[Federal Register Volume 80, Number 181 (Friday, September 18, 2015)]
[Notices]
[Pages 56503-56506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23400]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75916; File No. SR-BOX-2015-31]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
a Principles-Based Approach To Prohibit the Misuse of Material 
Nonpublic Information by Market Makers

September 14, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 3, 2015, BOX Options Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 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 Exchange proposes to adopt a principles-based approach to 
prohibit the misuse of material nonpublic information by Market Makers 
by deleting BOX Rule 8090 (Limitation on Dealings). The text of the 
proposed rule change is available from the principal office of the 
Exchange, at the Commission's Public Reference Room and also on the 
Exchange's Internet Web site at http://boxexchange.com.

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 a principles-based approach to 
prohibit the misuse of material non-public information by Market Makers 
by deleting BOX Rule 8090 (Limitation on Dealing). In doing so, the 
Exchange would harmonize its rules governing BOX Participants and BOX 
Market Makers relating to protecting against the misuse of material, 
non-public information. The Exchange believes that BOX Rule 8090 is no 
longer necessary because all Market Makers are subject to the 
Exchange's general principles-based requirements governing the 
protection against the misuse of material, non-public information, 
pursuant to BOX Rule 3090 (Prevention of the Misuse of Material 
Nonpublic Information), which obviates the need for separately-
prescribed requirements for a subset of market participants on the 
Exchange. Additionally, there is no separate regulatory purpose served 
by having separate rules for Market Makers. The Exchange notes that 
this proposed rule change will not decrease the protections against the 
misuse of material, non-public information; instead, it is designed to 
provide more flexibility to Option Participants. This is a competitive 
filing that is based on a proposal recently submitted by NYSE MKT LLC 
(``NYSE MKT'') and approved by the Commission.\3\
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    \3\ See Securities Exchange Act Release No. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving SR-NYSEMKT-2015-
23).
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Background
    The Exchange has two classes of registered Options Participants. 
Pursuant to BOX Rule 100(a)(4), the term ``Options Participant'' or 
``Participant'' means a firm, or organization that is registered with 
the Exchange pursuant to the Rule 2000 Series (Participation) for 
purposes of participating in options trading on BOX as an ``Order Flow 
Provider'' or ``Market Maker''. Pursuant to Rule 100(a)(30) Market 
Maker means an Options Participant registered with the Exchange for the 
purpose of making markets in options contracts traded on the Exchange 
and that is vested with the rights and responsibilities specified in 
the Rule 8000 Series. All Market Makers are designated as specialists 
on the Exchange for all purposes under the Exchange Act or Rules 
thereunder.

[[Page 56504]]

