Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Approving a Proposed Rule Change Regarding Qualified Contingent Trades and Related Information Recording Obligations by Certain Participants, 45325-45329 [2017-20754]
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Federal Register / Vol. 82, No. 187 / Thursday, September 28, 2017 / Notices
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[FR Doc. 2017–20755 Filed 9–27–17; 8:45 am]
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U.S. Office of Personnel Management.
Kathleen M. McGettigan,
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[FR Doc. 2017–20854 Filed 9–27–17; 8:45 am]
BILLING CODE 6325–38–P
SECURITIES AND EXCHANGE
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[Release No. 34–81683; File No. SR–CHX–
2017–12]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Order
Approving a Proposed Rule Change
Regarding Qualified Contingent Trades
and Related Information Recording
Obligations by Certain Participants
September 22, 2017.
I. Introduction
On July 26, 2017, the Chicago Stock
Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’),
pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’),2 and Rule 19b–4 thereunder,3 a
proposed rule change regarding
Qualified Contingent Trades (‘‘QCT(s)’’)
and related recordkeeping obligations
for certain Exchange participants. The
proposed rule change was published for
comment in the Federal Register on
August 10, 2017.4 The Commission
received no comments on the proposal.
This order approves the proposed rule
change.
II. Description of the Proposal
The Exchange permits its participants
to submit to the Exchange cross orders
marked with a QCT modifier
(sometimes referred to as ‘‘QCT
crosses’’) to effect transactions that
comprise the NMS stock component of
a QCT.5 QCT crosses are submitted to
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 81315
(August 4, 2017), 82 FR 37479 (‘‘Notice’’).
5 See id. at 37480. A QCT is ‘‘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
2 15
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Federal Register / Vol. 82, No. 187 / Thursday, September 28, 2017 / Notices
the Exchange consistent with an
exemption from Rule 611(a) of
Regulation NMS 6 that the Commission
granted in 2006 and modified in 2008
(the ‘‘QCT Exemption’’).7 As described
below, the Exchange proposes to amend
its rules relating to QCTs to permit only
Institutional Brokers (‘‘IB(s)’’) 8 to effect
such transactions on the Exchange, to
impose additional recordkeeping
requirements relating to such
transactions, and to make additional,
clarifying changes to its rules.
A. QCT Crosses May Only Be Submitted
by IBs
The Exchange proposes to amend
Article 1, Rule 2(b)(2)(E) to provide that
QCT crosses may be submitted to the
Exchange only by registered IBs.9
Article 1, Rule 2(b)(2) sets forth the
order execution modifiers that may be
attributed to cross orders, and Article 1,
Rule 2(b)(2)(E) defines the QCT cross
order modifier.10 Under the proposal,
this definition would be amended to
state that only IBs may utilize the QCT
cross order modifier.11 The Exchange
notes that, currently, CHX rules permit
any Exchange participant to submit QCT
crosses, but in practice non-IB
participants do not submit them.12 The
Exchange also notes that its rules
currently require only IBs to input all
orders and related information into
Brokerplex—an automated Exchange
order and trade management system—
and that this requirement facilitates the
Exchange’s ability to gather information
it considers to be crucial to its review
that have been announced or since cancelled; and
(6) the transaction is fully hedged (without regard
to any prior existing position) as a result of the
other components of the contingent trade. See id.
at 37480; see also Securities Exchange Act Release
No. 57620 (April 4, 2008), 73 FR 19271 (April 9,
2008) (‘‘2008 QCT Exemptive Order’’).
6 17 CFR 242.611(a).
7 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7,
2006); see also 2008 QCT Exemptive Order, supra
note 5.
8 Article 1, Rule 1(n) defines an IB as a member
of the Exchange that is registered as an IB pursuant
to Article 17 of the Exchange’s rules and has
satisfied all Exchange requirements to operate as an
IB. For the sake of clarity, the Commission notes
that, unless otherwise specified, references herein
to ‘‘Article’’ and ‘‘Rule’’ are references to the
Exchange’s rules.
9 See proposed Article 1, Rule 2(b)(2)(E).
10 See Article 1, Rule 2(b)(2).
11 See proposed Article 1, Rule 2(b)(2)(E). The
Exchange also proposes to add the acronym ‘‘QCT’’
to Article 1, Rule 2(b)(2)(E) to make clear that the
acronym refers to ‘‘Qualified Contingent Trade.’’
See id.; see also Notice, supra note 4, at 37481 n.25.
12 See Notice, supra note 4, at 37480 n.12 and
37481.
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of QCT crosses executed on the
Exchange.13
B. Recordkeeping Requirements for
Away Component Trades of QCT
Crosses
The CHX Broker Back Office System
(‘‘BBOS’’) is an Exchange-maintained
trade management system that, among
other things, enables the Exchange to
review information to identify the
specific component transactions on
away exchanges that are being used to
hedge QCT crosses executed on the
Exchange.14 Currently, the Exchange
encourages, but does not require, IBs to
input into BBOS certain information for
away QCT component orders and trades
related to QCT crosses executed on the
Exchange.15 Moreover, Article 11, Rule
3(a)(1)–(3), which sets forth
recordkeeping obligations for certain
Exchange participants, including IBs,
does not currently impose
recordkeeping obligations on Exchange
participants regarding such away
component orders and trades of QCT
crosses.16
The Exchange has proposed several
interrelated amendments to Article 11,
Rule 3 to require IBs to maintain their
own records of, and record with the
Exchange, certain information regarding
away QCT component orders and
trades. Specifically, the Exchange
proposes to adopt new Rule 3(a)(4),
which would make subject to the Rule
3(a) recordkeeping requirements every
component order and trade, whether
handled by the Exchange participant or
not, related to a cross order marked QCT
that is submitted by the Exchange
participant and executed within the
Exchange matching system.17
Relatedly, the Exchange proposes to
modify Rule 3(b) to include a cross
reference to proposed Rule 3(a)(4), and
would thereby require that, subject to
exceptions set out in interpretations to
Rule 3, IBs accurately record in an
electronic system designated by the
Exchange certain details regarding the
away component orders and executions
13 See id. at 37480–81; see also Article 17, Rules
3 and 5 (describing, among other things, Brokerplex
and certain IB obligations).
