Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Governing the Give Up of a Clearing Member by a User on Exchange Transactions, 4007-4011 [2020-01029]
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Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
disapprove the proposed rule change
(File No. SR–Nasdaq–2019–057).9
and at the Commission’s Public
Reference Room.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
J. Matthew DeLesDernier,
Assistant Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
[FR Doc. 2020–01039 Filed 1–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87985; File No. SR–
CboeBZX–2020–002]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Relating To
Amend Its Rules Governing the Give
Up of a Clearing Member by a User on
Exchange Transactions
January 16, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January 2,
2020, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘‘‘BZX’’’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX Options’’)
proposes to amend its rules governing
the give up of a Clearing Member by a
User on Exchange transactions. The text
of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
9 The 240th day from publication in the Federal
Register is March 21, 2020, which is a Saturday.
Therefore, the date by which the Commission must
take action is designated to be March 20, 2020.
10 17 CFR 200.30–3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 21.12, which governs the give up
of a Clearing Member 5 by a User 6 on
Exchange transactions, to substantially
conform to Cboe Exchange, Inc. (‘‘Cboe
Options’’) Rule 5.10, proposed Cboe
EDGX Exchange, Inc. (‘‘EDGX Options’’)
Rule 21.12, and proposed Cboe C2
Exchange, Inc. (‘‘C2 Options’’) Rule
6.30.7
Background
Under current Exchange rules, Users
entering transactions on the Exchange
must either be a Clearing Member or
must establish a clearing arrangement
with a Clearing Member, and must have
a Letter of Guarantee issued by a
Clearing Member. In addition, under
current Rule 21.12, a User must give up
the name of the Clearing Member
through which each transaction will be
cleared. Every Clearing Member accepts
financial responsibility for all BZX
Options transactions made by the
guaranteed User pursuant to Exchange
Rule 22.8(b) (Terms of Letter
Guarantee). The proposed amendment
will result in a more structured and
coherent streamlined give up process on
the Exchange as it will align with the
give up functionality on BZX Options
with that currently available on Cboe
5 The term ‘‘Clearing Member’’ means an Options
Member that is self-clearing or an Options Member
that clears BZX Options Transactions for other
Members of BZX Options. See Exchange Rule 16.1.
6 The term ‘‘User’’ means any Options Member or
Sponsored Participant who is authorized to obtain
access to the System pursuant to Rule 11.3 (Access).
See Exchange Rule 16.1.
7 See SR–CboeEDGX–2020–001 (filed January 2,
2020) and SR–C2–2020–001 (filed January 2, 2020)
(collectively referred to as the ‘‘EDGX Options and
C2 Options Proposed Give Up Rule’’).
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Options, C2 Options, and EDGX
Options.
Additionally, beginning in early 2018,
certain Clearing Members (in
conjunction with the Securities Industry
and Financial Markets Association
(‘‘SIFMA’’)) expressed concerns related
to the process by which executing
brokers on U.S. options exchanges (the
‘‘Exchanges’’) are allowed to designate
or ‘give up’ a clearing firm for purposes
of clearing particular transactions. The
SIFMA-affiliated Clearing Members
have recently identified the current give
up process as a significant source of risk
for clearing firms. SIFMA-affiliated
Clearing Members subsequently
requested that the Exchanges alleviate
this risk by amending Exchange rules
governing the give up process. 8
Therefore, the Exchange is now seeking
to amend its Rule 21.17 to align with
applicable rules of the Exchanges and
also to substantially conform to existing
Cboe Options Rule 5.10 and proposed
EDGX Options Rule 22.12 and C2
Options Rule 6.30.
Proposed Rule
The Exchange proposes to amend
Rule 21.12 by replacing the current rule
text with details regarding the give up
procedure for a User executing
transactions on the Exchange. As
amended, Rule 21.12 would provide
that a User may indicate, at the time of
the trade or through post trade
allocation, any Options Clearing
Corporation (‘‘OCC’’) number of the
Clearing Member through which the
transaction will be cleared (‘‘give up’’)
8 Cboe Options recently modified its give up
procedure under rule 5.10 to allow clearing trading
permit holders to ‘‘Opt In’’ such that the clearing
trading permit holder (‘‘TPH’’) may specify which
Cboe Options TPH organizations are authorized to
give up that clearing trading permit holder. See
Securities and Exchange Act Release No. 86401
(July 17, 2019), 84 FR 35433 (July 23, 2019) (SR–
CBOE–19–036). Nasdaq PHLX LLC (‘‘PHLX’’),
NYSE Arca, Inc., (‘‘NYSE Arca’’), and NYSE
American LLC (‘‘NYSE American’’) also recently
modified their respect give up rules to adopt an
‘‘Opt In’’ process; see also Securities and Exchange
Act Release No. 85136 (February 14, 2019), 84 FR
5526 (February 21, 2019) (SR–PHLX–2018–72),
Securities and Exchange Act Release No. 85871
(May 16, 2019), 84 FR 23613 (May 22, 2019) (SR–
NYSEArca 2019–32) and Securities and Exchange
Act Release 85875 (May 16, 2019), 84 FR 23591
(May 22, 2019) (SR–NYSEAMER–2019–17). The
Exchange’s proposal leads to the same result of
providing its Clearing Member’s the ability to
control risk and includes PHLX’s, NYSE Arca’s and
NYSE American’s ‘‘Opt In’’ process, but it
otherwise differs slightly in process from their give
up rules. For example, the Exchange intends to
maintain its provisions relating to Designated Give
Ups and eliminate its provisions relating to the
rejection of a trade. The Exchange’s proposal is
substantially the same as the current give up
process on Cboe Options.
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to either a ‘‘Designated Give Up’’ 9 or a
‘‘Guarantor’’,10 as those roles would be
defined in the Rule and discussed in
further detail below.11 Further, Rule
21.12 would provide that Clearing
Members may elect to ‘‘Opt In’’ and
restrict one or more of its OCC
number(s) (‘‘Restricted OCC Number’’),
as defined in the Rule and described in
further detail below.12
Amended Rule 21.12(b)(1) would
define the term ‘‘Designated Give Up’’
as a Clearing Member that a User (other
than a Market-Maker) 13 identifies to the
Exchange, in writing, as a Clearing
Member the User requests the ability to
give up.14 To designate a Designated
Give Up, a User must submit written
notification to the Exchange, in a form
and manner prescribed by the Exchange
(‘‘Notification Form’’).15 A copy of the
proposed Notification Form is included
with this filing in Exhibit 3. Similarly,
should a User no longer want the ability
to give up a particular Designated Give
Up, the User would have to submit
written notification to the Exchange, in
a form and manner prescribed by the
Exchange.16
The Exchange notes that, as proposed,
a User may designate any Clearing
Member as a Designated Give Up,
provided that the Designated Give Up
has not Opted In, or provided that the
User is an Authorized User 17 of that
Designated Give Up. Further, there
would be no maximum number of
Designated Give Ups that a User can
identify. The Exchange would notify a
Clearing Member, in writing and as soon
as practicable, of each User that has
identified it as a Designated Give Up.18
As amended, Rule 21.12(b)(2) would
define the term Guarantor as a Clearing
9 See
proposed Exchange Rule 21.12(b)(1).
proposed Exchange Rule 21.12(b)(2).
