[Federal Register Volume 80, Number 214 (Thursday, November 5, 2015)]
[Notices]
[Pages 68590-68595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28147]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76322]


Order Exempting Certain Large Traders From the Self-
Identification Requirements of Rule 13h-1 Under the Securities Exchange 
Act of 1934, and Exempting Certain Broker-Dealers From the 
Recordkeeping, Reporting, and Monitoring Responsibilities Under the 
Rule

October 30, 2015.
    On July 27, 2011, the Securities and Exchange Commission 
(``Commission'') adopted Rule 13h-1 (the ``Rule'') under the Securities 
Exchange Act of 1934 (``Exchange Act'') to assist the Commission in 
both identifying and obtaining information on market participants that 
conduct a substantial amount of trading activity, as measured by volume 
or market value, in U.S. securities (such persons are referred to as 
``large traders'').\1\ The Rule requires certain large traders to 
identify themselves to the Commission by filing Form 13H and separately 
requires certain broker-dealers to maintain records of large trader 
transaction information and report such information to the Commission 
upon request as well as monitor customer trading to help promote 
compliance with the Rule by traders. Since December 1, 2011, persons 
whose trading activity reached or exceeded the identifying activity 
level specified in the Rule have been required to identify themselves 
to the Commission by filing Form 13H through the Commission's EDGAR 
system. The Commission implemented the broker-dealer recordkeeping, 
reporting, and monitoring requirements of the Rule in phases through a 
series of exemptive orders establishing certain delayed compliance 
dates,\2\ and currently certain broker-dealers are required to keep 
records of and report to the Commission upon request transaction data 
for certain of their customers that are either a large trader or an 
Unidentified Large Trader.\3\ Most recently, the Commission established 
a compliance date of November 1, 2013 for Phase Two of the Rule, which, 
among other things, implemented the recordkeeping and reporting 
responsibilities for an additional category of traders and also 
implemented the monitoring requirements under the Rule to require 
certain broker-dealers to monitor their customers' trading activity in 
order to promote awareness of and foster compliance with the self-
identification requirements of the Rule.\4\ At that time, the 
Commission stated that the compliance date for Phase Three of the Rule 
would be November 1, 2015.\5\
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    \1\ See Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (Aug. 3, 2011) (``Adopting Release''). The 
effective date of Rule 13h-1 was October 3, 2011.
    \2\ See Securities Exchange Act Release Nos. 70150 (August 8, 
2013), 78 FR 49556 (August 14, 2013) (establishing Phase Two and 
providing for Phase Three); 69281 (April 3, 2013), 78 FR 20960 
(April 8, 2013) (extension of the compliance date); and 66839 (April 
20, 2012), 77 FR 25007 (April 26, 2012) (establishing Phase One).
    \3\ Rule 13h-1(a)(9) defines ``Unidentified Large Trader'' as 
``each person who has not complied with the identification 
requirements of paragraphs (b)(1) and (b)(2) of this rule that a 
registered broker-dealer knows or has reason to know is a large 
trader.'' The Rule provides that, for purposes of determining 
whether a registered broker-dealer has reason to know that a person 
is a large trader, ``a registered broker-dealer need take into 
account only transactions in NMS securities effected by or through 
such broker-dealer.'' Rule 13h-1(a)(9).
    \4\ See Securities Exchange Act Release No. 70150, supra note 2 
(establishing the November 1, 2013 compliance date for customer 
monitoring responsibilities). See also note 27, infra, and 
accompanying text.
    \5\ Phase Three includes all of the remaining requirements of 
Rule 13h-1 that were not implemented in either Phase One or Phase 
Two. In particular, Phase Three would require reporting of execution 
time on trades for additional categories of persons beyond those 
covered in Phases One and Two.
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    The Commission has received a request from the Financial 
Information Forum (``FIF'') to exempt options traders from the 
requirements of the Rule conditioned upon such traders not exceeding 
the ``identifying activity level'' (i.e., the threshold at which a 
person triggers the self-identification requirements of the Rule) as 
calculated based on the gross premium of the options trades.\6\ FIF 
asserts that such relief would appropriately limit the identification 
requirements of the Rule by exempting from the Rule a class of persons 
whose options trading is unlikely to have a market impact.\7\ In 
addition, FIF requested that the Commission permanently exempt broker-
dealers from the recordkeeping and reporting requirements of Phase 
Three of the Rule, or alternatively postpone the compliance date of the 
Phase Three requirements until November 1, 2020.\8\ The Securities 
Industry and Financial Markets Association (``SIFMA'') also has 
requested that the Commission permanently exempt broker-dealers from 
the recordkeeping and reporting

