Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Harmonize Liability Caps and Related Reimbursement Requirements, 14087-14090 [2017-05216]
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The Exchange also describes the
current derivative markets for bitcoin as
‘‘[n]ascent.’’ 138 The Exchange notes that
certain types of options, futures
contracts for differences, and other
derivative instruments are available in
certain jurisdictions, but that many of
these are not available in the United
States and that they generally are not
regulated ‘‘to the degree that U.S.
investors expect derivatives instruments
to be regulated.’’ 139 The Exchange notes
that the CFTC has approved the
registration of TeraExchange LLC as a
swap execution facility (‘‘SEF’’) and
that, on October 9, 2014, TeraExchange
announced that it had hosted the first
executed bitcoin swap traded on a
CFTC-regulated platform.140 Further,
the Exchange notes that the CFTC has
temporarily registered another SEF that
would trade swaps on bitcoin.141
The Commission acknowledges that
TeraExchange, a market for swaps on
bitcoin, has registered with the CFTC,
but the Exchange’s description of
trading activity on that market fails to
note that the very activity it cites was
the subject of an enforcement action by
the CFTC. The CFTC found that
TeraExchange had improperly arranged
for participants to make prearranged,
offsetting ‘‘wash’’ transactions of the
same price, notional amount, and tenor
and then issued a press release ‘‘to
create the impression of actual trading
in the Bitcoin swap.’’ 142 Neither the
Exchange nor any commenter provides
evidence of meaningful trading volume
in bitcoin derivatives on any regulated
marketplace. Thus, the Commission
believes that the bitcoin derivatives
markets are not significant, regulated
markets related to bitcoin with which
the Exchange can enter into a
surveillance-sharing agreement.
One commenter, and the author of the
paper submitted with respect to a
similar rule filing, assert that the
existence of bitcoin derivative markets
is not a necessary condition for a bitcoin
ETP.143 The key requirement the
Commission is applying here, however,
is not that a futures or derivatives
market is required for every ETP, but
that—when the spot market is
unregulated—there must be significant,
138 See Amendment No. 1, supra note 1, 81 FR
at 76661.
139 See id.
140 See id. See also ARK Letter, supra note 19, at
6 (noting that TeraExchange offers bitcoin
forwards).
141 See Amendment No. 1, supra note 1, 81 FR
at 76661.
142 See TeraExchange Settlement Order, supra
note 112.
143 See Anonymous Letter III, supra note 19, at 2;
Lewis Paper, supra note 42, at 8.
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regulated derivatives markets related to
the underlying asset with which the
Exchange can enter into a surveillancesharing agreement.
C. Basis for Disapproval
The Commission has, in past
approvals of commodity-trust ETPs,
emphasized the importance of
surveillance-sharing agreements
between the national securities
exchange listing and trading the ETP,
and significant markets relating to the
underlying asset.144 Such agreements,
which are a necessary tool to enable the
ETP-listing exchange to detect and deter
manipulative conduct, enable the
exchange to meet its obligation under
Section 6(b)(5) of the Exchange Act to
have rules that are designed to prevent
fraudulent and manipulative acts and
practices and to protect investors and
the public interest.145
As described above, the Exchange has
not entered into a surveillance-sharing
agreement with a significant, regulated,
bitcoin-related market. The Commission
also does not believe, as discussed
above, that the proposal supports a
finding that the significant markets for
bitcoin or derivatives on bitcoin are
regulated markets with which the
Exchange can enter into such an
agreement. Therefore, as the Exchange
has not entered into, and would
currently be unable to enter into, the
type of surveillance-sharing agreement
that has been in place with respect to all
previously approved commodity-trust
ETPs, the Commission does not find the
proposed rule change to be consistent
with the Exchange Act and, accordingly,
disapproves the proposed rule change.
The Commission notes that bitcoin is
still in the relatively early stages of its
development and that, over time,
regulated bitcoin-related markets of
significant size may develop.146 Should
such markets develop, the Commission
could consider whether a bitcoin ETP
would, based on the facts and
circumstances then presented, be
consistent with the requirements of the
Exchange Act.
IV. Conclusion
For the reasons set forth above, the
Commission does not find that the
proposed rule change, as modified by
Amendment Nos. 1 and 2, is consistent
with the requirements of the Exchange
144 See
supra note 96 and accompanying text.
