
of orders entered, and the number of contracts traded on ISE or, if
chosen by the member,\6\ across both ISE and ISE's affiliate, ISE
Gemini, LLC (``ISE Gemini''), which shares a trading system with ISE.
Members can use multiple counting programs to separate risk protections
for different groups established within the member.\7\ The
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counting programs will maintain separate counts, over rolling time
periods specified by the member for each count, of: (1) The total
number of orders entered in the regular order book; (2) the total
number of orders entered in the complex order book with only options
legs; (3) the total number of orders entered in the complex order book
with both stock and options legs; (4) the total number of contracts
traded in regular orders; and (5) the total number of contracts traded
in complex orders with only options legs.\8\
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\6\ Members will have the option to set different risk
parameters for their trading activity on each exchange, or set risk
parameters that apply to their trading across both ISE and ISE
Gemini, if desired.
\7\ The Exchange will explain how members can go about setting
up risk protections for different groups (e.g., business units) in a
circular issued to members.
\8\ The member's allowable order rate for the Order Entry Rate
Protection is comprised of the parameters defined in (1) to (3),
while the allowable contract execution rate for the Order Execution
Rate Protection is comprised of the parameters defined in (4) and
(5). As explained below, the Exchange is not including a complex
execution count for complex orders with a stock component as the
execution counts maintained by the Order Execution Rate Protection
are based solely on options contracts traded. See note 9 supra [sic]
and accompanying text.
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Members will have discretion to establish the applicable time
period for each of the counts maintained under the Market Wide Risk
Protection, provided that the selected period must be within minimum
and maximum parameters established by the Exchange and announced via
circular.\9\ While the Market Wide Risk Protection is mandatory for all
members, the Exchange is not proposing to establish minimum or maximum
values for the order entry and execution parameters described in (1)
through (5) above. The Exchange believes that this approach will give
members the flexibility needed to appropriately tailor the Market Wide
Risk Protection to their respective risk management needs. In this
regard, the Exchange notes that each member is in the best position to
determine risk settings appropriate for their firm based on the
member's trading activity and business needs. In the interest of
maintaining a fair and orderly market, however, the Exchange will
establish default values for the applicable time period and order entry
and execution parameters in a circular to be distributed to members.
Default values established by the Exchange will apply only to members
that do not submit their own parameters for the Market Wide Risk
Protection.
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\9\ The Exchange anticipates that the minimum and maximum values
for the applicable time period will be initially set at one second
and a full trading day, respectively.
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The Exchange proposes to use separate counts for regular orders,
complex options orders, and complex orders with a stock component as
members may want to have different risk settings for these instruments.
In order to fully protect members, however, if the Market Wide Risk
Protection is triggered based on any count, the triggered action will
be taken across the entire market. In particular, if the Market Wide
Risk Protection is triggered, action will be taken with respect to all
products traded in both simple and complex instruments, and across ISE
or, if applicable, ISE and ISE Gemini. Contracts executed on the agency
and contra-side of a two-sided crossing order will be counted
separately for the Order Execution Rate Protection. In addition, the
contract execution count for complex orders will be the sum of the
number of contracts executed with respect to each leg. Complex
instruments that contain a stock component will not be included as part
of the complex order execution count as the Order Execution Rate
Protection is based exclusively on options contracts executed, and
therefore does not apply to orders that have both stock and options
components.\10\
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\10\ Stock-option orders contain both an option component(s)
executed in contracts and a stock component executed in shares. The
Exchange does not believe that these two components can be combined
in a way that provides a meaningful measure of risk exposure for
members, and has therefore determined not to provide the Order
Execution Rate Protection for complex orders that contain a stock
component.
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The System will trigger the Market Wide Risk Protection when the
counting program has determined that the member has either (1) entered
during the specified time period a number of orders exceeding its
designated allowable order rate, or (2) executed during the specified
time period a number of contracts exceeding its designated allowable
contract execution rate. In particular, after a member enters an order,
or a member's order is executed, the System will look back over the
specified time period to determine whether the member has exceeded the
threshold that it has set for the total number of orders entered or the
total number of contracts traded, as applicable. If the member's
threshold has been exceeded in either simple or complex instruments,
the Market Wide Risk Protection will be triggered and the System will
automatically reject all subsequent incoming orders entered by the
member on ISE or, if applicable, across both ISE and ISE Gemini.\11\ In
addition, if the member has opted in to this functionality, the System
will automatically cancel all of the member's existing orders. The
Market Wide Risk Protection will remain engaged until the member
manually (e.g., via email) notifies the Exchange to enable the
acceptance of new orders; however, the System will still allow members
to interact with existing orders entered before the protection was
triggered, including sending cancel order messages and receiving trade
executions for those orders.
