Self-Regulatory Organizations; C2 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 Market-Makers and Designated Primary Market-Makers (“DPMs”), 52498-52502 [2016-18702]
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shorter time as designated by the
Commission.
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: (1) Necessary or appropriate in
the public interest; (2) for the protection
of investors; or (3) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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–
BatsEDGX–2016–36 and should be
submitted on or before August 29, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–18701 Filed 8–5–16; 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
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsEDGX–2016–36 on the subject line.
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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:
Self-Regulatory Organizations; C2
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 Market-Makers and
Designated Primary Market-Makers
(‘‘DPMs’’)
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–BatsEDGX–2016–36. 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 such
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78461; File No. SR–C2–
2016–015]
August 2, 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 July 28,
2016, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to delete
Rules 8.9 and 8.21 related to
information barriers. 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.
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
Frm 00102
Fmt 4703
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 Market-Makers and
DPMs by deleting Rule 8.9 and Rule
8.21. 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 8.9 and Rule 8.21 are
no longer necessary because all TPHs,
including Market-Makers and DPMs, are
subject to the Exchange’s general
principles-based requirements
governing the protection against misuse
of material, nonpublic information,
pursuant to Chapter 4 and incorporated
therin [sic] CBOE Rule 4.18 3
(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
Pursuant to Rule 8.1, TPHs registered
as Market-Makers have certain rights
and bear certain responsibilities beyond
those of other TPHs. All Market-Makers
are subject to the requirements of Rule
8.5, which sets forth the obligations of
Market-Makers, including providing
continuous electronic quotes.
Rule 8.17 outlines the obligations of
DPMs, which must fulfill a number of
increased obligations in addition to the
Market-Maker obligations of Rule 8.5,
including providing continuous
3 Chapter 4 of the CBOE rulebook has been
incorporated into Chapter 4 of the C2 Rules. CBOE
Rule 4.18, as incorporated in the C2 Rules, will
hereafter be referenced as ‘‘Rule 4.18.’’
9 17
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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electronic quotes in a larger percentage
of series.4
Pursuant to Rule 8.19, the Exchange
may establish participation entitlements
for DPMs appointed pursuant to the
aforementioned Rules. DPMs must meet
specific obligations prior to being
awarded a participation entitlements.
All Market-Makers and DPMs have
access to the same information in the
Book that is available to all other market
participants. Moreover, none of the
Exchange’s Market-Makers have agency
obligations to the Book.
Despite the fact that Market-Makers
and DPMs have access to the same
trading information as all other market
participants on the Exchange, the
Exchange has distinct rules governing
how Market-Makers and DPMs may
operate. Rule 8.9 states that a MarketMaker 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 Market-maker or that may act as a
specialist or market-maker in any
security underlying options allocated to
the Market-Maker. Rule 8.21 states 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 specialist or marketmaker in any security underlying
options allocated to the DPM. Rule 8.21
also requires a DPM provide its
information barriers to the Exchange
and obtain prior written approval.
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Proposed Rule Change
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 8.9 and 8.21 are designed to
address. Specifically, Rule 4.18 requires
every TPH to 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 Securities Exchange Act
of 1934 (the ‘‘Act’’) and Exchange Rules,
of material, nonpublic information by
4 Compare Rule 8.17(a)(1) (‘‘[Each DPM shall]
provide continuous electronic quotes . . . in at
least the lesser of 99% of the non-adjusted options
series (as defined in Rule 8.5(a)(1)) or 100% of the
non-adjusted option series minus one call-put pair
. . .’’) with Rule 8.5(a)(1) (‘‘During trading hours a
Market-Maker must maintain a continuous twosided market in 60% of the non-adjusted option
series of each registered class that have a time to
expiration of less than nine months.’’).
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such TPH or persons associated with
such TPH. For the purposes of Rule
4.18, conduct constituting the misuse of
material, nonpublic information in
violation of the 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 Market-Makers and DPMs are
already subject to the requirements of
Rule 4.18, the Exchange does not
believe that it is necessary to require all
Market-Makers and DPMs to explicitly
maintain information barriers. Deleting
Rules 8.9 and 8.21 would provide
Market-Makers and DPMs with the
flexibility to adapt their policies and
procedures as appropriate to reflect
changes to their business model,
PO 00000
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Fmt 4703
Sfmt 4703
52499
business activities, or the securities
market in a manner similar to how other
TPHs on the Exchange currently operate
consistent with Rule 4.18.