[[Page 68591]]

requirements of Phase Three of the Rule, or alternatively postpone the 
compliance date of the Phase Three requirements until November 1, 
2020.\9\
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    \6\ See Letter from Mary Lou VonKaenel, Managing Director, FIF, 
to Stephen Luparello, Director of the Division of Trading and 
Markets, Commission, dated March 27, 2015 (``FIF Letter''), 
available at: http://www.sec.gov/comments/s7-10-10/s71010.shtml. 
Currently, the fair market value of equity options is calculated 
based on the value of the underlying securities. See Rule 13h-
1(c)(1)(i).
    \7\ See FIF Letter, supra note 6, at 2-3.
    \8\ See FIF Letter, supra note 6, at 3.
    \9\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA to Stephen Luparello, Director of 
the Division of Trading and Markets, Commission, dated April 9, 2015 
(``SIFMA Letter''), available at: http://www.sec.gov/comments/s7-10-10/s71010.shtml.
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    For the reasons explained below, the Commission believes that 
providing exemptive relief for equity options traders and deferring 
Phase Three are appropriate. Accordingly, the Commission is: (1) 
Conditionally exempting equity options market participants from the 
self-identification requirements of the Rule if they have not met or 
exceeded the alternative threshold described below that is applicable 
to equity options trading; \10\ and (2) temporarily exempting broker-
dealers until November 1, 2017 from the remaining recordkeeping and 
reporting obligations of the Rule beyond those established in Phases 
One and Two.\11\
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    \10\ As discussed below, with respect to any persons that 
previously registered as a large trader on account of their equity 
options transactions, this exemption relieves those persons from 
continued compliance with the periodic filing obligations as long as 
they do not otherwise meet or exceed the identifying activity level 
in the future.
    \11\ Phases One and Two are discussed below. See infra text 
accompanying notes 53 and 54.
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I. Background

A. Large Trader Status

    The Rule defines a large trader as a person who ``directly or 
indirectly, including through other persons controlled by such person, 
exercises investment discretion over one or more accounts and effects 
transactions for the purchase or sale of any NMS security for or on 
behalf of such accounts, by or through one or more registered broker-
dealers, in an aggregate amount equal to or greater than the 
identifying activity level'' (emphasis added).\12\ The identifying 
activity level contains daily and monthly share volume and fair market 
value thresholds, namely: aggregate transactions in NMS securities that 
are equal to or greater than (1) during a calendar day, either 2 
million shares or shares with a fair market value of $20 million; or 
(2) during a calendar month, either 20 million shares or shares with a 
fair market value of $200 million.\13\
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    \12\ See Rule 13h-1(a)(1).
    \13\ See Rule 13h-1(a)(7).
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    In establishing the current identifying activity level for equity 
derivative securities, the Commission stated that the Rule was intended 
to focus on the potential impact of options transactions on the market 
for the underlying security.\14\
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    \14\ See Adopting Release, supra note 1, 76 FR at 46967 (noting 
that this focus reflected and was consistent with Section 13(h) of 
the Exchange Act).
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    Specifically, for equity options,
     share volume is calculated by multiplying the number of 
contracts by the option contract's specified multiplier; and
     fair market value is calculated using the value of the 
securities underlying the option.\15\
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    \15\ Examples of how to calculate the identifying activity for 
options transactions were provided in the Adopting Release, supra 
note 1, 76 FR at 46967. In contrast, for index options, share volume 
is not calculated because index options do not overlie shares and 
fair market value is calculated by multiplying together the index 
multiplier, the number of options, and the price per contract.
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    At the time the Commission adopted Rule 13h-1, the Commission 
stated that this approach was consistent with Section 13(h)(1) of the 
Exchange Act, which sought to promote the Commission's ability to 
``monitor[ ] the impact on the securities markets of securities 
transactions involving a substantial volume or a large fair market 
value or exercise value . . .'' in that the methodology considers the 
equivalent exercise value of the options on the date of purchase.\16\ 
This approach eliminates the need to track and separately consider 
exercise and instead preemptively identifies traders whose options 
trading may be of a sufficient magnitude to potentially affect the 
underlying stock if the positions are exercised.
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    \16\ See Adopting Release, supra note 1, 76 FR at 46967, text 
accompanying n.65.
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B. The Requirements of Rule 13h-1