14 See Notice, supra note 4, at 37480. The
Exchange notes that, currently, the vast majority of
such component transactions involve exchangetraded options. See Notice, supra note 4, at 37480
n.17.
15 See id. at 37482.
16 See id.
17 See proposed Article 11, Rule 3(a)(4). Article
11, Rule 3(a) requires covered Exchange
participants to preserve a record, meeting the
criteria of paragraph (b), of the information
enumerated in Rule 3(a) for at least three years (or
any longer period of time required by SEC Rule
17a–4).
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identified in proposed Rule 3(a)(4).18
The Exchange proposes to set forth
these details in new Rule 3(b)(27),
which would provide that, with respect
to any cross order marked QCT that is
submitted by the Exchange participant
and executed within the Exchange
matching system, the date and time of
receipt by the Exchange participant of
the corresponding order from its
customer and all information specified
by the Exchange regarding any related
component orders and trades executed
within the matching system or away
shall be entered into BBOS (as
applicable), in a manner prescribed by
the Exchange.19
In addition, the Exchange has
proposed amendments to Article 17 that
dovetail with its proposed changes to
Article 11, Rule 3. The Exchange
proposes to amend Article 17, Rule 3(a)
to state that an IB must enter all orders
it receives for execution and any other
information required under Article 11
into an automated system approved by
the Exchange.20 The Exchange states
that this proposed change is necessary
to broaden the scope of Article 17, Rule
3(a) beyond just orders received by the
IB for execution to reflect that proposed
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.21
The Exchange also proposes to adopt
new Article 17, Rule 7, which would
codify the BBOS into the Exchange’s
rules.22 Specifically, proposed Rule 7(a)
would state that the BBOS is a trade
management system developed and
maintained by the Exchange that
permits IBs to input certain information
and to generate reports therefrom, and
that it also is an automated system
approved by the Exchange for the
purposes of amended Article 17, Rule
3(a).23 Proposed Rule 7(b) would state
18 See proposed Article 11, Rule 3(b). The
Exchange also proposes to add the word
‘‘accurately’’ to the Rule 3(b) text so that the rule
requires covered participants to accurately record
the specified information in the designated
Exchange system(s). See id.
19 See proposed Article 11, Rule 3(b)(27); see also
proposed Article 17, Rule 7(c) (specifying the
information regarding related component orders
and trades to be entered into the BBOS). The
Exchange also proposes to relocate the current rule
text in Article 11, Rule 3(b)(27) to proposed Article
11, Rule 3(b)(28). Correspondingly, the Exchange
proposes to amend the cross references in
Interpretations and Policies paragraph .06 of Article
11, Rule 3 to reflect this relocation.
20 The Exchange also proposes to amend the title
of Rule 3(a) to reflect that it requires the entry of
orders and related information into an automated
system. See proposed Article 17, Rule 3(a); see also
Notice, supra note 4, at 37482.
21 See Notice, supra note 4, at 37482.
22 See proposed Article 17, Rule 7.
23 See proposed Article 17, Rule 7(a).
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that users of the BBOS are responsible
for entering all transactional, order and
other information into the system as
required by CHX Rules, in an accurate,
timely and complete manner; the
Exchange, as the operator of BBOS,
retains information entered into BBOS
on behalf of the user in conformity with
applicable rules and regulations; and
the Exchange will provide such
information to IBs in a format
designated by the Exchange to assist IBs
in conducting research regarding their
own trading activities, responding to
requests for information from
customers, regulatory authorities or by
process of law, and for other legitimate
business purposes.24 Further, proposed
Rule 7(b) would state that the Exchange
charges IBs the fees specified in its
published Schedule of Fees and
Assessments for the collection and
retrieval of such information.25
Proposed Rule 7(c) would list the
specific information regarding
component orders and trades related to
QCT crosses that IBs are required to
enter into the BBOS, as applicable.
Specifically, proposed Rule 7(c) would
provide 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.26
C. Proposed Clarification Regarding IB
Trading Accounts
Currently, Article 17, Rule 3(c)
provides that each IB must maintain
separate accounts for handling agency
transactions, principal transactions, and
transactions involving errors, and must
enter transactions into the appropriate
accounts.27 The Exchange states it is
proposing to amend this rule to clarify
that the required accounts relate to
special recordkeeping accounts that
must be maintained at the Exchange,
which, the Exchange represents, 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.28 Accordingly,
the Exchange has proposed to amend
Article 17, Rule 3(c) to state 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 transactions; and (3)
an error recordkeeping account for
transactions involving only bona fide
errors.29 The proposed rule also would
state that an IB must record each abovementioned transaction into the
appropriate CHX recordkeeping
account.30
D. Additional Proposed Rule
Clarifications—Article 11, Rule 3
The Exchange proposes various
clarifying amendments to Article 11,
Rule 3 regarding certain recordkeeping
requirements concerning orders and
executions by certain types of Exchange
participants, including, but not limited
to, IBs.31 Specifically, the Exchange
proposes to amend Article 11, Rule 3(a)
to state that the provisions of Rule 3
only apply to the Exchange participants
described in paragraph (e) of the rule—
namely, registered IBs and registered
market makers, as well as any Exchange
participant for which the Exchange is
the Designated Examining Authority.32
The Exchange also proposes to amend
paragraph (e) to state that any other
Exchange participant also is required to
maintain the information specified in
Rule 3 to the extent such information is
required to be maintained pursuant to
the Exchange Act and the rules
thereunder or, as previously set forth in
the pre-existing version of paragraph (e),
pursuant to the rules of the other selfregulatory organizations of which they
are members.33
In addition, the Exchange proposes to
clarify that proprietary orders fall under
the purview of Article 11, Rule 3.34 To
accomplish this, the Exchange proposes
28 See
24 See
proposed Article 17, Rule 7(b).