11 See proposed Exchange Rule 21.12(a); see also
paragraph (a) of the EDGX Options and C2 Options
Proposed Give Up Rule. The Exchange notes that
paragraph (a) of Cboe Options 5.10 slightly differs
from the proposed paragraph (a) on the Exchange,
EDGX Options, and C2 Options; however, Cboe
Options plans to amend its paragraph (a) of Rule
5.10 to conform to proposed Exchange, EDGX
Options, and C2 Options rules with slight
differences as it relates to floor trading.
12 Id.
13 For purposes of this rule, references to
‘‘Market-Maker’’ shall refer to a Member acting in
the capacity of a Market-Maker and shall include
all Market-Maker capacities.
14 See proposed Exchange Rule 21.12(b)(1); see
also Cboe Options 5.10(b)(1).
15 See proposed Exchange Rule 21.12(b)(3); see
also Cboe Options Rule 5.10(b)(3).
16 See proposed Exchange Rule 21.12(b)(7); see
also Cboe Options Rule 5.10(b)(7).
17 An ‘‘Authorized User’’ refers to a User that has
written authorization as described in proposed Rule
21.12(c)(2) to give up a Restricted OCC Number. See
proposed Exchange Rule 21.12(a).
18 Supra note 14.
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10 See
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Member that has issued a Letter of
Guarantee for the executing User,
pursuant to the Rules of the Exchange 19
that are in effect at the time of the
execution of the applicable trade.20 An
executing User may give up its
Guarantor without such Guarantor being
a Designated Give Up. The Exchange’s
Rule 22.8 provides that a Letter of
Guarantee is required to be issued and
filed by each Clearing Member through
which a User clears transactions.
Accordingly, a Market-Maker would
only be enabled to give up a Guarantor
that had executed a Letter of Guarantee
on its behalf pursuant to Rule 22.8.
Thus, Market-Makers would not identify
any Designated Give Ups.
Proposed Rule 21.12(c) would provide
that Clearing Members may request the
Exchange restrict one or more of their
OCC numbers (‘‘Opt In’’) from being
given up unless otherwise authorized.21
If a Clearing Member Opts In, the
Exchange will require written
authorization from the Clearing Member
permitting a User to give up a Clearing
Member’s Restricted OCC number.22 An
Opt In would remain in effect until the
Clearing Member terminates the Opt In
as described in proposed subparagraph
(c)(3).23 If a Clearing Member does not
Opt In, that Clearing Member’s OCC
number may be subject to being given
up by any User that has designated it as
a Designated Give Up.24 Proposed Rule
21.12(c)(1) will set forth the process by
which a Clearing Member may Opt In.25
Specifically, a Clearing Member may
Opt In by sending a completed
‘‘Clearing Member Restriction Form’’
listing all Restricted OCC Numbers and
Authorized Users.26 A copy of the
proposed form is included in Exhibit 3.
A Clearing Member may elect to restrict
one or more OCC clearing numbers that
are registered in its name at the OCC.27
The Clearing Member would be required
to submit the Clearing Member
Restriction Form to the Exchange’s MSD
19 See
Exchange Rule 22.8 (Letters of Guarantee).
proposed Exchange Rule 21.12(b)(2); see
also Cboe Options Rule 5.10(b)(2).
21 See proposed Exchange Rule 21.12(c); see also
Cboe Options Rule 5.10(c).
22 Id.
23 Id.
24 Id.
25 See proposed Exchange Rule 21.12(c)(1); see
also Cboe Options Rule 5.10(c)(1).
26 This form will be available on the Exchange’s
website. The Exchange will also maintain, on its
website, a list of the Restricted OCC Numbers,
which will be updated on a regular basis, and the
Clearing Member’s contact information to assist
Users (to the extent they are not already Authorized
Users) with requesting authorization for a Restricted
OCC Number. The Exchange may utilize additional
means to inform its Members of such updates on
a periodic basis.
27 Supra note 29.
20 See
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as described on the form. Once
submitted, the Exchange requires ninety
days before a Restricted OCC Number is
effective within the System.28 This time
period is to provide adequate time for
the Users of that Restricted OCC
Number who are not initially specified
by the Clearing Member as Authorized
Users to obtain the required written
authorization from the Clearing Member
for that Restricted OCC Number. Such
Users would still be able to give up that
Restricted OCC Number during this
ninety day period (i.e., until the number
becomes restricted within the System).
Proposed Rule 21.12(c)(2) will set
forth the process for Users to give up a
Clearing Member’s Restricted OCC
Number.29 Specifically, a User desiring
to give up a Restricted OCC Number
must become an Authorized User.30 The
Clearing Member will be required to
authorize a User as described in
subparagraph (1) or (3) of Rule 21.12(c)
(i.e., through a Clearing Member
Restriction Form), unless the Restricted
OCC Number is already subject to a
Letter of Guarantee that the User is a
party to, as set forth in Rule
21.12(b)(6).31 Pursuant to proposed Rule
21.12(c)(3), a Clearing Member may
amend the list of its Authorized Users
or Restricted OCC Numbers by
submitting a new Clearing Member
Restriction Form to the Exchange’s MSD
indicating the amendment as described
on the form.32 Once a Restricted OCC
Number is effective within the System
pursuant to Rule 21.12(c)(1), the
Exchange may permit the Clearing
Member to authorize, or remove
authorization for, a User to give up the
Restricted OCC Number intra-day only
in unusual circumstances, and on the
next business day in all regular
circumstances.33 The Exchange will
promptly notify Users if they are no
longer authorized to give up a Clearing
Member’s Restricted OCC Number.34 If
a Clearing Member removes a Restricted
OCC Number, any User may give up that
OCC clearing number once the removal
has become effective on or before the
next business day, provided that
Clearing Member has been designated as
a Designated Give Up.35
As noted above, amended Rule 21.12
would provide that a User may only
give up (A) a Clearing Member that has
28 Supra
note 29.
proposed Exchange Rule 21.12(c)(2); see
also Cboe Options Rule 5.10(c)(2).
30 Id.
31 Id.
32 See proposed Exchange Rule 21.12(c)(3) and
(e); see also Cboe Options Rule 5.10(c)(3) and (e).
33 Id.
34 Id.
35 Id.
29 See
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previously been identified and
processed by the Exchange as a
Designated Give Up for that User,
provided that the Designated Give Up
has not Opted In, or provided that the
User is an Authorized User of that
Designated Give Up, or (B) a Guarantor
for that user.36 This proposed
requirement would be enforced by the
Exchange’s trading systems.37
Specifically, the Exchange has
configured its trading systems to only
accept orders from a User that identifies
a Designated Give Up or Guarantor for
that User. For any Restricted OCC
Number, the Exchange’s trading systems
will only accept orders for that number
from an Authorized User that has also
designated that Clearing Member as a
Designated Give Up. The System would
reject any order entered by a User not
meeting the aforementioned criteria.
