Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Regarding Qualified Contingent Trades and Related Information Recording Obligations by Certain Participants, 37479-37484 [2017-16829]
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Federal Register / Vol. 82, No. 153 / Thursday, August 10, 2017 / Notices
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–
IEX–2017–10 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–IEX–2017–10. 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–IEX–
2017–10, and should be submitted on or
before August 31, 2017.
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VI. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 2, prior to
the thirtieth day after the date of
publication of the notice of Amendment
No. 2 in the Federal Register. The
Commission believes that the proposed
changes to the description of the process
for determining the Auction Clearing
Price that were included in Amendment
No. 2 add clarity to the price
determination process without
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materially changing the proposal from
what the Exchange originally filed.
Additionally, the Commission believes
that the proposed addition of a rounding
process to prevent certain Tick Size
Pilot securities from trading in an
impermissible increment eliminates a
potential conflict between the Tick Size
Pilot and IEX Auctions. Further, the
Commission believes that the proposed
modification of the process for affecting
incremental extensions of the period for
accepting orders after an LULD trading
pause will clarify the process and
ensure consistency with the
standardized approach agreed to by the
LULD Plan participants. The
Commission does not believe that any of
the changes proposed in Amendment
No. 2 introduce novel concepts, but
rather add detail to better reflect in the
proposed rule text how the proposed
IEX Auctions would work for IEX-listed
securities, and also reconciles the
proposed IEX Auctions with the ticksize requirements of the Tick Size Pilot.
Accordingly, for the reasons noted
above, the Commission finds good cause
for approving the proposed rule change,
as modified by Amendment No. 2, on an
accelerated basis, pursuant to Section
19(b)(2) of the Act.90
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,91 that the
proposed rule change (SR–IEX–2017–
10), as modified by Amendment No. 2,
is approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.92
Eduardo A. Aleman,
Assistant Secretary.
37479
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 26,
2017, the Chicago Stock Exchange, Inc.
(‘‘CHX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CHX proposes to amend the Rules of
the Exchange (‘‘CHX Rules’’) regarding
Qualified Contingent Trades (‘‘QCTs’’) 3
and related information recording
obligations by certain Participants.4 The
text of this proposed rule change is
available on the Exchange’s Web site at
https://www.chx.com/regulatoryoperations/rule-filings/, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those 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 parts of such
statements.
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[FR Doc. 2017–16830 Filed 8–9–17; 8:45 am]
[Release No. 34–81315; File No. SR–CHX–
2017–12]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing of Proposed Rule Change
Regarding Qualified Contingent Trades
and Related Information Recording
Obligations by Certain Participants
The Exchange proposes to amend
CHX Rules to effect the following
changes:
• Clarify the operation of cross
orders 5 and Cross With Size handling.6
• Only permit Participants that are
registered with the Exchange as
Institutional Brokers (‘‘IBs’’) 7 to submit
an NMS stock component order of a
1 15
August 4, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
90 15
U.S.C. 78s(b)(2).
91 Id.
92 17
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CFR 200.30–3(a)(12).
Frm 00062
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See infra Section A.1(1).
4 A Participant is a ‘‘member’’ of the Exchange for
purposes of the Act. See CHX Article 1, Rule 1(s).
5 See CHX Article 1, Rule 2(a)(2).
6 See CHX Article 1, Rule 2(g)(1).
7 See CHX Article 1, Rule 1(n); see also generally
CHX Article 17.
2 17
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Federal Register / Vol. 82, No. 153 / Thursday, August 10, 2017 / Notices
QCT (‘‘QCT Cross’’) to the Matching
System.8
• Clarify the scope of information
recording obligations under current
Article 11, Rule 3.
• Adopt rules describing the CHX
Broker Back Office System (‘‘BBOS’’), a
trade management system developed
and maintained by the Exchange.
• Require IBs to record certain
information in the BBOS regarding
component orders and trades related to
QCT Crosses executed within the
Matching System.
• Clarify the agency, principal and
error accounts requirements for IBs.
(1) Background
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In 2006,9 the Commission granted an
exemption from Rule 611(a) of
Regulation NMS 10 (‘‘QCT Exemption’’)
for any trade-throughs caused by the
execution of an order involving one or
more NMS stocks (each an ‘‘Exempted
NMS Stock Transaction’’) that are
components of a QCT, which was
modified in 2008 to eliminate the Size
Condition.11 Consistent with the QCT
Exemption, the Exchange permits
Participants to submit cross orders
marked with the QCT modifier (i.e.,
QCT Crosses) to the Matching System to
effect transactions that comprise the
NMS stock components of QCTs.12
8 The Matching System is an automated order
execution system, which is a part of the Exchange’s
‘‘Trading Facilities,’’ as defined under CHX Article
1, Rule 1(z).
9 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006)
(‘‘QCT Exemptive Order’’).
10 17 CFR 242.611(a).
11 ‘‘Qualified contingent trade’’ is defined as ‘‘a
transaction consisting of two or more component
orders, executed as agent or principal where: (1) At
least one component order is in an NMS stock; (2)
All components are effected with a product or price
contingency that either has been agreed to by the
respective counterparties or arranged for by a
broker-dealer as principal or agent; (3) The
execution of one component is contingent upon the
execution of all other components at or near the
same time; (4) The specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined at
the time the contingent order is placed; (5) The
component orders bear a derivative relationship to
one another, represent different classes of shares of
the same issuer, or involve the securities of
participants in mergers or with intentions to merge
that have been announced or since cancelled; and
(6) The Exempted NMS Stock Transaction is fully
hedged (without regard to any prior existing
position) as a result of the other components of the
contingent trade. See Securities Exchange Act
Release No. 57620 (April 4, 2008), 73 FR 19271
(April 9, 2008) (‘‘Modified QCT Exemptive Order’’).
In 2008, the Commission modified the QCT
Exemptive Order to eliminate a seventh
requirement (‘‘Size Condition’’) that the Exempted
NMS Stock Transaction that is part of a contingent
trade involves at least 10,000 shares or has a market
value of at least $200,000. See id. at 19274.
12 While CHX Rules currently permit any
Participant to submit a QCT Cross, in practice, only
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Mechanically, upon receipt of a QCT
Cross, the Exchange will immediately
execute the QCT Cross without regard to
the protected quotations of away
markets if the state of the CHX limit
order book (‘‘CHX book’’) in the relevant
security would permit the QCT Cross to
execute within the Matching System.13
If the QCT Cross is blocked by an order
resting on the CHX book, the QCT Cross
will be immediately cancelled. The
Exchange does not conduct a preexecution verification of each QCT
Cross for compliance with the terms of
the QCT Exemption due to the practical
difficulties of conducting such
verification within the constraints of the
‘‘at or near the same time’’ requirement
for the execution of the component
orders that comprise the QCT.14 Instead,
the Exchange maintains and operates a
comprehensive Surveillance and
Examination program that, among other
things, reviews executed QCT Crosses
for compliance with CHX Rules and the
QCT Exemption.
The Exchange believes that the
operation of the Matching System and
the Surveillance and Examination
program, in general, and as applied to
the execution and review of QCT
Crosses, in particular, are ‘‘reasonably
designed’’ in compliance with the
requirements of Rule 611(a)(1) of the
Regulation NMS.15 The Exchange also
regularly surveils to ascertain the
effectiveness of its policies and
procedures required by Rule 611(a)(1)
and has taken prompt action to remedy
deficiencies in such policies and
procedures, consistent with the
requirements of Rule 611(a)(2) of
Regulation NMS.16 As part of its
ongoing effort to update and optimize
the Surveillance and Examination
program, the Exchange has developed
and deployed BBOS, a trade
management system that, among other
things, permits the Exchange to review
additional information to identify the
specific component transactions 17 that
IBs have submitted QCT Crosses, in large part due
to the complexities of coordinating the execution of
the various components of a QCT and allocating
positions to the various parties to the QCT.
