Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Related to the Nullification and Adjustment of Options Transactions, 11248-11251 [2017-03295]

Download as PDF 11248 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on February 14, 2017, it filed with the Postal Regulatory Commission a Request of the United States Postal Service to Add Priority Mail Contract 294 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2017–91, CP2017–125. SUPPLEMENTARY INFORMATION: Stanley F. Mires, Attorney, Federal Compliance. BILLING CODE 7710–12–P POSTAL SERVICE Product Change—Priority Mail Express Negotiated Service Agreement ACTION: Postal ServiceTM. Notice. The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SUMMARY: DATES: Effective date: February 21, 2017. FOR FURTHER INFORMATION CONTACT: Elizabeth A. Reed, 202–268–3179. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on February 14, 2017, it filed with the Postal Regulatory Commission a Request of the United States Postal Service to Add Priority Mail Express Contract 45 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2017–92, CP2017–126. SUPPLEMENTARY INFORMATION: Stanley F. Mires, Attorney, Federal Compliance. [FR Doc. 2017–03287 Filed 2–17–17; 8:45 am] sradovich on DSK3GMQ082PROD with NOTICES BILLING CODE 7710–12–P VerDate Sep<11>2014 17:15 Feb 17, 2017 [Release No. 34–80040; File No. SR–CBOE– 2016–088] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Related to the Nullification and Adjustment of Options Transactions February 14, 2017. [FR Doc. 2017–03286 Filed 2–17–17; 8:45 am] AGENCY: SECURITIES AND EXCHANGE COMMISSION Jkt 241001 I. Introduction On December 14, 2016, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Exchange Rule 6.25, relating to the adjustment and nullification of erroneous complex order and stockoption order transactions. The proposed rule change was published for comment in the Federal Register on January 3, 2017.3 On February 13, 2017, the Exchange submitted Amendment No. 1 to the proposed rule change.4 The Commission received no comments regarding the proposal. This order approves the proposed rule change, as modified by Amendment No. 1. II. Description of the Proposed Rule Change The Exchange proposes to amend Rule 6.25, entitled ‘‘Nullification and Adjustment of Options Transactions’’ by adding Interpretation and Policy .07 (a)– (c) related to the adjustment and nullification of erroneous complex order and stock-option order transactions. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 79697 (December 27, 2016), 82 FR 167 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange proposed an implementation date of April 17, 2017, to allow all the other options exchanges that permit complex order or stock-option order transactions the time necessary to harmonize their obvious error rules with the proposed rule change. Because Amendment No. 1 does not materially alter the substance of the proposed rule change or raise unique or novel regulatory issues, Amendment No. 1 is not subject to notice and comment. To promote transparency of its proposed amendment, when CBOE filed Amendment No. 1 with the Commission, it also submitted Amendment No. 1 as a comment letter to the file, which the Commission posted on its Web site and placed in the public comment file for SR–CBOE–2016–088 (available at https://www.sec.gov/comments/sr-cboe-2016-088/ cboe2016088-1581994-131907.pdf). The Exchange also posted a copy of its Amendment No. 1 on its Web site (http://www.cboe.com/aboutcboe/legal/ submittedsecfilings.aspx), when it filed it with the Commission. 2 17 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 A. Background The Exchange and other options exchanges previously adopted new, harmonized rules related to the adjustment and nullification of erroneous options transactions.5 The Exchange believes that the changes the options exchanges implemented with the new, harmonized rule have led to increased transparency and finality with respect to the adjustment and nullification of erroneous options transactions. However, as part of the initial initiative, the Exchange and other options exchanges deferred a few specific matters for further discussion, including how erroneous complex orders and stock-option orders should be handled. Since the adopting of the initial harmonized rule, the exchanges that offer complex orders and/or stockoption orders discussed the adoption of a rule—described below—that they collectively believe will improve the handling of erroneous options transactions that result from the execution of complex orders and stockoption orders.6 B. Proposed Rule The proposed rule applies much of the initial harmonized rule to complex orders and stock-option orders. The proposed rule, however, deviates from the initial harmonized rule to account for unique qualities of complex orders and stock-option orders. Specifically, the proposed rule reflects the fact that complex orders can execute against other complex orders or can execute against individual simple orders in the leg markets. When a complex order executes against the leg markets, there may be different counterparties on each leg of the complex order, and not every leg will necessarily be executed at an erroneous price. With regards to stockoption orders, the proposed rule reflects the fact that stock-option orders contain a stock component that is executed on a stock trading venue, and the Exchange may not be able to ensure that the stock trading venue will adjust or nullify the stock execution in the event of an obvious or catastrophic error. In order to account for the unique characteristics of complex orders and stock-option orders, 5 See, e.g., Securities Exchange Act Release Nos. 74898 (May 7, 2015), 80 FR 27354 (May 13, 2015) (SR–CBOE–2015–039); and 74556 (March 20, 2015), 80 FR 16031 (March 26, 2015) (SR–BATS–2014– 067) (‘‘BATS Order’’). 6 See Notice, supra note 3, at 167. An exchange that does not offer complex orders and/or stockoption orders will not adopt these new provisions until such time as the exchange offers complex orders and/or stock-option orders. See id. at 167 n.5. E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices the Exchange divided proposed Interpretation and Policy .07 into three parts—paragraphs (a), (b), and (c). 