25 See id. The Exchange states that it is not
proposing 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 Exchange participants at
cost. See Notice, supra note 4, at 37482 n.38.
26 See proposed Article 17, Rule 7(c). The
Exchange notes that this required information
would be identical to the current data fields
available in the BBOS. See Notice, supra note 4, at
37482 n.37.
27 See Article 17, Rule 3(c); see also Notice, supra
note 4, at 37482.
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Notice, supra note 4, at 37482.
proposed Article 17, Rule 3(c).
30 See id.
31 The Exchange also proposes to add the phrase
‘‘by Certain Participants’’ to the title of the rule so
that it reads ‘‘Records of Orders and Executions by
Certain Participants.’’ See proposed Article 11, Rule
3. The Exchange states that this change is meant to
better distinguish Article 11, Rule 3 from Article 11,
Rule 2, which requires all Exchange participants to
comply with the requirements of SEC Rules 17a-3
and 17a–4. See Notice, supra note 4, at 37481.
32 See proposed Article 11, Rule 3(a).
33 See proposed Article 11, Rule 3(e).
34 See Notice, supra note 4, at 37481.
45327
to delete from paragraph .01 under the
Interpretations and Policies of Article
11, Rule 3 the sentence stating that a
decision by a participant to buy or sell
securities for his or her own account on
the Exchange shall not constitute an
order for which a record must be made
under the rule.35 The Exchange notes
that that sentence excluded from the
scope of Article 11, Rule 3(a) the
decision to purchase or sell a security
on a proprietary basis, and not the
proprietary order itself.36 The Exchange
states, however, that it believes the
sentence could be misconstrued to
exclude all proprietary orders from the
scope of Article 11, Rule 3.37 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 3.38
Further, the Exchange proposes to
amend paragraph .03 under the
Interpretations and Policies of Article
11, Rule 3. Currently, paragraph .03
states that the rule 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
Exchange states that it believes the
current provision could be
misconstrued to exclude such orders
from the scope of Article 11, Rule 3,
which is not the Exchange’s intent.39
Accordingly, the Exchange proposes to
amend paragraph .03 to state that a
participant that sends or receives orders,
cancellations and executions 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 is not
required to maintain separate records of
such orders, cancellations and
executions.40
E. Additional Proposed Rule
Clarifications—Cross Orders
The Exchange has also proposed to
adopt amendments to clarify its rules
regarding the operation of cross orders
and Cross With Size handling and to
eliminate redundant language in those
29 See
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Sfmt 4703
35 See proposed Interpretation and Policy .01 to
Article 11, Rule 3.
36 See Notice, supra note 4, at 37481.
37 See id.
38 See id.
39 See id. The Exchange also notes that the
amendments 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 SEC Rule 17a–3. See
id. at 37481–82, n.33.
40 See id.
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Federal Register / Vol. 82, No. 187 / Thursday, September 28, 2017 / Notices
rules.41 Specifically, the Exchange
proposes to amend the definition of
‘‘cross order’’ to state that a cross order
may only execute within the Exchange’s
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.42 The
Exchange notes that the amended
definition is intended to clarify that
while the pricing requirement is a
prerequisite for executing a cross order
within the matching system, a cross
order that does not meet the pricing
requirement is still by definition a cross
order for purposes of the Exchange’s
rules.43 The Exchange also proposes to
amend Article 1, Rule 2(g)(1), which
defines and sets forth special order
handling requirements for Cross With
Size orders, to state that a cross order
that meets the Cross With Size
definition will execute if there are no
resting orders on the CHX Book with a
working price better than the cross
order.44 In addition, the Exchange has
proposed to amend Article 20, Rule
8(e)(1), which specifies how certain
order types will be executed in the
matching system, to remove references
to Cross With Size and to state that cross
orders are to be handled pursuant to
Article 1, Rule 2(a)(2) and Rule 2(g)(1).45
The Exchange states it is proposing to
remove references to Cross With Size
from Article 20, Rule 8(e)(1) because
Cross With Size is a special handling for
cross orders, and not itself an order type
or order modifier.46
F. Operative Date
The Exchange has proposed to
provide notice to its participants of the
operative date of the proposed change in
the event that the proposed rule change
is approved by the Commission.47
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6 of the Act 48 and the rules and
41 See
Notice, supra note 4, at 37480–81.
proposed Article 1, Rule 2(a)(2).
43 See Notice, supra note 4, at 37480–81.
44 See proposed Article 1, Rule 2(g)(1). The
Exchange also proposes to remove from this rule,
as well Article 1, Rule 2(a)(2), language that states
that cross and Cross With Size orders will execute
so long as it would not constitute a trade-through
under Regulation NMS (including all applicable
exceptions and exemptions). See id.; see also
proposed Article 1, Rule 2(a)(2). The Exchange
notes that it is proposing to remove this language
because it is redundant. See Notice, supra note 4,
at 37481.
45 See proposed Article 20, Rule 8(e)(1).
46 See Notice, supra note 4, at 37481.
47 See Notice, supra note 4, at 37482.
48 15 U.S.C. 78f(b).
42 See
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regulations thereunder applicable to the
Exchange.49 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(1) of the Act,50 which requires that
an exchange be so organized and have
the capacity to carry out the purposes of
the Act and to comply, and to enforce
compliance by its members and persons
associated with its members, with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the exchange; and Section 6(b)(5) of the
Act,51 which requires, among other
things, that the rules of an exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to 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, and
not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
The Commission believes that the
Exchange’s proposal to permit only
registered IBs to submit QCT crosses to
the Exchange is consistent with the Act.