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\11\ Members that set different risk parameters for ISE and ISE
Gemini will only have their orders rejected on the exchange whose
threshold was exceeded.
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The Exchange believes that the proposed Market Wide Risk Protection
will assist members in better managing their risk when trading on the
[sic] ISE. In particular, the proposed rule change provides
functionality that allows members to set risk management thresholds for
the number of orders entered or contracts executed on the Exchange
during a specified period. This is similar to how other options
exchanges have implemented activity-based risk management
protections,\12\ and the Exchange believes this functionality will
likewise be beneficial for ISE members.
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\12\ See Securities Exchange Act Release Nos. 74118 (January 22,
2015), 80 FR 4605 (January 28, 2015) (Notice); 74496 (March 13,
2015), 80 FR 14421 (March 19, 2015) (Approval) (SR-MIAX-2015-03).
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The examples below illustrate how the Market Wide Risk Protection
would work both for order entry and order execution protections:
Example 1, Order Entry Rate Protection:
Broker Dealer 1 (``BD1'') designates an allowable order rate of 499
orders/1 second in simple instruments, 299 orders/1 second in complex
options orders, and 199 orders/1 second in complex orders with a stock
component.
@0 milliseconds, BD1 enters 200 regular orders. (Regular order total:
200 orders)
@150 milliseconds, BD1 enters 50 complex options orders. (Complex
options order total: 50 orders)
@250 milliseconds, BD1 enters 100 complex orders with a stock
component. (Complex order with stock total: 100 orders)
@450 milliseconds, BD1 enters 250 regular orders. (Regular order total:
450 orders)
@950 milliseconds, BD1 enters 50 regular orders. (Regular order total:
500 orders)
Market Wide Risk Protection is triggered on ISE, and, if
applicable, ISE Gemini \13\ due to exceeding 499 regular orders in 1
second. All subsequent orders in both simple and complex
[[Page 20006]]
instruments are rejected, and if BD1 has opted in to this
functionality, all existing orders are cancelled. BD1 must contact
Market Operations to resume trading.
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\13\ Members that share risk settings across both ISE and ISE
Gemini will have the Market Wide Risk Protection triggered on both
markets.
Example 2, Order Execution Rate Protection:
BD1 designates an allowable execution rate of 15,000 contracts/2
seconds in simple instruments and 10,000 contracts/2 seconds in complex
options orders.
@0 milliseconds, BD1 receives executions for 5,000 contracts from
regular orders. (Regular execution total: 5,000 contracts)
@500 milliseconds, BD1 receives an execution for 2,500 contracts from a
complex options order. (Complex execution total: 2,500 contracts)
@600 milliseconds, BD1 receives executions for 10,000 contracts from
regular orders. (Regular execution total: 15,000 contracts)
@650 milliseconds, BD1 receives an execution for 1,500 contracts from a
stock-option order. (Complex execution total: 2,500 contracts) \14\
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\14\ Complex orders with a stock component are not included in
the order execution count.
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@850 milliseconds, BD1 receives an execution for 3,000 contracts from a
complex options order. (Complex execution total: 5,500 contracts)
@1150 milliseconds, BD1 receives an execution for 3,000 contracts from
a
complex options order. (Complex execution total: 8,500 contracts)
@1700 milliseconds, BD1 receives an execution for 2,000 contracts from
a complex options order. (Complex execution total: 10,500 contracts)
Market Wide Risk Protection is triggered on ISE, and, if
applicable, ISE Gemini \15\ due to exceeding 10,000 contracts in 2
seconds for complex options orders. All subsequent orders in both
simple and complex instruments are rejected, and if BD1 has opted in to
this functionality, all existing orders are cancelled. BD1 must contact
Market Operations to resume trading.