    BOX Rule 8040 (Market Maker Obligations) specifies the obligations 
of Market Makers. The heightened quoting obligations of Market Makers 
are set forth in BOX Rule 8050 (Market Maker Quotations).\4\ BOX Rule 
8090 requires Market Makers to maintain information barriers that are 
reasonably designed to prevent the misuse of material, non-public 
corporate or markets information in the possession of persons on one 
side of the barrier to persons on the other side of the barrier.
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    \4\ BOX Rule 8050(e), Continuous Quotes, On a daily basis, a 
Market Maker must during regular market hours make markets and enter 
into any resulting transactions consistent with the applicable 
quoting requirements specified in these rules, such that on a daily 
basis a Market Maker must post valid quotes at least sixty percent 
(60%) of the time that the classes are open for trading. These 
obligations will apply to all of the Market Maker's appointed 
classes collectively, rather than on a class-by-class basis.
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Proposed Rule Change
    The Exchange believes that the particularized guidelines in BOX 
Rule 8090 for Market Makers are no longer necessary and proposes to 
delete it. Rather, the Exchange believes that BOX Rule 3090 (Prevention 
of the Misuse of Material Nonpublic Information) governing the misuse 
of material, non-public information provides for an appropriate, 
principles-based approach to prevent the market abuses BOX Rule 8090 is 
designed to address. Specifically, BOX Rule 3090 requires every Options 
Participant to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the misuse of material, non-
public information by such Participant or persons associated with such 
Participant. For purposes of this requirement, the misuse of material, 
non-public information includes, but is not limited to, the following:
    (1) Trading in any securities issued by a corporation, partnership, 
or a trust or similar entities, or in any related securities or related 
options or other derivative securities, or in any related non-U.S. 
currency, non-U.S. currency options, futures or options on futures on 
such currency, or any other derivatives based on such currency, or in 
any related commodity, related commodity futures or options on 
commodity futures or any other related commodity derivatives, while in 
possession of material nonpublic information concerning that issuer;
    (2) trading in an underlying security or related options or other 
derivative securities, or in any related non-U.S. currency, non-U.S. 
currency options, futures or options on futures on such currency, or in 
any related commodity, related commodity futures or options on 
commodity futures or any other related commodity derivatives, or any 
other derivatives based on such currency, while in possession of 
material nonpublic information concerning imminent transactions in the 
above; and
    (3) disclosing to another person any material nonpublic information 
involving a corporation, partnership, or Funds or a trust or similar 
entities whose shares are publicly traded or disclosing an imminent 
transaction in an underlying security or related securities or in the 
underlying non-U.S. currency or any related non-U.S. currency options, 
futures or options on futures on such currency, or in any related 
commodity, related commodity futures or options on commodity futures or 
any other related commodity derivatives, or any other derivatives based 
on such currency for the purpose of facilitating the possible misuse of 
such material nonpublic information.
    Because Options Participants are already subject to the 
requirements of BOX Rule 3090, the Exchange does not believe that it is 
necessary to separately require specific limitations on Market Makers. 
Deleting BOX Rule 8090 and requirements for specific procedures would 
provide Market Makers with the flexibility to adapt their policies and 
procedures as appropriate to reflect changes to their business model, 
business activities, or the securities market in a manner similar to 
how Options Participants on the Exchange currently operate and 
consistent with BOX Rule 3090.
    As noted above, Market Makers are distinguished under Exchange 
rules from other Options Participants only to the extent that Market 
Makers have heightened quiting [sic] obligations. However, none of 
these heightened obligations provides different or greater access to 
nonpublic information than any other Options Participant on the 
Exchange.\5\
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    \5\ See BOX Rules 8040 and 8050.
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    Accordingly, because Market Makers do not have any trading 
advantages at the Exchange due to their market role, the Exchange 
believes that they should be subject to the same rules regarding the 
protection against the misuse of material non-public information, which 
in this case, is existing BOX Rule 3090.\6\
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    \6\ The Exchange notes that by deleting BOX Rule 8090, the 
Exchange would no longer require specific information barriers for 
Market Makers or require pre-approval of any information barriers 
that a Market Maker would erect for purposes of protecting against 
the misuse of material non-public information. However, as is the 
case today with Options Participants, information barriers of new 
entrants, would be subject to review as part of a new firm 
application. Moreover, the policies and procedures of Market Makers, 
including those relating to information barriers, would be subject 
to review by FINRA, on behalf of the Exchange, pursuant to a 
Regulatory Services Agreement.
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    The Exchange notes that its proposed approach to use a principles-
based approach to protecting against the misuse of material non-public 
information for all of its registered Options Participants is 
consistent with recently filed rule changes for NYSE MKT and approved 
rule changes for, NYSE Arca Equities, Inc. (``NYSE Arca''), BATS 
Exchange, Inc.'s (``BATS''), and New York Stock Exchange LLC (``NYSE'') 
rules governing cash equity market makers on those respective 
exchanges.\7\ Except for prescribed rules relating to floor-based 
designated market makers on the NYSE, who have access to specified non-
public trading information, each of these exchanges have moved to a 
principles-based approach to protecting against the misuse of material 
non- public information. In connection with approving those rule 
changes, the Commission found that, with adequate oversight by the 
exchanges of their members, eliminating prescriptive information 
barrier requirements should not reduce the effectiveness of exchange 
rules requiring its members to establish and maintain systems to 
supervise the activities of its members, including written procedures 
reasonably designed to ensure compliance with applicable federal 
securities law and regulations, and with the rules of the applicable 
exchange.\8\
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    \7\ See Securities Exchange Act Release No. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a 
Principles-Based Approach to Prohibit the Misuse of Material 
Nonpublic Information by Specialists and e-Specialists by Deleting 
Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities 
Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 
8, 2009) (SR-NYSEArca-2009-78) (Order approving elimination of NYSE 
Arca rule that required market makers to establish and maintain 
specifically prescribed information barriers, including discussion 
of NYSE Arca and Nasdaq rules) (``Arca Approval Order''); 61574 
(Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003) (Order 
approving amendments to BATS Rule 5.5 to move to a principles-based 
approach to protecting against the misuse of material, non-public 
information, and noting that the proposed change is consistent with 
the approaches of NYSE Arca and Nasdaq) (``BATS Approval Order''); 
and 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR-NYSE-2014-
12) (Order approving amendments to NYSE Rule 98 governing designated 
market makers to move to a principles-based approach to prohibit the 
misuse of material non-public information) (``NYSE Approval 
Order'').
    \8\ See, e.g., BATS Approval Order, supra note 7 at 9458.
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    Comparable to members of cash equity markets, the Exchange believes 
that a principles-based rule applicable to members of options markets 
would be equally effective in protecting against