1. Large Trader Self-Identification
    As noted above, the Rule requires large traders to self-identify to 
the Commission on Form 13H and periodically update their Form 13H 
submission,\17\ obtain a unique large trader identification number 
(``LTID'') from the Commission,\18\ and provide this number to their 
brokers and identify each account to which the LTID applies.\19\ These 
large trader responsibilities are referred to collectively as the 
``Self-Identification Requirements.''
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    \17\ See Rule 13h-1(b)(1)(i)-(iii). Form 13H and all updates to 
it are filed electronically through the Commission's EDGAR system.
    \18\ When a large trader files its initial Form 13H filing 
through EDGAR, the system sends an automatically generated 
confirmation email acknowledging acceptance of the filing. That 
email also contains the unique 8-digit LTID number assigned to the 
large trader.
    \19\ See Rule 13h-1(b)(2). See also Large Trader Adopting 
Release, supra note 1, 76 FR at 46971 (``the requirements that a 
large trader provide its LTID to all registered broker-dealers who 
effect transactions on its behalf, and identify each account to 
which it applies, are ongoing responsibilities that must be 
discharged promptly'').
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2. Broker-Dealers' Recordkeeping and Reporting Responsibilities 
Regarding Unidentified Large Traders and the Customer Monitoring Safe 
Harbor
    Under Rules 13h-1(d) and (e), registered broker-dealers are 
responsible for, among other things, keeping records of and reporting 
to the Commission upon request data for their customers that are large 
traders or Unidentified Large Traders.\20\ Specifically, Rule 13h-1 
requires that every registered broker-dealer maintain records of data 
specified in paragraphs (d)(2) and (d)(3) of the Rule (``Transaction 
Data''), including the applicable LTID(s) and execution time on each 
component trade, for all transactions effected directly or indirectly 
by or through: (1) An account such broker-dealer carries for a large 
trader or an Unidentified Large Trader; or (2) if the broker-dealer is 
a large trader, any proprietary or other account over which such 
broker-dealer exercises investment discretion. Additionally, where a 
non-broker-dealer carries an account for a large trader or an 
Unidentified Large Trader under the Rule, the broker-dealer effecting 
transactions directly or indirectly for such large trader or 
Unidentified Large Trader must maintain records of all Transaction 
Data.\21\ These recordkeeping obligations are referred to collectively 
as the ``Recordkeeping Responsibilities.'' The Rule also requires that, 
upon Commission request, every registered broker-dealer that is itself 
a large trader or carries an account for a large trader or an 
Unidentified Large Trader must electronically report Transaction Data 
to the Commission through the Electronic Blue Sheets (``EBS'') system 
for all transactions, equal to or greater than the reporting activity 
level, effected directly or indirectly by or through accounts carried 
by such broker-dealer for large traders or Unidentified Large 
Traders.\22\ Additionally, where a non-broker-dealer carries an account 
for a large trader or an Unidentified Large Trader, the broker-dealer 
effecting such transactions directly or indirectly for a large trader 
or Unidentified Large Trader must electronically report Transaction 
Data to the Commission through the EBS system.\23\ The Rule requires 
that reporting broker-dealers submit the requested Transaction Data no 
later than the day and time specified in the

[[Page 68592]]

Commission's request.\24\ These reporting obligations are referred to 
collectively as the ``Reporting Responsibilities.'' The Commission has 
implemented the Recordkeeping and Reporting Responsibilities in phases, 
as discussed in greater detail below.\25\
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    \20\ See note 3, supra.
    \21\ See Rule 13h-1(d)(1)(iii).
    \22\ See Rule 13h-1(e).
    \23\ See id.
    \24\ See id.
    \25\ See Section II.D, infra.
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    Rule 13h-1(f) provides a safe harbor that is designed to reduce 
broker-dealers' recordkeeping and reporting burdens with respect to 
Unidentified Large Traders by, among other things, providing relief for 
when a broker-dealer shall be deemed to know or have reason to know 
that a person is a large trader and thus subject to reporting 
obligations related to Unidentified Large Traders under Rule 13h-1. 
Under the safe harbor, a registered broker-dealer is deemed not to know 
or have reason to know that a person is a large trader if it does not 
have actual knowledge that a person is a large trader and it 
establishes policies and procedures reasonably designed to identify 
customers whose transactions at the broker-dealer equal or exceed the 
identifying activity level and, if so, to treat such persons as 
Unidentified Large Traders and notify them of their potential reporting 
obligations under this Rule.\26\ Collectively, these broker-dealer 
undertakings are referred to as the ``Customer Monitoring 
Obligations.'' The Customer Monitoring Obligations are intended to 
promote awareness of and foster compliance with the Rule among persons 
who might not otherwise be aware of the large trader reporting 
requirements.\27\
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    \26\ See Rule 13h-1(f).
    \27\ See Adopting Release, supra note 1, 76 FR at 46997.
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    As noted above, the Commission previously granted broker-dealers 
temporary exemptions from the Customer Monitoring Obligations.\28\ As 
of November 1, 2013, to avail themselves of the safe harbor, broker-
dealers with recordkeeping and reporting responsibilities were required 
to implement the Customer Monitoring Obligations.
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    \28\ See Securities Exchange Act Release Nos. 66839 and 69281, 
supra note 2.
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II. Exemptive Relief