The Exchange has noted that, currently,
while other types of Exchange
participants are permitted to submit
QCT crosses, only IBs do so in
practice.52 As such, the Commission
believes that this aspect of the proposal
is designed to codify existing practice
with respect to QCT crosses and not
designed to alter the status quo with
respect to the type of Exchange
participant that submits them to the
Exchange. In addition, the Exchange has
represented that any Exchange
participant that has satisfied the
applicable requirements may register as
an IB.53 Further, the Exchange has noted
that IBs have experience in ensuring
that QCT crosses are submitted to the
Exchange matching system in a manner
consistent with Exchange rules and the
QCT Exemption, the Exchange’s
surveillance and examination program
is optimized with respect to the
submission of QCT crosses by IBs in
particular, and the Exchange believes
that the most effective way for it to
surveil QCT cross activity for
compliance with Exchange rules and the
QCT Exemption is to limit the
submission of QCTs to IBs.54
49 In approving these proposed rule changes, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
50 15 U.S.C. 78f(b)(1).
51 15 U.S.C. 78f(b)(5).
52 See Notice, supra note 4, at 37481, 37483.
53 See id. at 37483.
54 See id.
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Accordingly, the Commission believes
that the Exchange’s proposal to amend
Article 1, Rule 2(b)(2)(E) to reflect
current practice on the Exchange and
permit only IBs to submit QCT crosses
is consistent with Section 6(b)(5) of the
Act in that it is reasonably designed to
help prevent fraudulent and
manipulative acts and practices, and to
protect investors and the public interest,
and is not designed to permit unfair
discrimination. The Commission also
notes in this regard that it received no
comments on the proposal.
In addition, the Commission believes
that the Exchange’s proposed rule
amendments to require IBs to maintain
records of, and record with the
Exchange, appropriate information
regarding QCT cross transactions, and in
particular the away component orders
and trades of such transactions, are
consistent with the Act. As the
Exchange noted, currently, its
recordkeeping rules do not require the
recording of information regarding the
away component orders and trades
related to QCT crosses submitted to the
Exchange, and IBs instead are
encouraged, but not required, to enter
such information into the BBOS.55 In
addition, the BBOS currently is not
described in the Exchange’s rules. The
Commission believes that the
Exchange’s proposal to require reporting
of relevant information regarding away
component orders and trades related to
QCT crosses and subject that
information to the Exchange’s
recordkeeping requirements in Article
11, Rule 3 and Article 17, Rule 3, as
well as the Exchange’s proposal to
codify the BBOS in Article 17, Rule 7,
will strengthen the Exchange’s
recordkeeping requirements with
respect to QCT crosses and should
enhance the Exchange’s ability to
monitor for compliance with relevant
Exchange rules and the QCT
Exemption.56 Moreover, the
Commission does not believe that these
additional recordkeeping obligations
would be unduly burdensome to IBs,
and in this regard again notes that it
received no comments on the proposal.
Accordingly, the Commission believes
that the Exchange’s proposed
amendments to Article 11, Rule 3 and
Article 17, Rules 3 and 7 to require
additional recordkeeping regarding QCT
crosses is designed to support CHX’s
regulatory oversight of QCT crosses and
thereby should help protect investors
and the public interest, consistent with
Section 6(b)(5) of the Act.
55 See
56 See
E:\FR\FM\28SEN1.SGM
id. at 37482.
Notice, supra note 4, at 37483.
28SEN1
Federal Register / Vol. 82, No. 187 / Thursday, September 28, 2017 / Notices
Lastly, the Commission believes that
the Exchange’s additional proposed
amendments to clarify its rules
regarding IB recordkeeping accounts
(Article 17, Rule 3(c)), the
recordkeeping requirements for certain
Exchange participants (Article 11, Rule
3), and the operation of the cross order
type and Cross With Size handling
(Article 1, Rule 2(a)(2), Article 1, Rule
2(g)(1) and Article 20, Rule 8(e)) add
transparency and remove any potential
ambiguity in those rules and reduce the
potential for confusion as to their
meaning and intended application,
which should help protect investors
consistent with Section 6(b)(5) of the
Act. In addition, the Commission
believes that these proposed changes are
reasonably designed to clarify the scope
and meaning of those rules, which
should help the Exchange assure
compliance by Exchange participants
with the Exchange’s rules, consistent
with Section 6(b)(1) of the Act.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 57 that the
proposed rule change (SR–CHX–2017–
12), be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.58
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–20754 Filed 9–27–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81682; File No. SR–
NYSEArca–2017–103]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Reflect Certain
Changes Applicable to IQ Municipal
Insured ETF, IQ Municipal Intermediate
ETF, and IQ Municipal Short Duration
ETF
September 22, 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
September 13, 2017, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
57 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
58 17
VerDate Sep<11>2014
18:44 Sep 27, 2017
Jkt 241001
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes (1) to reflect
a change in the name of the IQ
Municipal Insured ETF, IQ Municipal
Intermediate ETF, and IQ Municipal
Short Duration ETF (each a ‘‘Fund’’ and,
collectively, the ‘‘Funds’’), and (2) to
reflect a change in the dollar-weighted
average duration to be maintained by
the IQ Municipal Insured ETF and IQ
Municipal Intermediate ETF. Shares of
the Funds have been approved by the
Securities and Exchange Commission
(the ‘‘Commission’’) for listing and
trading on the Exchange under NYSE
Arca Rule 8.600–E. The proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of 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 Commission has approved a
proposed rule change relating to listing
and trading on the Exchange of shares
(‘‘Shares’’) of the Funds under NYSE
Arca Rule 8.600–E,3 which governs the
3 See Securities Exchange Act Release Nos. 80584
(May 3, 2017), 82 FR 21573 (May 9, 2017) (SR–
NYSEArca–2017–44) (notice of filing of proposed
rule change to list and trade shares of the IQ
Municipal Insured ETF; IQ Municipal Short
Duration ETF; and IQ Municipal Intermediate ETF
under NYSE Arca Equities Rule 8.600) (‘‘Prior
Notice’’); 80885 (June 8, 2017), 82 FR 27302 (June
14, 2017) (SR–NYSEArca–2017–44) (order
approving proposed rule change to list and trade
shares of the IQ Municipal Insured ETF, IQ
Municipal Short Duration ETF, and IQ Municipal
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
45329
listing and trading of Managed Fund
Shares.4 The Shares will be offered by
the IndexIQ Active ETF Trust (the
‘‘Trust’’), which is registered with the
Commission as an open-end
management investment company. Each
Fund is a series of the Trust. Shares of
the Funds have been approved by the
Commission for listing and trading on
the Exchange under NYSE Arca Rule
8.600–E. The Funds’ Shares have not
commenced trading on the Exchange.
