[Federal Register Volume 80, Number 134 (Tuesday, July 14, 2015)]
[Notices]
[Pages 41112-41114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17290]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75317; File No. SR-CBOE-2015-012]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change Relating 
to Trading Permit Holder Qualifications

June 26, 2015.

I. Introduction

    On May 4, 2015, Chicago Board Options Exchange Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules related to 
Trading Permit Holder requirements and direct access to the Exchange's 
Hybrid Trading System (``System''). The proposed rule change was 
published for comment in the Federal Register on May 20, 2015.\3\ The 
Commission received no comments on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74963 (May 14, 
2015), 80 FR 29131 (May 20, 2015) (``Notice'').
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II. Description of Proposed Rule Change

    The Exchange proposes to amend its rules by (i) adopting new CBOE 
Rule 3.4A (Additional Trading Permit Holder Qualifications)to add 
additional qualification requirements for persons seeking to become and 
remain Trading Permit Holders, (ii) adding a requirement regarding 
access by Sponsored Users in CBOE Rule 6.20A (Sponsored Users), (iii) 
adding a requirement regarding access to the System in CBOE Rule 6.23A 
(Trading Permit Holder Connectivity), and (iv) making nonsubstantive 
changes to renumber the paragraphs in CBOE Rule 3.4 (Foreign Trading 
Permit Holders). The Exchange states that the proposed rule change is 
intended to accommodate the potential interest of non-U.S. persons or 
organizations in becoming Trading Permit Holders or accessing the 
System from foreign jurisdictions following the launch of Extended 
Trading Hours on the Exchange.\4\
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    \4\ See Securities Exchange Act Release No. 73704 (November 28, 
2014), 79 FR 72044 (December 4, 2014).
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Trading Permit Holder Requirements

    The Exchange proposes to add additional requirements that will be 
applicable to all Trading Permit Holders through new proposed CBOE Rule 
3.4A. Currently, CBOE Rules 3.2 (Qualifications of Individual Trading 
Permit Holders) and 3.3 (Qualifications of TPH Organizations) set forth 
the requirements for individuals and organizations, respectively, to 
become and remain Trading Permit Holders. For an individual to become 
and remain a Trading Permit Holder, CBOE Rule 3.2 requires the 
individual to (i) to be at least 21 years of age, (ii) be registered as 
a broker or dealer pursuant to Section 15 of the Act, or be associated 
with a Trading Permit Holder organization that is registered as a 
broker or dealer pursuant to Section 15 of the Act, and (iii) meet the 
qualification requirements to be a Trading Permit Holder under the 
Exchange's bylaws and rules. Similarly, for an organization to become 
and remain a Trading Permit Holder, CBOE Rule 3.3 requires the 
organization to (i) be a corporation, partnership, or limited liability 
company, (ii) be registered as a broker or dealer pursuant to Section 
15 of the Act, and (iii) meet the qualification requirements to be a 
Trading Permit Holder under the Exchange's bylaws and rules.
    Further, CBOE Rule 3.4 imposes additional qualifications on Trading 
Permit Holders that do not maintain an office in the United States that 
prepares and maintains financial and other reports required to be filed 
with the Commission and the Exchange. These foreign Trading Permit 
Holders must (i) prepare all such reports, and maintain a general 
ledger chart of account and any description thereof, in English and 
U.S. Dollars, (ii) reimburse the Exchange for any expense incurred in 
connection with examinations of the Trading Permit Holder to the extent 
that such expenses exceed the cost of examining a Trading Permit Holder 
located within the United States, and (iii) ensure the availability of 
an individual fluent in English knowledgeable in securities and 
financial matters to assist the representatives of the Exchange during 
examinations.\5\
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    \5\ The proposed rule change makes nonsubstantive formatting 
changes to CBOE Rule 3.4 to revise the numbering of the paragraphs.
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    Proposed CBOE Rule 3.4A(a) provides that, in addition to the 
requirements set forth in CBOE Rules 3.2 through 3.4, a Trading Permit 
Holder applicant must satisfy several new requirements. First, proposed 
CBOE Rule 3.4A(a)(i) provides that a Trading Permit Holder applicant 
must be domiciled in (with respect to