The Exchange notes that it would notify
a User in writing when an identified
Designated Give Up becomes effective
(i.e., when a Clearing Member has been
identified by the User as a Designated
Give Up, has been enabled by the
Exchange’s trading systems to be given
up).38 A Guarantor for a User, by virtue
of having an effective Letter of
Guarantee on file with the Exchange,
would be enabled to be given up for that
User without any further action by the
User.39 The Exchange notes that this
configuration (i.e., the trading systems
accepting only orders that identify a
Designated Give Up or a Guarantor) is
intended to help reduce keypunch
errors (errors involving erroneous data
entry), and prevent the User from
mistakenly giving up the name of a
Clearing Member that it does not have
the ability to give up a trade. However,
in light of Clearing Members having the
ability to restrict their OCC numbers
from being given up by unauthorized
Users, the Exchange does not propose to
adopt a process for Clearing Members to
‘‘reject’’ trades.40
The Exchange also proposes in Rule
21.12(f) three scenarios in which a give
up on a transaction may be changed
36 See proposed Exchange Rule 21.12(b)(3); see
also Cboe Options Rule 5.10(b)(3).
37 See proposed Exchange Rule 21.12(d); see also
Cboe Options Rule 5.10(d).
38 See proposed Exchange Rule 21.12(e); see also
Cboe Options Rule 5.10(e).
39 See proposed Exchange Rule 21.12(b)(6); see
also Cboe Options Rule 5.10(b)(6).
40 See paragraph (f) of existing EDGX Options
Rule 21.12 and C2 Options Rule 6.30(f). The
Exchange notes, that the EDGX Options and C2
Options Proposed Give Up Rule seeks to eliminate
existing paragraph (f). Further, Cboe Options Rule
5.10 does not have a process for Clearing Members
to ‘‘reject’’ trades.
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without Exchange involvement.41 First,
if an executing User has the ability
through an Exchange system to do so, it
could change the give up on a trade to
another Designated Give Up, provided
it’s an Authorized User for any
Restricted OCC Number, or its
Guarantor.42 The Exchange notes that
Users often make these changes when,
for example, there is a keypunch error.
The ability of the executing User to
make any such change would end at the
‘‘Trade Date Cutoff Time’’.43 Next, the
modified rule would provide that, if a
Designated Give Up has the ability to do
so, it may change the give up on a
transaction for which it was given up to
(A) another Clearing Member affiliated
with the Designated Give Up or (B) a
Clearing Member for which the
Designated Give Up is a back office
agent.44 The ability to make such a
change would end at the Trade Date
Cutoff Time.45 The Exchange notes that
often Clearing Members themselves
have the ability to change a give up on
a trade for which it was given up to
another Clearing Member affiliate or
Clearing Member for which the
Designated Give Up is a back office
agent. Therefore, Exchange involvement
in these instances is not necessary. In
addition, the proposed rule provides
that if both a Designated Give Up or
Guarantor and a Clearing Member have
the ability through an Exchange system
to do so, the Designated Give Up or
Guarantor and Clearing Member may
each enter trade records into the
Exchange’s systems on the next trading
day (‘‘T+1’’) that would effect a transfer
of the trade in a non-expired option
series from that Designated Give Up (or
Guarantor) to that Clearing Member.46
The Designated Give Up or Guarantor
could not make any such change after
the T+1 Cutoff Time.47 The Exchange
notes that a Designated Give Up or
Guarantor must notify, in writing, the
Exchange and all the parties to the
trade, of any such change made
41 See proposed Exchange Rule 21.12(f); see also
Cboe Options Rule 5.10(f).
42 See proposed Exchange Rule 21.12(f)(1); see
also Cboe Options Rule 5.10(f)(1).
43 The ‘‘Trade Date Cutoff Time’’ is established by
the Clearing Corporation (or 15 minutes thereafter
if the Exchange receives and is able to process a
request to extend its time of final trade submission
to the Clearing Corporation). Id.
44 See proposed Exchange Rule 21.12(f)(2); see
also Cboe Options Rule 5.10(f)(2).
45 Id.
46 See proposed Exchange Rule 21.12(f)(3); see
also Cboe Options Rule 5.10(f)(3).
47 The ‘‘T+1 Cutoff Time’’ is 1:00 p.m. Eastern
Time on T+1; see proposed Exchange Rule
21.12(f)(3); see also Cboe Options Rule 5.10(f)(3)
(which provides a cutoff time of 12:00 p.m. Central
Time).
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pursuant to this provision.48 This
notification alerts the parties and the
Exchange that a change to the give up
has been made. Finally, the Designated
Give Up or Guarantor would be
responsible for monitoring the trade and
ensuring that the other Clearing Member
has entered its side of the transaction
timely and correctly. If either a
Designated Give Up (or Guarantor) or
Clearing Member cannot themselves
enter trade records into the Exchange’s
systems to effect a transfer of the trade
from one to the other, the Designated
Give Up (or Guarantor) may request the
ability from the Exchange to enter both
sides of the transaction in accordance
with amended Rule 21.12(f)(3).
The Exchange proposes Rule 21.12(g)
to state that a Clearing Member would
be financially responsible for all trades
for which it is the give up at the
Applicable Cutoff Time (for purposes of
the proposed rule, the ‘‘Applicable
Cutoff Time’’ shall refer to the T+1
Cutoff Time for non-expiring option
series and to the Trade Date Cutoff Time
for expiring option series).49 The
Exchange notes, however, that nothing
in the proposed rule shall preclude a
different party from being responsible
for the trade outside of the Rules of the
Exchange pursuant to OCC Rules, any
agreement between the applicable
parties, other applicable rules and
regulations, arbitration, court
proceedings or otherwise.50
Additionally, the proposed Rule does
not preclude these factors from being
considered in a different forum (e.g.,
court or arbitration), nor does it
preclude any Clearing Member that
violates any provision of amended Rule
21.12 from being subject to disciplinary
actions in accordance with Exchange
rules.
The Exchange also proposes to adopt
subparagraph (h) of Rule 21.12 to
provide that an intentional misuse of
this Rule is impermissible, and may be
treated as a violation of Rule 3.1, titled
‘‘Business Conduct of Members’’.51 This
language will make clear that the
Exchange will regulate an intentional
48 Id.
49 See proposed Exchange Rule 21.12(g); see also
Cboe Options Rule 5.10(g).
50 See proposed Interpretation and Policy .01 to
Exchange Rule 21.12 (‘‘Nothing herein will be
deemed to preclude the clearance of Exchange
transactions by a non-User pursuant to the By-Laws
of the Options Clearing Corporation so long as a
Clearing Member who is a User is also designated
as having responsibility under these Rules for the
clearance of such transactions.’’); see also
Interpretation and Policy .01 to Cboe Options Rule
5.10.