13 See CHX Article 1, Rule 2(a)(2).
14 See CHX Article 1, Rule 2(b)(2)(E)(iii); see also
supra note 11.
15 17 CFR 242.611(a)(1).
16 17 CFR 242.611(a)(2).
17 Currently, the vast majority of component
transactions used to hedge QCT Crosses involve
exchange traded options. As such, BBOS permits
users to automatically link QCT Crosses with
specific exchange-traded options transactions via
the use of unique sequence numbers. While the
BBOS permits the entry of other types of
component transactions, such as futures
transactions, the full details of such component
transactions must be entered manually. See infra
note 18.
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are being used to hedge executed QCT
Crosses. Currently, the Exchange
encourages its IBs to include certain
information for away executions related
to QCT Crosses submitted to the
Matching System into the BBOS,18
which the Exchange uses to verify that
the components to the QCT satisfy the
derivative relationship and fully-hedged
requirements of the QCT Exemption.19
In addition, CHX Rules require IBs to
input all orders and related
information 20 it receives for execution
into an automated system (e.g.,
Brokerplex 21), which includes QCT
Crosses.
The Exchange now proposes various
amendments to the CHX Rules in order
to clarify the operation of cross orders,
to clarify the scope of certain Participant
obligations and to codify current
practices related to the enhancement of
the Exchange’s oversight of QCTs.
(2) Amendments Related to Cross
Orders
The Exchange proposes to adopt
various non-substantive amendments to
CHX Rules to clarify the operation of
cross orders and Cross With Size
handling.22 Current Article 1, Rule
2(a)(2) defines cross order as an order to
buy and sell the same security at a
specific price better than the Working
Price, as defined under Article 1, Rule
1(pp), of all resting orders on the CHX
Book and which would not constitute a
trade-through under Regulation NMS
(including all applicable exceptions and
exemptions). The rule also provides that
a cross order may represent interest of
one or more Participants of the
Exchange, but may only be executed in
an increment permitted by Article 20,
Rule 4(a)(7)(b). The rule then provides
that a cross order may be subject to
special handling, pursuant to Article 20,
Rule 2(g).
While the current definition is
technically accurate, the Exchange
believes that it can be amended to
clarify that the pricing requirement for
cross orders is prerequisite for execution
within the Matching System, but not a
prerequisite for submission into the
Matching System. That is, a cross order
that does not meet the pricing
requirement, and is thus cancelled by
18 Current data fields include: QCT Type; Related
Exchange; Print Time; Expiration Year; Expiration
Month; Price; Contracts; Strike Price; Call/Put;
Volume; and Short Sale Indicator. The alternatives
under ‘‘QCT Type’’ include exchange traded
options, over-the-counter traded options, FLEX
Options, equities, futures and ‘‘other.’’ See id.
19 See supra note 11.
20 See CHX Article 11, Rule 3(a) and (b).
21 See CHX Article 17, Rule 5.
22 See CHX Article 1, Rule 2(g)(1).
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the Matching System, is still a cross
order by definition, albeit not an
executable one. As such, the Exchange
proposes to amend the first paragraph of
current Article 1, Rule 2(a)(2) to provide
as follows:
‘‘Cross order’’: An order to buy and sell the
same security at a specific price. A cross
order may only execute within the Matching
System if it is priced better than the Working
Price, as defined under Article 1, Rule 1(pp),
of all resting orders on the CHX Book. A
cross order may represent interest of one or
more Participants of the Exchange, but may
only be executed in an increment permitted
by Article 20, Rule 4(a)(7)(b). A cross order
may be subject to special handling, pursuant
to paragraph (g) below.
Similarly, the Exchange proposes to
amend Article 1, Rule 2(g)(1)(A) to
clarify the requirements for Cross With
Size handling and to remove redundant
references to compliance various CHX
Rules and federal securities laws and
regulations:
‘‘Cross With Size’’: A cross order (except
any cross order subject to Non-Regular Way
Settlement) to buy and sell at least 5,000
shares of the same security with a total value
of at least $100,000 will execute,
notwithstanding resting orders in the CHX
Book at the same price, where: (A) There are
no resting orders on the CHX Book with a
Working Price, as defined under Article 1,
Rule 1(pp), better than the cross order; and
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In addition, the Exchange proposes to
amend Article 20, Rule 8(e) to replace
a redundant summary of the operation
of cross orders and Cross With Size
handling with specific references to the
relevant rules. Also, since Cross With
Size is a special handling for cross
orders and not a separate order type or
order modifier, the Exchange proposes
to eliminate reference to ‘‘Cross With
Size,’’ but to maintain the citation to the
relevant CHX Rules. Thus, amended
Article 20, Rule 8(e) provides that
‘‘Cross orders shall be handled pursuant
to Article 1, Rule 2(a)(2) and Rule 2(g)(1)
above.’’
(3) Amendments Related to QCT
Modifier
As noted above,23 while CHX Rules
permit any Participant to submit QCT
Crosses, in practice, non-IB Participants
do not currently submit QCT Crosses.
Moreover, CHX Rules require only IBs
to input additional information into
Brokerplex,24 which facilitates the
ability of the Exchange to gather crucial
information related to its review of QCT
Crosses executed on the Exchange.
Given that non-IBs do not currently
submit QCTs and the Surveillance and
Examination program is optimized to
23 See
24 See
supra Section A.1(1).
CHX Article 17, Rule 3.
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review QCT Crosses submitted by IBs,
the Exchange proposes to amend Article
1, Rule 2(b)(2)(E) to provide that QCT
Crosses may only be submitted by IBs.25
The Exchange believes that the
proposed restriction will ensure
consistent recordkeeping requirements
related to QCTs for those Participants
that submit QCT Crosses. Also, given
that any Participant may apply to
register as an IB,26 the Exchange submits
that the proposal is not unfairly
discriminatory to non-IB Participants.27
(4) Clarifying Amendments to
Recordkeeping Requirement for Certain
Participants
The Exchange also proposes various
non-substantive clarifying amendments
to Article 11, Rule 3 (Records of Orders
and Executions).28 Specifically, the
Exchange proposes to amend Article 11,
Rule 3(a) to clarify that the provisions
of Article 11, Rule 3 only apply to
certain Participants described under
Rule 3(e), which limits the applicability
of Article 11, Rule 3 to IBs, CHXregistered Market Makers,29 Participants
for whom the Exchange is the
Designated Examining Authority
(‘‘DEA’’) and any other Participant to
the extent that the information under
Article 11, Rule 3 is required by the
rules of the other self-regulatory
organizations of which they are
members.30 Similarly, the Exchange
proposes to amend the title of Article
11, Rule 3 to provide ‘‘Records of Orders
and Executions by Certain Participants,’’
which better describes the scope of the
rule and distinguishes it from Article
11, Rule 2 (Maintenance of Books and
Records), which requires all Participants
25 The Exchange also proposes to add the
acronym ‘‘QCT’’ to CHX Article 1, Rule 2(b)(2)(E)
to clarify that the term ‘‘QCT’’ refers to ‘‘Qualified
Contingent Trade.’’
26 See CHX Article 17, Rule 1.
27 See infra Section A.2.
28 The provisions under current CHX Article 11,
Rule 3 that the Exchange is proposing to clarify
were originally adopted in 2006 as part of the
Exchange’s transition to its current electronic
trading model. See Exchange Act Release No. 54550
(September 29, 2006), 71 FR 59563 (October 10,
2006) (SR–CHX–2006–05).