1. Complex Orders Executed Against Individual Legs Proposed Interpretation and Policy .07(a) governs the review of complex orders that are executed against individual legs (as opposed to a complex order that executes against another complex order).7 Proposed Rule 6.25.07(a) provides: If a complex order executes against individual legs and at least one of the legs qualifies as an Obvious or Catastrophic Error under this Rule 6.25, then the leg(s) that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. However, any Customer order subject to this paragraph (a) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the complex order or individual leg(s). If any leg of a complex order is nullified, the entire transaction is nullified. sradovich on DSK3GMQ082PROD with NOTICES At least one of the legs of the complex order must qualify as an obvious or catastrophic error under the initial harmonized rule in order for the complex order to receive obvious or catastrophic error relief. Thus, when the Exchange is notified (within the timeframes set forth in paragraph (c)(2) or (d)(2)) of a complex order that is a possible obvious error or catastrophic error, the Exchange will first review the individual legs of the complex order to determine if one or more legs qualify as an obvious or catastrophic error.8 If no leg qualifies as an obvious or catastrophic error, the transaction stands—no adjustment and no nullification. Reviewing the legs to determine whether one or more legs qualify as an obvious or catastrophic error requires the Exchange to follow the initial harmonized rule. In accordance with paragraphs (c)(1) and (d)(1) of the initial harmonized rule, the Exchange compares the execution price of each 7 The leg market consists of quotes and/or orders in single options series. A complex order may be received by the Exchange electronically, and the legs of the complex order may have different counterparties. 8 Because a complex order can execute against the leg market, the Exchange may also be notified of a possible obvious or catastrophic error by a counterparty that received an execution in an individual options series. If upon review of a potential obvious error the Exchange determines an individual options series was executed against the leg of a complex order or stock-option order, proposed Rule 6.25.07 will govern. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 individual leg to the Theoretical Price 9 of each leg (as determined by paragraph (b) of the initial harmonized rule). Under the proposed rule, if the execution price of an individual leg is higher or lower than the Theoretical Price for the series by an amount equal to at least the amount shown in the obvious error table in paragraph (c)(1) of the initial harmonized rule or the catastrophic error table in paragraph (d)(1) of the initial harmonized rule, the individual leg qualifies as an obvious or catastrophic error, and the Exchange will take steps to adjust or nullify the transaction.10 Paragraph (c)(4)(A) of the initial harmonized rule mandates that if it is determined that an obvious error has occurred, the execution price of the transaction will be adjusted pursuant to the table set forth in (c)(4)(A).11 Although for simple orders paragraph (c)(4)(A) is only applicable when no party to the transaction is a Customer,12 for the purposes of complex orders, paragraph (a) of proposed Interpretation and Policy .07 will supersede that limitation; therefore, if it is determined that a leg (or legs) of a complex order is an obvious error, the leg (or legs) will be adjusted pursuant to paragraph (c)(4)(A), regardless of whether a party to the transaction is a Customer. The Size Adjustment Modifier defined in subparagraph (a)(4) will similarly apply (regardless of whether a Customer is on the transaction) by virtue of the application of paragraph (c)(4)(A).13 Pursuant to proposed Rule 6.25.07(a), if a complex order executes against individual legs and at least one of the leg(s) qualifies as an Obvious Error or a Catastrophic Error, then the leg(s) that is 9 See Rule 6.25(b) (defining the manner in which Theoretical Price is determined). 10 Only the execution price on the leg (or legs) that qualifies as an obvious or catastrophic error pursuant to any portion of proposed Rule 6.25.07 will be adjusted. The execution price of a leg (or legs) that does not qualify as an obvious or catastrophic error will not be adjusted. 11 In contrast, paragraph (d)(3) of the initial harmonized rule mandates that if it is determined that a catastrophic error has occurred, the execution price of the transaction will be adjusted pursuant to the table set forth in paragraph (d)(3). However, if a Customer is a party to the transaction and the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price, the Customer order will be nullified. 12 See Rule 6.25(a)(1) (defining Customer for purposes of Rule 6.25 as not including a brokerdealer, Professional Customer, or Voluntary Professional Customer). 13 See Rule 6.25(c)(4)(A) (stating that any nonCustomer Obvious Error exceeding 50 contracts will be subject to the Size Adjustment Modifier defined in sub-paragraph (a)(4)). The Size Adjustment Modifier may also apply to the option leg of a stockoption order that is adjusted pursuant to proposed Rule 6.25.07(c). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 11249 an Obvious or Catastrophic error will be adjusted in accordance with paragraphs (c)(4)(A) or (d)(3) of the initial harmonized rule, respectively, regardless of whether one of the parties is a Customer. However, because incoming complex orders may execute against resting simple orders in the leg market and adjusting the execution price of the leg may violate the limit price of the resting order, proposed Rule 6.25.07(a) also provides protection for Customer orders, stating that where at least one party to a complex order transaction is a Customer, the transaction will be nullified if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the complex order or individual leg(s). If any leg of a complex order is nullified, the entire transaction will be nullified. 2. Complex Orders Executed Against Complex Orders Proposed Interpretation and Policy .07(b) governs the review of complex orders that are executed against other complex orders. Proposed Rule 6.25.07(b) provides: If a complex order executes against another complex order and at least one of the legs qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the leg(s) that is an Obvious or Catastrophic Error will be adjusted or busted in accordance with paragraph (c)(4) or (d)(3), respectively, so long as either: (i) The width of the National Spread Market for the complex order strategy just prior to the erroneous transaction was equal to or greater than the amount set forth in the wide quote table of paragraph (b)(3) or (ii) the net execution price of the complex order is higher (lower) than the offer (bid) of the National Spread Market for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount shown in the table in paragraph (c)(1). If any leg of a complex order is nullified, the entire transaction is nullified. For purposes of Rule 6.25, the National Spread Market for a complex order strategy is determined by the National Best Bid/Offer of the individual legs of the strategy. As described above in relation to proposed Rule 6.25.07(a), the first step is for the Exchange to review (upon receipt of a timely notification in accordance with paragraph (c)(2) or (d)(2) of the initial harmonized