51 See Cboe Options Rule 5.10(h), which states
that intentional misuse of Rule 5.10 may be treated
as a violation of Rule 8.1 (Just and Equitable
Principles of Trade).
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misuse of this Rule, and that such
behavior would be a violation of
Exchange rules. The proposed language
is similar to corresponding provisions in
other exchanges’ give up rules.52
Lastly, the Exchange proposes to
amend its current Member Notification
of Designated Give ups Form
(‘‘Designated Give ups Form’’). As of
October 7, 2019 the Cboe affiliated
Options Exchanges are on the same
technology platform. To provide further
harmonization across the Cboe affiliated
Options Exchanges and provide more
seamless administration of the Give Up
rule, the Exchange proposes to adopt the
forms currently applicable to the Cboe
Exchange, Inc., which will be applicable
to all Cboe affiliated Options Exchanges.
The proposed Designated Give Up forms
are included in Exhibit 3.
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Implementation Date
The Exchange proposes to announce
the implementation date of the
proposed rule change in an Exchange
Notice, to be published no later than
thirty (30) days following the operative
date. The implementation date will be
no later than sixty (60) days following
the operative date.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.53 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 54 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitation transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 55 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
Detailing in the rules how Users
would give up Clearing Members
provides transparency and operational
52 See
e.g., Cboe Options Rule 5.10(h).
U.S.C. 78f(b).
54 15 U.S.C. 78f(b)(5).
55 Id.
53 15
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certainty. The Exchange believes
additional transparency removes a
potential impediment to, and would
contribute to perfecting, the mechanism
of a free and open market and a national
market system, and, in general, would
protect investors and the public interest.
Moreover, the Exchange notes that
amended Rule 21.12 requires Users to
adhere to a standardized process to
ensure a seamless administration of the
Rule. For example, all notifications
relating to a change in give up must be
made in writing. The Exchange believes
that these requirements will aid the
Exchange’s efforts to monitor and
regulate Users and Clearing Members as
they relate to amended Rule 21.12 and
changes in give ups, thereby protecting
investors and the public interest.
Further, as discussed above, several
clearing firms affiliated with SIFMA
have recently expressed concerns
relating to the current give up process,
which permits Users to identify any
Clearing Member as a Designated Give
Up for purposes of clearing particular
transactions, and have identified the
current give up process (i.e., a process
that lacks authorization) as a significant
source of risk for clearing firms. The
Exchange believes that the proposed
changes to Rule 21.12 help alleviate this
risk by enabling Clearing Members to
‘Opt In’ to restrict one or more of its
OCC clearing numbers (i.e., Restricted
OCC Numbers), and to specify which
Authorized Users may give up those
Restricted OCC Numbers. As described
above, all other Users would be required
to receive written authorization from the
Clearing Member before they can give
up that Clearing Member’s Restricted
OCC Number. The Exchange believes
that this authorization provides proper
safeguards and protections for Clearing
Members as it provides controls for
Clearing Members to restrict access to
their OCC clearing numbers, allowing
access only to those Authorized Users
upon their request. The Exchange also
believes that its proposed Clearing
Member Restriction Form allows the
Exchange to receive in a uniform
fashion, written and transparent
authorization from Clearing Members,
which ensures seamless administration
of the Rule.
The Exchange believes that the
proposed Opt In process strikes the right
balance between the various views and
interests across the industry. For
example, although the proposed rule
would require Users (other than
Authorized Users) to seek authorization
from Clearing Members in order to have
the ability to give them up, each User
will still have the ability to give up a
Restricted OCC Number that is subject
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
to a Letter of Guarantee without
obtaining any further authorization if
that User is party to that arrangement.
The Exchange also notes that to the
extent the executing User has a clearing
arrangement with a Clearing Members
(i.e., through a Letter of Guarantee), a
trade can be assigned to the executing
User’s Guarantor. Accordingly, the
Exchange believes that the proposed
rule change is reasonable and continues
to provide certainty that a Clearing
Members would be responsible for a
trade, which protects investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change will impose an
unnecessary burden on intramarket
competition because it would apply
equally to all similarly situated
Members. The Exchange also notes that,
should the proposed changes make the
Exchange more attractive for trading,
market participants trading on other
exchanges can always elect to become
Members on the Exchange to take
advantage of the trading opportunities.
Furthermore, the proposed rule change
does not address any competitive issues
and ultimately, the target of the
Exchange’s proposal is to provide
transparency and operational certainty
to the Exchange’s give up process, and
also to reduce risk for Clearing
Members. Clearing firms make financial
decisions based on risk and reward, and
while it is generally in their beneficial
interest to clear transactions for market
participants in order to generate profit,
it is the Exchange’s understanding from
SIFMA and clearing firms that the
current process can create significant
risk when the clearing firm can be given
up on any market participant’s
transaction, even where there is no prior
customer relationship or authorization
for that designated transaction. In the
absence of a mechanism that governs a
market participant’s use of a Clearing
Member’s services, the Exchange’s
proposal may indirectly facilitate the
ability of a Clearing Member to manage
their existing customer relationships
while continuing to allow market
participant choice in broker execution
services. While Clearing Members may
compete with executing brokers for
order flow, the Exchange does not
believe this proposal imposes an undue
burden on competition. Rather, the
Exchange believes that the proposed
E:\FR\FM\23JAN1.SGM
23JAN1
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
rule change balances the need for
Clearing Members to manage risks and
allows them to address outlier behavior
from executing brokers while still
allowing freedom of choice to select an
executing broker.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, it has
become effective pursuant to 19(b)(3)(A)
of the Act 56 and Rule 19b–4(f)(6) 57
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days after the
date of the filing. However, Rule 19b–
4(f)(6)(iii) 58 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. In its
filing, the Exchange requested that the
Commission waive the 30-day operative
delay. The Exchange represented that
the proposal establishes a rule regarding
the give up of a Clearing Member in
order to help clearing firms manage risk
while continuing to allow market
participants choice in broker execution
services. The Commission notes that it
recently approved a substantially
similar proposed rule change from Phlx,
after which other options exchanges
subsequently adopted subatantially
similarly rules.59 The Commission
believes that waiver of the 30-day
operative delay is consistent with the
protection of investors and the public
56 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
58 17 CFR 240.19b–4(f)(6)(iii).
59 See Securities Exchange Act Release No. 85136
(February 14, 2019), 84 FR 5526 (February 21, 2019)
(Phlx-2018–72) (order approving a proposed rule
change to establish rules governing give ups). See
also supra note 18 (citing the filings in which other
options exchanges adopted substantially similar
rules).
jbell on DSKJLSW7X2PROD with NOTICES
57 17
VerDate Sep<11>2014
17:13 Jan 22, 2020
Jkt 250001
4011
interest, because the Exchange’s
proposal raises no new issues. Further,
such waiver will permit the Exchange,
without further delay, to begin
implementing the new standardized
give up process, thus aligning its give
up process with that of the other option
exchanges. Accordingly, the
Commission waives the 30-day
operative delay and designates the
proposed rule change operative upon
filing.60
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2020–002 and
should be submitted on or before
February 13, 2020.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.61
J. Matthew DeLesDernier,
Assistant Secretary.