29 See CHX Article 16, Rule 1.
30 The Exchange proposes to amend Article 11,
Rule 3(e) to clarify that the provisions of Article 11,
Rule 3 would apply to IBs, Market Makers,
Participants for which the Exchange is its DEA and
any other Participant to the extent that the
information under Article 11, Rule 3 is required by
the Exchange Act and the rules thereunder, as well
as the rules of the other self-regulatory
organizations of which they are members. The
Exchange believes that this amendment is
appropriate given that Participants are ‘‘members’’
of the Exchange, as defined under the Exchange
Act, and any provisions under the Exchange Act
and the rules thereunder that apply to a ‘‘member’’
of an exchange would apply to Participants. See
CHX Article 1, Rule 1(s).
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37481
to comply with the requirements of
Rules 17a–3 31 and 17a–4 under the
Exchange Act.32
The Exchange further proposes to
amend paragraph .01 under the
Interpretations and Policies of Article
11, Rule 3 to clarify that proprietary
orders, such as those submitted by
Market Makers, fall under the purview
of Article 11, Rule 3. Specifically, while
the second sentence under paragraph
.01 excludes from the scope of orders
described under Article 11, Rule 3(a) the
actual decision to purchase or sell a
security by a Participant on a
proprietary basis and not the proprietary
order itself, the Exchange believes that
the sentence could be misconstrued to
exclude all proprietary orders from the
scope of Article 11, Rule 3. The
Exchange also believes that current
Article 11, Rule 3(a)(1)–(3) adequately
describes the types of orders subject to
current Article 11, Rule 3. Accordingly,
the Exchange proposes to delete the
second sentence of paragraph .01 in its
entirety.
Current paragraph .03 under the
Interpretations and Policies of Article
11, Rule 3 provides, in pertinent part,
that Article 11, Rule 3 shall not apply
to orders sent or received through the
Matching System or through any other
electronic system that the Exchange
expressly recognizes as providing the
required information in a format
acceptable to the Exchange. The
purpose of current paragraph .03 is to
clarify that Participants that submit or
receive orders through Exchangeapproved electronic systems are not
required to maintain a separate record of
the information required under Article
11, Rule 3. However, the Exchange
believes that paragraph .03 could be
misconstrued as to exclude orders sent
or received through an Exchangeapproved electronic system from the
scope of Article 11, Rule 3 entirely,
which is incorrect. Accordingly, the
Exchange proposes to amend paragraph
.03 to provide that a Participant that
sends or receives orders, cancellations
and executions, as applicable, through
the Matching System or through any
other electronic systems that the
Exchange expressly recognizes as
providing the required information in a
format acceptable to the Exchange is not
required to maintain a separate record of
such orders, cancellations and
executions.33 Moreover, the Exchange
31 17
CFR 240.17a–3.
CFR 240.17a–4.
33 The Exchange notes that the proposed
amendment to paragraph .03 would have no impact
on a Participant’s recordkeeping obligations under
Article 11, Rule 2, which requires, among other
32 17
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Federal Register / Vol. 82, No. 153 / Thursday, August 10, 2017 / Notices
proposes to add the term ‘‘expressly’’
before the term ‘‘recognize’’ under the
second sentence of current paragraph
.03 to be stylistically consistent with the
amended first sentence and to make
other grammatical amendments.
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(5) Proposed Recordkeeping
Requirements for Away Component
Trades for QCT Crosses Executed
Within the Matching System
The Exchange proposes to require IBs
to record certain information34 for away
QCT component orders and trades
related to QCT Crosses executed within
the Matching System into the BBOS.
While the Exchange currently
encourages IBs to enter such
information into the BBOS,35 the CHX
Rules do not currently require IBs to do
so. Given that current Article 11, Rule
3(a)(1)–(3) does not contemplate such
component orders and trades, as some
component orders may not originate or
otherwise be handled by the Participant,
the Exchange proposes to adopt Article
11, Rule 3(a)(4), which would bring
within the scope of Article 11, Rule 3
every component order and trade,
whether handled by the Participant or
not, related to a QCT Cross that is
submitted by the Participant and
executed within the Matching System.
Correspondingly, the Exchange
proposes to amend the citation under
Article 11, Rule 3(b) to include
proposed Article 11, Rule 3(a)(4).
Moreover, the Exchange proposes to
amend Article 11, Rule 3(b)(27) 36 to
provide that subject to certain
enumerated exceptions, each Participant
must accurately record, with respect to
any cross orders marked Qualified
Contingent Trade executed within the
Matching System, (A) the date and time
of receipt by the Participant of the
corresponding order from its customer
and (B) all information specified by the
Exchange regarding any related
component orders and trades executed
within the Matching System or away,
which shall be entered into the BBOS
things, that Participants comply with the
recordkeeping requirements of Rule 17a–3 under
the Act. For example, the proposed amendment to
paragraph .03 would not impinge on a Participant’s
obligation pursuant to Article 11, Rule 2 and Rule
17a–3(a)(6)(i) under the Act to maintain a
memorandum of each brokerage order, and of any
other instruction, given or received for the purchase
or sale of securities, whether executed or
unexecuted.
34 See supra Section A.1(1).
35 See id.
36 The Exchange proposes to move the current
language under current CHX Article 11, Rule
3(b)(27) to proposed CHX Article 11, Rule 3(b)(28).
Correspondingly, the Exchange proposes to amend
paragraph .06 of the Interpretations and Policies of
CHX Article 11, Rule 3 to contemplate the addition
of Rule 3(b)(28).
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(as applicable), in a manner prescribed
by the Exchange.37
The Exchange also proposes to adopt
Article 17, Rule 7 (Broker Back Office
System) to describe the BBOS. Proposed
Rule 7(a) provides that BBOS is a trade
management system developed and
maintained by the Exchange that
permits IBs to input certain information
and to generate reports therefrom. The
rule also states that BBOS is an
automated system approved by the
Exchange for the purposes of amended
Rule 3(a) above.
Proposed Rule 7(b) provides that
users of the BBOS are responsible for
entering all transaction, order and other
information into the system as required
by CHX Rules. The rule further states
that as operator of BBOS, the Exchange
retains information entered into BBOS
on behalf of the user in conformity with
applicable rules and regulations. The
rule then provides that the Exchange
provides such information to IBs in a
format designated by the Exchange to
assist IBs: In conducting research
regarding their own trading activities; in
responding to requests for information
from customers, regulatory authorities
or by process of law; and for other
legitimate business purposes. The rule
also states that the Exchange charges IBs
the fees specified in its published
Schedule of Fees and Assessments for
the collection and retrieval of such
information.38
Proposed Rule 7(c) lists the specific
information regarding component orders
and trades related to QCT Crosses that
IBs are required to enter into the BBOS.
Specifically, proposed Rule 7(c)
provides that for all orders and trades
described under amended Article 11,
Rule 3(b)(27), IBs must record the
following information into the BBOS, as
applicable: (1) QCT Type; (2) Related
Exchange; (3) Print Time; (4) Expiration
Year; (5) Expiration Month; (6) Price; (7)
Contracts; (8) Strike Price; (9) Call/Put;
(10) Volume; and (11) Short Sale
Indicator.
In addition, in order to contemplate
the proposed IB responsibilities related
to the QCT Crosses, the Exchange
proposes to amend Article 17, Rule 3(a)
to broaden its scope so as to provide
that each IB must enter all orders it
receives for execution and any other
37 The required information would be identical to
the current data fields available in the BBOS. See
supra note 18. As described below, the Exchange
proposes to codify the required information under
proposed Article 17, Rule 7(c).