    Pursuant to Section 13(h)(6) of the Exchange Act and Rule 13h-1(g) 
thereunder,\29\ the Commission, by order, may exempt from the 
provisions of Rule 13h-1, upon specified terms and conditions or for 
stated periods, any person or class of persons or any transaction or 
class of transactions from the provisions of Rule 13h-1 to the extent 
that such exemption is consistent with the purposes of the Exchange 
Act.
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    \29\ See 15 U.S.C. 78m and 17 CFR 240.13h-1(g), respectively.
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    FIF requests that the Commission grant exemptive relief for options 
traders that would be conditioned upon such traders' activity not 
exceeding the Rule's identifying activity threshold based on the gross 
premiums paid for the options as opposed to the value of the underlying 
stock at the time of the trade.\30\ FIF notes that some of its members, 
particularly brokers with retail customers, have identified through 
their Customer Monitoring Obligations a number of retail customers that 
met or exceeded the threshold based primarily on such customers' equity 
options trading, particularly in deep out-of-the-money options on high 
priced underlying stocks.\31\ According to FIF, customers that meet the 
``underlying value'' threshold rarely exercise their options, and many 
of them would be unable to do so based on their account balances.\32\ 
FIF argues that exemptive relief for all options traders conditioned 
upon a premium-based threshold calculation would appropriately focus 
the Rule on traders who are more significant participants in the U.S. 
securities markets and who are more likely to trade options at levels 
and in a manner that could have a market impact.\33\
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    \30\ FIF requests that the alternative ``options premium'' 
threshold be consistent with Rule 13h-1(a)(7), which establishes the 
daily and monthly market value thresholds of the identifying 
activity level as $20 million and $200 million, respectively. See 
FIF Letter, supra note 6, at 2.
    \31\ See FIF Letter, supra note 6, at 1.
    \32\ See FIF Letter, supra note 6, at 2.
    \33\ See FIF Letter, supra note 6, at 2-3.
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    In addition, both FIF and SIMFA request that the Commission 
permanently exempt broker-dealers from the additional recordkeeping and 
reporting requirements of Phase Three of the Rule, which have not yet 
been implemented.\34\ In the alternative, FIF requests an extension of 
Phase Three by an additional five years \35\ and SIFMA requests an 
extension to the earlier of full implementation of a Consolidated Audit 
Trail (``CAT'') or November 1, 2020.\36\ Both FIF and SIFMA stated that 
their request would allow firms to focus their resources on 
implementing a CAT.\37\
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    \34\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra 
note 9, at 2-3.
    \35\ See FIF Letter, supra note 6, at 3.
    \36\ See SIFMA Letter, supra note 9, at 2. See also Rule 613; 
Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 
45722 (Aug. 1, 2012).
    \37\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra 
note 9, at 2.
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A. Exemption From the Self-Identification Requirements for Equity 
Options Traders

    As discussed above, the current identifying activity level 
methodology for equity options was designed to focus on the potential 
impact of options transactions on the market for the underlying 
securities. Based on its experience and the experience of its member 
firms, however, FIF suggests that the current methodology designates as 
large traders some persons who rarely exercise their options and whose 
aggregate equity options transactions, considering the actual premium 
paid for the options, are not of a large enough fair market value to 
have an impact either on the options market or the underlying equities 
markets.
    In particular, FIF notes that this issue appears to be especially 
pronounced for market participants, particularly individual non-
professional investors, who transact in deep out-of-the money options 
on high-priced securities.\38\ While such transactions may have large 
exercise values, the premium paid for the options may be modest due to 
the deep-out-of-the-money nature of the contract, and, importantly, 
exercise among these traders is very infrequent, according to FIF. 
FIF's members reported that, among their customers that became large 
traders as a result of options transactions, such customers very rarely 
exercised their options,\39\ and FIF asserts that many may have lacked 
the resources to do so.\40\ In other words, the current methodology for 
calculating the fair market value of equity options has resulted in the 
self-identification as large traders of a number of investors who trade 
equity options, yet such investors' activity is

[[Page 68593]]