[[Page 41113]]

individuals), or organized under the laws of (with respect to 
organizations), a jurisdiction expressly approved by the Exchange. The 
proposed rule provides that when determining whether to approve a 
jurisdiction, the Exchange will consider whether: (i) The applicant 
will be able to supply the Exchange with such information with respect 
to the applicant's dealings with the Exchange as set forth in CBOE's 
rules, (ii) the Exchange will be able to examine the applicant's books 
and records to verify the accuracy of any information so supplied, 
(iii) approval of such application will comply with all applicable 
laws, rules, and regulations, and (iv) other factors that the Exchange 
reasonably and objectively determines may impact the applicant's 
ability to comply with the Exchange's rules and the Act or the 
Exchange's ability to accept Trading Permit Holders from the applicable 
jurisdiction. The proposed rule also provides that this approval may be 
limited to one or more specified categories of Trading Permit Holders 
or Trading Permit Holder activities in a jurisdiction or be contingent 
upon the satisfaction of specified conditions by all applicants from a 
jurisdiction to the extent such limits or conditions are necessary to 
satisfy clauses (i) through (iv).
    Second, proposed CBOE Rule 3.4(a)(ii) provides that a Trading 
Permit Holder applicant must be subject to the jurisdiction of the 
federal courts of the United States and the courts of the state of 
Illinois.
    Finally, proposed CBOE Rule 3.4(a)(iii) provides that a Trading 
Permit Holder applicant, prior to acting as agent for a customer, must 
be able to provide information regarding the customer and the 
customer's trading activities to the Exchange in response to a 
regulatory request for information pursuant to the CBOE's rules. To the 
extent an individual or organization is required by an applicable law, 
rule, or regulation to obtain written consent from a customer to permit 
the provision of this information to the Exchange, the applicant must 
obtain such consent.\6\
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    \6\ The Exchange also proposes to amend Rule 6.20A pertaining to 
Sponsoring Trading Permit Holders. The Exchange asserts that it 
needs the same information from Sponsored Users as it does from 
Trading Permit Holders. See Notice, supra note 3, at n. 7. Proposed 
new paragraph (c) under Rule 6.20A requires Sponsored Users to 
satisfy the requirements of CBOE Rule 3.4A(a) and only access the 
System from an approved jurisdiction.
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    The Exchange intends to provide a list of approved jurisdictions 
and notify market participants, both initially and when updated, in a 
Regulatory Circular.\7\ Additionally, the Exchange intends to have a 
Web site that lists currently approved jurisdictions.
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    \7\ Regulatory Circulars are publicly available on the 
Exchange's Web site. The Exchange states that it will issue a 
Regulatory Circular notifying market participants if it no longer 
intends to issue a Regulatory Circular to announce changes to the 
list of approved jurisdictions and only update the Web site. See 
Notice, supra note 3, at 29132. See also Regulatory Circular RG15-
014 (question #5 includes a current list of approved jurisdictions, 
subject to Commission approval of this proposed rule change).
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    Proposed CBOE Rule 3.4A(b) allows the Exchange to determine at any 
time that a Trading Permit Holder can no longer comply with proposed 
CBOE Rule 3.4A. For example, this scenario could arise if the laws in 
the Trading Permit Holder's jurisdiction change in a manner that 
prevents compliance with CBOE Rule 3.4A. If the Exchange determines 
that the Trading Permit Holder is not in compliance with CBOE Rule 
3.4A, then the Trading Permit Holder will have three months following 
the date of this determination to come into compliance. If the Trading 
Permit Holder does not come into compliance during that time period, 
the Exchange may terminate the Trading Permit Holder's status as a 
Trading Permit Holder.\8\
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    \8\ The Exchange asserts that this rule change is consistent 
with CBOE Rule 3.5(d), which among other things, permits the 
Exchange to determine not to permit a Trading Permit Holder to 
continue being a Trading Permit Holder if it fails to meet any 
qualification requirements for being a Trading Permit Holder after 
approval as a Trading Permit Holder. See Notice, supra note 3, at n. 
5.
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    The Exchange states that these proposed requirements will enhance 
the Exchange's regulatory oversight of its Trading Permit Holders' 
activity and its ability to monitor Trading Permit Holders' compliance 
with Exchange rules and the Act.\9\ While the proposed changes apply to 
all Trading Permit Holders, the Exchange indicates that certain 
jurisdictions may limit market participants' ability to share or access 
certain information.\10\ The Exchange states that the additional 
requirements are intended to assure the Exchange that it will be able 
to obtain the information necessary to perform its self-regulatory 
obligations and to comply with the applicable regulatory requirements 
in jurisdictions in which Trading Permit Holders are located.\11\
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    \9\ See id. at 29133.
    \10\ See id.
    \11\ See id.
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System Access and Sponsored Users

