[Federal Register Volume 78, Number 26 (Thursday, February 7, 2013)]
[Notices]
[Pages 9076-9078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02705]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68800; File No. SR-CBOE-2013-012]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend CBSX Rule 52.4 Relating to the Clearly 
Erroneous Policy

February 1, 2013.
    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 29, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to extend a pilot program related to CBOE 
Stock Exchange (``CBSX'') Rule 52.4, entitled ``Clearly Erroneous 
Policy.'' The Exchange also proposes to adopt new paragraph (i) to CBSX 
Rule 52.4 in connection with the upcoming operation of the Plan to 
Address Extraordinary Market Volatility Pursuant to Rule 608 of 
Regulation NMS under the Securities and Exchange Act of 1934 (the 
``Limit Up-Limit Down Plan'' or ``Plan'').\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release'').

(additions are in italics; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated

Rules

* * * * *

Rule 52.4 Clearly Erroneous Policy

    The provisions of paragraphs (c), (e)(2), (f), and (g) of this 
Rule, as amended on September 10, 2010, and the provisions of 
paragraph (i), shall be in effect during a pilot period set to end 
on [February 4]September 30, 2013. If the pilot is not either 
extended, replaced or approved permanent by September 30, 2013, the 
prior versions of paragraphs (c), (e)(2), (f), and (g) shall be in 
effect, and the provisions of paragraph (i) shall be null and void.
* * * * *
    (i) Securities Subject to Limit Up-Limit Down Plan. For purposes 
of this paragraph, the phrase ``Limit Up-Limit Down Plan'' or 
``Plan'' shall mean the Plan to Address Extraordinary Market 
Volatility Pursuant to Rule 608 of Regulation NMS under the Act. The 
provisions of paragraphs (a) through (h) above shall govern all CBSX 
transactions, including transactions in securities subject to the 
Plan, other than as set forth in this paragraph (i). If as a result 
of CBSX technology or systems issue any transaction occurs outside 
of the applicable price bands disseminated pursuant to the Plan, an 
Official or senior level employee designee, acting on his or her own 
motion or at the request of a third party, shall review and declare 
any such trades null and void. Absent extraordinary circumstances, 
any such action of the Official or other senior level employee 
designee shall be taken in a timely fashion, generally within thirty 
(30) minutes of the detection of the erroneous transaction. When 
extraordinary circumstances exist, any such action of the Official 
or other senior level employee designee must be taken by no later 
than the start of CBSX Regular Trading Hours on the trading day 
following the date on which the execution(s) under review occurred. 
Each CBSX Trader involved in the transaction shall be notified as 
soon as practicable by CBSX, and the party aggrieved by the action 
may appeal such action in accordance with the provisions of 
paragraph (e)(2) above. In the event that a single plan processor 
experiences a technology or systems issue that prevents the 
dissemination of price bands, CBSX will make the determination of 
whether to nullify transactions based on paragraphs (a) through (h) 
above.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to extend the effectiveness of CBSX's 
current rule ``Clearly Erroneous Policy'' and to adopt new paragraph 
(i) to CBSX Rule 52.4 in connection with upcoming operation of the 
Limit Up-Limit Down Plan.
Proposal To Extend Pilot
    Portions of Rule 52.4, explained in further detail below, are 
currently operating as a pilot program set to expire on February 4, 
2013.\4\ The Exchange proposes to extend the pilot program to September 
30, 2013.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 67575 (August 2, 2012), 
77 FR 47478 (August 8, 2012) (SR-CBOE-2012-070).
---------------------------------------------------------------------------

    On September 10, 2010, the Commission approved, on a pilot basis, 
changes to CBSX Rule 52.4 to provide for uniform treatment: (1) Of 
clearly erroneous execution reviews in multi-stock events involving 
twenty or more securities; and (2) in the event transactions occur that 
result in the issuance of an individual stock trading pause by the 
primary market and subsequent transactions that occur before the 
trading pause is in effect on CBSX.\5\ The Exchange also adopted 
additional changes to CBSX Rule 52.4 that reduced the ability of CBSX 
to deviate from the objective standards set forth in Rule 52.4.\6\ The 
Exchange believes the benefits to market participants from the more 
objective clearly erroneous executions rule should continue on a pilot 
basis through

[[Page 9077]]

September 30, 2013, which is the date that the Exchange anticipates 
that the phased implementation of the Limit Up-Limit Down Plan will be 
complete. As explained in further detail below, although the Limit Up-
Limit Down Plan is intended to prevent executions that would need to be 
nullified as clearly erroneous, the Exchange believes that certain 
protections should be maintained while the industry gains initial 
experience operating with the Limit Up-Limit Down Plan, including the 
provisions of Rule 52.4 that currently operate as a pilot.
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 62886 (September 10, 
2010), 75 FR 56613 (September 16, 2010) (SR-CBOE-2010-056).
    \6\ Id.
---------------------------------------------------------------------------