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\15\ Members that share risk settings across both ISE and ISE
Gemini will have the Market Wide Risk Protection triggered on both
markets.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange, and,
in particular, with the requirements of Section 6(b) of the Act.\16\
Specifically, the proposed rule change is consistent with Section
6(b)(5) of the Act,\17\ because it is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would assist
with the maintenance of a fair and orderly market by establishing new
activity based risk protections for orders. The Exchange currently
offers a risk protection mechanism for market maker quotes that removes
the member's quotes if a specified number of curtailment events occur
during a set time period (``Market Wide Speed Bump'').\18\ The Exchange
believes that this Market Wide Speed Bump functionality has been
successful in reducing market maker risk and now proposes to adopt risk
protections for orders that would allow other members to properly
manage their exposure to excessive risk. In particular, the proposed
rule change would implement two new risk protections based on the rate
of order entry and order execution, respectively. The Exchange believes
that both of these new protections, which together encompass the
proposed Market Wide Risk Protection, would enable members to better
manage their risk when trading options on the Exchange by limiting the
member's risk exposure when systems or other issues result in orders
being entered or executed at a rate that exceeds predefined thresholds.
In today's market the Exchange believes that robust risk management is
becoming increasingly more important for all members. The proposed rule
change would provide an additional layer of risk protection for market
participants that trade on the Exchange.
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\18\ See Rule 804(g)(2).
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The proposed Market Wide Risk Protection is similar to risk
management functionality provided by other options exchanges,
including, for example, the MIAX Options Exchange (``MIAX''), which
recently received Commission approval for its ``Risk Protection
Monitor'' for orders.\19\ In particular, the Market Wide Risk
Protection is designed to reduce risk associated with system errors or
market events that may cause members to send a large number of orders,
or receive multiple, automatic executions, before they can adjust their
exposure in the market. Without adequate risk management tools, such as
those proposed in this filing, members could reduce the amount of order
flow and liquidity that they provide. Such actions may undermine the
quality of the markets available to customers and other market
participants. Accordingly, the proposed rule change is designed to
encourage members to submit additional order flow and liquidity to the
Exchange, thereby removing impediments to and perfect [sic] the
mechanisms of a free and open market and a national market system and,
in general, protecting investors and the public interest. In addition,
providing members with more tools for managing risk will facilitate
transactions in securities because, as noted above, the members will
have more confidence that protections are in place that reduce the
risks from potential system errors and market events. As a result, the
new functionality has the potential to promote just and equitable
principles of trade.
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\19\ See supra note 10 [sic].
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The Exchange also believes that it is consistent with the
protection of investors and the public interest to offer the Market
Wide Risk Protection to members across both ISE and ISE Gemini as this
will permit members to more effectively manage their risk
simultaneously on both markets if desired. The Exchange already offers
cross market risk protections for market makers [sic] quotes,\20\ and
is now proposing to similarly offer a cross market risk protection for
orders in order to reduce the risk that members face when entering
orders on multiple exchanges. The Exchange notes that issues that would
trigger the Market Wide Risk Protection are not normally confined to a
member's activity on a single exchange. Accordingly, the Exchange
believes that offering the Market Wide Risk Protection on a cross-
market basis would help members to more effectively manage their risk
when trading on multiple markets, and reduce disruptive trading events
to the benefit of all members and investors.
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\20\ See Securities Exchange Act Release Nos. 71759 (March 20,
2014), 79 FR 16850 (March 26, 2014) (``Notice''); 73147 (September
19, 2014), 79 FR 57639 (September 25, 2014) (Approval) (SR-ISE-2014-
09).
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\21\ the Exchange
does not believe that the proposed rule change would impose any burden
on intermarket or intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
Market Wide Risk Protection is similar to risk protections already
available on other options exchanges,\22\ and is designed to be a
competitive
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offering that would mitigate the risk associated with trading on the
Exchange. Market makers already benefit from Market Wide Speed Bump
functionality available for quotes. The proposed change would extend
new risk protections to orders so that additional market participants
can benefit from risk mitigating functionality. Like the Exchange's
Market Wide Speed Bump, the proposed rule change would also be offered
cross-market to members that want to be protected from inadvertent
exposure to excessive risk when trading on both ISE and ISE Gemini.
Permitting this functionality to be cross-market will not have any
impact on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. In addition, the proposed
functionality would be mandatory for all members, and would be made
available on an equal and non-discriminatory basis. As such, the
Exchange does not believe that the proposed rule change would impose
any unnecessary burden on competition.
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\21\ 15 U.S.C. 78f(b)(8).
\22\ See supra notes 10 [sic] and 19.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the publication date of this notice or within
such longer period (1) as the Commission may designate up to 45 days of
such date if it finds such longer period to be appropriate and
publishes its reasons for so finding or (2) as to which the self-
regulatory organization 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-ISE-2016-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2016-08. 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-ISE-2016-08 and should be
submitted on or before April 27, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07834 Filed 4-5-16; 8:45 am]
BILLING CODE 8011-01-P