U.S.C. 78f(b)(5).
146 The Exchange notes, for example, that the
CME and the ICE recently announced bitcoin
pricing indexes. See Amendment No. 1, supra note
1, 81 FR at 76666. In the future, regulated futures
or derivative markets might begin to trade products
based on these indexes.
145 15
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14087
Act and the rules and regulations
thereunder applicable to a national
securities exchange, and in particular,
with Section 6(b)(5) of the Exchange
Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,
that the proposed rule change (SR–
BatsBZX–2016–30), as modified by
Amendments No. 1 and 2, be, and it
hereby is, disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.147
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–05213 Filed 3–15–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80209; File No. SR–
ISEGemini–2017–11]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Harmonize Liability
Caps and Related Reimbursement
Requirements
March 10, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
27, 2017, ISE Gemini, LLC (‘‘ISE
Gemini’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 705 (Limitation of Liability) to
harmonize its liability caps and related
reimbursement requirements with those
of NASDAQ BX, Inc. (‘‘BX’’), NASDAQ
PHLX LLC (‘‘Phlx’’) and NASDAQ Stock
Market LLC (‘‘NSM’’ and together with
BX and Phlx, the ‘‘Nasdaq Exchanges’’).
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
147 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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
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1. Purpose
The purpose of this proposed rule
change is to amend Rule 705 (Limitation
of Liability) to harmonize the
Exchange’s existing liability caps and
related reimbursement requirements for
claims under Rule 705(d) with the caps
and requirements set forth in the rules
of the Nasdaq Exchanges.3 The
Exchange and its affiliates, International
Securities Exchange, LLC and ISE
Mercury, LLC (together, the ‘‘ISE
Exchanges’’), were recently acquired
(the ‘‘Acquisition’’) by Nasdaq, Inc.
(‘‘HoldCo’’).4 In the context of the
Acquisition, the ISE Exchanges are
working to align certain rules with rules
of the Nasdaq Exchanges in order to
provide consistent standards across the
six exchanges operated by HoldCo (the
‘‘HoldCo Affiliated Exchanges’’). As part
of this effort, the proposal set forth
below harmonizes the Exchange’s
liability caps and the related
reimbursement requirements with those
of the Nasdaq Exchanges in order to
provide uniform standards and
requirements for users of the HoldCo
Affiliated Exchanges.5
Rule 705 in its current form generally
states that the Exchange is not liable for
any losses due to the Exchange’s
negligence or unintentional actions, but
also provides in Rule 705(d) that
notwithstanding this general limitation
on liability, the Exchange may
compensate its members for losses
resulting directly from the malfunction
3 See BX Rule 4626(b) and Phlx Rule 1015. See
also NSM Rule 4626(b).
4 See Securities Exchange Act Release No. 78119
(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR–
ISE–2016–11; SR–ISEGemini–2016–05; SR–
ISEMercury–2016–10).
5 International Securities Exchange, LLC and ISE
Mercury, LLC will each file a proposed rule change
with the Commission to adopt similar requirements.
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of the Exchange’s physical equipment,
devices and/or programming.
Subsections (d)(1)–(d)(3) of Rule 705
contains express conditions governing
the voluntary payments made by the
Exchange under these limited
circumstances. Specifically, the
Exchange’s payments for any and all
system failures on a single trading day
are capped at $250,000 under
subsection (d)(1). The rule text states
that for the aggregate of all claims made
by all market participants related to the
use of the Exchange on a single trading
day, the Exchange’s payments shall not
exceed $250,000. Subsection (d)(2)
further provides that if the cumulative
claims exceed the $250,000 cap, this
amount would be proportionally
allocated among all such claims.
Finally, subsection (d)(3) specifies that
in order for a member to be eligible to
receive payment under this Rule, claims
for payment must be made in writing
and submitted no later than the opening
of trading on the next business day after
the loss. Once in receipt of a claim, the
Exchange is required to verify that: (i) A
valid order was accepted into the
Exchange’s systems; and (ii) an
Exchange system failure occurred
during the execution or handling of that
order. A system failure will be deemed
to have occurred when there is a
malfunction of the Exchange’s physical
systems, devices or software.