On June 27, 2017, the name of the IQ
Municipal Insured ETF was changed to
IQ MacKay Shields Municipal Insured
ETF, the name of the IQ Municipal
Intermediate ETF was changed to IQ
MacKay Shields Municipal Intermediate
ETF, and the name of the IQ Municipal
Short Duration ETF was changed to IQ
MacKay Shields Municipal Short
Duration ETF. This proposed rule
change proposes to reflect these
changes.
The Prior Release stated that the IQ
Municipal Insured ETF generally will
maintain a dollar-weighted average
duration within plus or minus two years
of the dollar-weighted average duration
of the S&P Municipal Bond Insured
Index. The Fund proposes to change
this representation to state that the Fund
generally will maintain a dollarweighted average modified duration of 3
to15 years.
In addition, the Prior Release stated
that the IQ Municipal Intermediate ETF
generally will maintain a dollarweighted average duration within plus
or minus two years of the dollarweighted average duration of the S&P
Municipal Bond Intermediate Index.
The Fund proposes to change this
representation to state that the Fund
generally will maintain a dollarweighted average modified duration of
three to ten years.5
Intermediate ETF under NYSE Arca Equities Rule
8.600) (Prior Order, and, together with the Prior
Notice, the ‘‘Prior Release’’). All terms referenced
but not defined herein are defined in the Prior
Release.
4 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Equities Rule 5.2–
E(j)(3), seeks to provide investment results that
correspond generally to the price and yield
performance of a specific foreign or domestic stock
index, fixed income securities index or combination
thereof.
5 The Exchange notes that the Commission has
approved the listing and trading of other issues of
Managed Fund Shares that have a duration range
E:\FR\FM\28SEN1.SGM
Continued
28SEN1
]]>Agencies
[Federal Register Volume 82, Number 187 (Thursday, September 28, 2017)]
[Notices]
[Pages 45325-45329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20754]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81683; File No. SR-CHX-2017-12]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving a Proposed Rule Change Regarding Qualified Contingent
Trades and Related Information Recording Obligations by Certain
Participants
September 22, 2017.
I. Introduction
On July 26, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) \1\ of the
Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4
thereunder,\3\ a proposed rule change regarding Qualified Contingent
Trades (``QCT(s)'') and related recordkeeping obligations for certain
Exchange participants. The proposed rule change was published for
comment in the Federal Register on August 10, 2017.\4\ The Commission
received no comments on the proposal. This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 81315 (August 4,
2017), 82 FR 37479 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange permits its participants to submit to the Exchange
cross orders marked with a QCT modifier (sometimes referred to as ``QCT
crosses'') to effect transactions that comprise the NMS stock component
of a QCT.\5\ QCT crosses are submitted to
[[Page 45326]]
the Exchange consistent with an exemption from Rule 611(a) of
Regulation NMS \6\ that the Commission granted in 2006 and modified in
2008 (the ``QCT Exemption'').\7\ As described below, the Exchange
proposes to amend its rules relating to QCTs to permit only
Institutional Brokers (``IB(s)'') \8\ to effect such transactions on
the Exchange, to impose additional recordkeeping requirements relating
to such transactions, and to make additional, clarifying changes to its
rules.
---------------------------------------------------------------------------
\5\ See id. at 37480. A QCT is ``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 transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade. See id. at 37480; see also Securities Exchange Act
Release No. 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008)
(``2008 QCT Exemptive Order'').
\6\ 17 CFR 242.611(a).
\7\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006); see also 2008 QCT Exemptive
Order, supra note 5.
\8\ Article 1, Rule 1(n) defines an IB as a member of the
Exchange that is registered as an IB pursuant to Article 17 of the
Exchange's rules and has satisfied all Exchange requirements to
operate as an IB. For the sake of clarity, the Commission notes
that, unless otherwise specified, references herein to ``Article''
and ``Rule'' are references to the Exchange's rules.
---------------------------------------------------------------------------
A. QCT Crosses May Only Be Submitted by IBs
The Exchange proposes to amend Article 1, Rule 2(b)(2)(E) to
provide that QCT crosses may be submitted to the Exchange only by
registered IBs.\9\ Article 1, Rule 2(b)(2) sets forth the order
execution modifiers that may be attributed to cross orders, and Article
1, Rule 2(b)(2)(E) defines the QCT cross order modifier.\10\ Under the
proposal, this definition would be amended to state that only IBs may
utilize the QCT cross order modifier.\11\ The Exchange notes that,
currently, CHX rules permit any Exchange participant to submit QCT
crosses, but in practice non-IB participants do not submit them.\12\
The Exchange also notes that its rules currently require only IBs to
input all orders and related information into Brokerplex--an automated
Exchange order and trade management system--and that this requirement
facilitates the Exchange's ability to gather information it considers
to be crucial to its review of QCT crosses executed on the
Exchange.\13\
---------------------------------------------------------------------------
\9\ See proposed Article 1, Rule 2(b)(2)(E).
\10\ See Article 1, Rule 2(b)(2).
\11\ See proposed Article 1, Rule 2(b)(2)(E). The Exchange also
proposes to add the acronym ``QCT'' to Article 1, Rule 2(b)(2)(E) to
make clear that the acronym refers to ``Qualified Contingent
Trade.'' See id.; see also Notice, supra note 4, at 37481 n.25.
\12\ See Notice, supra note 4, at 37480 n.12 and 37481.