    The Exchange proposes to amend CBOE Rule 6.23A to provide that 
Trading Permit Holders, persons associated with Trading Permit Holders, 
and Sponsored Users with authorized access may only directly access the 
System from a jurisdiction expressly approved by the Exchange pursuant 
to CBOE Rule 3.4A(a).\12\ The Exchange asserts that the laws, rules, 
and regulations of a jurisdiction relating to exchange membership apply 
in the same manner to persons or entities accessing the System from 
such jurisdiction.\13\ For example, restrictions on supplying an 
exchange with certain information or providing access to books and 
records would apply whether the Trading Permit Holder was domiciled in 
such jurisdiction or was directly accessing the System from such 
jurisdiction. Accordingly, the Exchange asserts that direct access 
should only be permitted from approved jurisdictions for the same 
reasons discussed above.\14\
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    \12\ The Exchange asserts that it currently has similar 
authority under CBOE Rule 6.23A(e) to prescribe technical 
specifications regarding the establishment of an electronic 
connection to the System, arguing proposed CBOE Rule 6.23A(c) is 
similar to a ``specification'' because the location requirement will 
be part of the same process which the Trading Permit Holder must 
comply when establishing a connection to the Exchange. See id. at 
29134.
    \13\ See id. at 29133.
    \14\ See id. at 29133-34.
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    The Exchange also proposes to amend CBOE Rule 6.20A to require 
Sponsoring Trading Permit Holders to ensure that a Sponsored User 
satisfies the requirements of CBOE Rule 3.4A(a) and only directly 
accesses the System from an approved jurisdiction as set forth in CBOE 
Rule 6.23A(d). The Exchange asserts it would need the same information 
from Sponsored Users as it does from Trading Permit Holders and 
therefore the same requirements should apply.\15\
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    \15\ See id. at n. 7.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which 
requires, among other things, that the rules of a national securities 
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

[[Page 41114]]

