[Federal Register Volume 79, Number 174 (Tuesday, September 9, 2014)]
[Notices]
[Pages 53498-53500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21364]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72970; File No. SR-CBOE-2014-066]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Trade Nullification and Price 
Adjustment

September 3, 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 August 26, 2014, 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, II, and III 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 amend Exchange rules regarding trade 
nullification and price adjustment. The text of the proposed rule 
change is 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'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 is proposing to add Rule 6.19, ``Trade Nullification 
and Price Adjustment Procedure.'' \3\ As proposed, Rule 6.19 will allow 
for transactions to be nullified if both parties to the transaction 
agree to the nullification and allow the price of executions to be 
adjusted if the price adjustment is agreed to by both parties to the 
transaction and authorized by the Exchange.\4\ The Exchange is also 
proposing to make other conforming administrative changes to streamline 
the rules governing this subject within the Exchange's rules.
---------------------------------------------------------------------------

    \3\ The Exchange notes that this proposal is only intended to be 
effective until the joint efforts by the exchanges to create uniform 
trade nullification and adjustment rules are approved and in effect. 
Once the uniform rule has been approved and is effective, the 
Exchange will amend its rules appropriately.
    \4\ The Exchange notes that, as proposed, Rule 6.19 will only 
apply to trades that were executed on the Exchange and, as such, any 
orders that were either fully or partially routed to, or executed, 
on another Exchange will not be subject to the proposed Rule 6.19.
---------------------------------------------------------------------------

Background
    Currently, pursuant to Exchange Rules 6.13(d) and 6.25(f), the 
Exchange allows for parties to agree to nullify an execution. Rule 
6.13(d) also states that once both parties agree to the trade 
nullification, one party must ``contact the Help Desk which will 
confirm the agreement and disseminate cancellation information in 
prescribed OPRA format.'' In addition, the Exchange currently allows 
for a mutual price adjustment for trades that meet the obvious error 
requirements pursuant to Exchange Rules 6.25(a)(1)(i) and 
6.25(a)(1)(ii) if those mutual agreements are done within specific 
timeframes.\5\ The Exchange is now proposing to relocate the 
aforementioned trade nullification language and add a provision to 
allow parties to mutually adjust prices of executions outside of those 
done in obvious error.
---------------------------------------------------------------------------

    \5\ See Exchange Rule 6.25(a)(1)(i) which allows executions that 
are erroneous to be adjusted to an agreed upon price within ten (10) 
minutes where no party to the transaction is a non-broker-dealer 
customer. See also 6.25(a)(1)(ii) which allows parties to adjust an 
erroneous transaction to a mutually agreed upon price within thirty 
(30) minutes where at least one party is a non-broker-dealer 
customer.
---------------------------------------------------------------------------

Proposed New Rule 6.19
    The Exchange is proposing to add Rule 6.19, ``Trade Nullification 
and Price Adjustment Procedure,'' which would: (a) Allow for any trades 
on the

[[Page 53499]]

Exchange to be nullified if both parties to the trade agree to such 
nullification, and (b) allow for prices of executions to be adjusted if 
the price adjustment is agreed upon by both parties of the trade and 
authorized by the Exchange.\6\
---------------------------------------------------------------------------

    \6\ See note 2 supra.
---------------------------------------------------------------------------

    As stated above, the Exchange currently allows for trades to be 
nullified based upon mutual agreement.\7\ With the proposed addition of 
Rule 6.19, the Exchange is only moving the location of this provision 
to eliminate confusion. The Exchange believes that having the provision 
as a standalone rule will make it easier for Trading Permit Holders 
(``TPHs'') to locate. In addition, the Exchange believes this 
administrative change will streamline the provisions surrounding this 
notion to put in one place.
---------------------------------------------------------------------------

    \7\ See Exchange Rules 6.13(d) and 6.25(f).
---------------------------------------------------------------------------