Neither the obligations nor the
entitlements associated with MarketMakers and DPMs provide different or
greater access to nonpublic information
than any other market participant on the
Exchange. Specifically, neither MarketMakers nor DPMs 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, Market-Makers
and DPMs on the Exchange do not have
any agency responsibilities for orders in
the Book. Accordingly, because MarketMakers and DPMs do not have any
trading advantages at the Exchange due
to their market roles, the Exchange
believes that they should be subject to
the same rules regarding the prevention
of the misuse of material, nonpublic
information, specifically Rule 4.18.5
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 the
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’), NYSE MKT,
LLC on behalf of NYSE Amex Options,
International Securities Exchange, LLC
(‘‘ISE’’), BOX Options Exchange, LLC
(‘‘BOX’’), BATS Exchange, Inc.
(‘‘BATS’’) on behalf of BATS Options
Market (‘‘BATS Options’’), NASDAQ
OMX PHLX, LLC (‘‘PHLX’’), and
NASDAQ BX, Inc. (‘‘BX Options’’) 6 The
5 The Exchange notes that by deleting Rules 8.9
and 8.21, the Exchange would no longer require
information barriers for Market-Makers or DPMs or,
with respect to DPMs, require pre-approval of any
information barriers that a DPM would erect for
purposes of protecting against the misuse of
material nonpublic information. However,
information barriers of new entrants, including new
Market-Makers and DPMs, would be subject to
review as part of a new firm application. Moreover,
the policies and procedures of Market-Makers and
DPMs, including those relating to information
barriers, would be subject to review by FINRA, on
behalf of the Exchange, pursuant to a Regulatory
Services Agreement.
6 See Securities Exchange Act Release Nos. 77081
(February 8, 2016), 81 FR 7609 (February 12, 2016)
(SR–CBOE–2016–007) (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 (‘‘LMM’s’’));
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 eSpecialists by Deleting Rule 927.3NY and Section
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mstockstill on DSK3G9T082PROD with NOTICES
proposed approach is also consistent
with approved rule changes for NYSE
Arca Equities Inc. (‘‘NYSE Arca’’),
BATS, and New York Stock Exchange,
LLC (‘‘NYSE’’) rules governing cash
equity Market-Makers on those
respective exchanges.7 Except for
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
Securities and Exchange Commission
(the ‘‘Commission’’) found that, with
adequate oversite [sic] by the exchanges
of their members, 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
(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, Nonpublic 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); 76327 (November
2, 2015), 80 FR 68884 (November 6, 2015) (SR–
BATS–2015–093) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Delete
Rule 22.10, Limitations on Dealings); 76687
(December 18, 2015), 80 FR 80403 (December 24,
2015) (SR–PHLX–2015–85) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Delete Sections (e) Through (h) of Exchange Rule
1020, Registration and Functions of Options
Specialists); 77461 (March 28, 2016), 81 FR 18907
(April 1, 2016) (SR–BX–2016–018) (Notice of Filing
and Immediate Effectiveness of Proposed Rule
Change To Delete From the Exchange’s Rulebook
Section 10, Limitations on Dealings, of Chapter VII,
Market Participants).
7 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, nonpublic 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
nonpublic information) (‘‘NYSE Approval Order’’).
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22:23 Aug 05, 2016
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securities law and regulations, and with
the rules of the applicable exchange.8
The Exchange notes that even with
this proposed rule change, pursuant to
Rule 4.18, a Market-Maker or DPM
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, nonpublic 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 or DPM could share with
such Market-Maker or DPM. In that
regard, the proposed rule change will
not permit the brokerage unit of a TPH
firm to have access to any nonpublic
order or quote information of an
affiliated Market-Maker or DPM,
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,
nonpublic information. The Exchange
also suggests that the pre-approval
requirement is unnecessary because
DPMs do not have agency
responsibilities to the Book. However,
information barriers of new entrants
would be subject to review as part of a
new firm application. Moreover, the
policies and procedures of MarketMakers and DPMs, including those
relating to information barriers, would
be subject to review by FINRA, on
8 See, e.g., BATS Approval Order, supra note 4 at
9458.