unlikely to have a material impact either on the options market or the 
underlying equities markets for the purposes of Rule 13h-1.
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    \38\ See FIF Letter, supra note 6, at 1.
    \39\ FIF reports that it surveyed its members and found that 
customers that became large traders as a result of options 
transactions (``Equity Options LT Customers'') exercised their 
options less than 2% of the time on average. See FIF Letter, supra 
note 6, at 2.
    \40\ FIF states that, ``[g]iven the account size associated with 
this class of investor it is unlikely that they would have the 
ability to exercise these out of the money options.'' See id. To 
support this conclusion, FIF provides anecdotal data: A firm with 
approximately 2,000 Equity Options LT Customers reported that the 
average account value was $835,000. Another FIF member firm reported 
that: The average account size for 90% of its Equity Options LT 
Customers was less than $555,000; the average value across all 
Equity Options LT Customer accounts was $2.5 million; and excluding 
the top 50% of its Equity Options LT Customer accounts, the average 
account size was under $56,000. See id. FIF suggests that without 
sufficient assets or collateral, such customers would not be able to 
outright purchase or otherwise finance their acquisition of the 
underlying securities in an amount that equals or exceeds the $20 
million threshold.
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    In order to alleviate the burdens on these persons without 
undermining the purposes of Section 13(h), the Commission hereby is 
providing a conditional exemption from the Self-Identification 
Requirements for persons that trade equity options if: (1) The 
aggregate value of their equity option transactions based on premium 
paid,\41\ combined with the aggregate value of their transactions in 
all other NMS securities (if any), does not reach or exceed the current 
fair market value thresholds of the identifying activity level; and (2) 
they also do not reach or exceed the share volume thresholds of the 
identifying activity level.\42\ Accordingly, this exemptive relief 
makes the calculation of fair market value for equity options 
consistent with how index options are valued under the identifying 
activity level.\43\
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    \41\ To calculate premium paid for an options trade, multiply 
together the number of options contracts involved, the premium paid, 
and the applicable multiplier. For an example, see infra Section 
II.A.3.
    \42\ Neither FIF nor SIFMA have requested exemptive relief for 
persons who become large traders as a result of reaching the 
identifying activity level share volume thresholds applicable to 
equity options, and the Commission is not herein granting such 
relief.
    \43\ See Rule 13h-1(c)(1)(ii) (concerning the fair market value 
of index options). See also Adopting Release, supra note 1, 76 FR at 
46967 (noting, in footnote 64 and the accompanying text, how to 
determine the fair market value of index (and equity) options).
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    This relief utilizes the existing fair market value thresholds of 
the identifying activity level and references premium paid instead of 
the price of the underlying at the time of the trade.\44\ The 
Commission is persuaded that valuing equity options using premium paid 
and applying the existing fair market value thresholds appropriately 
focuses the Rule on persons whose transactions are more likely to have 
a market impact and therefore warrant triggering the Self-
Identification Requirements. In particular, as FIF has stated, the 
current methodology impacts a number of equity options traders, many of 
whom reach the threshold by purchasing options that are deep out of the 
money and who do not otherwise trade in an amount required to reach the 
identifying activity level. When these options expire out of the money 
and are not exercised, the position does not result in any trading in 
the underlying securities, and thus valuing such options with reference 
to the price of the underlying security is unlikely to be a useful 
method to identify traders with the potential to have a market impact 
on the underlying equities.\45\ Using premium paid to value equity 
options instead will focus the identification requirement on options 
traders who trade options in larger amounts that thus may be more 
likely to have a market impact regardless of whether the positions are 
ultimately exercised. In addition, employing the existing fair market 
value thresholds to the new premium-based methodology for equity 
options allows all trading in NMS securities to be easily aggregated 
for purposes of determining large trader status.\46\ For these reasons, 
the Commission believes that calculating the fair market value for 
equity options by referencing the premium paid for the options is a 
better overall indicator, for purposes of Rule 13h-1, of potential 
market impact and provides appropriate relief to equity options 
traders. Accordingly, the Commission finds the exemptive relief to be 
consistent with the purposes of the Exchange Act.
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    \44\ See Rule 13h-1(c)(1)(i) (concerning the fair market value 
of equity securities underlying transactions in stock options).
    \45\ Only purchases and sales of equity options and not 
transactions in the underlying securities pursuant to exercises or 
assignments count toward the identifying activity level. See Rule 
13h-1(a)(6). Purchases and sales pursuant to exercises or 
assignments were expressly excluded from the identifying activity 
level calculation to avoid double-counting. See Adopting Release, 
supra note 1, 76 FR at 46967. The Commission notes that traders may 
trigger the Self-Identification Requirements when they trade out of 
the position they obtained by exercising their options.
    \46\ Further, as noted above, for purposes of the identifying 
activity level under Rule 13h-1(c) (i) and (ii), fair market value 
of equity options is calculated differently than that for index 
options; the fair market value of equity options is calculated based 
on the value of the underlying security, while the fair market value 
of index options is calculated based on the premium paid for the 
contract. As a result, it is easier to reach the identifying 
activity level by transacting in options on an exchange-traded fund 
overlying a securities index than it is to transact in index options 
on the same securities index. This relief harmonizes the fair market 
value calculations for equity options overlying index-tracking 
securities (such as index-based exchange traded funds) with the 
calculations for index options, thereby eliminating the Self-
Identification Requirements as a consideration for investors 
choosing between options products with comparable exposures.
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    Applying the Threshold Permitted by this Conditional Exemption. 
Equity Option Transactions Example. For example, during a calendar day, 
a person purchases 200 call options on ABC stock, each with a 100 
multiplier, for a premium of $15 per share, where the underlying stock 
is trading at $1,000 at the time of the transaction. This transaction 
reaches the identifying activity level under the current calculation 
methodology,\47\ pursuant to which the options are valued as follows: 
200 contracts x 100 shares per contract x $1,000 (the market price of 
the underlying stock at the time of the trade) = $20 million. 
Therefore, this transaction would cause the person to qualify as a 
large trader. However, under this exemptive relief, the fair market 
value of the options trade would be calculated as follows: 200 
contracts x 100 shares per contract x $15 premium price = $300,000. In 
this case, the transaction price of $300,000 is less than the 
identifying activity level of $20 million. Further, the daily share 
volume would be calculated as follows: 200 contracts x 100 shares of 
the underlying per contract = 20,000 shares, which also is less than 
the identifying activity level of 2 million shares. Therefore, the 
person would qualify for this exemption from the Self-Identification 
Requirements and would not be required to register as a large trader on 
the basis of this particular options trade alone.
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    \47\ The daily market value threshold of the identifying 
activity level is $20 million.
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    ``Mixed'' Transactions Example. By way of another example, consider 
a person that, during a calendar day, (1) purchases: (a) 100 call 
options, each with a 100 multiplier, for a premium of $15 per share, 
where the underlying stock is trading at $1,000 at the time of the 
transaction; and (b) 100 contracts of puts on an index, where each 
option uses a $100 multiplier, for $50 per unit; and (2) sells 100,000 
shares of an exchange-traded fund (``ETF'') for $100 per share. Under 
the current method, the fair market value of each transaction would be 
calculated as follows:

 100 call option contracts x 100 (contract multiplier) x $1,000 
(price of the underlying stock) = $10 million
 100 index puts x $100 (contract multiplier) x $50 (price per 
unit) = $500,000
 100,000 ETF shares x $100 (price per share) = $10 million

    Collectively, for purposes of the identifying activity level, the 
transactions would be valued at $20,500,000 ($10 million + $500,000 + 
$10 million), which is greater than the daily value threshold ($20 
million). Accordingly, the person would be required to self-identify to 
the Commission as a large trader.
    To determine whether the large trader qualifies for this exemptive 
relief, the equity options would be valued as follows:

 100 call option contracts x 100 (contract multiplier) x $15 
(premium price) = $150,000
 100 index puts x $100 (contract multiplier) x $50 (price per 
unit) = $500,000

[[Page 68594]]

 100,000 ETF shares x $100 (price per share) = $10 million

    The person qualifies for exemption from the Self-Identification 
Requirements (i.e., does not have to identify as a large trader based 
on this day's transactions alone) because: (1) The daily share volume 
threshold of the identifying activity level (2 million shares) is not 
reached; \48\ and (2) the value of the equity options under the 
alternative methodology ($150,000), when combined with the fair market 
value of the index option and ETF transactions ($500,000 and $10 
million, respectively), is less than the daily identifying activity 
level threshold ($20 million).\49\
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    \48\ The share volume calculation of the three transactions is 
as follows: (100 call option contracts x 100 contract multiplier) + 
0 (index options have no underlying shares) + 100,000 ETF shares = 
110,000 shares.
    \49\ $150,000 + $500,000 + $10 million = $10,650,000, which is 
less than the daily market threshold of the identifying activity 
level ($20 million).
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B. Broker-Dealers May Update Their Monitoring Safe Harbor Policies and 
Procedures To Use the New Methodology

    Paragraph (f) of Rule 13h-1 provides a safe harbor to reduce 
broker-dealers' burdens in connection with monitoring their customers' 
trading for purposes of identifying possible large traders. To take 
advantage of the safe harbor, broker-dealers must have policies and 
procedures reasonably designed to identify persons who have reached or 
exceeded the identifying activity level \50\ but not identified 
themselves to the broker-dealer as a large trader, treat such persons 
as Unidentified Large Traders, and inform such persons of the 
obligations under Rule 13h-1. A broker-dealer that updates its policies 
and procedures to reflect the terms of the exemptive relief described 
above will be able to avail itself of the monitoring safe harbor.
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    \50\ See Rule 13h-1(f)(1).
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C. Relief for Equity Options Large Traders Who Already Self-Identified