38 The Exchange does not propose to assess a fee
for use of the BBOS in addition to the current fees
related to costs incurred by the Exchange in
creating any requested reports, which shall be
rebilled to Participants at cost. See Section K of the
Fee Schedule of CHX.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
information as required under Article 11
into an automated system approved by
the Exchange. Correspondingly, the
Exchange proposes to amend the header
to Article 17, Rule 3(a) to state ‘‘Entry
of orders and related information into
an automated system.’’ Given that
amended Article 11, Rule 3(b)(27) may
require the recording of information
related to orders that the IB did not
actually receive or otherwise handle, the
Exchange believes that broadening the
scope of Article 17, Rule 3(a) is
necessary, as it currently only applies to
orders received by the IB.
(6) Clarifying Amendments Related to IB
Trading Accounts
Current Article 17, Rule 3(c) provides
that each IB must maintain separate
accounts for handling (1) agency
transactions; (2) principal transactions;
and (3) transactions involving errors,
and must enter transactions into the
appropriate accounts. The Exchange
proposes to amend the rule to clarify
that the required accounts relate to
special recordkeeping accounts that
must be maintained at CHX, which is
necessary for the Exchange to
adequately surveil and examine the
relevant IB trading activity, as well as to
provide additional detail as to the types
of transactions that must be recorded in
the respective accounts. Accordingly,
amended Article 17, Rule 3(c) provides
that each IB must establish and
maintain separate CHX recordkeeping
accounts at the Exchange for the sole
purpose of recording the following
activity: (1) An agency recordkeeping
account for agency transactions; (2) a
principal recordkeeping account for
principal and riskless principal 39
transactions; and (3) an error
recordkeeping account for transactions
involving only Bona Fide Errors.40 The
rule also provides that an IB must
record each above-mentioned
transaction into the appropriate CHX
recordkeeping account.
(7) Operative Date
In the event the proposed rule change
is approved by the Commission, the
proposed rule change shall be operative
pursuant to notice by the Exchange to
Participants.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act in general,41 and
furthers the objectives of Section 6(b)(5)
39 See
CHX Article 9, Rule 14.
CHX Article 1, Rule 1(ii).
41 15 U.S.C. 78f(b).
40 See
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in particular,42 in that it is designed to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments and perfect the
mechanisms of a free and open market,
and, in general, to protect investors and
the public interest; and is not designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
Specifically, the Exchange believes
that permitting only IBs to submit QCT
Crosses to the Matching System would
protect investors and the public interest,
as IBs have historically been the only
Participants that have submitted QCT
Crosses and, thus, have the necessary
experience in ensuring that QCT Crosses
are submitted to the Matching System in
a manner consistent with CHX Rules
and the QCT Exemption. Moreover,
given that the Surveillance and
Examination program as applied to
QCTs is optimized with respect to the
submission of QCT Crosses by IBs, the
Exchange believes that the proposal
would permit the Exchange to more
effectively monitor the use of QCT
Crosses by ensuring that all QCT
activity on the Exchange is monitored
via the same surveillance and
examination protocols, which further
the protection of investors and the
public interest.
The Exchange also believes that
permitting only IBs to submit QCT
Crosses to the Matching System would
not result in unfair discrimination
among Participants. Initially, the
Exchange notes that any Participant that
has satisfied all Exchange requirements
to operate as an IB may register as an
IB,43 which would, in effect, permit any
Participant that meets Exchange
requirements to submit QCT Crosses.
Moreover, even if the proposal
discriminates between IB and non-IB
Participants, given the complexity of
facilitating QCTs, the Exchange believes
that the heightened recordkeeping
requirements for QCTs are necessary
and appropriate to ensure that QCTs are
executed in a manner consistent with
CHX Rules and the QCT Exemption.
Since the Surveillance and Examination
program as applied to QCTs is
optimized with respect to the
submission of QCT Crosses by IBs, the
Exchange believes that the most
effective way to surveil for compliance
with CHX Rules and the QCT
Exemption is to limit the submission of
QCTs to IBs. The Exchange also believes
that the proposal would eliminate the
possibility of regulatory disparities that
42 15
U.S.C. 78f(b)(5).
CHX Article 17, Rule 1.
43 See
VerDate Sep<11>2014
17:03 Aug 09, 2017
may result from the transmission of
QCT-related information to the
Exchange through different means and
ensure consistent recordkeeping
obligations among Participants that
submit QCT Crosses. Thus, the
Exchange submits that any
discrimination between IB and non-IB
Participants is justified.
In addition, the Exchange believes
that the proposed IB recordkeeping
requirements for component orders
related to QCT Crosses executed within
the Matching System and the
requirement that such information be
entered into the BBOS would protect
investors and the public interest by
requiring the entry of more detailed
information, which will enhance the
ability of the Exchange to monitor
compliance by the IBs with CHX Rules
and the QCT Exemption.
Also, the Exchange believes that the
non-substantive amendments to the
operation of the cross order type and
Cross With Size handling under Article
1, Rule 2(a)(2), Article 1, Rule 2(g)(1)
and Article 20, Rule 8(e); the
recordkeeping requirements under
Article 11, Rule 3; and the IB
recordkeeping account requirements
under Article 17, Rule 3(c), clarifies the
scope and meaning of those rules,
which furthers the objectives of Section
6(b)(1) 44 in that it further enables the
Exchange to be so organized as to have
the capacity to be able to carry out the
purposes of the Act and to comply, and
to enforce compliance by its
Participants and persons associated
with its Participants, with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the Exchange.
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change enhances the
Exchange’s Surveillance and
Examination program as applied to
QCTs and otherwise clarifies existing
CHX Rules. Thus, the Exchange does
not believe that the proposed rule
change raises any competitive issues.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
44 15
Jkt 241001
PO 00000
U.S.C. 78f(b)(1).
Frm 00066
Fmt 4703
Sfmt 4703
37483
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will: (a) By order approve or disapprove
such proposed rule change, or (b)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CHX–2017–12 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CHX–2017–12. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
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Federal Register / Vol. 82, No. 153 / Thursday, August 10, 2017 / Notices
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–CHX–
2017–12, and should be submitted on or
before August 31, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16829 Filed 8–9–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81318; File No. SR–FINRA–
2017–021]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Make
Available a New TRACE Security
Activity Report
August 4, 2017.
I. Introduction
On June 19, 2017, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend FINRA
Rule 7730 (Trade Reporting and
Compliance Engine (‘‘TRACE’’)) to make
available a new ‘‘Security Activity
Report.’’ The proposed rule change was
published for comment in the Federal
Register on June 29, 2017.3 The
Commission received two comments on
the proposal.4 On August 3, 2017,
FINRA submitted a letter responding to
comments.5 As discussed below, the
45 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 81007
(June 23, 2017), 82 FR 29602 (June 29, 2017)
(‘‘Notice’’).
4 See letters to Brent J. Fields, Secretary,
Commission, from Bennett Golub, Chief Risk
Officer, and Alexis Rosenblum, Director,
BlackRock, Inc., dated July 20, 2017 (‘‘BlackRock
Letter’’); and Sean Davy, Managing Director, Capital
Markets Division, Securities Industry and Financial
Markets Association (‘‘SIFMA’’), dated July 20,
2017 (‘‘SIFMA Letter’’).
5 See letter to Brent J. Fields, Secretary
Commission, from Racquel L. Russell, Associate
General Counsel, FINRA, dated August 3, 2017
(‘‘Response Letter’’).
mstockstill on DSK30JT082PROD with NOTICES
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VerDate Sep<11>2014
17:03 Aug 09, 2017
Jkt 241001
Commission is approving the proposed
rule change.