rule) the individual legs to determine whether a leg or legs qualifies as an obvious or catastrophic error. If no leg qualifies as an obvious or catastrophic error, the transaction stands—no adjustment and no nullification. Unlike proposed Rule 6.25.07(a), the Exchange also proposes to compare the E:\FR\FM\21FEN1.SGM 21FEN1 11250 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES net execution price of the entire complex order package to the National Spread Market for the complex order strategy.14 Complex orders are exempt from the order protection rules of the options exchanges.15 Thus, depending on the manner in which the systems of an options exchange are calibrated, a complex order can execute without regard to the prices offered in the complex order books or the leg markets of other options exchanges. Accordingly, the Exchange proposes to consider the National Spread Market. Specifically, proposed Rule 6.25.07(b) provides that if the Exchange determines that a leg or legs does qualify as an obvious or catastrophic error, the leg or legs will be adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the initial harmonized rule, so long as either: (i) The width of the National Spread Market for the complex order strategy just prior to the erroneous transaction was equal to or greater than the amount set forth in the wide quote table of paragraph (b)(3) of the initial harmonized rule or (ii) the net execution price of the complex order is higher (lower) than the offer (bid) of the National Spread Market for the complex order strategy just prior to the erroneous transaction by an amount equal to at least the amount shown in the table in paragraph (c)(1) of the initial harmonized rule. For purposes of complex orders that meet the requirements of proposed Rule 6.25.07(b), the Exchange proposes to apply the initial harmonized rule and adjust or bust obvious errors in accordance with paragraph (c)(4) (as opposed to applying only paragraph (c)(4)(A) as is the case under proposed Rule 6.25.07(a)) and catastrophic errors in accordance with paragraph (d)(3). Therefore, for purposes of complex orders under proposed Rule 6.25.07(b), if one of the legs is determined to be an obvious error under paragraph (c)(1), all Customer transactions will be nullified, unless a Trading Permit Holder (‘‘TPH’’) submits 200 or more Customer transactions for review in accordance with paragraph (c)(4)(C).16 For purposes of complex orders under proposed Rule 6.25.07(b), if one of the legs is determined to be a catastrophic error under paragraph (d)(3) and all of the 14 National Spread Market is the derived net market for a complex order package. See, e.g., Rule 6.53C.04 (utilizing the term derived net market in the context of complex order strategies). 15 See Rule 6.81(b)(7). All options exchanges have the same order protection rule. 16 Rule 6.25(c)(4)(C) also requires the orders resulting in 200 or more Customer transactions to have been submitted during the course of 2 minutes or less. VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 other requirements of proposed Rule 6.25.07(b) are met, all market participants will be adjusted in accordance with the table set forth in paragraph (d)(3). Again, however, pursuant to paragraph (d)(3) where at least one party to a complex order transaction is a Customer, the transaction will be nullified if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the complex order or individual leg(s). Also, if any leg of a complex order is nullified, the entire transaction is nullified. 3. Stock-Option Orders Proposed Interpretation and Policy .07(c) governs stock-option orders. Proposed Rule 6.25.07(c) provides: If the option leg of a stock-option order qualifies as an Obvious Error under paragraph (c)(1) or a Catastrophic Error under paragraph (d)(1), then the option leg that is an Obvious or Catastrophic Error will be adjusted in accordance with paragraph (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. However, the option leg of any Customer order subject to this paragraph (c) will be nullified if the adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the stock-option order, and the Exchange will attempt to nullify the stock leg. Whenever a stock trading venue nullifies the stock leg of a stock-option order or whenever the stock leg cannot be executed, the Exchange will nullify the option leg upon request of one of the parties to the transaction or in accordance with paragraph (c)(3). Similar to proposed Interpretation and Policy .07(a), an option leg (or legs) of a stock-option order must qualify as an obvious or catastrophic error under the initial harmonized rule in order for the stock-option order to qualify as an obvious or catastrophic error. Also, similar to proposed Rule 6.25.07(a), if an option leg (or legs) does qualify as an obvious or catastrophic error, the option leg (or legs) will be adjusted in accordance with paragraph (c)(4)(A) or (d)(3), respectively, regardless of whether one of the parties is a Customer. Again, as with proposed Rule 6.25.07(a), where at least one party to a complex order transaction is a Customer, the Exchange will nullify the option leg and attempt to nullify the stock leg if adjustment would result in an execution price higher (for buy transactions) or lower (for sell transactions) than the Customer’s limit price on the complex order or individual leg(s). Finally, the Exchange proposes to provide guidance that whenever the PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 stock trading venue nullifies the stock leg of a stock-option order, the option will be nullified upon request of one of the parties to the transaction or by an Official acting on their own motion in accordance with paragraph (c)(3). The Exchange states that there are situations in which buyer and seller agree to trade a stock-option order, but the stock leg cannot be executed. Thus, the Exchange proposes to provide that whenever the stock portion of a stock-option order cannot be executed, the Exchange will nullify the option leg upon request of one of the parties to the transaction or on an Official’s own motion. In order to ensure that other options exchanges are able to adopt rules consistent with this proposal and to coordinate the effectiveness of such harmonized rules, the Exchange proposes to delay the effectiveness of this proposal to April 17, 2017.17 III. Discussion and Commission Findings The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.18 In particular, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 6(b) of the Act 19 and with Section 6(b)(5) of the Act,20 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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. The Commission believes that the proposal to amend Rule 6.25 will help assure greater objectivity, transparency, and clarity with respect to the adjustment and nullification of erroneous options transactions and, in particular, those involving complex order or stock-option order transactions. The Commission notes that the proposal is designed to achieve more consistent results for participants across U.S. options exchanges than under the initial harmonized rules, while maintaining a fair and orderly market, protecting investors, and protecting the public 17 See Amendment No. 1. approving this proposed rule change, as amended, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 19 15 U.S.C. 78f(b). 