PO 00000
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Fmt 4703
Sfmt 4703
behalf of the Exchange, pursuant to a
Regulatory Services Agreement.
The Exchange further notes that under
Rule 4.18, a TPH would be able to
provide for its options Market-Makers or
DPMs, 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 Market-Maker or DPM on
the Exchange could be in the same
independent trading unit, a defined in
Rule 200(f) of Regulation SHO,9 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 10 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 nonpublic
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 nonpublic
information.
The Exchange believes that the
proposed reliance on the principlesbased Rule 4.18 would ensure that a
TPH that operates a Market-Maker or
DPM 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 based on
Rule 4.18 would still provide TPHs
operating Market-Makers or DPMs 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 MarketMaker or DPM to be able to consider
9 17
CFR part 242.200(f).
U.S.C. 78o(g).
10 15
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mstockstill on DSK3G9T082PROD with NOTICES
both Market-Maker or DPM tradedpositions for the purposes of calculating
net positions consistent with Rule 200
of Regulation SHO,11 calculating intraday net capital positions, and managing
risk both generally as well as in
compliance with Rule 15c3–5 under the
Act (the ‘‘Market Access Rule’’).12 The
Exchange notes that any risk
management operations would need to
operate consistent with the requirement
to protect against the misuse of material
nonpublic information.
The Exchange further notes that if
options Market-Makers or DPMs are
integrated with other Market-Making
operations, they would be subject to
existing rules that prohibit TPHs 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 options
Market-Making or DPM 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
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 Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.13 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
CFR part 242.200.
CFR part 240.15c3–5.
13 15 U.S.C. 78f(b).
6(b)(5) 14 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) 15 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 Market-Maker
or DPM 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
Market-Maker or DPM operations. The
Exchange notes that the proposed rule
change is based on an approved rule of
the Exchange to which Market-Makers
and DPMs are already subject (Rule
4.18) and harmonizes the rules
governing Market-Makers, DPMs, and
other market participants. Moreover,
TPHs operating Market-Makers and
DPMs would continue to be subject to
federal and Exchange requirements for
protecting material nonpublic order
information.16 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
Market-Makers and DPMs to redundant
requirements. The Exchange does not
believe that the existing requirements
applicable to Market-Makers and DPMs
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 Book.
The Exchange further believes the
proposal is designed to prevent
11 17
14 15
12 17
15 Id.
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22:23 Aug 05, 2016
U.S.C. 78f(b)(5).
16 See
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PO 00000
15 U.S.C. 78o(g) and Rule 4.18.
Frm 00105
Fmt 4703
Sfmt 4703
52501
fraudulent and manipulative acts and
practices and to promote just and
equitable principles of trade because
existing rules make clear to all TPHs the
type of conduct that is prohibited by the
Exchange. While the proposal
eliminates certain requirements relating
to the misuse of material nonpublic
information, Market-Makers, DPMs and
all other TPHs 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
TPHs operating Market-Makers and
DPMs 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, both MarketMaker and DPM written policies and
procedures would continue to be subject
to oversight by the Exchange and
therefore the elimination of the preapproval requirements should not
reduce the effectiveness of the Exchange
rules to protect against the misuse of
material nonpublic information. MarketMakers and DPMs 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
the Exchange notes that 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 Market-Makers
and DPMs, 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
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mstockstill on DSK3G9T082PROD with NOTICES
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 Market-Makers and DPMs 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 Market-Makers and
DPMs.
Moreover, the Exchange believes that
the proposed rule change would
eliminate a burden on competition for
TPHs that 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 TPHs 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 TPHs
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, which operates
as a Market-Maker or DPM on the
Exchange, to evaluate its business to
assure that its policies and procedures
are reasonably designed to protect
against the misuse of material,
nonpublic 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 proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
VerDate Sep<11>2014
22:23 Aug 05, 2016
Jkt 238001
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)
thereunder.17
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act normally does not become operative
for 30 days after the date of its filing.