II. Description of the Proposal
FINRA Rule 7730, among other
things, sets forth the TRACE data
products offered by FINRA. FINRA
proposed to amend Rule 7730 to make
available a new Security Activity
Report, which will provide aggregated
statistics by security for TRACE-Eligible
Securities that are corporate or agency
bonds (collectively ‘‘CA Bonds’’).
FINRA stated that the Security Activity
Report will include basic descriptive
elements for each CA Bond, such as the
issuer’s name and the security’s coupon
and maturity date, as well as aggregate
transaction statistics. These statistics
will include par value volume and
number of customer buy transactions,
par value volume and number of
customer sell transactions, and par
value volume and number of interdealer transactions.6 FINRA noted that,
currently, transactions whose volume is
over the dissemination cap 7 becomes
available only after 18 months as part of
the Historic TRACE Data product.8
FINRA will provide the Security
Activity Report on a 90-day delay to
address potential confidentiality
concerns.
The Security Activity Report also will
provide information regarding the
number of unique MPIDs that report
transactions in a particular security. The
report will provide the aggregate activity
of the five most active MPIDs in each
CA Bond and the number of unique
MPIDs for disseminated uncapped and
6 The Security Activity Report will reflect
differing levels of par value volume detail
depending on whether the transaction size is larger
than the dissemination cap and whether there are
more than six transactions occurring in a calendar
month. Additionally, if a CA Bond has more than
six transactions in a month, the par value volume
traded would appear on the report within specified
size categories along with a range of the number of
transactions that occur within the specified volume
size categories. These size categories will be
announced in the Regulatory Notice which
announces the effective date of the Security
Activity Report.
7 Currently, the actual par value traded is publicly
disseminated only if it is below the size cap in that
asset class. For transactions in investment grade CA
bonds over a $5 million par value, TRACE
disseminates the size as ‘‘5MM+.’’ For transactions
in non-investment grade corporate bonds over a $1
million par value, TRACE disseminates the size as
‘‘1MM+.’’
8 The Commission notes that on June 23, 2017 it
approved a proposed rule change to reduce the
minimum delay from 18 months to six months for
transactions included in the Historic TRACE Data
Sets relating to CA Bonds. This approval occurred
after the current proposed rule change was filed
with the Commission. See Securities Exchange Act
Release No. 81011 (June 23, 2017), 82 FR 29597
(June 29, 2017). The effective date of this change is
October 2, 2017. See also, FINRA Regulatory Notice
17–23.
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
capped transactions.9 In addition, the
report will include the percentage, in
aggregate, of the total number of
transactions and the total par value
volume traded by the top five MPIDs for
each particular security.
FINRA believes that the Security
Activity Report might be useful for both
business and regulatory purposes. For
example, FINRA noted that members
might use the information provided in
the Security Activity Report to better
ascertain their relative trading activity
in particular CA Bonds. Interested
parties also could use the information in
the Security Activity Report in
connection with regulatory obligations,
such as assessing, classifying, and
reviewing the liquidity risk of
individual securities pursuant to Rule
22e–4 under the Investment Company
Act.10
FINRA has stated that it will
announce in a Regulatory Notice the
effective date of the proposed rule
change, which will be no later than 365
days following Commission approval.11
FINRA intends to establish a fee for the
TRACE Security Activity Report in the
future. The fee will be established
pursuant to a separate rule filing.
III. Summary of Comments and
FINRA’s Response
As previously noted, the Commission
received two comment letters 12 and a
FINRA Response Letter 13 on the
proposed rule change. Both commenters
expressed general support for the
proposal and noted that the additional
data provided by the Security Activity
Report would assist in regulatory
compliance with Rule 22e–4.14 One
commenter raised concerns about the
implementation, calculation, and the
format of the Security Activity Report.15
This commenter noted that the delay
period reduction for the Historic TRACE
Data product from 18 months to six
months had the potential to impact
market participant behavior, and
recommended delaying the
implementation of the Security Activity
9 FINRA stated that the number of unique
reporting MPIDs will be provided by displaying
either the actual number of unique MPIDs where
there are six or more unique MPIDs or as ‘‘1 to 5’’
where there are five or fewer reporting MPIDs.
Specific market participants that engaged in the
transactions will not be identified in the Security
Activity Report.
10 17 CFR 270.22e–4.
11 In its Response Letter FINRA stated that it
intends for the effective date for the Security
Activity Report to be no sooner than February 1,
2018. See Response Letter at 2.
12 See supra note 4.
13 See supra note 5.
14 See SIFMA Letter at 1; BlackRock Letter at 1.
15 See SIFMA Letter at 2–3.
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]]>Agencies
[Federal Register Volume 82, Number 153 (Thursday, August 10, 2017)]
[Notices]
[Pages 37479-37484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16829]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81315; File No. SR-CHX-2017-12]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change Regarding Qualified Contingent
Trades and Related Information Recording Obligations by Certain
Participants
August 4, 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 July 26, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CHX proposes to amend the Rules of the Exchange (``CHX Rules'')
regarding Qualified Contingent Trades (``QCTs'') \3\ and related
information recording obligations by certain Participants.\4\ The text
of this proposed rule change is available on the Exchange's Web site at
https://www.chx.com/regulatory-operations/rule-filings/, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
---------------------------------------------------------------------------
\3\ See infra Section A.1(1).
\4\ A Participant is a ``member'' of the Exchange for purposes
of the Act. See CHX Article 1, Rule 1(s).
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend CHX Rules to effect the following
changes:
Clarify the operation of cross orders \5\ and Cross With
Size handling.\6\
---------------------------------------------------------------------------
\5\ See CHX Article 1, Rule 2(a)(2).
\6\ See CHX Article 1, Rule 2(g)(1).
---------------------------------------------------------------------------
Only permit Participants that are registered with the
Exchange as Institutional Brokers (``IBs'') \7\ to submit an NMS stock
component order of a
[[Page 37480]]
QCT (``QCT Cross'') to the Matching System.\8\
---------------------------------------------------------------------------
\7\ See CHX Article 1, Rule 1(n); see also generally CHX Article
17.
\8\ The Matching System is an automated order execution system,
which is a part of the Exchange's ``Trading Facilities,'' as defined
under CHX Article 1, Rule 1(z).
---------------------------------------------------------------------------
Clarify the scope of information recording obligations
under current Article 11, Rule 3.
Adopt rules describing the CHX Broker Back Office System
(``BBOS''), a trade management system developed and maintained by the
Exchange.
Require IBs to record certain information in the BBOS
regarding component orders and trades related to QCT Crosses executed
within the Matching System.
Clarify the agency, principal and error accounts
requirements for IBs.
(1) Background
In 2006,\9\ the Commission granted an exemption from Rule 611(a) of
Regulation NMS \10\ (``QCT Exemption'') for any trade-throughs caused
by the execution of an order involving one or more NMS stocks (each an
``Exempted NMS Stock Transaction'') that are components of a QCT, which
was modified in 2008 to eliminate the Size Condition.\11\ Consistent
with the QCT Exemption, the Exchange permits Participants to submit
cross orders marked with the QCT modifier (i.e., QCT Crosses) to the
Matching System to effect transactions that comprise the NMS stock
components of QCTs.\12\
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\9\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006) (``QCT Exemptive Order'').
\10\ 17 CFR 242.611(a).