The Exchange now proposes to amend
the existing rule text in Rule 705(d) to
adopt the same liability caps and
reimbursement requirements as the
Nasdaq Exchanges.6 Proposed Rule
705(d) would provide that the Exchange
may, notwithstanding the general
limitations on liability contained in
Rule 705(a), compensate users of the
Exchange for losses directly resulting
from the actual failure of the System,7
or any other Exchange quotation,
transaction reporting, execution, order
routing or other systems or facility to
correctly process an order, quote,
message, or other data, provided that the
Exchange has acknowledged receipt of
the order, quote, message, or data. This
limited exception in proposed Rule
705(d) would be subject to certain
conditions and requirements contained
in proposed subsections (d)(1)–(3).
Subsection (d)(1) proposes that the
aggregate payments for all compensation
claims made by all market participants
related to the use of the Exchange
during a single calendar month would
6 See
note 4 above.
means the electronic system operated
by the Exchange that receives and disseminates
quotes, executes orders and reports transactions.
See the Constitution of ISE Gemini, Section
13.1(dd).
7 ‘‘System’’
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not exceed the larger of $500,000, or the
amount of the recovery obtained by the
Exchange under any applicable
insurance policy.8 Under this proposal,
the Exchange will eliminate the existing
$250,000 daily cap on liability and
consider all such claims on a monthly
basis, subject to proposed $500,000
monthly liability cap. Each Nasdaq
Exchange currently analyzes total
eligible liability claims on a per-month
look-back basis. The Exchange’s
proposal to adopt an identical claims
process, in effect, would allow ISE
Gemini an increased capability to
compensate a market participant up to
the monthly cap of $500,000 even
though the losses occurred on a single
day or were across multiple days for a
single participant.
Proposed subsection (d)(2) specifies
how the reimbursement funds would be
allocated in the event all of the
compensation claims submitted during
a single calendar month exceed the
$500,000 monthly cap. Specifically, if
all of the claims arising out of the use
of the Exchange cannot be fully satisfied
because in the aggregate they exceed the
limitations provided for in the Rule
($500,000), then the maximum
permitted amount would be
proportionally allocated among all such
claims arising during a single calendar
month.9 This is substantially similar to
the existing process where the
maximum amount is proportionally
allocated among all such claims, except
it would be for all claims arising during
a one-month period under the proposed
rule change rather than during a single
trading day under the existing Rule.
Finally, proposed subsection (d)(3)
specifies the requirements and
procedures applicable to the submission
of reimbursement claims. Specifically,
all claims for compensation must be
submitted in writing no later than 12:00
p.m. ET on the next business day
following the day on which the use of
the Exchange gave rise to such claims.10
As such, the Exchange is proposing to
extend the deadline to submit
compensation claims from the opening
of trading on the next business day to
12:00 p.m. ET. The Exchange believes
that the extension of time to make such
compensation claims increases the
ability of market participants to submit
claims in a timely manner. Proposed
8 See BX Rule 4626(b)(1), Phlx Rule 1015(1), and
NSM Rule 4626(b)(1) for substantially similar
provisions.
9 See BX Rule 4626(b)(2), Phlx Rule 1015(2), and
NSM Rule 4626(b)(5) for substantially similar
provisions.
10 See BX Rule 4626(b)(3) and Phlx Rule 1015(3)
for substantially similar provisions. See also NSM
Rule 4626(b)(6).
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subsection (d)(3) also states that nothing
in the Rule obligates the Exchange to
seek recovery under any applicable
insurance policy. If the Exchange does
seek and receive an insurance recovery
that is larger than $500,000, the amount
of that recovery would limit the
reimbursement funds available for the
incident supporting the recovery to the
greater recovery amount.11
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2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,12 in general, and furthers the
objectives of Section 6(b)(5) of the Act,13
in particular, in that it is designed 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
proposal supports this policy by
establishing a fair and transparent
process by which the Exchange can
accommodate claims for reimbursement
for the failure of specified systems in
specified facilities and under specified
conditions. The Exchange believes that
its proposal to amend Rule 705(d) will
continue to promote fairness in the
marketplace in situations where one or
more firm’s claim results from a
problem in a function performed by the
Exchange’s trading system that is solely
the fault of the Exchange. As noted
above, the proposal would allow the
Exchange an increased capability to
compensate a market participant up to
the monthly cap of $500,000 even
though the losses occurred on a single
day or were across multiple days for a
single participant. Furthermore, the
proposed expansion of time to make
such compensation claims would
increase the ability of market
participants to submit claims in a timely
manner.
