[Federal Register Volume 79, Number 128 (Thursday, July 3, 2014)]
[Notices]
[Pages 38105-38107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-15606]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72490; File No. SR-ISE-2014-34]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Establish New Rule 720A

June 27, 2014.
    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 June 24, 2014, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to establish new procedures to account for 
erroneous trades occurring from disruptions and/or malfunctions of 
Exchange systems. The changes described in this proposal would 
establish new ISE Rule 720A. The text of the proposed rule change is 
available on the Exchange's Web site www.ise.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 adopt Rule 720A to provide for new 
procedures to account for erroneous trades occurring from disruptions 
and/or malfunctions of Exchange systems. Specifically, proposed new 
Rule 720A would provide that any transaction that arises out of a 
``verifiable systems disruption or malfunction'' in the use or 
operation of an Exchange automated quotation, dissemination, execution, 
or communication system may either be nullified or adjusted by Market 
Control.\3\ Under the rule, Market Control may act, on its own motion, 
to review erroneous transactions. This filing is based on the rules of 
NYSE Arca, Inc. (``NYSE Arca'').\4\
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    \3\ Market Control consists of designated personnel in the 
Exchange's market control center. See ISE Rule 720(a)(3)(ii).
    \4\ See NYSE Arca Rule 6.89. The proposed rule change is also 
based in part on NASDAQ OMX PHLX, LLC (``Phlx'') Rule 
1092(c)(ii)(A), and in addition is substantially similar to Chicago 
Board Options Exchange, Inc. (``CBOE'') Rule 6.25(a)(3).
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    The Exchange believes that it is appropriate to provide the 
flexibility and authority provided for in proposed Rule 720A so as not 
to limit the Exchange's ability to plan for and respond to unforeseen 
systems problems or malfunctions. The proposed rule change would 
provide the Exchange with the same authority to nullify or adjust 
trades in the event of a ``verifiable disruption or malfunction'' in 
the use of operation of its systems as other exchanges have.\5\ For 
this reason, the Exchange believes that, in the interest of maintaining 
a fair and orderly market and for the protection of investors, 
authority to nullify or adjust trades in these circumstances, 
consistent with the authority on other exchanges, is warranted.
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    \5\ Id.
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    According to the proposal, in the event of any verifiable 
disruption or malfunction in the use or operation of an Exchange 
automated quotation, dissemination, execution, or communication system, 
in which the nullification or modification of transactions may be 
necessary for the maintenance of a fair and orderly market or the 
protection of investors and the public interest exist, Market Control, 
on his or her own motion, may review such transactions and declare such 
transactions arising out of the use or operation of such facilities 
during such period null and void or modify the

[[Page 38106]]