20 15 U.S.C. 78f(b)(5). 18 In E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 82, No. 33 / Tuesday, February 21, 2017 / Notices interest. In particular, the proposal is designed to increase the consistency and transparency in the handling of erroneous options transactions among those options exchanges that allow complex order or stock-option order transactions. In its order approving the initial harmonized rule of BATS Exchange, Inc., the Commission noted that the options exchanges intended to work together to further develop additional objectivity with respect to their processes for the adjustment and nullification of erroneous options transactions.21 The Commission believes that the proposed rule change to specifically delineate the treatment of erroneous complex order or stockoption order transactions constitutes an additional step towards this goal. Based on the foregoing, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act 22 in that proposed Rule 6.25 will foster cooperation and coordination with persons engaged in regulating and facilitating transactions. The Commission notes that the proposed rule change will become operative on April 17, 2017. This delayed implementation is to ensure that other options exchanges that permit transactions in complex orders or stockoption orders will have sufficient time to put in place similar rules consistent with this proposed rule change and to coordinate the date of implementation of such harmonized rules.23 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change, as modified by Amendment No. 1 (SR–CBOE–2016– 088) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–03295 Filed 2–17–17; 8:45 am] sradovich on DSK3GMQ082PROD with NOTICES BILLING CODE 8011–01–P 21 See BATS Order, supra note 5, at 16039. U.S.C. 78f(b)(5). 23 See Amendment No. 1. 24 15 U.S.C. 78s(b)(2). 25 17 CFR 200.30–3(a)(12). 22 15 VerDate Sep<11>2014 17:15 Feb 17, 2017 Jkt 241001 SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 32478; File No. 812–14724] Brinker Capital Destinations Trust, et al.; Notice of Application February 14, 2017. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of an application for an order under section 12(d)(1)(J) of the Investment Company Act of 1940 (the ‘‘Act’’) for an exemption from sections 12(d)(1)(A), (B), and (C) of the Act and under sections 6(c) and 17(b) of the Act for an exemption from sections 17(a)(1) and (2) of the Act. The requested order would permit certain registered openend investment companies to acquire shares of certain registered open-end investment companies, registered closed-end investment companies, business development companies, as defined in section 2(a)(48) of the Act, and unit investment trusts (collectively, ‘‘Underlying Funds’’) that are within and outside the same group of investment companies as the acquiring investment companies, in excess of the limits in section 12(d)(1) of the Act. AGENCY: Brinker Capital Destinations Trust, a Delaware statutory trust that is registered under the Act as an open-end management investment company with multiple series, and Brinker Capital, Inc., a Delaware Corporation registered as an investment adviser under the Investment Advisers Act of 1940. DATES: Filing Dates: The application was filed on December 8, 2016 and amended on February 1, 2017. 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 March 14, 2017 and should be accompanied by proof of service on the applicants, in the form of an affidavit, or, for lawyers, a certificate of service. Pursuant to Rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. APPLICANTS: PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 11251 Secretary, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. Applicants: Jason B. Moore, Brinker Capital Destinations Trust, 1055 Westlakes Drive, Berwyn, PA 19312; and John J. O’Brien, Esq., Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103. FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel, at (202) 551–5786, or Nadya Roytblat, Assistant Chief Counsel, at (202) 551– 6821 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s Web site by searching for the file number, or for an applicant using the Company name box, at http:// www.sec.gov/search/search.htm, or by calling (202) 551–8090. ADDRESSES: Summary of the Application 1. Applicants request an order to permit (a) a Fund 1 (each a ‘‘Fund of Funds’’) to acquire shares of Underlying Funds 2 in excess of the limits in sections 12(d)(1)(A) and (C) of the Act and (b) the Underlying Funds that are registered open-end investment companies or series thereof, their principal underwriters and any broker or dealer registered under the Securities Exchange Act of 1934 to sell shares of the Underlying Fund to the Fund of Funds in excess of the limits in section 12(d)(1)(B) of the Act.3 Applicants also request an order of exemption under 1 Applicants request that the order apply to each existing and future series of Brinker Capital Destinations Trust and to each existing and future registered open-end investment company or series thereof that is advised by Brinker Capital, Inc. or its successor or by any other investment adviser controlling, controlled by or under common control with Brinker Capital, Inc. or its successor and is part of the same ‘‘group of investment companies’’ as Brinker Capital Destinations Trust (each, a ‘‘Fund’’). For purposes of the requested order, ‘‘successor’’ is limited to an entity that results from a reorganization into another jurisdiction or a change in the type of business organization. For purposes of the request for relief, the term ‘‘group of investment companies’’ means any two or more registered investment companies, including closedend investment companies and business development companies, that hold themselves out to investors as related companies for purposes of investment and investor services. 2 Certain of the Underlying Funds have obtained exemptions from the Commission necessary to permit their shares to be listed and traded on a national securities exchange at negotiated prices and, accordingly, to operate as an exchange-traded fund (‘‘ETF’’). 3 Applicants do not request relief for Funds of Funds to invest in reliance on the order in business development companies and registered closed-end investment companies that are not listed and traded on a national securities exchange. E:\FR\FM\21FEN1.SGM 21FEN1