\13\ See id. at 37480-81; see also Article 17, Rules 3 and 5
(describing, among other things, Brokerplex and certain IB
obligations).
---------------------------------------------------------------------------
B. Recordkeeping Requirements for Away Component Trades of QCT Crosses
The CHX Broker Back Office System (``BBOS'') is an Exchange-
maintained trade management system that, among other things, enables
the Exchange to review information to identify the specific component
transactions on away exchanges that are being used to hedge QCT crosses
executed on the Exchange.\14\ Currently, the Exchange encourages, but
does not require, IBs to input into BBOS certain information for away
QCT component orders and trades related to QCT crosses executed on the
Exchange.\15\ Moreover, Article 11, Rule 3(a)(1)-(3), which sets forth
recordkeeping obligations for certain Exchange participants, including
IBs, does not currently impose recordkeeping obligations on Exchange
participants regarding such away component orders and trades of QCT
crosses.\16\
---------------------------------------------------------------------------
\14\ See Notice, supra note 4, at 37480. The Exchange notes
that, currently, the vast majority of such component transactions
involve exchange-traded options. See Notice, supra note 4, at 37480
n.17.
\15\ See id. at 37482.
\16\ See id.
---------------------------------------------------------------------------
The Exchange has proposed several interrelated amendments to
Article 11, Rule 3 to require IBs to maintain their own records of, and
record with the Exchange, certain information regarding away QCT
component orders and trades. Specifically, the Exchange proposes to
adopt new Rule 3(a)(4), which would make subject to the Rule 3(a)
recordkeeping requirements every component order and trade, whether
handled by the Exchange participant or not, related to a cross order
marked QCT that is submitted by the Exchange participant and executed
within the Exchange matching system.\17\
---------------------------------------------------------------------------
\17\ See proposed Article 11, Rule 3(a)(4). Article 11, Rule
3(a) requires covered Exchange participants to preserve a record,
meeting the criteria of paragraph (b), of the information enumerated
in Rule 3(a) for at least three years (or any longer period of time
required by SEC Rule 17a-4).
---------------------------------------------------------------------------
Relatedly, the Exchange proposes to modify Rule 3(b) to include a
cross reference to proposed Rule 3(a)(4), and would thereby require
that, subject to exceptions set out in interpretations to Rule 3, IBs
accurately record in an electronic system designated by the Exchange
certain details regarding the away component orders and executions
identified in proposed Rule 3(a)(4).\18\ The Exchange proposes to set
forth these details in new Rule 3(b)(27), which would provide that,
with respect to any cross order marked QCT that is submitted by the
Exchange participant and executed within the Exchange matching system,
the date and time of receipt by the Exchange participant of the
corresponding order from its customer and all information specified by
the Exchange regarding any related component orders and trades executed
within the matching system or away shall be entered into BBOS (as
applicable), in a manner prescribed by the Exchange.\19\
---------------------------------------------------------------------------
\18\ See proposed Article 11, Rule 3(b). The Exchange also
proposes to add the word ``accurately'' to the Rule 3(b) text so
that the rule requires covered participants to accurately record the
specified information in the designated Exchange system(s). See id.
\19\ See proposed Article 11, Rule 3(b)(27); see also proposed
Article 17, Rule 7(c) (specifying the information regarding related
component orders and trades to be entered into the BBOS). The
Exchange also proposes to relocate the current rule text in Article
11, Rule 3(b)(27) to proposed Article 11, Rule 3(b)(28).
Correspondingly, the Exchange proposes to amend the cross references
in Interpretations and Policies paragraph .06 of Article 11, Rule 3
to reflect this relocation.
---------------------------------------------------------------------------
In addition, the Exchange has proposed amendments to Article 17
that dovetail with its proposed changes to Article 11, Rule 3. The
Exchange proposes to amend Article 17, Rule 3(a) to state that an IB
must enter all orders it receives for execution and any other
information required under Article 11 into an automated system approved
by the Exchange.\20\ The Exchange states that this proposed change is
necessary to broaden the scope of Article 17, Rule 3(a) beyond just
orders received by the IB for execution to reflect that proposed
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.\21\
---------------------------------------------------------------------------
\20\ The Exchange also proposes to amend the title of Rule 3(a)
to reflect that it requires the entry of orders and related
information into an automated system. See proposed Article 17, Rule
3(a); see also Notice, supra note 4, at 37482.
\21\ See Notice, supra note 4, at 37482.
---------------------------------------------------------------------------
The Exchange also proposes to adopt new Article 17, Rule 7, which
would codify the BBOS into the Exchange's rules.\22\ Specifically,
proposed Rule 7(a) would state that the BBOS is a trade management
system developed and maintained by the Exchange that permits IBs to
input certain information and to generate reports therefrom, and that
it also is an automated system approved by the Exchange for the
purposes of amended Article 17, Rule 3(a).\23\ Proposed Rule 7(b) would
state
[[Page 45327]]
that users of the BBOS are responsible for entering all transactional,
order and other information into the system as required by CHX Rules,
in an accurate, timely and complete manner; the Exchange, as the
operator of BBOS, retains information entered into BBOS on behalf of
the user in conformity with applicable rules and regulations; and the
Exchange will provide such information to IBs in a format designated by
the Exchange to assist IBs in conducting research regarding their own
trading activities, responding to requests for information from
customers, regulatory authorities or by process of law, and for other
legitimate business purposes.\24\ Further, proposed Rule 7(b) would
state that the Exchange charges IBs the fees specified in its published
Schedule of Fees and Assessments for the collection and retrieval of
such information.\25\ Proposed Rule 7(c) would list the specific
information regarding component orders and trades related to QCT
crosses that IBs are required to enter into the BBOS, as applicable.
Specifically, proposed Rule 7(c) would provide 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.\26\
---------------------------------------------------------------------------
\22\ See proposed Article 17, Rule 7.
\23\ See proposed Article 17, Rule 7(a).
\24\ See proposed Article 17, Rule 7(b).
\25\ See id. The Exchange states that it is not proposing 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 Exchange participants at cost.