    For any person that previously reached the identifying activity 
level as a result of the fair market value of their equity options 
transactions and previously self-identified to the Commission as a 
large trader, but who otherwise does not presently meet the identifying 
activity level as calculated under the exemptive relief provided 
herein, the Commission finds that it is consistent with the purposes of 
the Exchange Act to allow such person to file for inactive status 
without waiting the required full calendar year provided in paragraph 
(b)(3)(iii) of Rule 13h-1.
    To take advantage of this relief, a large trader must file for 
inactive status by submitting Form 13H electronically through 
EDGAR.\51\ After filing for inactive status, the large trader is 
relieved from the Self-Identification Requirements, and thereafter is 
not required to file any further amendments or annual updates to Form 
13H through EDGAR, unless and until the large trader subsequently 
effects transactions that reach or exceed the identifying activity 
level, accounting for the relief granted herein for calculating equity 
options activity. If a large trader that has filed for inactive status 
later reaches or exceeds the identifying activity level, using premium 
paid to calculate the fair market value of subsequent equity options 
transactions, then the large trader must promptly file Form 13H with 
the Commission for reactivated status and promptly thereafter notify 
its broker-dealers of its reactivated status and update them regarding 
the applicability of the large trader's LTID and the accounts to which 
it applies.
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    \51\ The specific form type in EDGAR to file for inactive status 
is Form 13H-I. After filing for inactive status, the large trader 
also may inform the broker-dealers through which it transacts of its 
inactive status. Broker-dealers are not required to keep records of 
transactions by inactive large trader customers after receiving 
notice of inactive status from such trader with respect to 
transactions effected subsequent to such notification. See Adopting 
Release, supra note 1, 76 FR at 46976.
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D. Temporary Exemption From Phase Three of the Recordkeeping and 
Reporting Responsibilities

    As noted above, the Commission has implemented the Recordkeeping 
and Reporting Responsibilities applicable to clearing brokers for large 
traders in phases. In Phase One, which began on November 30, 2012, the 
Commission required clearing brokers for large traders (including the 
large trader itself if it is a self-clearing broker-dealer) to keep 
records and report Transaction Data for large traders' transactions 
that were either (1) proprietary trades by a U.S. registered broker-
dealer; or (2) effected through a ``sponsored access'' arrangement; 
\52\ otherwise, broker-dealers were temporarily exempted from the 
Recordkeeping and Reporting Responsibilities.\53\ In Phase Two, which 
began on November 1, 2013, the Commission again temporarily exempted 
broker-dealers, until November 1, 2015, from the Recordkeeping and 
Reporting Responsibilities, except for: (1) The clearing broker-dealer 
for a large trader, with respect to (a) proprietary transactions by a 
large trader broker-dealer; (b) transactions effected pursuant to a 
``sponsored access'' arrangement; and (c) transactions effected 
pursuant to a ``direct market access'' arrangement; and (2) a broker-
dealer that carries an account for a large trader, with respect to 
transactions other than those set forth above, and for Transaction Data 
other than the execution time.\54\ The Commission also established 
Phase Three, which requires full compliance with the Recordkeeping and 
Reporting Responsibilities for all applicable broker-dealers starting 
November 1, 2015.\55\
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    \52\ See Securities Exchange Act Release No. 66839, supra note 
2, 77 FR at 25008-9. A sponsored access arrangement is one where a 
broker-dealer permits a customer to enter orders into a trading 
center without using the broker-dealer's trading system (i.e., using 
the customer's own technology or that of a third party provider). At 
the time, FIF indicated that broker-dealer compliance would be 
easier for sponsored access customers because those arrangements 
typically are distinct from all other business lines of the broker-
dealer, with infrastructure that processes this order flow that is 
separate from the platforms that handle other client and proprietary 
flows. See id., 77 FR at 25008, n.16.
    \53\ See id., 77 FR at 25010.
    \54\ See Securities Exchange Act Release No. 70150, supra note 
2, 78 FR at 49558-9.
    \55\ See id., 78 FR at 49560.
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    When the Commission adopted the Rule, it characterized the large 
trader reporting requirements as ``relatively modest steps'' to 
``address the Commission's near-term need for access to more 
information about large traders and their trading activities. . . .'' 
\56\ After the Commission adopted the Rule, industry commenters began 
to identify specific implementation challenges and offered more 
detailed estimates of the cost of full compliance with the 
Recordkeeping and Reporting Responsibilities. Such concerns led the 
Commission to implement the Recordkeeping and Reporting 
Responsibilities in phases.\57\
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    \56\ See Adopting Release, supra note 1, 76 FR at 46963.
    \57\ See note 2, supra.
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    Additionally, since adopting the Rule, the Commission adopted Rule 
613, which directed the self-regulatory organizations (``SROs'') to 
jointly submit a plan to create a comprehensive CAT that would allow 
regulators to efficiently and accurately track all activity throughout 
the U.S. markets in National Market System (NMS) securities.\58\ When 
the Commission adopted that rule, it stated that, while certain aspects 
of Rule 13h-1 are not addressed by Rule 613, Rule 613 may