\11\ ``Qualified contingent trade'' is defined as ``a
transaction consisting of two or more component orders, executed as
agent or principal where: (1) At least one component order is in an
NMS stock; (2) All components are effected with a product or price
contingency that either has been agreed to by the respective
counterparties or arranged for by a broker-dealer as principal or
agent; (3) The execution of one component is contingent upon the
execution of all other components at or near the same time; (4) The
specific relationship between the component orders (e.g., the spread
between the prices of the component orders) is determined at the
time the contingent order is placed; (5) The component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or since cancelled; and (6) The Exempted NMS Stock
Transaction is fully hedged (without regard to any prior existing
position) as a result of the other components of the contingent
trade. See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``Modified QCT Exemptive
Order''). In 2008, the Commission modified the QCT Exemptive Order
to eliminate a seventh requirement (``Size Condition'') that the
Exempted NMS Stock Transaction that is part of a contingent trade
involves at least 10,000 shares or has a market value of at least
$200,000. See id. at 19274.
\12\ While CHX Rules currently permit any Participant to submit
a QCT Cross, in practice, only IBs have submitted QCT Crosses, in
large part due to the complexities of coordinating the execution of
the various components of a QCT and allocating positions to the
various parties to the QCT.
---------------------------------------------------------------------------
Mechanically, upon receipt of a QCT Cross, the Exchange will
immediately execute the QCT Cross without regard to the protected
quotations of away markets if the state of the CHX limit order book
(``CHX book'') in the relevant security would permit the QCT Cross to
execute within the Matching System.\13\ If the QCT Cross is blocked by
an order resting on the CHX book, the QCT Cross will be immediately
cancelled. The Exchange does not conduct a pre-execution verification
of each QCT Cross for compliance with the terms of the QCT Exemption
due to the practical difficulties of conducting such verification
within the constraints of the ``at or near the same time'' requirement
for the execution of the component orders that comprise the QCT.\14\
Instead, the Exchange maintains and operates a comprehensive
Surveillance and Examination program that, among other things, reviews
executed QCT Crosses for compliance with CHX Rules and the QCT
Exemption.
---------------------------------------------------------------------------
\13\ See CHX Article 1, Rule 2(a)(2).
\14\ See CHX Article 1, Rule 2(b)(2)(E)(iii); see also supra
note 11.
---------------------------------------------------------------------------
The Exchange believes that the operation of the Matching System and
the Surveillance and Examination program, in general, and as applied to
the execution and review of QCT Crosses, in particular, are
``reasonably designed'' in compliance with the requirements of Rule
611(a)(1) of the Regulation NMS.\15\ The Exchange also regularly
surveils to ascertain the effectiveness of its policies and procedures
required by Rule 611(a)(1) and has taken prompt action to remedy
deficiencies in such policies and procedures, consistent with the
requirements of Rule 611(a)(2) of Regulation NMS.\16\ As part of its
ongoing effort to update and optimize the Surveillance and Examination
program, the Exchange has developed and deployed BBOS, a trade
management system that, among other things, permits the Exchange to
review additional information to identify the specific component
transactions \17\ that are being used to hedge executed QCT Crosses.
Currently, the Exchange encourages its IBs to include certain
information for away executions related to QCT Crosses submitted to the
Matching System into the BBOS,\18\ which the Exchange uses to verify
that the components to the QCT satisfy the derivative relationship and
fully-hedged requirements of the QCT Exemption.\19\ In addition, CHX
Rules require IBs to input all orders and related information \20\ it
receives for execution into an automated system (e.g., Brokerplex
\21\), which includes QCT Crosses.
---------------------------------------------------------------------------
\15\ 17 CFR 242.611(a)(1).
\16\ 17 CFR 242.611(a)(2).
\17\ Currently, the vast majority of component transactions used
to hedge QCT Crosses involve exchange traded options. As such, BBOS
permits users to automatically link QCT Crosses with specific
exchange-traded options transactions via the use of unique sequence
numbers. While the BBOS permits the entry of other types of
component transactions, such as futures transactions, the full
details of such component transactions must be entered manually. See
infra note 18.
\18\ Current data fields include: QCT Type; Related Exchange;
Print Time; Expiration Year; Expiration Month; Price; Contracts;
Strike Price; Call/Put; Volume; and Short Sale Indicator. The
alternatives under ``QCT Type'' include exchange traded options,
over-the-counter traded options, FLEX Options, equities, futures and
``other.'' See id.
\19\ See supra note 11.
\20\ See CHX Article 11, Rule 3(a) and (b).
\21\ See CHX Article 17, Rule 5.
---------------------------------------------------------------------------
The Exchange now proposes various amendments to the CHX Rules in
order to clarify the operation of cross orders, to clarify the scope of
certain Participant obligations and to codify current practices related
to the enhancement of the Exchange's oversight of QCTs.
(2) Amendments Related to Cross Orders
The Exchange proposes to adopt various non-substantive amendments
to CHX Rules to clarify the operation of cross orders and Cross With
Size handling.\22\ Current Article 1, Rule 2(a)(2) defines cross order
as an order to buy and sell the same security at a specific price
better than the Working Price, as defined under Article 1, Rule 1(pp),
of all resting orders on the CHX Book and which would not constitute a
trade-through under Regulation NMS (including all applicable exceptions
and exemptions). The rule also provides that a cross order may
represent interest of one or more Participants of the Exchange, but may
only be executed in an increment permitted by Article 20, Rule
4(a)(7)(b). The rule then provides that a cross order may be subject to
special handling, pursuant to Article 20, Rule 2(g).
---------------------------------------------------------------------------
\22\ See CHX Article 1, Rule 2(g)(1).
---------------------------------------------------------------------------
While the current definition is technically accurate, the Exchange
believes that it can be amended to clarify that the pricing requirement
for cross orders is prerequisite for execution within the Matching
System, but not a prerequisite for submission into the Matching System.
That is, a cross order that does not meet the pricing requirement, and
is thus cancelled by
[[Page 37481]]
the Matching System, is still a cross order by definition, albeit not
an executable one. As such, the Exchange proposes to amend the first
---------------------------------------------------------------------------
paragraph of current Article 1, Rule 2(a)(2) to provide as follows:
``Cross order'': An order to buy and sell the same security at a
specific price. A cross order may only execute within the Matching
System if it is priced better than the Working Price, as defined
under Article 1, Rule 1(pp), of all resting orders on the CHX Book.
A cross order may represent interest of one or more Participants of
the Exchange, but may only be executed in an increment permitted by
Article 20, Rule 4(a)(7)(b). A cross order may be subject to special
handling, pursuant to paragraph (g) below.
Similarly, the Exchange proposes to amend Article 1, Rule
2(g)(1)(A) to clarify the requirements for Cross With Size handling and
to remove redundant references to compliance various CHX Rules and
federal securities laws and regulations:
``Cross With Size'': A cross order (except any cross order
subject to Non-Regular Way Settlement) to buy and sell at least
5,000 shares of the same security with a total value of at least
$100,000 will execute, notwithstanding resting orders in the CHX
Book at the same price, where: (A) There are no resting orders on
the CHX Book with a Working Price, as defined under Article 1, Rule
1(pp), better than the cross order; and
In addition, the Exchange proposes to amend Article 20, Rule 8(e)
to replace a redundant summary of the operation of cross orders and
Cross With Size handling with specific references to the relevant
rules. Also, since Cross With Size is a special handling for cross
orders and not a separate order type or order modifier, the Exchange
proposes to eliminate reference to ``Cross With Size,'' but to maintain
the citation to the relevant CHX Rules. Thus, amended Article 20, Rule
8(e) provides that ``Cross orders shall be handled pursuant to Article
1, Rule 2(a)(2) and Rule 2(g)(1) above.''