See Notice, supra note 4, at 37482 n.38.
\26\ See proposed Article 17, Rule 7(c). The Exchange notes that
this required information would be identical to the current data
fields available in the BBOS. See Notice, supra note 4, at 37482
n.37.
---------------------------------------------------------------------------
C. Proposed Clarification Regarding IB Trading Accounts
Currently, Article 17, Rule 3(c) provides that each IB must
maintain separate accounts for handling agency transactions, principal
transactions, and transactions involving errors, and must enter
transactions into the appropriate accounts.\27\ The Exchange states it
is proposing to amend this rule to clarify that the required accounts
relate to special recordkeeping accounts that must be maintained at the
Exchange, which, the Exchange represents, 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.\28\ Accordingly, the
Exchange has proposed to amend Article 17, Rule 3(c) to state 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
transactions; and (3) an error recordkeeping account for transactions
involving only bona fide errors.\29\ The proposed rule also would state
that an IB must record each above-mentioned transaction into the
appropriate CHX recordkeeping account.\30\
---------------------------------------------------------------------------
\27\ See Article 17, Rule 3(c); see also Notice, supra note 4,
at 37482.
\28\ See Notice, supra note 4, at 37482.
\29\ See proposed Article 17, Rule 3(c).
\30\ See id.
---------------------------------------------------------------------------
D. Additional Proposed Rule Clarifications--Article 11, Rule 3
The Exchange proposes various clarifying amendments to Article 11,
Rule 3 regarding certain recordkeeping requirements concerning orders
and executions by certain types of Exchange participants, including,
but not limited to, IBs.\31\ Specifically, the Exchange proposes to
amend Article 11, Rule 3(a) to state that the provisions of Rule 3 only
apply to the Exchange participants described in paragraph (e) of the
rule--namely, registered IBs and registered market makers, as well as
any Exchange participant for which the Exchange is the Designated
Examining Authority.\32\ The Exchange also proposes to amend paragraph
(e) to state that any other Exchange participant also is required to
maintain the information specified in Rule 3 to the extent such
information is required to be maintained pursuant to the Exchange Act
and the rules thereunder or, as previously set forth in the pre-
existing version of paragraph (e), pursuant to the rules of the other
self-regulatory organizations of which they are members.\33\
---------------------------------------------------------------------------
\31\ The Exchange also proposes to add the phrase ``by Certain
Participants'' to the title of the rule so that it reads ``Records
of Orders and Executions by Certain Participants.'' See proposed
Article 11, Rule 3. The Exchange states that this change is meant to
better distinguish Article 11, Rule 3 from Article 11, Rule 2, which
requires all Exchange participants to comply with the requirements
of SEC Rules 17a-3 and 17a-4. See Notice, supra note 4, at 37481.
\32\ See proposed Article 11, Rule 3(a).
\33\ See proposed Article 11, Rule 3(e).
---------------------------------------------------------------------------
In addition, the Exchange proposes to clarify that proprietary
orders fall under the purview of Article 11, Rule 3.\34\ To accomplish
this, the Exchange proposes to delete from paragraph .01 under the
Interpretations and Policies of Article 11, Rule 3 the sentence stating
that a decision by a participant to buy or sell securities for his or
her own account on the Exchange shall not constitute an order for which
a record must be made under the rule.\35\ The Exchange notes that that
sentence excluded from the scope of Article 11, Rule 3(a) the decision
to purchase or sell a security on a proprietary basis, and not the
proprietary order itself.\36\ The Exchange states, however, that it
believes the sentence could be misconstrued to exclude all proprietary
orders from the scope of Article 11, Rule 3.\37\ 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.\38\
---------------------------------------------------------------------------
\34\ See Notice, supra note 4, at 37481.
\35\ See proposed Interpretation and Policy .01 to Article 11,
Rule 3.
\36\ See Notice, supra note 4, at 37481.
\37\ See id.
\38\ See id.
---------------------------------------------------------------------------
Further, the Exchange proposes to amend paragraph .03 under the
Interpretations and Policies of Article 11, Rule 3. Currently,
paragraph .03 states that the rule 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 Exchange states
that it believes the current provision could be misconstrued to exclude
such orders from the scope of Article 11, Rule 3, which is not the
Exchange's intent.\39\ Accordingly, the Exchange proposes to amend
paragraph .03 to state that a participant that sends or receives
orders, cancellations and executions 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 is not required to maintain separate records of such
orders, cancellations and executions.\40\
---------------------------------------------------------------------------
\39\ See id. The Exchange also notes that the amendments 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 SEC Rule
17a-3. See id. at 37481-82, n.33.
\40\ See id.
---------------------------------------------------------------------------
E. Additional Proposed Rule Clarifications--Cross Orders
The Exchange has also proposed to adopt amendments to clarify its
rules regarding the operation of cross orders and Cross With Size
handling and to eliminate redundant language in those
[[Page 45328]]
rules.\41\ Specifically, the Exchange proposes to amend the definition
of ``cross order'' to state that a cross order may only execute within
the Exchange's 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.\42\ The Exchange notes that the amended definition is
intended to clarify that while the pricing requirement is a
prerequisite for executing a cross order within the matching system, a
cross order that does not meet the pricing requirement is still by
definition a cross order for purposes of the Exchange's rules.\43\ The
Exchange also proposes to amend Article 1, Rule 2(g)(1), which defines
and sets forth special order handling requirements for Cross With Size
orders, to state that a cross order that meets the Cross With Size
definition will execute if there are no resting orders on the CHX Book
with a working price better than the cross order.\44\ In addition, the
Exchange has proposed to amend Article 20, Rule 8(e)(1), which
specifies how certain order types will be executed in the matching
system, to remove references to Cross With Size and to state that cross
orders are to be handled pursuant to Article 1, Rule 2(a)(2) and Rule
2(g)(1).\45\ The Exchange states it is proposing to remove references
to Cross With Size from Article 20, Rule 8(e)(1) because Cross With
Size is a special handling for cross orders, and not itself an order
type or order modifier.\46\
---------------------------------------------------------------------------
\41\ See Notice, supra note 4, at 37480-81.