Agencies

[Federal Register Volume 82, Number 33 (Tuesday, February 21, 2017)]
[Notices]
[Pages 11248-11251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03295]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80040; File No. SR-CBOE-2016-088]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment No. 1, Related to the Nullification and 
Adjustment of Options Transactions

February 14, 2017.

I. Introduction

    On December 14, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Exchange Rule 6.25, 
relating to the adjustment and nullification of erroneous complex order 
and stock-option order transactions. The proposed rule change was 
published for comment in the Federal Register on January 3, 2017.\3\ On 
February 13, 2017, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\4\ The Commission received no comments regarding 
the proposal. This order approves the proposed rule change, as modified 
by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79697 (December 27, 
2016), 82 FR 167 (``Notice'').
    \4\ In Amendment No. 1, the Exchange proposed an implementation 
date of April 17, 2017, to allow all the other options exchanges 
that permit complex order or stock-option order transactions the 
time necessary to harmonize their obvious error rules with the 
proposed rule change. Because Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, Amendment No. 1 is not subject to notice 
and comment. To promote transparency of its proposed amendment, when 
CBOE filed Amendment No. 1 with the Commission, it also submitted 
Amendment No. 1 as a comment letter to the file, which the 
Commission posted on its Web site and placed in the public comment 
file for SR-CBOE-2016-088 (available at https://www.sec.gov/comments/sr-cboe-2016-088/cboe2016088-1581994-131907.pdf). The 
Exchange also posted a copy of its Amendment No. 1 on its Web site 
(http://www.cboe.com/aboutcboe/legal/submittedsecfilings.aspx), when 
it filed it with the Commission.
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.25, entitled ``Nullification 
and Adjustment of Options Transactions'' by adding Interpretation and 
Policy .07 (a)-(c) related to the adjustment and nullification of 
erroneous complex order and stock-option order transactions.

A. Background

    The Exchange and other options exchanges previously adopted new, 
harmonized rules related to the adjustment and nullification of 
erroneous options transactions.\5\ The Exchange believes that the 
changes the options exchanges implemented with the new, harmonized rule 
have led to increased transparency and finality with respect to the 
adjustment and nullification of erroneous options transactions. 
However, as part of the initial initiative, the Exchange and other 
options exchanges deferred a few specific matters for further 
discussion, including how erroneous complex orders and stock-option 
orders should be handled.
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    \5\ See, e.g., Securities Exchange Act Release Nos. 74898 (May 
7, 2015), 80 FR 27354 (May 13, 2015) (SR-CBOE-2015-039); and 74556 
(March 20, 2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067) 
(``BATS Order'').
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    Since the adopting of the initial harmonized rule, the exchanges 
that offer complex orders and/or stock-option orders discussed the 
adoption of a rule--described below--that they collectively believe 
will improve the handling of erroneous options transactions that result 
from the execution of complex orders and stock-option orders.\6\
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    \6\ See Notice, supra note 3, at 167. An exchange that does not 
offer complex orders and/or stock-option orders will not adopt these 
new provisions until such time as the exchange offers complex orders 
and/or stock-option orders. See id. at 167 n.5.
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B. Proposed Rule

    The proposed rule applies much of the initial harmonized rule to 
complex orders and stock-option orders. The proposed rule, however, 
deviates from the initial harmonized rule to account for unique 
qualities of complex orders and stock-option orders. Specifically, the 
proposed rule reflects the fact that complex orders can execute against 
other complex orders or can execute against individual simple orders in 
the leg markets. When a complex order executes against the leg markets, 
there may be different counterparties on each leg of the complex order, 
and not every leg will necessarily be executed at an erroneous price. 
With regards to stock-option orders, the proposed rule reflects the 
fact that stock-option orders contain a stock component that is 
executed on a stock trading venue, and the Exchange may not be able to 
ensure that the stock trading venue will adjust or nullify the stock 
execution in the event of an obvious or catastrophic error. In order to 
account for the unique characteristics of complex orders and stock-
option orders,