Proposed Limit Up-Limit Down Provision to Rule 52.4
    The Exchange proposes to adopt new paragraph (i) to Rule 52.4, to 
provide that the existing provisions of CBSX Rule 52.4 will continue to 
apply to all CBSX transactions, including transactions in securities 
subject to the Plan, other than as set forth in proposed paragraph (i). 
Accordingly, other than as proposed below, the Exchange proposes to 
maintain and continue to apply the Clearly Erroneous Policy standards 
in the same way that it does today. Notably, this means that CBSX might 
nullify transactions that occur within the price bands disseminated 
pursuant to the Limit Up-Limit Down Plan to the extent such 
transactions qualify as clearly erroneous under existing criteria. As 
an example, assume that a Tier 1 security pursuant to the Plan has a 
reference price pursuant to both the Plan and Rule 52.4 of $100.00. The 
lower pricing band under the Plan would be $95.00 and the upper pricing 
band under the Plan would be $105.00. An execution could occur on CBSX 
in this security at $96.00, as this is within the Plan's pricing bands. 
However, if subjected to review as potentially clearly erroneous, CBSX 
would nullify an execution at $96.00 as clearly erroneous because it 
exceeds the 3% threshold that is in place pursuant to Rule 52.4(c)(1) 
for securities priced above $50.00 (i.e., with a reference price of 
$100.00, any transactions at or below $97.00 or above $103.00 could be 
nullified as clearly erroneous). Accordingly, this proposal maintains 
the status quo with respect to reviews of clearly erroneous executions 
and the application of objective numerical guidelines by CBSX. The 
proposal does not increase the discretion afforded to CBSX in 
connection with reviews of clearly erroneous executions.
    The Limit Up-Limit Down Plan is designed to prevent executions from 
occurring outside of dynamic price bands disseminated to the public by 
the single plan processor as defined in the Limit Up-Limit Down 
Plan.\7\ The possibility remains that CBSX could experience a 
technology or systems problem with respect to the implementation of the 
price bands disseminated pursuant to the Plan. To address such 
possibilities, CBSX proposes to adopt language to make clear that if a 
CBSX technology or systems issue results in any transaction occurring 
outside of the price bands disseminated pursuant to the Plan, an 
Official or senior level employee designee, acting on his or her own 
motion or at the request of a third party, shall review and declare any 
such trades null and void. Absent extraordinary circumstances, any such 
action of the Official or other senior level employee designee shall be 
taken in a timely fashion, generally within thirty (30) minutes of the 
detection of the erroneous transaction. When extraordinary 
circumstances exist, any such action of the Official or other senior 
level employee designee must be taken by no later than the start of 
CBSX Regular Trading Hours \8\ on the trading day following the date on 
which the execution(s) under review occurred. Although CBSX will act as 
promptly as possible and the proposed objective standard (i.e., whether 
an execution occurred outside the band) should make it feasible to 
quickly make a determination, there may be circumstances in which 
additional time may be needed for verification of facts or coordination 
with outside parties, including the single plan processor responsible 
for disseminating the price bands and other market centers. 
Accordingly, CBSX believes it necessary to maintain some flexibility to 
make a determination outside of the thirty (30) minute guideline. In 
addition, CBSX proposes that a transaction that is nullified pursuant 
to new paragraph (i) would be appealable in accordance with the 
provisions of Rule 52.4(e)(2). In addition, CBSX proposes to make clear 
that in the event that a single plan processor experiences a technology 
or systems problem that prevents the dissemination of price bands, CBSX 
would make the determination of whether to nullify transactions based 
on Rule 52.4(a)-(h).
---------------------------------------------------------------------------

    \7\ See Limit Up-Limit Down Release, supra note 3.
    \8\ Regular Trading Hours commence at 9:30 a.m. Eastern Time. 
See CBSX Rule 51.2(a).
---------------------------------------------------------------------------

    The Exchange believes that cancelling trades that occur outside of 
the price bands disseminated pursuant to the Plan is consistent with 
the purpose and intent of the Plan, as such transactions are not 
intended to occur in the first place. If transactions do occur outside 
of the price bands and no exception applies--which necessarily would be 
caused by a technology or systems issue--then the Exchange believes the 
appropriate result is to nullify such transactions.
 2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\9\ In particular, the 
proposal is consistent with Section 6(b)(5) of the Act,\10\ because it 
would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system. The Exchange believes that the pilot 
program promotes just and equitable principles of trade in that it 
promotes transparency and uniformity across markets concerning review 
of transactions as clearly erroneous. More specifically, the Exchange 
believes that the extension of the pilot would help assure that the 
determination of whether a clearly erroneous trade has occurred will be 
based on clear and objective criteria, and that the resolution of the 
incident will occur promptly through a transparent process. The 
proposed rule change would also help assure consistent results in 
handling erroneous trades across the U.S. markets, thus furthering fair 
and orderly markets, the protection of investors and the public 
interest. Although the Limit Up-Limit Down Plan will be operational 
during the same time period as the proposed extended pilot, the 
Exchange believes that maintaining the pilot for at least through the 
phased implementation of the Plan is operational will help to protect 
against unanticipated consequences. To that end, the extension will 
allow the Exchange to determine whether Rule 52.4 is necessary once the 
Plan is operational and, if so, whether improvements can be made. 
Further, the Exchange believes it consistent with the protection of 
investors and the public interest to adopt objective criteria to 
nullify transactions that occur outside of the Plan's price bands when 
such transactions should not have been executed but were due to a 
systems or technology issue.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------

[[Page 9078]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
believes that the Financial Industry Regulatory Authority (``FINRA'') 
and other national securities exchanges are also filing similar 
proposals, and thus, that the proposal will help to ensure consistent 
rules across market centers.

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 comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of 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.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \13\ normally 
does not become operative for 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii) \14\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the pilot program to continue uninterrupted, thereby 
avoiding the investor confusion that could result from a temporary 
interruption in the pilot program. For this reason, the Commission 
designates the proposed rule change to be operative upon filing.\15\
---------------------------------------------------------------------------

    \15\ 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).
---------------------------------------------------------------------------

    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.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2013-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2013-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2013-012 and should be 
submitted on or before February 28, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02705 Filed 2-6-13; 8:45 am]
BILLING CODE 8011-01-P