(3) Amendments Related to QCT Modifier
As noted above,\23\ while CHX Rules permit any Participant to
submit QCT Crosses, in practice, non-IB Participants do not currently
submit QCT Crosses. Moreover, CHX Rules require only IBs to input
additional information into Brokerplex,\24\ which facilitates the
ability of the Exchange to gather crucial information related to its
review of QCT Crosses executed on the Exchange. Given that non-IBs do
not currently submit QCTs and the Surveillance and Examination program
is optimized to review QCT Crosses submitted by IBs, the Exchange
proposes to amend Article 1, Rule 2(b)(2)(E) to provide that QCT
Crosses may only be submitted by IBs.\25\ The Exchange believes that
the proposed restriction will ensure consistent recordkeeping
requirements related to QCTs for those Participants that submit QCT
Crosses. Also, given that any Participant may apply to register as an
IB,\26\ the Exchange submits that the proposal is not unfairly
discriminatory to non-IB Participants.\27\
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\23\ See supra Section A.1(1).
\24\ See CHX Article 17, Rule 3.
\25\ The Exchange also proposes to add the acronym ``QCT'' to
CHX Article 1, Rule 2(b)(2)(E) to clarify that the term ``QCT''
refers to ``Qualified Contingent Trade.''
\26\ See CHX Article 17, Rule 1.
\27\ See infra Section A.2.
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(4) Clarifying Amendments to Recordkeeping Requirement for Certain
Participants
The Exchange also proposes various non-substantive clarifying
amendments to Article 11, Rule 3 (Records of Orders and
Executions).\28\ Specifically, the Exchange proposes to amend Article
11, Rule 3(a) to clarify that the provisions of Article 11, Rule 3 only
apply to certain Participants described under Rule 3(e), which limits
the applicability of Article 11, Rule 3 to IBs, CHX-registered Market
Makers,\29\ Participants for whom the Exchange is the Designated
Examining Authority (``DEA'') and any other Participant to the extent
that the information under Article 11, Rule 3 is required by the rules
of the other self-regulatory organizations of which they are
members.\30\ Similarly, the Exchange proposes to amend the title of
Article 11, Rule 3 to provide ``Records of Orders and Executions by
Certain Participants,'' which better describes the scope of the rule
and distinguishes it from Article 11, Rule 2 (Maintenance of Books and
Records), which requires all Participants to comply with the
requirements of Rules 17a-3 \31\ and 17a-4 under the Exchange Act.\32\
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\28\ The provisions under current CHX Article 11, Rule 3 that
the Exchange is proposing to clarify were originally adopted in 2006
as part of the Exchange's transition to its current electronic
trading model. See Exchange Act Release No. 54550 (September 29,
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
\29\ See CHX Article 16, Rule 1.
\30\ The Exchange proposes to amend Article 11, Rule 3(e) to
clarify that the provisions of Article 11, Rule 3 would apply to
IBs, Market Makers, Participants for which the Exchange is its DEA
and any other Participant to the extent that the information under
Article 11, Rule 3 is required by the Exchange Act and the rules
thereunder, as well as the rules of the other self-regulatory
organizations of which they are members. The Exchange believes that
this amendment is appropriate given that Participants are
``members'' of the Exchange, as defined under the Exchange Act, and
any provisions under the Exchange Act and the rules thereunder that
apply to a ``member'' of an exchange would apply to Participants.
See CHX Article 1, Rule 1(s).
\31\ 17 CFR 240.17a-3.
\32\ 17 CFR 240.17a-4.
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The Exchange further proposes to amend paragraph .01 under the
Interpretations and Policies of Article 11, Rule 3 to clarify that
proprietary orders, such as those submitted by Market Makers, fall
under the purview of Article 11, Rule 3. Specifically, while the second
sentence under paragraph .01 excludes from the scope of orders
described under Article 11, Rule 3(a) the actual decision to purchase
or sell a security by a Participant on a proprietary basis and not the
proprietary order itself, the Exchange believes that the sentence could
be misconstrued to exclude all proprietary orders from the scope of
Article 11, Rule 3. The Exchange also believes that current Article 11,
Rule 3(a)(1)-(3) adequately describes the types of orders subject to
current Article 11, Rule 3. Accordingly, the Exchange proposes to
delete the second sentence of paragraph .01 in its entirety.
Current paragraph .03 under the Interpretations and Policies of
Article 11, Rule 3 provides, in pertinent part, that Article 11, Rule 3
shall not apply to orders sent or received through the Matching System
or through any other electronic system that the Exchange expressly
recognizes as providing the required information in a format acceptable
to the Exchange. The purpose of current paragraph .03 is to clarify
that Participants that submit or receive orders through Exchange-
approved electronic systems are not required to maintain a separate
record of the information required under Article 11, Rule 3. However,
the Exchange believes that paragraph .03 could be misconstrued as to
exclude orders sent or received through an Exchange-approved electronic
system from the scope of Article 11, Rule 3 entirely, which is
incorrect. Accordingly, the Exchange proposes to amend paragraph .03 to
provide that a Participant that sends or receives orders, cancellations
and executions, as applicable, through the Matching System or through
any other electronic systems that the Exchange expressly recognizes as
providing the required information in a format acceptable to the
Exchange is not required to maintain a separate record of such orders,
cancellations and executions.\33\ Moreover, the Exchange
[[Page 37482]]
proposes to add the term ``expressly'' before the term ``recognize''
under the second sentence of current paragraph .03 to be stylistically
consistent with the amended first sentence and to make other
grammatical amendments.
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\33\ The Exchange notes that the proposed amendment to paragraph
.03 would have no impact on a Participant's recordkeeping
obligations under Article 11, Rule 2, which requires, among other
things, that Participants comply with the recordkeeping requirements
of Rule 17a-3 under the Act. For example, the proposed amendment to
paragraph .03 would not impinge on a Participant's obligation
pursuant to Article 11, Rule 2 and Rule 17a-3(a)(6)(i) under the Act
to maintain a memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of
securities, whether executed or unexecuted.
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(5) Proposed Recordkeeping Requirements for Away Component Trades for
QCT Crosses Executed Within the Matching System
The Exchange proposes to require IBs to record certain
information\34\ for away QCT component orders and trades related to QCT
Crosses executed within the Matching System into the BBOS. While the
Exchange currently encourages IBs to enter such information into the
BBOS,\35\ the CHX Rules do not currently require IBs to do so. Given
that current Article 11, Rule 3(a)(1)-(3) does not contemplate such
component orders and trades, as some component orders may not originate
or otherwise be handled by the Participant, the Exchange proposes to
adopt Article 11, Rule 3(a)(4), which would bring within the scope of
Article 11, Rule 3 every component order and trade, whether handled by
the Participant or not, related to a QCT Cross that is submitted by the
Participant and executed within the Matching System. Correspondingly,
the Exchange proposes to amend the citation under Article 11, Rule 3(b)
to include proposed Article 11, Rule 3(a)(4).
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\34\ See supra Section A.1(1).
\35\ See id.
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Moreover, the Exchange proposes to amend Article 11, Rule 3(b)(27)
\36\ to provide that subject to certain enumerated exceptions, each
Participant must accurately record, with respect to any cross orders
marked Qualified Contingent Trade executed within the Matching System,
(A) the date and time of receipt by the Participant of the
corresponding order from its customer and (B) all information specified
by the Exchange regarding any related component orders and trades
executed within the Matching System or away, which shall be entered
into the BBOS (as applicable), in a manner prescribed by the
Exchange.\37\
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\36\ The Exchange proposes to move the current language under
current CHX Article 11, Rule 3(b)(27) to proposed CHX Article 11,
Rule 3(b)(28). Correspondingly, the Exchange proposes to amend
paragraph .06 of the Interpretations and Policies of CHX Article 11,
Rule 3 to contemplate the addition of Rule 3(b)(28).