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–
CboeBZX–2020–002 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–CboeBZX–2020–002. 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 website (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
60 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
[FR Doc. 2020–01029 Filed 1–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87987; File No. SR–
NYSEARCA–2020–01]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To Amend the Rule
11.6800 Series, the Exchange’s
Compliance Rule Regarding the
National Market System Plan
Governing the Consolidated Audit Trail
January 16, 2020.
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 January
3, 2020, NYSE Arca, Inc. (‘‘NYSE Arca’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III 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.
61 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\23JAN1.SGM
23JAN1
]]>Agencies
[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 4007-4011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01029]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87985; File No. SR-CboeBZX-2020-002]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Its Rules Governing the Give Up of a Clearing Member by a User
on Exchange Transactions
January 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 2, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
````BZX'''') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to amend its rules governing the give up of a Clearing Member
by a User on Exchange transactions. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 21.12, which governs the give
up of a Clearing Member \5\ by a User \6\ on Exchange transactions, to
substantially conform to Cboe Exchange, Inc. (``Cboe Options'') Rule
5.10, proposed Cboe EDGX Exchange, Inc. (``EDGX Options'') Rule 21.12,
and proposed Cboe C2 Exchange, Inc. (``C2 Options'') Rule 6.30.\7\
---------------------------------------------------------------------------
\5\ The term ``Clearing Member'' means an Options Member that is
self-clearing or an Options Member that clears BZX Options
Transactions for other Members of BZX Options. See Exchange Rule
16.1.
\6\ The term ``User'' means any Options Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Rule 11.3 (Access). See Exchange Rule 16.1.
\7\ See SR-CboeEDGX-2020-001 (filed January 2, 2020) and SR-C2-
2020-001 (filed January 2, 2020) (collectively referred to as the
``EDGX Options and C2 Options Proposed Give Up Rule'').
---------------------------------------------------------------------------
Background
Under current Exchange rules, Users entering transactions on the
Exchange must either be a Clearing Member or must establish a clearing
arrangement with a Clearing Member, and must have a Letter of Guarantee
issued by a Clearing Member. In addition, under current Rule 21.12, a
User must give up the name of the Clearing Member through which each
transaction will be cleared. Every Clearing Member accepts financial
responsibility for all BZX Options transactions made by the guaranteed
User pursuant to Exchange Rule 22.8(b) (Terms of Letter Guarantee). The
proposed amendment will result in a more structured and coherent
streamlined give up process on the Exchange as it will align with the
give up functionality on BZX Options with that currently available on
Cboe Options, C2 Options, and EDGX Options.
Additionally, beginning in early 2018, certain Clearing Members (in
conjunction with the Securities Industry and Financial Markets
Association (``SIFMA'')) expressed concerns related to the process by
which executing brokers on U.S. options exchanges (the ``Exchanges'')
are allowed to designate or `give up' a clearing firm for purposes of
clearing particular transactions. The SIFMA-affiliated Clearing Members
have recently identified the current give up process as a significant
source of risk for clearing firms. SIFMA-affiliated Clearing Members
subsequently requested that the Exchanges alleviate this risk by
amending Exchange rules governing the give up process. \8\ Therefore,
the Exchange is now seeking to amend its Rule 21.17 to align with
applicable rules of the Exchanges and also to substantially conform to
existing Cboe Options Rule 5.10 and proposed EDGX Options Rule 22.12
and C2 Options Rule 6.30.
---------------------------------------------------------------------------
\8\ Cboe Options recently modified its give up procedure under
rule 5.10 to allow clearing trading permit holders to ``Opt In''
such that the clearing trading permit holder (``TPH'') may specify
which Cboe Options TPH organizations are authorized to give up that
clearing trading permit holder. See Securities and Exchange Act
Release No. 86401 (July 17, 2019), 84 FR 35433 (July 23, 2019) (SR-
CBOE-19-036). Nasdaq PHLX LLC (``PHLX''), NYSE Arca, Inc., (``NYSE
Arca''), and NYSE American LLC (``NYSE American'') also recently
modified their respect give up rules to adopt an ``Opt In'' process;
see also Securities and Exchange Act Release No. 85136 (February 14,
2019), 84 FR 5526 (February 21, 2019) (SR-PHLX-2018-72), Securities
and Exchange Act Release No. 85871 (May 16, 2019), 84 FR 23613 (May
22, 2019) (SR-NYSEArca 2019-32) and Securities and Exchange Act
Release 85875 (May 16, 2019), 84 FR 23591 (May 22, 2019) (SR-
NYSEAMER-2019-17). The Exchange's proposal leads to the same result
of providing its Clearing Member's the ability to control risk and
includes PHLX's, NYSE Arca's and NYSE American's ``Opt In'' process,
but it otherwise differs slightly in process from their give up
rules. For example, the Exchange intends to maintain its provisions
relating to Designated Give Ups and eliminate its provisions
relating to the rejection of a trade. The Exchange's proposal is
substantially the same as the current give up process on Cboe
Options.
---------------------------------------------------------------------------
Proposed Rule
The Exchange proposes to amend Rule 21.12 by replacing the current
rule text with details regarding the give up procedure for a User
executing transactions on the Exchange. As amended, Rule 21.12 would
provide that a User may indicate, at the time of the trade or through
post trade allocation, any Options Clearing Corporation (``OCC'')
number of the Clearing Member through which the transaction will be
cleared (``give up'')
[[Page 4008]]
to either a ``Designated Give Up'' \9\ or a ``Guarantor'',\10\ as those
roles would be defined in the Rule and discussed in further detail
below.\11\ Further, Rule 21.12 would provide that Clearing Members may
elect to ``Opt In'' and restrict one or more of its OCC number(s)
(``Restricted OCC Number''), as defined in the Rule and described in
further detail below.\12\
---------------------------------------------------------------------------
\9\ See proposed Exchange Rule 21.12(b)(1).
\10\ See proposed Exchange Rule 21.12(b)(2).
\11\ See proposed Exchange Rule 21.12(a); see also paragraph (a)
of the EDGX Options and C2 Options Proposed Give Up Rule. The
Exchange notes that paragraph (a) of Cboe Options 5.10 slightly
differs from the proposed paragraph (a) on the Exchange, EDGX
Options, and C2 Options; however, Cboe Options plans to amend its
paragraph (a) of Rule 5.10 to conform to proposed Exchange, EDGX
Options, and C2 Options rules with slight differences as it relates
to floor trading.
\12\ Id.