[[Page 56505]]

the misuse of material non-public information. Indeed, BOX Rule 3090 is 
currently applicable to Options Participants which already requires 
policies and procedures reasonably designed to protect against the 
misuse of material nonpublic information, which is similar to the 
respective NYSE MKT, NYSE Arca Equities, BATS and NYSE rules governing 
cash equity market makers. The Exchange believes BOX Rule 3090 provides 
appropriate protection against the misuse of material nonpublic 
information by Options Participants and there is no longer a need for 
prescriptive information barrier requirements in BOX Rule 8090.
    The Exchange notes that even with this proposed rule change, 
pursuant to BOX Rule 3090, an Options Participant would still be 
obligated to ensure that its policies and procedures reflect the 
current state of its business and continue to be reasonably designed to 
achieve compliance with applicable federal securities law and 
regulations, including Section 15(g) of the Act,\9\ and with applicable 
Exchange rules, including being reasonably designed to protect against 
the misuse of material, non-public information. While information 
barriers would not specifically be required under the proposal, BOX 
Rule 3090 already requires that an Options Participant consider its 
business model or business activities in structuring its policies and 
procedures, which may dictate that an information barrier or a 
functional separation be part of the appropriate set of policies and 
procedures that would be reasonably designed to achieve compliance with 
applicable securities law and regulations, and with applicable Exchange 
rules.
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    \9\ 15 U.S.C. 78o(g).
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    The Exchange believes that the proposed reliance on the principles-
based BOX Rule 3090 would ensure that an Options Participant would be 
required to protect against the misuse of any material non-public 
information. As noted above, BOX Rule 3090 already requires that firms 
refrain from trading while in possession of material non-public 
information concerning imminent transactions in the security or related 
product. The Exchange believes that moving to a principles-based 
approach rather than prescribing how and when to wall off a Market 
Maker from the rest of the firm would provide Market Makers with 
flexibility when managing risk across a firm, including integrating 
options positions with other positions of the firm or, as applicable, 
by the respective independent trading unit.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Securities Exchange Act of 1934 
(the ``Act''),\10\ in general, and Section 6(b)(5) of the Act,\11\ in 
particular, in that it is 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 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(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 by 
adopting a principles- based approach to permit an Options Participant 
to maintain and enforce policies and procedures to, among other things, 
prohibit the misuse of material non-public information and provide 
flexibility on how a Market Maker structures its operations. The 
Exchange notes that the proposed rule change is based on an approved 
rule of the Exchange to which Options Participants--BOX Rule 3090--and 
harmonizes the rules governing Options Participants. Moreover, Market 
Makers would continue to be subject to federal and Exchange 
requirements for protecting material non- public order information.\12\ 
The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market 
because it would harmonize the Exchange's approach to protecting 
against the misuse of material nonpublic information and no longer 
subject Market Makers to prescriptive requirements. The Exchange does 
not believe that the existing prescriptive requirements applicable to 
Options Participants are narrowly tailored to their respective roles 
because neither market participant has access to Exchange trading 
information in a manner different from any other market participant on 
the Exchange.
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    \12\ See 15 U.S.C. 78o(g) and BOX Rule 3090.
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    The Exchange further believes the proposal is designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade because existing rules make clear to 
Options Participants the type of conduct that is prohibited by the 
Exchange. While the proposal eliminates prescriptive requirements 
relating to the misuse of material non-public information, Market 
Makers would remain subject to existing Exchange rules requiring them 
to establish and maintain systems to supervise their activities, and to 
create, implement, and maintain written procedures that are reasonably 
designed to comply with applicable securities laws and Exchange rules, 
including the prohibition on the misuse of material, nonpublic 
information. Additionally, the policies and procedures of Market 
Makers, including those relating to information barriers, would be 
subject to review by FINRA, on behalf of the Exchange.\13\
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    \13\ See supra, note 6.
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    The Exchange notes that the proposed rule change would still 
require that Market Makers maintain and enforce policies and procedures 
reasonably designed to ensure compliance with applicable federal 
securities laws and regulations and with Exchange rules. Even though 
there would no longer be pre-approval of Market Maker information 
barriers, any Market Maker written policies and procedures would 
continue to be subject to oversight by the Exchange and therefore the 
elimination of prescribed restrictions should not reduce the 
effectiveness of the Exchange rules to protect against the misuse of 
material non-public information. Rather, Options Participants will be 
able to utilize a flexible, principles-based approach to modify their 
policies and procedures as appropriate to reflect changes to their 
business model, business activities, or to the securities market 
itself. Moreover, while specified information barriers may no longer be 
required, an Options Participant's business model or business 
activities may dictate that an information barrier or functional 
separation be part of the appropriate set of policies and procedures 
that would be reasonably designed to achieve compliance with applicable 
securities laws and regulations, and with applicable Exchange rules. 
The Exchange therefore believes that the proposed rule change will 
maintain the existing protection of investors and the public interest 
that is currently applicable to Market Makers, while at the same time 
removing impediments to and perfecting a free and open market by moving 
to a principles-based approach to protect against the misuse of 
material non-public information.