[[Page 68595]]

supersede certain of the broker-dealer Recordkeeping and Reporting 
Responsibilities of Rule 13h-1.\59\ Specifically, the Commission 
stated: ``[t]o the extent that . . . data reported to the central 
repository under Rule 613 obviates the need for the EBS system, the 
Commission expects that the separate [trade] reporting requirements of 
Rule 13h-1 related to the EBS system would be eliminated.'' \60\
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    \58\ Among other things, Rule 613 requires the self-regulatory 
organizations to jointly submit an NMS plan to create, implement and 
maintain a consolidated audit trail, and specifies the type of data 
to be collected and reported to a central repository.
    \59\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722, 45734 (August 1, 2012).
    \60\ Id., text accompanying n.95.
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    The SROs submitted the initial CAT NMS plan to the Commission on 
September 30, 2014, and filed an amended plan on February 27, 2015.\61\ 
As of the date of this Order, an NMS plan for a CAT has not yet been 
published for notice and comment. Accordingly, the Commission continues 
to rely on, among other things, information available through the 
Recordkeeping and Reporting Responsibilities as implemented through 
Phases One and Two. In light of the fact that there is no approved CAT 
NMS plan, the Commission is hesitant at this time to require broker-
dealers to incur the costs associated with the remaining Phase Three 
Large Trader data while the timing of a CAT remains unclear.
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    \61\ Pursuant to Rule 613, the SROs were required to file the 
CAT NMS Plan on or before April 28, 2013. At the SROs' request, the 
Commission granted exemptions to extend the deadline for filing the 
CAT NMS Plan to December 6, 2013, and then to September 30, 2014. 
See Securities Exchange Act Release Nos. 69060 (Mar. 7, 2013), 78 FR 
15771 (Mar. 12, 2013) and 71018 (Dec. 6, 2013), 78 FR 75669 (Dec. 
12, 2013).
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    However, the Commission finds that it is consistent with the 
purposes of the Exchange Act to delay Phase Three, temporarily 
exempting broker-dealers until November 1, 2017 from the Recordkeeping 
and Reporting Responsibilities, except for: (1) The clearing broker-
dealer for a large trader, with respect to (a) proprietary transactions 
by a large trader broker-dealer; (b) transactions effected pursuant to 
a ``sponsored access'' arrangement; and (c) transactions effected 
pursuant to a ``direct market access'' arrangement; and (2) a broker-
dealer that carries an account for a large trader, with respect to 
transactions other than those set forth above, and for Transaction Data 
other than the execution time. While FIF and SIFMA have requested a 
permanent exemption, or alternatively an additional 5-year deferment of 
the compliance date for Phase Three,\62\ the Commission believes at 
this time that a 2-year extension of the Phase Three compliance date 
provides sufficient time for the Commission to consider whether to 
revisit compliance with all of the Recordkeeping and Reporting 
Responsibilities. Specifically, two years will give the Commission 
enough time to evaluate future developments, including any investment 
in or progress on a CAT.\63\
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    \62\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra 
note 9, at 2-3.
    \63\ See note 60, supra, and accompanying text.
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III. Conclusion

    It is hereby ordered, pursuant to Section 13(h)(6) of the Exchange 
Act and Rule 13h-1(g) thereunder, that:
    (1) Persons transacting in equity options are exempt from the Self-
Identification Requirements if: (1) The aggregate value of their equity 
option transactions, calculated based on premium paid, combined with 
the aggregate value of their transactions in all other NMS securities 
(if any), does not reach or exceed the fair market value thresholds of 
the identifying activity level; and (2) they also do not reach or 
exceed the share volume thresholds of the identifying activity level.
    (2) A large trader whose transactions in NMS securities since 
October 3, 2011 reached the identifying activity level one or more 
times because of the fair market value of its equity options 
transactions and who would have qualified in each instance for relief 
under this exemption is exempt from its responsibilities under Rule 
13h-1(b)(1)(ii), 13h-1(b)(1)(iii), and 13h-1(b)(2), if such trader 
files for inactive status by submitting Form 13H and does not 
subsequently effect transactions that reach or exceed the identifying 
activity threshold using premium paid to calculate the fair market 
value of equity options transactions.
    (3) Broker-dealers are exempted temporarily until November 1, 2017 
from the recordkeeping and reporting requirements of Rule 13h-1(d) and 
(e), except for (1) clearing broker-dealers for large traders with 
respect to (a) proprietary transactions by a large trader broker-
dealer, (b) transactions effected pursuant to a ``sponsored access'' 
arrangement, and (c) transactions effected pursuant to a ``direct 
market access'' arrangement; and, for other types of transactions, (2) 
broker-dealers that carry an account for a large trader for Transaction 
Data other than the execution time.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-28147 Filed 11-4-15; 8:45 am]
 BILLING CODE 8011-01-P