---------------------------------------------------------------------------
Amended Rule 21.12(b)(1) would define the term ``Designated Give
Up'' as a Clearing Member that a User (other than a Market-Maker) \13\
identifies to the Exchange, in writing, as a Clearing Member the User
requests the ability to give up.\14\ To designate a Designated Give Up,
a User must submit written notification to the Exchange, in a form and
manner prescribed by the Exchange (``Notification Form'').\15\ A copy
of the proposed Notification Form is included with this filing in
Exhibit 3. Similarly, should a User no longer want the ability to give
up a particular Designated Give Up, the User would have to submit
written notification to the Exchange, in a form and manner prescribed
by the Exchange.\16\
---------------------------------------------------------------------------
\13\ For purposes of this rule, references to ``Market-Maker''
shall refer to a Member acting in the capacity of a Market-Maker and
shall include all Market-Maker capacities.
\14\ See proposed Exchange Rule 21.12(b)(1); see also Cboe
Options 5.10(b)(1).
\15\ See proposed Exchange Rule 21.12(b)(3); see also Cboe
Options Rule 5.10(b)(3).
\16\ See proposed Exchange Rule 21.12(b)(7); see also Cboe
Options Rule 5.10(b)(7).
---------------------------------------------------------------------------
The Exchange notes that, as proposed, a User may designate any
Clearing Member as a Designated Give Up, provided that the Designated
Give Up has not Opted In, or provided that the User is an Authorized
User \17\ of that Designated Give Up. Further, there would be no
maximum number of Designated Give Ups that a User can identify. The
Exchange would notify a Clearing Member, in writing and as soon as
practicable, of each User that has identified it as a Designated Give
Up.\18\
---------------------------------------------------------------------------
\17\ An ``Authorized User'' refers to a User that has written
authorization as described in proposed Rule 21.12(c)(2) to give up a
Restricted OCC Number. See proposed Exchange Rule 21.12(a).
\18\ Supra note 14.
---------------------------------------------------------------------------
As amended, Rule 21.12(b)(2) would define the term Guarantor as a
Clearing Member that has issued a Letter of Guarantee for the executing
User, pursuant to the Rules of the Exchange \19\ that are in effect at
the time of the execution of the applicable trade.\20\ An executing
User may give up its Guarantor without such Guarantor being a
Designated Give Up. The Exchange's Rule 22.8 provides that a Letter of
Guarantee is required to be issued and filed by each Clearing Member
through which a User clears transactions. Accordingly, a Market-Maker
would only be enabled to give up a Guarantor that had executed a Letter
of Guarantee on its behalf pursuant to Rule 22.8. Thus, Market-Makers
would not identify any Designated Give Ups.
---------------------------------------------------------------------------
\19\ See Exchange Rule 22.8 (Letters of Guarantee).
\20\ See proposed Exchange Rule 21.12(b)(2); see also Cboe
Options Rule 5.10(b)(2).
---------------------------------------------------------------------------
Proposed Rule 21.12(c) would provide that Clearing Members may
request the Exchange restrict one or more of their OCC numbers (``Opt
In'') from being given up unless otherwise authorized.\21\ If a
Clearing Member Opts In, the Exchange will require written
authorization from the Clearing Member permitting a User to give up a
Clearing Member's Restricted OCC number.\22\ An Opt In would remain in
effect until the Clearing Member terminates the Opt In as described in
proposed subparagraph (c)(3).\23\ If a Clearing Member does not Opt In,
that Clearing Member's OCC number may be subject to being given up by
any User that has designated it as a Designated Give Up.\24\ Proposed
Rule 21.12(c)(1) will set forth the process by which a Clearing Member
may Opt In.\25\ Specifically, a Clearing Member may Opt In by sending a
completed ``Clearing Member Restriction Form'' listing all Restricted
OCC Numbers and Authorized Users.\26\ A copy of the proposed form is
included in Exhibit 3. A Clearing Member may elect to restrict one or
more OCC clearing numbers that are registered in its name at the
OCC.\27\ The Clearing Member would be required to submit the Clearing
Member Restriction Form to the Exchange's MSD as described on the form.
Once submitted, the Exchange requires ninety days before a Restricted
OCC Number is effective within the System.\28\ This time period is to
provide adequate time for the Users of that Restricted OCC Number who
are not initially specified by the Clearing Member as Authorized Users
to obtain the required written authorization from the Clearing Member
for that Restricted OCC Number. Such Users would still be able to give
up that Restricted OCC Number during this ninety day period (i.e.,
until the number becomes restricted within the System).
---------------------------------------------------------------------------
\21\ See proposed Exchange Rule 21.12(c); see also Cboe Options
Rule 5.10(c).
\22\ Id.
\23\ Id.
\24\ Id.
\25\ See proposed Exchange Rule 21.12(c)(1); see also Cboe
Options Rule 5.10(c)(1).
\26\ This form will be available on the Exchange's website. The
Exchange will also maintain, on its website, a list of the
Restricted OCC Numbers, which will be updated on a regular basis,
and the Clearing Member's contact information to assist Users (to
the extent they are not already Authorized Users) with requesting
authorization for a Restricted OCC Number. The Exchange may utilize
additional means to inform its Members of such updates on a periodic
basis.
\27\ Supra note 29.
\28\ Supra note 29.
---------------------------------------------------------------------------
Proposed Rule 21.12(c)(2) will set forth the process for Users to
give up a Clearing Member's Restricted OCC Number.\29\ Specifically, a
User desiring to give up a Restricted OCC Number must become an
Authorized User.\30\ The Clearing Member will be required to authorize
a User as described in subparagraph (1) or (3) of Rule 21.12(c) (i.e.,
through a Clearing Member Restriction Form), unless the Restricted OCC
Number is already subject to a Letter of Guarantee that the User is a
party to, as set forth in Rule 21.12(b)(6).\31\ Pursuant to proposed
Rule 21.12(c)(3), a Clearing Member may amend the list of its
Authorized Users or Restricted OCC Numbers by submitting a new Clearing
Member Restriction Form to the Exchange's MSD indicating the amendment
as described on the form.\32\ Once a Restricted OCC Number is effective
within the System pursuant to Rule 21.12(c)(1), the Exchange may permit
the Clearing Member to authorize, or remove authorization for, a User
to give up the Restricted OCC Number intra-day only in unusual
circumstances, and on the next business day in all regular
circumstances.\33\ The Exchange will promptly notify Users if they are
no longer authorized to give up a Clearing Member's Restricted OCC
Number.\34\ If a Clearing Member removes a Restricted OCC Number, any
User may give up that OCC clearing number once the removal has become
effective on or before the next business day, provided that Clearing
Member has been designated as a Designated Give Up.\35\
---------------------------------------------------------------------------
\29\ See proposed Exchange Rule 21.12(c)(2); see also Cboe
Options Rule 5.10(c)(2).
\30\ Id.
\31\ Id.
\32\ See proposed Exchange Rule 21.12(c)(3) and (e); see also
Cboe Options Rule 5.10(c)(3) and (e).
\33\ Id.
\34\ Id.
\35\ Id.