Lastly, the proposed rule change is
intended to align the liability caps and
compensation claims requirements with
the caps and requirements currently
provided by the Nasdaq Exchanges in
order to provide consistent rules across
the six HoldCo Affiliated Exchanges.14
Consistent rules, in turn, would
simplify the regulatory requirements for
11 There are no other practical differences
between the Exchange’s existing reimbursement
rule and this proposal than as described above.
Specifically these differences are: The liability caps
(i.e. the greater of $500,000 or, if the Exchange opts
to seek recovery, the recovery amount under any
applicable insurance policy), the look-back analysis
period of one month, and the later claims deadline
of 12:00 p.m. ET.
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
14 See note 4 above.
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members of the Exchange that are also
participants on the Nasdaq Exchanges.
The Exchange believes that the
proposed rule change would provide
greater harmonization among similar
rules of the HoldCo Affiliated
Exchanges, resulting in greater
uniformity and more efficient regulatory
compliance. As such, the proposed rule
change would foster cooperation and
coordination with persons engaged in
facilitating transactions in securities and
would remove impediments to and
perfect the mechanism of a free and
open market and a national market
system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act because all
members would be subject to the same
liability caps and reimbursement
requirements. The proposed rule change
is designed to provide greater
harmonization among similar rules
across the six HoldCo Affiliated
Exchanges, resulting in more efficient
regulatory compliance for common
members.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 15 and
subparagraph (f)(6) of Rule 19b–4
thereunder.16
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
15 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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.
16 17
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14089
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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–
ISEGemini–2017–11 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISEGemini–2017–11. 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 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–
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ISEGemini–2017–11, and should be
submitted on or before April 6, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Eduardo A. Aleman,
Assistant Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2017–05216 Filed 3–15–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80200; File No. SR–
ISEGemini–2017–12]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to the
Decommission of the Tick-Worse
Functionality
March 10, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
28, 2017, ISE Gemini, LLC (‘‘ISE
Gemini’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes (i) to describe
the decommission of its ‘‘Tick-Worse’’
functionality and (ii) to amend Rule 713
(Priority of Quotes and Orders) relating
to the priority of split price transactions.
The Exchange requests that the
proposed rule change become operative
on February 28, 2017.
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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.
1. Purpose
The purpose of the proposed rule
change is (i) to describe the
decommission of the ‘‘Tick-Worse’’
functionality and (ii) to amend Rule 713
(Priority of Quotes and Orders) as it
relates to the priority of split price
transactions. The proposed changes are
discussed below.
‘‘Tick-Worse’’ Functionality
The Exchange currently provides
market makers 3 with Tick-Worse
functionality, which allows market
makers to pre-define the prices and
sizes at which the system will
automatically move their quotation
following an execution that exhausts the
size of their existing quotation.4 As
such, when a market maker’s quote is
traded out, it can be automatically
reinstated into the Exchange’s order
book at the next best price.5 This
optional feature is intended to help
market makers meet their continuous
quoting obligations under the
Exchange’s rules 6 when their displayed
3 The term ‘‘market makers’’ refers to
‘‘Competitive Market Makers’’ and ‘‘Primary Market
Makers’’ collectively. See Rule 100(a)(25).
4 Tick-Worse functionality is not currently
memorialized in the Exchange’s rulebook. In
addition, the Exchange will not offer Tick-Worse on
the new Nasdaq INET system going forward. On
September 30, 2004, International Securities
Exchange, LLC (‘‘ISE’’) filed with the Commission
a proposal to codify this functionality in its
rulebook, but inadvertently deleted the rule as
obsolete rule text in a subsequent proposal filed on
December 21, 2012. See Securities Exchange Act
Release No. 51050 (January 18, 2005), 70 FR 3758
(January 26, 2005) (SR–ISE–2004–31); Securities
Exchange Act Release No. 68570 (January 3, 2013),
78 FR 1901 (January 9, 2013) (SR–ISE–2012–82).
The Exchange imported Rule 713 from ISE’s
rulebook when the Commission granted the
Exchange’s application for registration as a national
securities exchange, which was after the TickWorse functionality rule was inadvertently removed
from ISE’s rules. See Securities Exchange Act
Release No. 70050 (July 26, 2013), 78 FR 46622
(August 1, 2013) (Order Granting Registration as a
National Securities Exchange).
