[Federal Register Volume 80, Number 215 (Friday, November 6, 2015)]
[Notices]
[Pages 68884-68888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28268]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76327; File No. SR-BATS-2015-93


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Delete 
Rule 22.10, Limitations on Dealings

November 2, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 21, 2015, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Exchange has designated this proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal for the BATS Options Market (``BATS 
Options'') to adopt a principles-based approach to prohibit the misuse 
of material nonpublic information by Market Makers by deleting Rule 
22.10 (Limitations on Dealings).

[[Page 68885]]

    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts 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 Rule 22.10 (Limitations on Dealings). In doing so, the 
Exchange, with regard to BATS Options, would harmonize its rules 
governing Market Makers and Options Members that are not Market Makers 
relating to the protection against misuse of material, non-public 
information. The Exchange believes that Rule 22.10 is no longer 
necessary because all Options Members, including Market Makers, are 
subject to the Exchange's generally applicable principles-based 
requirements governing the protection against the misuse of material, 
non-public information, pursuant to Rule 5.5 (Prevention of the Misuse 
of Material, Non-Public Information), which obviates the need for 
separately prescribed requirements for a subset of Exchange 
participants. 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 Options Members. This is a 
competitive filing that is based on a proposal recently submitted by 
NYSE MKT LLC (``NYSE MKT'') and approved by the Commission.\5\
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    \5\ 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 BATS Options participants. 
Specifically, pursuant to Rule 16.1.(a)(38), the term ``Options 
Member'' means a firm or organization that is registered with the 
Exchange pursuant to Chapter XVII of the Rules for the purposes of 
participating in options trading on BATS Options either as an ``Options 
Order Entry Firm'' or as an ``Options Market Maker.'' Pursuant to Rule 
16.1(a)(36), the terms ``Options Order Entry Firm'' or ``Order Entry 
Firm'' or ``OEF'' mean those Options Members representing as agent 
Customer Orders on BATS Options and those non-Market Maker Members 
conducting proprietary trading. Pursuant to Rule 16.1(a)(37), the term 
``Options Market Maker'' or ``Market Maker'' means an Options Member 
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 Chapter XXII of the Rules.
    Rule 22.5 (Obligations of Market Makers) describes the obligations 
of Market Makers. Rule 22.6 (Market Maker Quotations) sets forth 
quoting obligations of Market Makers.\6\ Rule 22.10 (Limitations on 
Dealings) 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 information barrier by persons on the other side of the 
information barrier.
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    \6\ Rule 22.6 generally requires that Market Makers provide 
firm, two-sided, continuous quotations, in minimum size, for the 
options series to which it is registered.
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Proposed Rule Change
    The Exchange believes that the particularized guidelines for Market 
Makers in Rule 22.10 are no longer necessary and proposes to delete 
Rule 22.10. The Exchange believes that Rule 5.5 (Prevention of the 
Misuse of Material, Nonpublic Information), which governs the misuse of 
material, non-public information and applies to all Members (including 
Options Members), provides an appropriate, principles-based approach to 
prevent the market abuses that Rule 22.10 seeks to address. 
Specifically, Rule 5.5 requires every Member (including Options 
Members) to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the misuse of material, non-
public information by such Member or persons associated with such 
Member. For purposes of Rule 5.5, the misuse of material, non-public 
information includes, but is not limited to, the following:
    (1) Trading in any securities issued by a corporation, or in any 
related securities or related options or other derivative securities, 
while in possession of material, non-public information concerning that 
issuer;
    (2) Trading in a security or related options or other derivative 
securities, while in possession of material, non-public information 
concerning imminent transactions in the security or related securities; 
and
    (3) Disclosing to another person or entity any material nonpublic 
information involving a corporation whose shares are publicly traded or 
an imminent transaction in an underlying security or related securities 
for the purpose of facilitating the possible misuse of such material 
nonpublic information.
    Because Options Members are already subject to the requirements of 
Rule 5.5, the Exchange does not believe that it is necessary to 
separately require particularized limitations on Market Makers. 
Deleting Rule 22.10, with its particularized limitations 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 Members on the Exchange currently operate in conformity 
with Rule 5.5.
    As noted above, Market Makers are distinguished under Exchange 
rules from other Options Members only to the extent that Market Makers 
have heightened quoting obligations. However, such heightened quoting 
obligations do not afford different or greater access to nonpublic 
information than any other Options Member of the Exchange.\7\ 
Therefore, because Market Makers do not have any trading advantages 
over Order Entry Firms on BATS Options, the Exchange believes

[[Page 68886]]

