[Federal Register Volume 79, Number 243 (Thursday, December 18, 2014)]
[Notices]
[Pages 75602-75604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29620]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73833; File No. SR-C2-2014-027]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Exchange Rules Regarding Trade Nullification and Price 
Adjustment

December 12, 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 December 11, 2014, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules related to trade 
nullification and price adjustment. The text of the proposed rule 
change is provided below.
    (additions are italicized; deletions are [bracketed])
* * * * *

C2 Options Exchange, Incorporated Rules

* * * * *

Rule 6.20. Trade Nullification and Price Adjustment Procedure

    A trade on the Exchange may be nullified or adjusted if the parties 
to the trade agree to the nullification or adjustment. A trade may be 
nullified or adjusted on the terms that all parties to a particular 
transaction agree, provided, however, that any trade that is nullified 
or adjusted pursuant to this Rule must

[[Page 75603]]

be authorized by the Exchange prior to the nullification or adjustment.
    In addition, any trade that is adjusted pursuant to this Rule must 
be adjusted to a price that was permissible and in compliance with all 
Exchange and Securities and Exchange Commission Rules, as amended, at 
the time the original transaction was executed. The format and 
information required by the Exchange for this submission will be 
released by the Exchange via Regulatory Circular.
* * * * *
    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'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 6.20, ``Trade Nullification 
and Price Adjustment Procedure.'' \3\ As proposed, Rule 6.20 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\
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    \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 6.20 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 6.20.
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    Currently, Exchange Rules do not allow parties to nullify or adjust 
the price on an execution, unless there is an obvious error or 
catastrophic error pursuant to Rule 6.15. The Exchange is proposing to 
add Rule 6.20, ``Trade Nullification and Price Adjustment Procedure,'' 
which would: (a) Allow for any trades on the 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.
    As stated above, the Exchange currently allows for trades to be 
nullified or prices adjusted when there is an obvious error or 
catastrophic error.\5\ The Exchange is also proposing, however, to add 
a provision to allow TPHs to mutually agree to nullify a transaction or 
adjust a price of an execution. The Exchange believes allowing parties 
to adjust the price of a transaction 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.
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    \5\ See Exchange Rule 6.15.
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    As proposed, Rule 6.20 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 proposed Rule 6.20 is based on 
Chicago Board Options Exchange, Inc. (``CBOE'') Rule 6.19 \6\ and that 
the process that C2 TPHs follow to nullify or adjust the price of a 
transaction pursuant to proposed rule 6.20 will be similar to how CBOE 
TPHs nullify or adjust the price of a transaction pursuant to CBOE Rule 
6.19. Additionally, as with CBOE Rule 6.19, proposed C2 Rule 6.20 
requires 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.\7\ 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 6.20 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.
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    \6\ Securities Exchange Act Release No. 34-72970 (September 3, 
2014), 79 FR 53498 (September 9, 2014) (SR-CBOE-2014-066).
    \7\ For example, the Exchange would ensure that the mutually 
agreed upon price would not have traded through resting interest at 
the time of the initial execution.
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    To conclude, the Exchange believes that the proposed changes are in 
furtherance of the Act because the proposed Rule 6.20 will allow TPHs 
to agree to nullify transactions or adjust 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.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ 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

[[Page 75604]]

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) \10\ 
requirement that the rules of an exchange not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    More specifically, the Exchange believes that the proposed changes 
are consistent with the Act as they are designed to promote just and 
equitable principles of trade and protect investors and the public 
interest. 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 
adjustment will result in the least amount of disruption to the overall 
market. In addition, the Exchange does not believe that the proposed 
changes are unfairly discriminatory because they will be applied to all 
Trading Permit Holders equally. Finally, as noted above, proposed Rule 
6.20 is based on CBOE Rule 6.19.

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 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 \11\ and 
Rule 19b-4(f)(6) \12\ 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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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-C2-2014-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-C2-2014-027. 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 such 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-C2-2014-027, and should be 
submitted on or before January 8, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29620 Filed 12-17-14; 8:45 am]
BILLING CODE 8011-01-P