5 Market makers may choose to set Tick-Worse
parameters by specifying how many price ticks
back, and for what size, the quote is to be
reinstated.
6 Specifically, Primary Market Makers (‘‘PMMs’’)
are required under Rule 804(e)(1) to enter
quotations in all of the series listed on the Exchange
of the options classes to which they are appointed
on a daily basis. Supplementary Material .01 to
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quotations are exhausted. When a
market maker’s quote is traded out and
automatically reinstated into the
Exchange’s order book using the TickWorse functionality, the reinstated
quote will be given priority pursuant to
the Exchange’s split price priority rule
as discussed below.
Due to the lack of demand for the
Tick-Worse feature, the Exchange
decommissioned the use of this
functionality on February 21, 2017 by
asking its members to stop using TickWorse by February 21st.7 The Exchange
plans to turn off this functionality in the
system when the last symbol migrates
onto the new Nasdaq INET system on or
around April 3, 2017 8 as part of its
system migration to Nasdaq INET
technology.9 As discussed above, the
Exchange offers the Tick-Worse feature
as a voluntary tool for market makers to
assist them in meeting their continuous
quoting obligations under the
Exchange’s rules. As such, market
makers are not required to use the
Exchange-provided functionality and
can program their own systems to
perform the same functions if they
prefer. Here, the Exchange has found
that almost all market makers use their
own systems rather than the Exchange’s
Tick-Worse feature to send refreshed
quotations when their displayed
quotations are exhausted, and therefore
discontinued this functionality. Because
the Tick-Worse functionality is
currently not memorialized in the
Exchange’s rules as noted above, there
is no text of the proposed rule change.
The Exchange provided advance notice
to its members on January 31, 2017
through an informational circular that it
would decommission the use of the
Tick-Worse functionality on February
21, 2017. The Exchange believes that
this gave market makers the opportunity
to make any necessary changes to their
Rule 804 further requires PMMs to quote 90% of
the time their assigned options class is open for
trading on the Exchange. As provided in Rule
804(e)(2), Competitive Market Makers (‘‘CMMs’’)
are not required to enter quotations in the options
class to which they are appointed, but in the event
a CMM does initiate quoting, such CMM is
generally required to quote 60% of the time its
assigned options class is open for trading on the
Exchange.
7 This functionality was only being used by one
market maker on the Exchange.
8 The detailed schedule of the symbol migration
is available at: https://www.nasdaqtrader.com/
MicroNews.aspx?id=OTA2017-13.
9 See Securities Exchange Release No. 80011
(February 10, 2017), 82 FR 10927 (February 16,
2017) (SR–ISEGemini–2016–17) (Order Approving
Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2, To Amend Various Rules in
Connection With a System Migration to Nasdaq
INET Technology).
E:\FR\FM\16MRN1.SGM
16MRN1
]]>Agencies
[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14087-14090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05216]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80209; File No. SR-ISEGemini-2017-11]
Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Harmonize
Liability Caps and Related Reimbursement Requirements
March 10, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 27, 2017, ISE Gemini, LLC (``ISE Gemini'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 705 (Limitation of Liability)
to harmonize its liability caps and related reimbursement requirements
with those of NASDAQ BX, Inc. (``BX''), NASDAQ PHLX LLC (``Phlx'') and
NASDAQ Stock Market LLC (``NSM'' and together with BX and Phlx, the
``Nasdaq Exchanges'').