\37\ The required information would be identical to the current
data fields available in the BBOS. See supra note 18. As described
below, the Exchange proposes to codify the required information
under proposed Article 17, Rule 7(c).
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The Exchange also proposes to adopt Article 17, Rule 7 (Broker Back
Office System) to describe the BBOS. Proposed Rule 7(a) provides that
BBOS is a trade management system developed and maintained by the
Exchange that permits IBs to input certain information and to generate
reports therefrom. The rule also states that BBOS is an automated
system approved by the Exchange for the purposes of amended Rule 3(a)
above.
Proposed Rule 7(b) provides that users of the BBOS are responsible
for entering all transaction, order and other information into the
system as required by CHX Rules. The rule further states that as
operator of BBOS, the Exchange retains information entered into BBOS on
behalf of the user in conformity with applicable rules and regulations.
The rule then provides that the Exchange provides such information to
IBs in a format designated by the Exchange to assist IBs: In conducting
research regarding their own trading activities; in responding to
requests for information from customers, regulatory authorities or by
process of law; and for other legitimate business purposes. The rule
also states that the Exchange charges IBs the fees specified in its
published Schedule of Fees and Assessments for the collection and
retrieval of such information.\38\
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\38\ The Exchange does not propose to assess a fee for use of
the BBOS in addition to the current fees related to costs incurred
by the Exchange in creating any requested reports, which shall be
rebilled to Participants at cost. See Section K of the Fee Schedule
of CHX.
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Proposed Rule 7(c) lists the specific information regarding
component orders and trades related to QCT Crosses that IBs are
required to enter into the BBOS. Specifically, proposed Rule 7(c)
provides that for all orders and trades described under amended Article
11, Rule 3(b)(27), IBs must record the following information into the
BBOS, as applicable: (1) QCT Type; (2) Related Exchange; (3) Print
Time; (4) Expiration Year; (5) Expiration Month; (6) Price; (7)
Contracts; (8) Strike Price; (9) Call/Put; (10) Volume; and (11) Short
Sale Indicator.
In addition, in order to contemplate the proposed IB
responsibilities related to the QCT Crosses, the Exchange proposes to
amend Article 17, Rule 3(a) to broaden its scope so as to provide that
each IB must enter all orders it receives for execution and any other
information as required under Article 11 into an automated system
approved by the Exchange. Correspondingly, the Exchange proposes to
amend the header to Article 17, Rule 3(a) to state ``Entry of orders
and related information into an automated system.'' Given that amended
Article 11, Rule 3(b)(27) may require the recording of information
related to orders that the IB did not actually receive or otherwise
handle, the Exchange believes that broadening the scope of Article 17,
Rule 3(a) is necessary, as it currently only applies to orders received
by the IB.
(6) Clarifying Amendments Related to IB Trading Accounts
Current Article 17, Rule 3(c) provides that each IB must maintain
separate accounts for handling (1) agency transactions; (2) principal
transactions; and (3) transactions involving errors, and must enter
transactions into the appropriate accounts. The Exchange proposes to
amend the rule to clarify that the required accounts relate to special
recordkeeping accounts that must be maintained at CHX, which is
necessary for the Exchange to adequately surveil and examine the
relevant IB trading activity, as well as to provide additional detail
as to the types of transactions that must be recorded in the respective
accounts. Accordingly, amended Article 17, Rule 3(c) provides that each
IB must establish and maintain separate CHX recordkeeping accounts at
the Exchange for the sole purpose of recording the following activity:
(1) An agency recordkeeping account for agency transactions; (2) a
principal recordkeeping account for principal and riskless principal
\39\ transactions; and (3) an error recordkeeping account for
transactions involving only Bona Fide Errors.\40\ The rule also
provides that an IB must record each above-mentioned transaction into
the appropriate CHX recordkeeping account.
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\39\ See CHX Article 9, Rule 14.
\40\ See CHX Article 1, Rule 1(ii).
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(7) Operative Date
In the event the proposed rule change is approved by the
Commission, the proposed rule change shall be operative pursuant to
notice by the Exchange to Participants.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\41\ and furthers the
objectives of Section 6(b)(5)
[[Page 37483]]
in particular,\42\ in that it is designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments and perfect the mechanisms of a free and open market, and,
in general, to protect investors and the public interest; and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that permitting only IBs to
submit QCT Crosses to the Matching System would protect investors and
the public interest, as IBs have historically been the only
Participants that have submitted QCT Crosses and, thus, have the
necessary experience in ensuring that QCT Crosses are submitted to the
Matching System in a manner consistent with CHX Rules and the QCT
Exemption. Moreover, given that the Surveillance and Examination
program as applied to QCTs is optimized with respect to the submission
of QCT Crosses by IBs, the Exchange believes that the proposal would
permit the Exchange to more effectively monitor the use of QCT Crosses
by ensuring that all QCT activity on the Exchange is monitored via the
same surveillance and examination protocols, which further the
protection of investors and the public interest.
The Exchange also believes that permitting only IBs to submit QCT
Crosses to the Matching System would not result in unfair
discrimination among Participants. Initially, the Exchange notes that
any Participant that has satisfied all Exchange requirements to operate
as an IB may register as an IB,\43\ which would, in effect, permit any
Participant that meets Exchange requirements to submit QCT Crosses.
Moreover, even if the proposal discriminates between IB and non-IB
Participants, given the complexity of facilitating QCTs, the Exchange
believes that the heightened recordkeeping requirements for QCTs are
necessary and appropriate to ensure that QCTs are executed in a manner
consistent with CHX Rules and the QCT Exemption. Since the Surveillance
and Examination program as applied to QCTs is optimized with respect to
the submission of QCT Crosses by IBs, the Exchange believes that the
most effective way to surveil for compliance with CHX Rules and the QCT
Exemption is to limit the submission of QCTs to IBs. The Exchange also
believes that the proposal would eliminate the possibility of
regulatory disparities that may result from the transmission of QCT-
related information to the Exchange through different means and ensure
consistent recordkeeping obligations among Participants that submit QCT
Crosses. Thus, the Exchange submits that any discrimination between IB
and non-IB Participants is justified.
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\43\ See CHX Article 17, Rule 1.
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In addition, the Exchange believes that the proposed IB
recordkeeping requirements for component orders related to QCT Crosses
executed within the Matching System and the requirement that such
information be entered into the BBOS would protect investors and the
public interest by requiring the entry of more detailed information,
which will enhance the ability of the Exchange to monitor compliance by
the IBs with CHX Rules and the QCT Exemption.
Also, the Exchange believes that the non-substantive amendments to
the operation of the cross order type and Cross With Size handling
under Article 1, Rule 2(a)(2), Article 1, Rule 2(g)(1) and Article 20,
Rule 8(e); the recordkeeping requirements under Article 11, Rule 3; and
the IB recordkeeping account requirements under Article 17, Rule 3(c),
clarifies the scope and meaning of those rules, which furthers the
objectives of Section 6(b)(1) \44\ in that it further enables the
Exchange to be so organized as to have the capacity to be able to carry
out the purposes of the Act and to comply, and to enforce compliance by
its Participants and persons associated with its Participants, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the Exchange.
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\44\ 15 U.S.C. 78f(b)(1).
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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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
enhances the Exchange's Surveillance and Examination program as applied
to QCTs and otherwise clarifies existing CHX Rules. Thus, the Exchange
does not believe that the proposed rule change raises any competitive
issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CHX-2017-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CHX-2017-12. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal
[[Page 37484]]
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-CHX-2017-12, and should be submitted on or before August 31, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16829 Filed 8-9-17; 8:45 am]
BILLING CODE 8011-01-P