[[Page 56506]]

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 not necessary or appropriate in 
furtherance of the purposes of the Act. In this regard and as indicated 
above, the Exchange notes that the rule change is being proposed as a 
competitive response to a filing submitted by NYSE MKT that was 
recently approved by the Commission.\14\
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    \14\ See supra, note 3.
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    To the contrary, the Exchange believes that the proposal will 
enhance competition by allowing Market Makers to comply with applicable 
Exchange rules in a manner best suited to their business models, 
business activities, and the securities markets, thus reducing 
regulatory burdens while still ensuring compliance with applicable 
securities laws and regulations and Exchange rules. The Exchange 
believes that the proposal will foster a fair and orderly marketplace 
without being overly burdensome upon Market Makers.
    Moreover, the Exchange believes that the proposed rule change would 
eliminate a burden on competition for Options Participants which 
currently exists as a result of disparate rule treatment between the 
options and equities markets regarding how to protect against the 
misuse of material non-public information. For those Options 
Participants that are also members of equity exchanges, their 
respective equity market maker operations are now subject to a 
principles-based approach to protecting against the misuse of material 
non-public information. The Exchange believes it would remove a burden 
on competition to enable Options Participants to similarly apply a 
principles-based approach to protecting against the misuse of material 
nonpublic information in the options space. To this end, the Exchange 
notes that BOX Rule 3090 still requires Market Makers to evaluate its 
business to assure that its policies and procedures are reasonably 
designed to protect against the misuse of material nonpublic 
information. However, with this proposed rule change, an Options 
Participant that trades equities and options could look at its firm 
more holistically to structure its operations in a manner that provides 
it with better tools to manage its risks across multiple security 
classes, while at the same time protecting against the misuse of 
material non-public information.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder because the 
foregoing 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 after its filing date, or such shorter time as the Commission may 
designate.
    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-BOX-2015-31 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-BOX-2015-31. 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 will also 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-BOX-2015-31 and should be 
submitted on or before October 9, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-23400 Filed 9-17-15; 8:45 am]
BILLING CODE 8011-01-P