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 Rule 5.5.
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    \7\ The Exchange notes that by deleting Rule 22.10, the Exchange 
would no longer require specific information barriers for Market 
Makers; however, as is the case currently with Options Members, 
information barriers of new participants would be subject to review 
as part of a new firm application. Moreover, the policies and 
procedures of Market Makers, including those relating to any 
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 Members is consistent 
with recently approved rule changes for NYSE MKT and recently filed 
changes for the International Securities Exchange LLC (``ISE'') and the 
Boston Options Exchange LLC (``BOX'').\8\ Each of these exchanges has 
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.\9\
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    \8\ 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. 75792 (August 31, 2015), 80 FR 53601 
(September 4, 2015) (SR-ISE-2015-26) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Adopting a Principles-Based 
Approach To Prohibit the Misuse of Material, Non-Public Information 
by Market Makers by Deleting Rule 810); 75916 (September 14, 2015), 
80 FR 56503 (September 18, 2015) (SR-BOX-2015-31) (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).
    \9\ See supra note 8.
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    The Exchange believes that a principles-based rule applicable to 
members of options markets would be effective in protecting against the 
misuse of material non-public information. Indeed, Exchange Rule 5.5 is 
currently applicable to Options Members and already requires policies 
and procedures reasonably designed to prevent the misuse of material 
nonpublic information. The Exchange believes that Rule 5.5 provides 
appropriate protection against the misuse of material nonpublic 
information by Options Members and that there is no longer a need for 
prescriptive information barrier requirements set forth in Rule 22.10.
    The Exchange notes that even with this proposed rule change and the 
elimination of the requirement that the Exchange pre-approve a Member's 
policies and procedures, pursuant to Rule 5.5, an Options Member 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,\10\ and with 
applicable Exchange rules, including being reasonably designed to 
protect against the misuse of material, non-public information. Thus, 
the Exchange does not believe there will be any material change to 
Member's information barriers as a result of the Exchange's pre-
approval no longer being required. In fact, the Exchange anticipates 
that the lack of such pre-approval would facilitate Market Maker's 
ability to more quickly implement changes to their information barrier 
as necessary to protect against the misuse of material, non-public 
information.
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    \10\ 15 U.S.C 78o(g).
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    The Exchange is not proposing to change what is considered to be 
material, non-public information and, thus, would not expect there to 
be any changes to the types of information that an affiliated brokerage 
business of a Market Maker could share with such Market Maker. In 
addition, the Exchange notes that the proposed rule change would not 
permit the affiliates of a Market Maker to have access to any non-
public order or quote information of the Market Maker, including the 
non-displayed size of Reserve Orders.\11\ Affiliates of Market Makers 
would only be permitted to have access to orders and quotes that are 
publicly available to all market participants.
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    \11\ Reserve Orders are described in Rule 21.1(d) and include 
both a quantity that is displayed and a reserve portion that is not 
displayed.
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    While information barriers would not specifically be required under 
the proposal, Rule 5.5 already requires that an Options Member 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.
    The Exchange believes that the proposed reliance on the principles-
based Rule 5.5 would ensure that an Options Member would be required to 
protect against the misuse of any material non-public information. As 
noted above, Rule 5.5 already requires that Members 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 particularized information barriers applicable to 
Market Makers 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 its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\12\ In particular, 
the proposal is consistent with Section 6(b)(5) of the Act \13\ because 
it is designed to prevent fraudulent and manipulative acts and 
practices, would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, and, in general protect investors and the 
public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 Member 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 upon an approved 
rule of the Exchange to which Options Members are subject--Rule 5.5--
and the proposed change harmonizes the rules governing Options Members. 
Moreover, Market Makers would continue to be subject to federal and 
Exchange requirements for protecting material non- public order 
information.\14\ 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

[[Page 68887]]

nonpublic information and no longer subject Market Makers to 
particularized prescriptive requirements. The Exchange does not believe 
that the existing prescriptive requirements applicable to Options 
Market Makers are narrowly tailored to their respective role because 
Market Makers do not have access to Exchange trading information in a 
manner different from any other Options Member that is not a Market 
Maker.
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    \14\ See 15 U.S.C. 78o(g) and Rule 5.5.
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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 Members the type of conduct that is prohibited by the Exchange. 
While the proposal eliminates certain 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.\15\
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    \15\ See supra, note 7.
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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 particularized 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 requirements should not reduce the 
effectiveness of the Exchange rules to protect against the misuse of 
material non-public information. Rather, all Options Members 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 particularized information barriers may no 
longer be required, an Options Member'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.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. In 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.\16\ The Exchange believes 
this proposed rule change is necessary to permit fair competition among 
the options exchanges.
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    \16\ See supra, note 5.
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    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.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    Because the foregoing proposed rule change does not: (A) 
Significantly affect the protection of investors or the public 
interest; (B) impose any significant burden on competition; and (C) by 
its terms, become operative for 30 days from the date on which it was 
filed or such shorter time as the Commission may designate it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and 
paragraph (f)(6) of Rule 19b-4 thereunder,\18\ the Exchange has 
designated this rule filing as non-controversial. The Exchange has 
given the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4.
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    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: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) 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-BATS-2015-93 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-BATS-2015-93. 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

[[Page 68888]]

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-BATS-2015-93 and should be submitted on or before 
November 27, 2015.

     For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-28268 Filed 11-5-15; 8:45 am]
 BILLING CODE 8011-01-P