---------------------------------------------------------------------------
As noted above, amended Rule 21.12 would provide that a User may
only give up (A) a Clearing Member that has
[[Page 4009]]
previously been identified and processed by the Exchange as a
Designated Give Up for that User, provided that the Designated Give Up
has not Opted In, or provided that the User is an Authorized User of
that Designated Give Up, or (B) a Guarantor for that user.\36\ This
proposed requirement would be enforced by the Exchange's trading
systems.\37\ Specifically, the Exchange has configured its trading
systems to only accept orders from a User that identifies a Designated
Give Up or Guarantor for that User. For any Restricted OCC Number, the
Exchange's trading systems will only accept orders for that number from
an Authorized User that has also designated that Clearing Member as a
Designated Give Up. The System would reject any order entered by a User
not meeting the aforementioned criteria. The Exchange notes that it
would notify a User in writing when an identified Designated Give Up
becomes effective (i.e., when a Clearing Member has been identified by
the User as a Designated Give Up, has been enabled by the Exchange's
trading systems to be given up).\38\ A Guarantor for a User, by virtue
of having an effective Letter of Guarantee on file with the Exchange,
would be enabled to be given up for that User without any further
action by the User.\39\ The Exchange notes that this configuration
(i.e., the trading systems accepting only orders that identify a
Designated Give Up or a Guarantor) is intended to help reduce keypunch
errors (errors involving erroneous data entry), and prevent the User
from mistakenly giving up the name of a Clearing Member that it does
not have the ability to give up a trade. However, in light of Clearing
Members having the ability to restrict their OCC numbers from being
given up by unauthorized Users, the Exchange does not propose to adopt
a process for Clearing Members to ``reject'' trades.\40\
---------------------------------------------------------------------------
\36\ See proposed Exchange Rule 21.12(b)(3); see also Cboe
Options Rule 5.10(b)(3).
\37\ See proposed Exchange Rule 21.12(d); see also Cboe Options
Rule 5.10(d).
\38\ See proposed Exchange Rule 21.12(e); see also Cboe Options
Rule 5.10(e).
\39\ See proposed Exchange Rule 21.12(b)(6); see also Cboe
Options Rule 5.10(b)(6).
\40\ See paragraph (f) of existing EDGX Options Rule 21.12 and
C2 Options Rule 6.30(f). The Exchange notes, that the EDGX Options
and C2 Options Proposed Give Up Rule seeks to eliminate existing
paragraph (f). Further, Cboe Options Rule 5.10 does not have a
process for Clearing Members to ``reject'' trades.
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The Exchange also proposes in Rule 21.12(f) three scenarios in
which a give up on a transaction may be changed without Exchange
involvement.\41\ First, if an executing User has the ability through an
Exchange system to do so, it could change the give up on a trade to
another Designated Give Up, provided it's an Authorized User for any
Restricted OCC Number, or its Guarantor.\42\ The Exchange notes that
Users often make these changes when, for example, there is a keypunch
error. The ability of the executing User to make any such change would
end at the ``Trade Date Cutoff Time''.\43\ Next, the modified rule
would provide that, if a Designated Give Up has the ability to do so,
it may change the give up on a transaction for which it was given up to
(A) another Clearing Member affiliated with the Designated Give Up or
(B) a Clearing Member for which the Designated Give Up is a back office
agent.\44\ The ability to make such a change would end at the Trade
Date Cutoff Time.\45\ The Exchange notes that often Clearing Members
themselves have the ability to change a give up on a trade for which it
was given up to another Clearing Member affiliate or Clearing Member
for which the Designated Give Up is a back office agent. Therefore,
Exchange involvement in these instances is not necessary. In addition,
the proposed rule provides that if both a Designated Give Up or
Guarantor and a Clearing Member have the ability through an Exchange
system to do so, the Designated Give Up or Guarantor and Clearing
Member may each enter trade records into the Exchange's systems on the
next trading day (``T+1'') that would effect a transfer of the trade in
a non-expired option series from that Designated Give Up (or Guarantor)
to that Clearing Member.\46\ The Designated Give Up or Guarantor could
not make any such change after the T+1 Cutoff Time.\47\ The Exchange
notes that a Designated Give Up or Guarantor must notify, in writing,
the Exchange and all the parties to the trade, of any such change made
pursuant to this provision.\48\ This notification alerts the parties
and the Exchange that a change to the give up has been made. Finally,
the Designated Give Up or Guarantor would be responsible for monitoring
the trade and ensuring that the other Clearing Member has entered its
side of the transaction timely and correctly. If either a Designated
Give Up (or Guarantor) or Clearing Member cannot themselves enter trade
records into the Exchange's systems to effect a transfer of the trade
from one to the other, the Designated Give Up (or Guarantor) may
request the ability from the Exchange to enter both sides of the
transaction in accordance with amended Rule 21.12(f)(3).
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\41\ See proposed Exchange Rule 21.12(f); see also Cboe Options
Rule 5.10(f).
\42\ See proposed Exchange Rule 21.12(f)(1); see also Cboe
Options Rule 5.10(f)(1).
\43\ The ``Trade Date Cutoff Time'' is established by the
Clearing Corporation (or 15 minutes thereafter if the Exchange
receives and is able to process a request to extend its time of
final trade submission to the Clearing Corporation). Id.
\44\ See proposed Exchange Rule 21.12(f)(2); see also Cboe
Options Rule 5.10(f)(2).
\45\ Id.
\46\ See proposed Exchange Rule 21.12(f)(3); see also Cboe
Options Rule 5.10(f)(3).
\47\ The ``T+1 Cutoff Time'' is 1:00 p.m. Eastern Time on T+1;
see proposed Exchange Rule 21.12(f)(3); see also Cboe Options Rule
5.10(f)(3) (which provides a cutoff time of 12:00 p.m. Central
Time).
\48\ Id.
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The Exchange proposes Rule 21.12(g) to state that a Clearing Member
would be financially responsible for all trades for which it is the
give up at the Applicable Cutoff Time (for purposes of the proposed
rule, the ``Applicable Cutoff Time'' shall refer to the T+1 Cutoff Time
for non-expiring option series and to the Trade Date Cutoff Time for
expiring option series).\49\ The Exchange notes, however, that nothing
in the proposed rule shall preclude a different party from being
responsible for the trade outside of the Rules of the Exchange pursuant
to OCC Rules, any agreement between the applicable parties, other
applicable rules and regulations, arbitration, court proceedings or
otherwise.\50\ Additionally, the proposed Rule does not preclude these
factors from being considered in a different forum (e.g., court or
arbitration), nor does it preclude any Clearing Member that violates
any provision of amended Rule 21.12 from being subject to disciplinary
actions in accordance with Exchange rules.
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\49\ See proposed Exchange Rule 21.12(g); see also Cboe Options
Rule 5.10(g).
\50\ See proposed Interpretation and Policy .01 to Exchange Rule
21.12 (``Nothing herein will be deemed to preclude the clearance of
Exchange transactions by a non-User pursuant to the By-Laws of the
Options Clearing Corporation so long as a Clearing Member who is a
User is also designated as having responsibility under these Rules
for the clearance of such transactions.''); see also Interpretation
and Policy .01 to Cboe Options Rule 5.10.