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. The Commission also finds 
that the proposal is designed to not permit unfair discrimination 
between customers, issuers, brokers, or dealers pursuant to Section 
6(b)(5) of the Act.\18\ Further, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(1) of the Act,\19\ which 
provides that an exchange must be so organized and have the capacity to 
be able to carry out the purposes of this Act and to comply, and to 
enforce compliance by its members and persons associated with its 
members, with the Act, the rules and regulations thereunder, and the 
rules of the exchange.
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    \16\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
    \19\ 15 U.S.C. 78f(b)(1).
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    The Commission believes that the additional requirements prescribed 
by CBOE Rules 3.4A, 6.20A, and 6.23A are reasonably designed to assure 
the Exchange that it will be able to obtain the information necessary 
to perform its self-regulatory obligations. In this regard, the 
Commission notes that certain foreign jurisdictions may have laws, 
rules, or regulations that prohibit or restrict the sharing of certain 
information that would be necessary for the Exchange to adequately 
oversee the trading activity of Trading Permit Holders from such 
jurisdictions. Accordingly, the Commission believes that it is 
appropriate and consistent with the Act for the Exchange to require 
Trading Permit Holders to be domiciled in, or only directly access the 
System from, jurisdictions that would not impede the Exchange's ability 
to carry out its regulatory responsibilities, and that Trading Permit 
Holders are otherwise able to provide to CBOE pertinent information 
regarding their customers and their customers' trading activities in 
response to a regulatory request.
    The Commission believes that these new CBOE requirements will help 
facilitate the Exchange's surveillance, examinations, and inspections 
of Trading Permit Holders by helping to ensure that the Exchange has 
access to information necessary for it to enforce compliance by all 
Trading Permit Holders with CBOE's rules and the federal securities 
laws, consistent with the Act.\20\ With unencumbered access to the same 
level of information from each member, without regard to whether such 
members are located within or outside the U.S., the proposal is 
designed to support CBOE's ability to fulfil its regulatory mandate to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and protect investors and the public 
interest, consistent with Section 6(b)(5) of the Act.\21\
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    \20\ 15 U.S.C. 78f(b). In this regard, as noted above, the Rule 
provides that in approving a given jurisdiction, among other things, 
the Exchange will consider whether: The applicant will be able to 
supply the Exchange with such information with respect to its 
dealings on the Exchange, the Exchange will be able to examine the 
applicant's books and records to verify the accuracy of any 
information so supplied, and other factors that the Exchange 
reasonably and objectively determines may impact the applicant's 
ability to comply with the Exchange's rules and the Act. See CBOE 
Rule 3.4A(a)(i). Further, it requires that a Trading Permit Holder, 
prior to acting as agent for a customer, must be able to provide 
information regarding the customer and the customer's trading 
activities to the Exchange in response to a regulatory request for 
information. To the extent that an individual or organization is 
required by an applicable, law, rule, or regulation to obtain 
written consent from a customer to permit the provision of this 
information to the Exchange, the applicant must obtain such consent. 
See CBOE Rule 3.4A(a)(iii).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the factors enumerated in CBOE Rule 
3.4A(a)(i) for determining whether to approve a jurisdiction are 
objective and reasonably designed to achieve the purposes discussed 
above. Further, the Commission notes that the Exchange represents that 
it will consider all of the factors for all of the jurisdictions in the 
same manner and that such consideration will include reviews of the 
applicable laws, rules, and regulations of a jurisdiction to determine 
whether the factors enumerated in the Rule can be satisfied.\22\ In 
addition, while the Rule allows the Exchange to limit approval to 
specified categories of Trading Permit Holders or activities in a 
jurisdiction or impose other specified conditions, this provision 
provides CBOE with limited discretion as any such conditions must be 
imposed on all applicants from a given jurisdiction and only to the 
extent that such limits or conditions are necessary to satisfy the 
factors of CBOE Rule 3.4A(a)(i)(A)-(D). For example, the Exchange notes 
that a foreign jurisdiction may permit only certain activities on the 
Exchange by market participants in that jurisdiction.\23\ This 
provision would allow the Exchange to permit Trading Permit Holders 
from such a jurisdiction, subject to certain conditions that enable the 
Exchange to comply with the laws, rules, or regulations of such 
jurisdiction. The Commission also notes that the Exchange represents 
that it will determine in the same manner for all jurisdictions whether 
to impose any such limits or conditions on Trading Permit Holders.\24\ 
The Commission therefore believes that the proposed rule is not 
designed to permit CBOE to apply the new requirements in an arbitrary 
or discriminatory manner and similarly situated applicants should 
therefore be treated consistently.
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    \22\ See Notice, supra note 3, at 29133.
    \23\ See id.
    \24\ See id.
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    Further, the Commission notes that the Exchange will publish a list 
of approved jurisdictions in a Regulatory Circular and on a dedicated 
Web site. Making the jurisdictional determinations available publicly 
will provide transparency to CBOE's determinations under the proposed 
Rule, as well as provide notice to market participants and prospective 
Trading Permit Holders of the approved jurisdictions.
    Finally, the Commission believes that the requirement in CBOE Rule 
3.4A(a)(ii) that an applicant be subject to the jurisdiction of the 
federal courts of the United States and the courts of the state of 
Illinois is reasonable. Among other things, this provision could be 
useful to a U.S. person involved in a dispute with a Trading Permit 
Holder or Sponsored User as it may provide a forum in which such 
aggrieved party could pursue any available legal or equitable remedies 
against such party.

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-CBOE-2015-012) be, and it 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-17290 Filed 7-13-15; 8:45 am]
BILLING CODE 8011-01-P