[[Page 11249]]

the Exchange divided proposed Interpretation and Policy .07 into three 
parts--paragraphs (a), (b), and (c).
1. Complex Orders Executed Against Individual Legs
    Proposed Interpretation and Policy .07(a) governs the review of 
complex orders that are executed against individual legs (as opposed to 
a complex order that executes against another complex order).\7\ 
Proposed Rule 6.25.07(a) provides:
---------------------------------------------------------------------------

    \7\ The leg market consists of quotes and/or orders in single 
options series. A complex order may be received by the Exchange 
electronically, and the legs of the complex order may have different 
counterparties.

    If a complex order executes against individual legs and at least 
one of the legs qualifies as an Obvious or Catastrophic Error under 
this Rule 6.25, then the leg(s) that is an Obvious or Catastrophic 
Error will be adjusted in accordance with paragraphs (c)(4)(A) or 
(d)(3), respectively, regardless of whether one of the parties is a 
Customer. However, any Customer order subject to this paragraph (a) 
will be nullified if the adjustment would result in an execution 
price higher (for buy transactions) or lower (for sell transactions) 
than the Customer's limit price on the complex order or individual 
leg(s). If any leg of a complex order is nullified, the entire 
---------------------------------------------------------------------------
transaction is nullified.

    At least one of the legs of the complex order must qualify as an 
obvious or catastrophic error under the initial harmonized rule in 
order for the complex order to receive obvious or catastrophic error 
relief. Thus, when the Exchange is notified (within the timeframes set 
forth in paragraph (c)(2) or (d)(2)) of a complex order that is a 
possible obvious error or catastrophic error, the Exchange will first 
review the individual legs of the complex order to determine if one or 
more legs qualify as an obvious or catastrophic error.\8\ If no leg 
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification.
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    \8\ Because a complex order can execute against the leg market, 
the Exchange may also be notified of a possible obvious or 
catastrophic error by a counterparty that received an execution in 
an individual options series. If upon review of a potential obvious 
error the Exchange determines an individual options series was 
executed against the leg of a complex order or stock-option order, 
proposed Rule 6.25.07 will govern.
---------------------------------------------------------------------------

    Reviewing the legs to determine whether one or more legs qualify as 
an obvious or catastrophic error requires the Exchange to follow the 
initial harmonized rule. In accordance with paragraphs (c)(1) and 
(d)(1) of the initial harmonized rule, the Exchange compares the 
execution price of each individual leg to the Theoretical Price \9\ of 
each leg (as determined by paragraph (b) of the initial harmonized 
rule). Under the proposed rule, if the execution price of an individual 
leg is higher or lower than the Theoretical Price for the series by an 
amount equal to at least the amount shown in the obvious error table in 
paragraph (c)(1) of the initial harmonized rule or the catastrophic 
error table in paragraph (d)(1) of the initial harmonized rule, the 
individual leg qualifies as an obvious or catastrophic error, and the 
Exchange will take steps to adjust or nullify the transaction.\10\
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    \9\ See Rule 6.25(b) (defining the manner in which Theoretical 
Price is determined).
    \10\ Only the execution price on the leg (or legs) that 
qualifies as an obvious or catastrophic error pursuant to any 
portion of proposed Rule 6.25.07 will be adjusted. The execution 
price of a leg (or legs) that does not qualify as an obvious or 
catastrophic error will not be adjusted.
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    Paragraph (c)(4)(A) of the initial harmonized rule mandates that if 
it is determined that an obvious error has occurred, the execution 
price of the transaction will be adjusted pursuant to the table set 
forth in (c)(4)(A).\11\ Although for simple orders paragraph (c)(4)(A) 
is only applicable when no party to the transaction is a Customer,\12\ 
for the purposes of complex orders, paragraph (a) of proposed 
Interpretation and Policy .07 will supersede that limitation; 
therefore, if it is determined that a leg (or legs) of a complex order 
is an obvious error, the leg (or legs) will be adjusted pursuant to 
paragraph (c)(4)(A), regardless of whether a party to the transaction 
is a Customer. The Size Adjustment Modifier defined in subparagraph 
(a)(4) will similarly apply (regardless of whether a Customer is on the 
transaction) by virtue of the application of paragraph (c)(4)(A).\13\
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    \11\ In contrast, paragraph (d)(3) of the initial harmonized 
rule mandates that if it is determined that a catastrophic error has 
occurred, the execution price of the transaction will be adjusted 
pursuant to the table set forth in paragraph (d)(3). However, if a 
Customer is a party to the transaction and the adjustment would 
result in an execution price higher (for buy transactions) or lower 
(for sell transactions) than the Customer's limit price, the 
Customer order will be nullified.
    \12\ See Rule 6.25(a)(1) (defining Customer for purposes of Rule 
6.25 as not including a broker-dealer, Professional Customer, or 
Voluntary Professional Customer).
    \13\ See Rule 6.25(c)(4)(A) (stating that any non-Customer 
Obvious Error exceeding 50 contracts will be subject to the Size 
Adjustment Modifier defined in sub-paragraph (a)(4)). The Size 
Adjustment Modifier may also apply to the option leg of a stock-
option order that is adjusted pursuant to proposed Rule 6.25.07(c).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 6.25.07(a), if a complex order executes 
against individual legs and at least one of the leg(s) qualifies as an 
Obvious Error or a Catastrophic Error, then the leg(s) that is an 
Obvious or Catastrophic error will be adjusted in accordance with 
paragraphs (c)(4)(A) or (d)(3) of the initial harmonized rule, 
respectively, regardless of whether one of the parties is a Customer. 
However, because incoming complex orders may execute against resting 
simple orders in the leg market and adjusting the execution price of 
the leg may violate the limit price of the resting order, proposed Rule 
6.25.07(a) also provides protection for Customer orders, stating that 
where at least one party to a complex order transaction is a Customer, 
the transaction will be nullified if adjustment would result in an 
execution price higher (for buy transactions) or lower (for sell 
transactions) than the Customer's limit price on the complex order or 
individual leg(s). If any leg of a complex order is nullified, the 
entire transaction will be nullified.
2. Complex Orders Executed Against Complex Orders
    Proposed Interpretation and Policy .07(b) governs the review of 
complex orders that are executed against other complex orders. Proposed 
Rule 6.25.07(b) provides:

    If a complex order executes against another complex order and at 
least one of the legs qualifies as an Obvious Error under paragraph 
(c)(1) or a Catastrophic Error under paragraph (d)(1), then the 
leg(s) that is an Obvious or Catastrophic Error will be adjusted or 
busted in accordance with paragraph (c)(4) or (d)(3), respectively, 
so long as either: (i) The width of the National Spread Market for 
the complex order strategy just prior to the erroneous transaction 
was equal to or greater than the amount set forth in the wide quote 
table of paragraph (b)(3) or (ii) the net execution price of the 
complex order is higher (lower) than the offer (bid) of the National 
Spread Market for the complex order strategy just prior to the 
erroneous transaction by an amount equal to at least the amount 
shown in the table in paragraph (c)(1). If any leg of a complex 
order is nullified, the entire transaction is nullified. For 
purposes of Rule 6.25, the National Spread Market for a complex 
order strategy is determined by the National Best Bid/Offer of the 
individual legs of the strategy.

As described above in relation to proposed Rule 6.25.07(a), the first 
step is for the Exchange to review (upon receipt of a timely 
notification in accordance with paragraph (c)(2) or (d)(2) of the 
initial harmonized rule) the individual legs to determine whether a leg 
or legs qualifies as an obvious or catastrophic error. If no leg 
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification.
    Unlike proposed Rule 6.25.07(a), the Exchange also proposes to 
compare the

[[Page 11250]]

net execution price of the entire complex order package to the National 
Spread Market for the complex order strategy.\14\ Complex orders are 
exempt from the order protection rules of the options exchanges.\15\ 
Thus, depending on the manner in which the systems of an options 
exchange are calibrated, a complex order can execute without regard to 
the prices offered in the complex order books or the leg markets of 
other options exchanges. Accordingly, the Exchange proposes to consider 
the National Spread Market. Specifically, proposed Rule 6.25.07(b) 
provides that if the Exchange determines that a leg or legs does 
qualify as an obvious or catastrophic error, the leg or legs will be 
adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the 
initial harmonized rule, so long as either: (i) The width of the 
National Spread Market for the complex order strategy just prior to the 
erroneous transaction was equal to or greater than the amount set forth 
in the wide quote table of paragraph (b)(3) of the initial harmonized 
rule or (ii) the net execution price of the complex order is higher 
(lower) than the offer (bid) of the National Spread Market for the 
complex order strategy just prior to the erroneous transaction by an 
amount equal to at least the amount shown in the table in paragraph 
(c)(1) of the initial harmonized rule.
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    \14\ National Spread Market is the derived net market for a 
complex order package. See, e.g., Rule 6.53C.04 (utilizing the term 
derived net market in the context of complex order strategies).
    \15\ See Rule 6.81(b)(7). All options exchanges have the same 
order protection rule.
---------------------------------------------------------------------------

    For purposes of complex orders that meet the requirements of 
proposed Rule 6.25.07(b), the Exchange proposes to apply the initial 
harmonized rule and adjust or bust obvious errors in accordance with 
paragraph (c)(4) (as opposed to applying only paragraph (c)(4)(A) as is 
the case under proposed Rule 6.25.07(a)) and catastrophic errors in 
accordance with paragraph (d)(3). Therefore, for purposes of complex 
orders under proposed Rule 6.25.07(b), if one of the legs is determined 
to be an obvious error under paragraph (c)(1), all Customer 
transactions will be nullified, unless a Trading Permit Holder 
(``TPH'') submits 200 or more Customer transactions for review in 
accordance with paragraph (c)(4)(C).\16\ For purposes of complex orders 
under proposed Rule 6.25.07(b), if one of the legs is determined to be 
a catastrophic error under paragraph (d)(3) and all of the other 
requirements of proposed Rule 6.25.07(b) are met, all market 
participants will be adjusted in accordance with the table set forth in 
paragraph (d)(3). Again, however, pursuant to paragraph (d)(3) where at 
least one party to a complex order transaction is a Customer, the 
transaction will be nullified if adjustment would result in an 
execution price higher (for buy transactions) or lower (for sell 
transactions) than the Customer's limit price on the complex order or 
individual leg(s). Also, if any leg of a complex order is nullified, 
the entire transaction is nullified.
---------------------------------------------------------------------------