    The Exchange is also proposing, however, to add a provision to 
allow TPHs to mutually agree to adjust a price of an execution. The 
Exchange believes this provision is necessary given the benefits of 
adjusting a trade price rather than nullifying the trade completely. 
Because options trades are used to hedge transactions in other markets, 
including securities and futures, many TPHs, and their customers, would 
rather adjust prices of executions rather than nullify the transactions 
and, thus, lose a hedge altogether. As such, the Exchange believes it 
is in the best interest of investors to allow for price adjustments as 
well as nullifications. In addition, the Exchange believes it is in the 
nature of a fair and orderly market to allow for price adjustments 
rather than only cancellations because an adjustment will result in the 
least amount of disruption to the overall market. The Exchange also 
notes that current Exchange rules allow for prices of trades to be 
adjusted at the consent of both parties if such transactions are within 
the current obvious error provisions. The Exchange is now proposing to 
merely allow this practice for any trade.
    As proposed, Rule 6.19 expressly states that trades may be subject 
to nullification or price adjustment only if such trades are authorized 
by the Exchange. The Exchange notes that this process is very similar 
to the process TPHs follow today for trade nullification based upon 
mutual consent. As described in more detail above, current Rule 6.13(d) 
allows two parties to agree to a trade nullification and ``contact the 
Help Desk which will confirm the agreement and disseminate cancellation 
information in prescribed OPRA format.'' The Exchange is only slightly 
changing this procedure by expressly requiring Exchange authorization 
prior to the effectuation of such nullification or price adjustment. As 
part of the authorization process, in the case of a mutual 
nullification or mutual price adjustment, the Exchange will only 
authorize if the Exchange received verification from both parties to 
the trade that a mutual agreement has been made. In addition, prior to 
an authorization for a mutual price adjustment, the Exchange will 
ensure the agreed upon price would have been permissible and in 
compliance with all Exchange and Securities and Exchange Commission 
Rules, as amended, at the time the original transaction was 
executed.\8\ Finally, the proposed rule will state that the format and 
information required by the Exchange for this submission will be 
released by the Exchange via Regulatory Circular. As such, prior to 
Rule 6.19 becoming operative, the Exchange will provide TPHs with 
specific requirements via an Exchange Regulatory Circular. The circular 
will, among other things, state specific timeframes required for 
requests and the format in which the requests will be accepted by the 
Exchange.
---------------------------------------------------------------------------

    \8\ For example, the Exchange would ensure that the mutually 
agreed upon price would ensure that that mutually agreed upon price 
would not have traded through resting interest at the time of the 
initial execution.
---------------------------------------------------------------------------

Administrative Changes
    Finally, the Exchange is proposing to make administrative 
conforming changes to ensure Exchange rules on the subject are 
consistent. More specifically, the Exchange is proposing to delete the 
provisions in current Rules 6.13(d) and 6.25(f). The Exchange believes 
that deleting current Exchange Rule 6.13(d) will avoid any confusion 
with the proposed Rule 6.19. Because the proposed Rule 6.19 will 
address trade nullification and adjustments at all times, the Exchange 
does not believe it is still necessary to include a reference to trade 
nullification within the Exchange's rule related to obvious and 
catastrophic errors or other places in the Exchange's rules. Thus, the 
Exchange believes the proposed administrative changes are necessary to 
eliminate confusion given the proposed Rule 6.19.
Conclusion
    To conclude, the Exchange believes that the proposed changes are in 
furtherance of the Act because the proposed Rule 6.19 will allow TPHs 
to agree to nullify transaction or adjusts prices of transactions to 
maintain a fair and orderly market. As stated above, the Exchange 
intends to release a Regulatory Circular to announce the implementation 
of the Rule and other specifics surrounding the procedures of the 
implementation. In addition, prior to implementation, the Exchange will 
ensure it has proper policies and procedures in place to correctly 
administer the Rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ 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 facilitating 
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) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
---------------------------------------------------------------------------

    More specifically, the Exchange believes that the proposed changes 
are consistent with the Act as they are designed to promote just and 
equitable principles and protect investors and the public interest. In 
particular, the Exchange believes the proposed change to move the 
provision authorizing parties to mutually agree to nullify a trade 
protects investors by eliminating confusion and making the provision 
more clear. Because options trades are used to hedge transactions in 
other markets, including securities and futures, many market 
participants would rather adjust prices of executions rather than 
nullify the transactions and, thus, lose a hedge altogether. As such, 
the Exchange believes it is in the best interest of investors to allow 
for price adjustments as well as nullifications. In addition, the 
Exchange believes it is in the nature of a fair and orderly market to 
allow for price adjustments rather than only cancellations because an

[[Page 53500]]

adjustment will result in the least amount of disruption to the overall 
market. Finally, the Exchange believes that the other administrative 
changes are just and equitable as they are merely trying to create more 
transparency in the Exchange's rules. Finally, the Exchange does not 
believe that the proposed changes are unfairly discriminatory because 
they will be applied to all Trading Permit Holders equally.

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. In fact, the Exchange believes 
that the proposed rule change will foster competition as it will allow 
for less overall disruption to the market and encourage participation 
on the Exchange.

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 foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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 \12\ and 
Rule 19b-4(f)(6) \13\ thereunder. 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 will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-2014-066 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-CBOE-2014-066. 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-2014-066 and should be 
submitted on or before September 30, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21364 Filed 9-8-14; 8:45 am]
BILLING CODE 8011-01-P