The text of the proposed rule change is available on the Exchange's
Web site at www.ise.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
[[Page 14088]]
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 purpose of this proposed rule change is to amend Rule 705
(Limitation of Liability) to harmonize the Exchange's existing
liability caps and related reimbursement requirements for claims under
Rule 705(d) with the caps and requirements set forth in the rules of
the Nasdaq Exchanges.\3\ The Exchange and its affiliates, International
Securities Exchange, LLC and ISE Mercury, LLC (together, the ``ISE
Exchanges''), were recently acquired (the ``Acquisition'') by Nasdaq,
Inc. (``HoldCo'').\4\ In the context of the Acquisition, the ISE
Exchanges are working to align certain rules with rules of the Nasdaq
Exchanges in order to provide consistent standards across the six
exchanges operated by HoldCo (the ``HoldCo Affiliated Exchanges''). As
part of this effort, the proposal set forth below harmonizes the
Exchange's liability caps and the related reimbursement requirements
with those of the Nasdaq Exchanges in order to provide uniform
standards and requirements for users of the HoldCo Affiliated
Exchanges.\5\
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\3\ See BX Rule 4626(b) and Phlx Rule 1015. See also NSM Rule
4626(b).
\4\ See Securities Exchange Act Release No. 78119 (June 21,
2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISEGemini-
2016-05; SR-ISEMercury-2016-10).
\5\ International Securities Exchange, LLC and ISE Mercury, LLC
will each file a proposed rule change with the Commission to adopt
similar requirements.
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Rule 705 in its current form generally states that the Exchange is
not liable for any losses due to the Exchange's negligence or
unintentional actions, but also provides in Rule 705(d) that
notwithstanding this general limitation on liability, the Exchange may
compensate its members for losses resulting directly from the
malfunction of the Exchange's physical equipment, devices and/or
programming. Subsections (d)(1)-(d)(3) of Rule 705 contains express
conditions governing the voluntary payments made by the Exchange under
these limited circumstances. Specifically, the Exchange's payments for
any and all system failures on a single trading day are capped at
$250,000 under subsection (d)(1). The rule text states that for the
aggregate of all claims made by all market participants related to the
use of the Exchange on a single trading day, the Exchange's payments
shall not exceed $250,000. Subsection (d)(2) further provides that if
the cumulative claims exceed the $250,000 cap, this amount would be
proportionally allocated among all such claims. Finally, subsection
(d)(3) specifies that in order for a member to be eligible to receive
payment under this Rule, claims for payment must be made in writing and
submitted no later than the opening of trading on the next business day
after the loss. Once in receipt of a claim, the Exchange is required to
verify that: (i) A valid order was accepted into the Exchange's
systems; and (ii) an Exchange system failure occurred during the
execution or handling of that order. A system failure will be deemed to
have occurred when there is a malfunction of the Exchange's physical
systems, devices or software.
The Exchange now proposes to amend the existing rule text in Rule
705(d) to adopt the same liability caps and reimbursement requirements
as the Nasdaq Exchanges.\6\ Proposed Rule 705(d) would provide that the
Exchange may, notwithstanding the general limitations on liability
contained in Rule 705(a), compensate users of the Exchange for losses
directly resulting from the actual failure of the System,\7\ or any
other Exchange quotation, transaction reporting, execution, order
routing or other systems or facility to correctly process an order,
quote, message, or other data, provided that the Exchange has
acknowledged receipt of the order, quote, message, or data. This
limited exception in proposed Rule 705(d) would be subject to certain
conditions and requirements contained in proposed subsections (d)(1)-
(3).
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\6\ See note 4 above.
\7\ ``System'' means the electronic system operated by the
Exchange that receives and disseminates quotes, executes orders and
reports transactions. See the Constitution of ISE Gemini, Section
13.1(dd).
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Subsection (d)(1) proposes that the aggregate payments for all
compensation claims made by all market participants related to the use
of the Exchange during a single calendar month would not exceed the
larger of $500,000, or the amount of the recovery obtained by the
Exchange under any applicable insurance policy.\8\ Under this proposal,
the Exchange will eliminate the existing $250,000 daily cap on
liability and consider all such claims on a monthly basis, subject to
proposed $500,000 monthly liability cap. Each Nasdaq Exchange currently
analyzes total eligible liability claims on a per-month look-back
basis. The Exchange's proposal to adopt an identical claims process, in
effect, would allow ISE Gemini an increased capability to compensate a
market participant up to the monthly cap of $500,000 even though the
losses occurred on a single day or were across multiple days for a
single participant.