\42\ See proposed Article 1, Rule 2(a)(2).
\43\ See Notice, supra note 4, at 37480-81.
\44\ See proposed Article 1, Rule 2(g)(1). The Exchange also
proposes to remove from this rule, as well Article 1, Rule 2(a)(2),
language that states that cross and Cross With Size orders will
execute so long as it would not constitute a trade-through under
Regulation NMS (including all applicable exceptions and exemptions).
See id.; see also proposed Article 1, Rule 2(a)(2). The Exchange
notes that it is proposing to remove this language because it is
redundant. See Notice, supra note 4, at 37481.
\45\ See proposed Article 20, Rule 8(e)(1).
\46\ See Notice, supra note 4, at 37481.
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F. Operative Date
The Exchange has proposed to provide notice to its participants of
the operative date of the proposed change in the event that the
proposed rule change is approved by the Commission.\47\
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\47\ See Notice, supra note 4, at 37482.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \48\
and the rules and regulations thereunder applicable to the
Exchange.\49\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\50\ which
requires that an exchange be so organized and have the capacity to
carry out the purposes of the Act and to comply, and to enforce
compliance by its members and persons associated with its members, with
the provisions of the Act, the rules and regulations thereunder, and
the rules of the exchange; and Section 6(b)(5) of the Act,\51\ which
requires, among other things, that the rules of an exchange be designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to 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,
and not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\48\ 15 U.S.C. 78f(b).
\49\ In approving these proposed rule changes, the Commission
has considered the proposed rules' impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f(b)(1).
\51\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the Exchange's proposal to permit only
registered IBs to submit QCT crosses to the Exchange is consistent with
the Act. The Exchange has noted that, currently, while other types of
Exchange participants are permitted to submit QCT crosses, only IBs do
so in practice.\52\ As such, the Commission believes that this aspect
of the proposal is designed to codify existing practice with respect to
QCT crosses and not designed to alter the status quo with respect to
the type of Exchange participant that submits them to the Exchange. In
addition, the Exchange has represented that any Exchange participant
that has satisfied the applicable requirements may register as an
IB.\53\ Further, the Exchange has noted that IBs have experience in
ensuring that QCT crosses are submitted to the Exchange matching system
in a manner consistent with Exchange rules and the QCT Exemption, the
Exchange's surveillance and examination program is optimized with
respect to the submission of QCT crosses by IBs in particular, and the
Exchange believes that the most effective way for it to surveil QCT
cross activity for compliance with Exchange rules and the QCT Exemption
is to limit the submission of QCTs to IBs.\54\ Accordingly, the
Commission believes that the Exchange's proposal to amend Article 1,
Rule 2(b)(2)(E) to reflect current practice on the Exchange and permit
only IBs to submit QCT crosses is consistent with Section 6(b)(5) of
the Act in that it is reasonably designed to help prevent fraudulent
and manipulative acts and practices, and to protect investors and the
public interest, and is not designed to permit unfair discrimination.
The Commission also notes in this regard that it received no comments
on the proposal.
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\52\ See Notice, supra note 4, at 37481, 37483.
\53\ See id. at 37483.
\54\ See id.
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In addition, the Commission believes that the Exchange's proposed
rule amendments to require IBs to maintain records of, and record with
the Exchange, appropriate information regarding QCT cross transactions,
and in particular the away component orders and trades of such
transactions, are consistent with the Act. As the Exchange noted,
currently, its recordkeeping rules do not require the recording of
information regarding the away component orders and trades related to
QCT crosses submitted to the Exchange, and IBs instead are encouraged,
but not required, to enter such information into the BBOS.\55\ In
addition, the BBOS currently is not described in the Exchange's rules.
The Commission believes that the Exchange's proposal to require
reporting of relevant information regarding away component orders and
trades related to QCT crosses and subject that information to the
Exchange's recordkeeping requirements in Article 11, Rule 3 and Article
17, Rule 3, as well as the Exchange's proposal to codify the BBOS in
Article 17, Rule 7, will strengthen the Exchange's recordkeeping
requirements with respect to QCT crosses and should enhance the
Exchange's ability to monitor for compliance with relevant Exchange
rules and the QCT Exemption.\56\ Moreover, the Commission does not
believe that these additional recordkeeping obligations would be unduly
burdensome to IBs, and in this regard again notes that it received no
comments on the proposal. Accordingly, the Commission believes that the
Exchange's proposed amendments to Article 11, Rule 3 and Article 17,
Rules 3 and 7 to require additional recordkeeping regarding QCT crosses
is designed to support CHX's regulatory oversight of QCT crosses and
thereby should help protect investors and the public interest,
consistent with Section 6(b)(5) of the Act.
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\55\ See id. at 37482.
\56\ See Notice, supra note 4, at 37483.
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[[Page 45329]]
Lastly, the Commission believes that the Exchange's additional
proposed amendments to clarify its rules regarding IB recordkeeping
accounts (Article 17, Rule 3(c)), the recordkeeping requirements for
certain Exchange participants (Article 11, Rule 3), and the operation
of the cross order type and Cross With Size handling (Article 1, Rule
2(a)(2), Article 1, Rule 2(g)(1) and Article 20, Rule 8(e)) add
transparency and remove any potential ambiguity in those rules and
reduce the potential for confusion as to their meaning and intended
application, which should help protect investors consistent with
Section 6(b)(5) of the Act. In addition, the Commission believes that
these proposed changes are reasonably designed to clarify the scope and
meaning of those rules, which should help the Exchange assure
compliance by Exchange participants with the Exchange's rules,
consistent with Section 6(b)(1) of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\57\ that the proposed rule change (SR-CHX-2017-12), be, and hereby is,
approved.
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\57\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-20754 Filed 9-27-17; 8:45 am]
BILLING CODE 8011-01-P