However, Rule 19b–4(f)(6)(iii) permits
the Commission to designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. Waiver of the 30-day operative
delay would help facilitate the
harmonization of information barrier
rules across options exchanges. The
Exchange represents that Exchange rules
still require a Market Maker to evaluate
its business to assure that its policies
and procedures are reasonably designed
to protect against the misuse of material
nonpublic information. Further, the
Exchange states that the proposed rule
change is designed to provide more
flexibility to market participants, while
not decreasing the protections against
the misuse of material, non-public
information. Based on the foregoing, the
Commission believes the waiver of the
operative delay is consistent with the
protection of investors and the public
interest.18 The Commission hereby
grants the waiver and designates the
proposal operative upon filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
17 In addition, Rule 19b–4(f)(6)(iii) requires the
Exchange to give the Commission written notice of
the Exchange’s intent to file the proposed rule
change, along with a brief description and text of
the proposed rule change, at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
18 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
PO 00000
Frm 00106
Fmt 4703
Sfmt 9990
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
C2–2016–015 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–C2–2016–015. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–C2–
2016–015 and should be submitted on
or before August 29, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–18702 Filed 8–5–16; 8:45 am]
BILLING CODE 8011–01–P
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Agencies
[Federal Register Volume 81, Number 152 (Monday, August 8, 2016)]
[Notices]
[Pages 52498-52502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18702]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78461; File No. SR-C2-2016-015]
Self-Regulatory Organizations; C2 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 Market-Makers and Designated
Primary Market-Makers (``DPMs'')
August 2, 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 July 28, 2016, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to delete Rules 8.9 and 8.21 related to
information barriers. 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 Market-Makers
and DPMs by deleting Rule 8.9 and Rule 8.21. 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 8.9 and Rule 8.21 are no
longer necessary because all TPHs, including Market-Makers and DPMs,
are subject to the Exchange's general principles-based requirements
governing the protection against misuse of material, nonpublic
information, pursuant to Chapter 4 and incorporated therin [sic] CBOE
Rule 4.18 \3\ (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.
---------------------------------------------------------------------------
\3\ Chapter 4 of the CBOE rulebook has been incorporated into
Chapter 4 of the C2 Rules. CBOE Rule 4.18, as incorporated in the C2
Rules, will hereafter be referenced as ``Rule 4.18.''
---------------------------------------------------------------------------
Background
Pursuant to Rule 8.1, TPHs registered as Market-Makers have certain
rights and bear certain responsibilities beyond those of other TPHs.
All Market-Makers are subject to the requirements of Rule 8.5, which
sets forth the obligations of Market-Makers, including providing
continuous electronic quotes.
Rule 8.17 outlines the obligations of DPMs, which must fulfill a
number of increased obligations in addition to the Market-Maker
obligations of Rule 8.5, including providing continuous
[[Page 52499]]
electronic quotes in a larger percentage of series.\4\
---------------------------------------------------------------------------
\4\ Compare Rule 8.17(a)(1) (``[Each DPM shall] provide
continuous electronic quotes . . . in at least the lesser of 99% of
the non-adjusted options series (as defined in Rule 8.5(a)(1)) or
100% of the non-adjusted option series minus one call-put pair . .
.'') with Rule 8.5(a)(1) (``During trading hours a Market-Maker must
maintain a continuous two-sided market in 60% of the non-adjusted
option series of each registered class that have a time to
expiration of less than nine months.'').
---------------------------------------------------------------------------
Pursuant to Rule 8.19, the Exchange may establish participation
entitlements for DPMs appointed pursuant to the aforementioned Rules.
DPMs must meet specific obligations prior to being awarded a
participation entitlements.
All Market-Makers and DPMs have access to the same information in
the Book that is available to all other market participants. Moreover,
none of the Exchange's Market-Makers have agency obligations to the
Book.
Despite the fact that Market-Makers and DPMs have access to the
same trading information as all other market participants on the
Exchange, the Exchange has distinct rules governing how Market-Makers
and DPMs may operate. Rule 8.9 states that a Market-Maker 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
Market-maker or that may act as a specialist or market-maker in any
security underlying options allocated to the Market-Maker. Rule 8.21
states 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 specialist or
market-maker in any security underlying options allocated to the DPM.