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\8\ See BX Rule 4626(b)(1), Phlx Rule 1015(1), and NSM Rule
4626(b)(1) for substantially similar provisions.
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Proposed subsection (d)(2) specifies how the reimbursement funds
would be allocated in the event all of the compensation claims
submitted during a single calendar month exceed the $500,000 monthly
cap. Specifically, if all of the claims arising out of the use of the
Exchange cannot be fully satisfied because in the aggregate they exceed
the limitations provided for in the Rule ($500,000), then the maximum
permitted amount would be proportionally allocated among all such
claims arising during a single calendar month.\9\ This is substantially
similar to the existing process where the maximum amount is
proportionally allocated among all such claims, except it would be for
all claims arising during a one-month period under the proposed rule
change rather than during a single trading day under the existing Rule.
---------------------------------------------------------------------------
\9\ See BX Rule 4626(b)(2), Phlx Rule 1015(2), and NSM Rule
4626(b)(5) for substantially similar provisions.
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Finally, proposed subsection (d)(3) specifies the requirements and
procedures applicable to the submission of reimbursement claims.
Specifically, all claims for compensation must be submitted in writing
no later than 12:00 p.m. ET on the next business day following the day
on which the use of the Exchange gave rise to such claims.\10\ As such,
the Exchange is proposing to extend the deadline to submit compensation
claims from the opening of trading on the next business day to 12:00
p.m. ET. The Exchange believes that the extension of time to make such
compensation claims increases the ability of market participants to
submit claims in a timely manner. Proposed
[[Page 14089]]
subsection (d)(3) also states that nothing in the Rule obligates the
Exchange to seek recovery under any applicable insurance policy. If the
Exchange does seek and receive an insurance recovery that is larger
than $500,000, the amount of that recovery would limit the
reimbursement funds available for the incident supporting the recovery
to the greater recovery amount.\11\
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\10\ See BX Rule 4626(b)(3) and Phlx Rule 1015(3) for
substantially similar provisions. See also NSM Rule 4626(b)(6).
\11\ There are no other practical differences between the
Exchange's existing reimbursement rule and this proposal than as
described above. Specifically these differences are: The liability
caps (i.e. the greater of $500,000 or, if the Exchange opts to seek
recovery, the recovery amount under any applicable insurance
policy), the look-back analysis period of one month, and the later
claims deadline of 12:00 p.m. ET.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ in particular, in that it is designed 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 proposal supports this policy by establishing a fair and
transparent process by which the Exchange can accommodate claims for
reimbursement for the failure of specified systems in specified
facilities and under specified conditions. The Exchange believes that
its proposal to amend Rule 705(d) will continue to promote fairness in
the marketplace in situations where one or more firm's claim results
from a problem in a function performed by the Exchange's trading system
that is solely the fault of the Exchange. As noted above, the proposal
would allow the Exchange an increased capability to compensate a market
participant up to the monthly cap of $500,000 even though the losses
occurred on a single day or were across multiple days for a single
participant. Furthermore, the proposed expansion of time to make such
compensation claims would increase the ability of market participants
to submit claims in a timely manner.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Lastly, the proposed rule change is intended to align the liability
caps and compensation claims requirements with the caps and
requirements currently provided by the Nasdaq Exchanges in order to
provide consistent rules across the six HoldCo Affiliated
Exchanges.\14\ Consistent rules, in turn, would simplify the regulatory
requirements for members of the Exchange that are also participants on
the Nasdaq Exchanges. The Exchange believes that the proposed rule
change would provide greater harmonization among similar rules of the
HoldCo Affiliated Exchanges, resulting in greater uniformity and more
efficient regulatory compliance. As such, the proposed rule change
would foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
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\14\ See note 4 above.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act because all members would be
subject to the same liability caps and reimbursement requirements. The
proposed rule change is designed to provide greater harmonization among
similar rules across the six HoldCo Affiliated Exchanges, resulting in
more efficient regulatory compliance for common members.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \15\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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-ISEGemini-2017-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISEGemini-2017-11. 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 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-
[[Page 14090]]
ISEGemini-2017-11, and should be submitted on or before April 6, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05216 Filed 3-15-17; 8:45 am]
BILLING CODE 8011-01-P