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The Exchange also proposes to adopt subparagraph (h) of Rule 21.12
to provide that an intentional misuse of this Rule is impermissible,
and may be treated as a violation of Rule 3.1, titled ``Business
Conduct of Members''.\51\ This language will make clear that the
Exchange will regulate an intentional
[[Page 4010]]
misuse of this Rule, and that such behavior would be a violation of
Exchange rules. The proposed language is similar to corresponding
provisions in other exchanges' give up rules.\52\
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\51\ See Cboe Options Rule 5.10(h), which states that
intentional misuse of Rule 5.10 may be treated as a violation of
Rule 8.1 (Just and Equitable Principles of Trade).
\52\ See e.g., Cboe Options Rule 5.10(h).
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Lastly, the Exchange proposes to amend its current Member
Notification of Designated Give ups Form (``Designated Give ups
Form''). As of October 7, 2019 the Cboe affiliated Options Exchanges
are on the same technology platform. To provide further harmonization
across the Cboe affiliated Options Exchanges and provide more seamless
administration of the Give Up rule, the Exchange proposes to adopt the
forms currently applicable to the Cboe Exchange, Inc., which will be
applicable to all Cboe affiliated Options Exchanges. The proposed
Designated Give Up forms are included in Exhibit 3.
Implementation Date
The Exchange proposes to announce the implementation date of the
proposed rule change in an Exchange Notice, to be published no later
than thirty (30) days following the operative date. The implementation
date will be no later than sixty (60) days following the operative
date.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\53\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \54\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitation transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \55\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\53\ 15 U.S.C. 78f(b).
\54\ 15 U.S.C. 78f(b)(5).
\55\ Id.
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Detailing in the rules how Users would give up Clearing Members
provides transparency and operational certainty. The Exchange believes
additional transparency removes a potential impediment to, and would
contribute to perfecting, the mechanism of a free and open market and a
national market system, and, in general, would protect investors and
the public interest. Moreover, the Exchange notes that amended Rule
21.12 requires Users to adhere to a standardized process to ensure a
seamless administration of the Rule. For example, all notifications
relating to a change in give up must be made in writing. The Exchange
believes that these requirements will aid the Exchange's efforts to
monitor and regulate Users and Clearing Members as they relate to
amended Rule 21.12 and changes in give ups, thereby protecting
investors and the public interest.
Further, as discussed above, several clearing firms affiliated with
SIFMA have recently expressed concerns relating to the current give up
process, which permits Users to identify any Clearing Member as a
Designated Give Up for purposes of clearing particular transactions,
and have identified the current give up process (i.e., a process that
lacks authorization) as a significant source of risk for clearing
firms. The Exchange believes that the proposed changes to Rule 21.12
help alleviate this risk by enabling Clearing Members to `Opt In' to
restrict one or more of its OCC clearing numbers (i.e., Restricted OCC
Numbers), and to specify which Authorized Users may give up those
Restricted OCC Numbers. As described above, all other Users would be
required to receive written authorization from the Clearing Member
before they can give up that Clearing Member's Restricted OCC Number.
The Exchange believes that this authorization provides proper
safeguards and protections for Clearing Members as it provides controls
for Clearing Members to restrict access to their OCC clearing numbers,
allowing access only to those Authorized Users upon their request. The
Exchange also believes that its proposed Clearing Member Restriction
Form allows the Exchange to receive in a uniform fashion, written and
transparent authorization from Clearing Members, which ensures seamless
administration of the Rule.
The Exchange believes that the proposed Opt In process strikes the
right balance between the various views and interests across the
industry. For example, although the proposed rule would require Users
(other than Authorized Users) to seek authorization from Clearing
Members in order to have the ability to give them up, each User will
still have the ability to give up a Restricted OCC Number that is
subject to a Letter of Guarantee without obtaining any further
authorization if that User is party to that arrangement. The Exchange
also notes that to the extent the executing User has a clearing
arrangement with a Clearing Members (i.e., through a Letter of
Guarantee), a trade can be assigned to the executing User's Guarantor.
Accordingly, the Exchange believes that the proposed rule change is
reasonable and continues to provide certainty that a Clearing Members
would be responsible for a trade, which protects investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that the proposed rule change will impose an unnecessary burden on
intramarket competition because it would apply equally to all similarly
situated Members. The Exchange also notes that, should the proposed
changes make the Exchange more attractive for trading, market
participants trading on other exchanges can always elect to become
Members on the Exchange to take advantage of the trading opportunities.
Furthermore, the proposed rule change does not address any competitive
issues and ultimately, the target of the Exchange's proposal is to
provide transparency and operational certainty to the Exchange's give
up process, and also to reduce risk for Clearing Members. Clearing
firms make financial decisions based on risk and reward, and while it
is generally in their beneficial interest to clear transactions for
market participants in order to generate profit, it is the Exchange's
understanding from SIFMA and clearing firms that the current process
can create significant risk when the clearing firm can be given up on
any market participant's transaction, even where there is no prior
customer relationship or authorization for that designated transaction.
In the absence of a mechanism that governs a market participant's use
of a Clearing Member's services, the Exchange's proposal may indirectly
facilitate the ability of a Clearing Member to manage their existing
customer relationships while continuing to allow market participant
choice in broker execution services. While Clearing Members may compete
with executing brokers for order flow, the Exchange does not believe
this proposal imposes an undue burden on competition. Rather, the
Exchange believes that the proposed
[[Page 4011]]
rule change balances the need for Clearing Members to manage risks and
allows them to address outlier behavior from executing brokers while
still allowing freedom of choice to select an executing broker.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \56\ and Rule 19b-4(f)(6) \57\
thereunder.
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\56\ 15 U.S.C. 78s(b)(3)(A).
\57\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of the filing. However,
Rule 19b-4(f)(6)(iii) \58\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing, the Exchange
requested that the Commission waive the 30-day operative delay. The
Exchange represented that the proposal establishes a rule regarding the
give up of a Clearing Member in order to help clearing firms manage
risk while continuing to allow market participants choice in broker
execution services. The Commission notes that it recently approved a
substantially similar proposed rule change from Phlx, after which other
options exchanges subsequently adopted subatantially similarly
rules.\59\ The Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest, because the Exchange's proposal raises no new issues.
Further, such waiver will permit the Exchange, without further delay,
to begin implementing the new standardized give up process, thus
aligning its give up process with that of the other option exchanges.
Accordingly, the Commission waives the 30-day operative delay and
designates the proposed rule change operative upon filing.\60\
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\58\ 17 CFR 240.19b-4(f)(6)(iii).
\59\ See Securities Exchange Act Release No. 85136 (February 14,
2019), 84 FR 5526 (February 21, 2019) (Phlx-2018-72) (order
approving a proposed rule change to establish rules governing give
ups). See also supra note 18 (citing the filings in which other
options exchanges adopted substantially similar rules).
\60\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2020-002 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-CboeBZX-2020-002. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2020-002 and should be submitted
on or before February 13, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
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\61\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01029 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P