    \16\ Rule 6.25(c)(4)(C) also requires the orders resulting in 
200 or more Customer transactions to have been submitted during the 
course of 2 minutes or less.
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3. Stock-Option Orders
    Proposed Interpretation and Policy .07(c) governs stock-option 
orders. Proposed Rule 6.25.07(c) provides:

    If the option leg of a stock-option order qualifies as an 
Obvious Error under paragraph (c)(1) or a Catastrophic Error under 
paragraph (d)(1), then the option leg that is an Obvious or 
Catastrophic Error will be adjusted in accordance with paragraph 
(c)(4)(A) or (d)(3), respectively, regardless of whether one of the 
parties is a Customer. However, the option leg of any Customer order 
subject to this paragraph (c) will be nullified if the adjustment 
would result in an execution price higher (for buy transactions) or 
lower (for sell transactions) than the Customer's limit price on the 
stock-option order, and the Exchange will attempt to nullify the 
stock leg. Whenever a stock trading venue nullifies the stock leg of 
a stock-option order or whenever the stock leg cannot be executed, 
the Exchange will nullify the option leg upon request of one of the 
parties to the transaction or in accordance with paragraph (c)(3).

    Similar to proposed Interpretation and Policy .07(a), an option leg 
(or legs) of a stock-option order must qualify as an obvious or 
catastrophic error under the initial harmonized rule in order for the 
stock-option order to qualify as an obvious or catastrophic error. 
Also, similar to proposed Rule 6.25.07(a), if an option leg (or legs) 
does qualify as an obvious or catastrophic error, the option leg (or 
legs) will be adjusted in accordance with paragraph (c)(4)(A) or 
(d)(3), respectively, regardless of whether one of the parties is a 
Customer. Again, as with proposed Rule 6.25.07(a), where at least one 
party to a complex order transaction is a Customer, the Exchange will 
nullify the option leg and attempt to nullify the stock leg if 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the complex order or individual leg(s).
    Finally, the Exchange proposes to provide guidance that whenever 
the stock trading venue nullifies the stock leg of a stock-option 
order, the option will be nullified upon request of one of the parties 
to the transaction or by an Official acting on their own motion in 
accordance with paragraph (c)(3). The Exchange states that there are 
situations in which buyer and seller agree to trade a stock-option 
order, but the stock leg cannot be executed. Thus, the Exchange 
proposes to provide that whenever the stock portion of a stock-option 
order cannot be executed, the Exchange will nullify the option leg upon 
request of one of the parties to the transaction or on an Official's 
own motion.
    In order to ensure that other options exchanges are able to adopt 
rules consistent with this proposal and to coordinate the effectiveness 
of such harmonized rules, the Exchange proposes to delay the 
effectiveness of this proposal to April 17, 2017.\17\
---------------------------------------------------------------------------

    \17\ See Amendment No. 1.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\18\ In 
particular, the Commission finds that the proposed rule change, as 
amended, is consistent with the requirements of Section 6(b) of the Act 
\19\ and with Section 6(b)(5) of the Act,\20\ which requires, among 
other things, that the Exchange's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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.
---------------------------------------------------------------------------

    \18\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposal to amend Rule 6.25 will 
help assure greater objectivity, transparency, and clarity with respect 
to the adjustment and nullification of erroneous options transactions 
and, in particular, those involving complex order or stock-option order 
transactions. The Commission notes that the proposal is designed to 
achieve more consistent results for participants across U.S. options 
exchanges than under the initial harmonized rules, while maintaining a 
fair and orderly market, protecting investors, and protecting the 
public

[[Page 11251]]

interest. In particular, the proposal is designed to increase the 
consistency and transparency in the handling of erroneous options 
transactions among those options exchanges that allow complex order or 
stock-option order transactions.
    In its order approving the initial harmonized rule of BATS 
Exchange, Inc., the Commission noted that the options exchanges 
intended to work together to further develop additional objectivity 
with respect to their processes for the adjustment and nullification of 
erroneous options transactions.\21\ The Commission believes that the 
proposed rule change to specifically delineate the treatment of 
erroneous complex order or stock-option order transactions constitutes 
an additional step towards this goal. Based on the foregoing, the 
Commission believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \22\ in that proposed Rule 6.25 will foster 
cooperation and coordination with persons engaged in regulating and 
facilitating transactions.
---------------------------------------------------------------------------

    \21\ See BATS Order, supra note 5, at 16039.
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that the proposed rule change will become 
operative on April 17, 2017. This delayed implementation is to ensure 
that other options exchanges that permit transactions in complex orders 
or stock-option orders will have sufficient time to put in place 
similar rules consistent with this proposed rule change and to 
coordinate the date of implementation of such harmonized rules.\23\
---------------------------------------------------------------------------

    \23\ See Amendment No. 1.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change, as modified by Amendment No. 1 
(SR-CBOE-2016-088) be, and hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03295 Filed 2-17-17; 8:45 am]
BILLING CODE 8011-01-P