Rule 8.21 also requires a DPM provide its information barriers to the
Exchange and obtain prior written approval.
Proposed Rule Change
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
8.9 and 8.21 are designed to address. Specifically, Rule 4.18 requires
every TPH to 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
Securities Exchange Act of 1934 (the ``Act'') and Exchange Rules, of
material, nonpublic information by such TPH or persons associated with
such TPH. For the purposes of Rule 4.18, conduct constituting the
misuse of material, nonpublic information in violation of the 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 Market-Makers and DPMs are already subject to the
requirements of Rule 4.18, the Exchange does not believe that it is
necessary to require all Market-Makers and DPMs to explicitly maintain
information barriers. Deleting Rules 8.9 and 8.21 would provide Market-
Makers and DPMs 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 other TPHs on the Exchange currently operate consistent with Rule
4.18.
Neither the obligations nor the entitlements associated with
Market-Makers and DPMs provide different or greater access to nonpublic
information than any other market participant on the Exchange.
Specifically, neither Market-Makers nor DPMs 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, Market-Makers and DPMs on the Exchange do not have any
agency responsibilities for orders in the Book. Accordingly, because
Market-Makers and DPMs do not have any trading advantages at the
Exchange due to their market roles, 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.\5\
---------------------------------------------------------------------------
\5\ The Exchange notes that by deleting Rules 8.9 and 8.21, the
Exchange would no longer require information barriers for Market-
Makers or DPMs or, with respect to DPMs, require pre-approval of any
information barriers that a DPM would erect for purposes of
protecting against the misuse of material nonpublic information.
However, information barriers of new entrants, including new Market-
Makers and DPMs, would be subject to review as part of a new firm
application. Moreover, the policies and procedures of Market-Makers
and DPMs, 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 the Chicago Board Options Exchange,
Incorporated (``CBOE''), NYSE MKT, LLC on behalf of NYSE Amex Options,
International Securities Exchange, LLC (``ISE''), BOX Options Exchange,
LLC (``BOX''), BATS Exchange, Inc. (``BATS'') on behalf of BATS Options
Market (``BATS Options''), NASDAQ OMX PHLX, LLC (``PHLX''), and NASDAQ
BX, Inc. (``BX Options'') \6\ The
[[Page 52500]]
proposed approach is also consistent with approved rule changes for
NYSE Arca Equities Inc. (``NYSE Arca''), BATS, and New York Stock
Exchange, LLC (``NYSE'') rules governing cash equity Market-Makers on
those respective exchanges.\7\ Except for 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 Securities and Exchange Commission (the
``Commission'') found that, with adequate oversite [sic] by the
exchanges of their members, 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.\8\
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\6\ See Securities Exchange Act Release Nos. 77081 (February 8,
2016), 81 FR 7609 (February 12, 2016) (SR-CBOE-2016-007) (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 (``LMM's'')); 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); 76327 (November 2, 2015), 80 FR 68884 (November 6, 2015)
(SR-BATS-2015-093) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change To Delete Rule 22.10, Limitations on
Dealings); 76687 (December 18, 2015), 80 FR 80403 (December 24,
2015) (SR-PHLX-2015-85) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Delete Sections (e) Through
(h) of Exchange Rule 1020, Registration and Functions of Options
Specialists); 77461 (March 28, 2016), 81 FR 18907 (April 1, 2016)
(SR-BX-2016-018) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Delete From the Exchange's Rulebook Section
10, Limitations on Dealings, of Chapter VII, Market Participants).
\7\ 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, nonpublic 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
nonpublic information) (``NYSE Approval Order'').
\8\ 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 Market-Maker or DPM 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, nonpublic 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 or DPM could share with such Market-Maker or
DPM. In that regard, the proposed rule change will not permit the
brokerage unit of a TPH firm to have access to any nonpublic order or
quote information of an affiliated Market-Maker or DPM, 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, nonpublic
information. The Exchange also suggests that the pre-approval
requirement is unnecessary because DPMs do not have agency
responsibilities to the Book. However, 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 and DPMs,
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 to provide for its options Market-Makers or DPMs, 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 Market-Maker or DPM
on the Exchange could be in the same independent trading unit, a
defined in Rule 200(f) of Regulation SHO,\9\ 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 \10\ 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 nonpublic
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
nonpublic information.