terms of the transactions, in accordance with the guidelines contained 
in Rule 720(b)(2)(i)(A) and (B). Pursuant to the proposal, Market 
Control, absent extraordinary circumstances, must initiate action under 
this authority within sixty (60) minutes of the occurrence of the 
erroneous transaction that was a result of the verifiable disruption or 
malfunction. Each Member involved in the transaction shall be notified 
as soon as practicable, and any Member aggrieved by the action may 
appeal such action in accordance with the provisions of subsection (b) 
of Rule 720A.
    If Market Control determines that a transaction(s) is erroneous 
pursuant to Rule 720A(a) as described above, any Member aggrieved by 
the action may appeal such action in accordance with the provisions 
provided in Rule 720(b). The Exchange plans to utilize a Review Panel 
(``Panel'') to review decisions made by Market Control under this Rule.
    Once a Member has properly notified the Exchange that it wishes to 
appeal the decision of Market Control, a four person Panel will review 
and make a determination as to the appeal. The Panel as described in 
proposed Rule 720A(b)(1)(i) will be comprised of representatives from 
four (4) Members. Two (2) of the representatives must be directly 
engaged in market making activity and two (2) of the representatives 
must be employed by an Electronic Access Member (``EAM'').\6\ The 
Exchange feels that by having a four person panel will help to ensure 
that determinations regarding erroneous transactions resulting from 
system malfunctions or extraordinary market conditions are made by a 
diverse representative group in a manner that will help to ensure 
fairness and impartiality. To qualify as a representative of an 
Electronic Access Member on a Review Panel, a person must (i) be 
employed by a Member whose revenues from options market making activity 
do not exceed ten percent (10%) of its total revenues; or (ii) have as 
his or her primary responsibility the handling of Public Customer 
orders or supervisory responsibility over persons with such 
responsibility, and not have any responsibilities with respect to 
market making activities.\7\
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    \6\ The composition of the Review Panel is similar to that of 
the ISE Obvious and Catastrophic Errors Panel, as defined in ISE 
Rule 720(d).
    \7\ The qualification requirements of the Review Panel are 
identical to those of the ISE Obvious and Catastrophic Errors Panel, 
as provided in Supplementary Material .02 to ISE Rule 720.
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    The Exchange shall designate at least five (5) market maker 
representatives and at least five (5) EAM representatives to be called 
upon to serve on the Panel as needed. In no case shall a Panel include 
a person related to a party to the trade in question. To the extent 
reasonably possible, the Exchange shall call upon the designated 
representatives to participate in a Panel on an equally frequent basis.
    The Exchange notes that the options markets are currently in the 
process of identifying how to harmonize their respective obvious and 
catastrophic error rules, including a rule specifying the circumstances 
in which an options exchange may nullify or adjust trades because of a 
systems problem or malfunction. Because it is uncertain when this 
harmonized rule will be filed with and approved by the Commission, the 
Exchange believes it is critical to its current ability to maintain a 
fair and orderly market and to protect investors to propose an 
amendment to its current rules. The proposed rule would be superseded 
by a future proposed harmonized rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change will allow the 
Exchange, in extraordinary market conditions, to maintain a fair and 
orderly market. The Exchange believes the proposed rule change is 
consistent with the Act and the rules and regulations thereunder and, 
in particular, the requirements of section 6(b) of the Act. 
Specifically, the Exchange believes the proposed rule change is 
consistent with the section 6(b)(5) \8\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78(f)(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
national market system and promote a fair and orderly market because it 
would provide authority for the Exchange to nullify or adjust trades 
that may have resulted from a verifiable systems disruption or 
malfunction. The Exchange believes that it is appropriate to provide 
the flexibility and authority provided for in proposed Rule 720A so as 
not to limit the Exchange's ability to plan for and respond to 
unforeseen systems problems or malfunctions that may result in harm to 
the public. Allowing for the nullification or modification of 
transactions that result from verifiable disruptions and/or 
malfunctions of Exchanges systems will offer market participants on ISE 
a level of relief presently not available. The Exchange further notes 
that when acting under its own motion to nullify or adjust trades 
pursuant to proposed Rule 720A, the Exchange must consider whether 
taking such action would be in the interest of maintaining a fair and 
orderly market and for the protection of investors. The Exchange notes 
that the proposed rule change is based on NYSE Arca rules and is 
substantially similar to rules of other markets.\9\
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    \9\ See supra note 3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Rather, the Exchange 
believes that the proposed rule change is pro-competitive because it 
will align the Exchange's rules with the rules of other markets, 
including CBOE, NYSE Arca, and Phlx. By adopting proposed Rule 720A, 
the Exchange will be in a position to treat transactions that are a 
result of a verifiable systems issue or malfunction in a manner similar 
to other exchanges.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\ The Exchange provided the Commission with 
written

[[Page 38107]]

notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least five 
business days prior to the date of filing the proposed rule change as 
required by Rule 19b-4(f)(6).
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2014-34 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-ISE-2014-34. 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-ISE-2014-34 and should be 
submitted on or before July 24, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15606 Filed 7-2-14; 8:45 am]
BILLING CODE 8011-01-P