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\9\ 17 CFR part 242.200(f).
\10\ 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 Market-Maker or
DPM 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 based on Rule 4.18 would still provide TPHs operating Market-
Makers or DPMs 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 Market-Maker or DPM to be
able to consider
[[Page 52501]]
both Market-Maker or DPM traded-positions for the purposes of
calculating net positions consistent with Rule 200 of Regulation
SHO,\11\ 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'').\12\ The Exchange notes that any risk
management operations would need to operate consistent with the
requirement to protect against the misuse of material nonpublic
information.
---------------------------------------------------------------------------
\11\ 17 CFR part 242.200.
\12\ 17 CFR part 240.15c3-5.
---------------------------------------------------------------------------
The Exchange further notes that if options Market-Makers or DPMs
are integrated with other Market-Making operations, they would be
subject to existing rules that prohibit TPHs 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 options
Market-Making or DPM 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
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 Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\13\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \14\ 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) \15\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ Id.
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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 Market-Maker or DPM 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 Market-Maker or DPM
operations. The Exchange notes that the proposed rule change is based
on an approved rule of the Exchange to which Market-Makers and DPMs are
already subject (Rule 4.18) and harmonizes the rules governing Market-
Makers, DPMs, and other market participants. Moreover, TPHs operating
Market-Makers and DPMs would continue to be subject to federal and
Exchange requirements for protecting material nonpublic order
information.\16\ 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 Market-Makers and DPMs to redundant requirements. The
Exchange does not believe that the existing requirements applicable to
Market-Makers and DPMs 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 Book.
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\16\ See 15 U.S.C. 78o(g) and Rule 4.18.
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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
TPHs the type of conduct that is prohibited by the Exchange. While the
proposal eliminates certain requirements relating to the misuse of
material nonpublic information, Market-Makers, DPMs and all other TPHs
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 TPHs operating Market-Makers and DPMs 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, both Market-Maker and DPM written policies and procedures
would continue to be subject to oversight by the Exchange and therefore
the elimination of the pre-approval requirements should not reduce the
effectiveness of the Exchange rules to protect against the misuse of
material nonpublic information. Market-Makers and DPMs 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 the Exchange notes that 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 Market-Makers and DPMs, 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
[[Page 52502]]
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 Market-Makers and DPMs 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 Market-Makers and DPMs.
Moreover, the Exchange believes that the proposed rule change would
eliminate a burden on competition for TPHs that 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 TPHs 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 TPHs 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, which operates as a Market-
Maker or DPM on the Exchange, to evaluate its business to assure that
its policies and procedures are reasonably designed to protect against
the misuse of material, nonpublic 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 proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6)
thereunder.\17\
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\17\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to
give the Commission written notice of the Exchange's intent to file
the proposed rule change, along with a brief description and text of
the proposed rule change, at least five business days prior to the
date of filing of the proposed rule change, or such shorter time as
designated by the Commission. The Exchange has satisfied this
requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act normally does not become operative for 30 days after the date of
its filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. Waiver of the 30-day
operative delay would help facilitate the harmonization of information
barrier rules across options exchanges. The Exchange represents that
Exchange rules still require a Market Maker to evaluate its business to
assure that its policies and procedures are reasonably designed to
protect against the misuse of material nonpublic information. Further,
the Exchange states that the proposed rule change is designed to
provide more flexibility to market participants, while not decreasing
the protections against the misuse of material, non-public information.
Based on the foregoing, the Commission believes the waiver of the
operative delay is consistent with the protection of investors and the
public interest.\18\ The Commission hereby grants the waiver and
designates the proposal operative upon filing.
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\18\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-C2-2016-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2016-015. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-C2-2016-015 and should be
submitted on or before August 29, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18702 Filed 8-5-16; 8:45 am]
BILLING CODE 8011-01-P