[Federal Register Volume 81, Number 148 (Tuesday, August 2, 2016)]
[Notices]
[Pages 50759-50761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78423; File No. SR-ISE-2015-30]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Disapproving a Proposed Rule Change To Amend Rule 804(g)

July 27, 2016.

I. Introduction

    On November 10, 2015, the International Securities Exchange, LLC 
(``ISE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require Clearing Member \3\ 
approval for a market maker \4\ to resume trading after the activation 
of a market-wide speed bump under ISE Rule 804(g). The proposed rule 
change was published for comment in the Federal Register on November 
30, 2015.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Clearing Member'' is a Member that is self-clearing or 
an Electronic Access Member that clears transactions executed on or 
through the facilities of the Exchange for other Members of the 
Exchange. See ISE Rule 100(a)(8). An ``Electronic Access Member'' is 
an Exchange Member that is approved to exercise trading privileges 
associated with EAM Rights. See Article XIII, Section 13.1(l) of the 
Second Amended and Restated Constitution of ISE.
    \4\ ISE has two categories of market makers: Primary Market 
Makers (``PMMs'') and Competitive Market Makers (``CMMs''). A PMM is 
appointed to each options class traded on the Exchange, but a CMM 
may or may not be appointed to each such options class. See ISE Rule 
802.
    \5\ See Securities Exchange Act Release No. 76506 (November 23, 
2015), 80 FR 74829 (``Notice'').
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    On January 13, 2016, the Commission extended the time period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change to February 28, 2016.\6\ On February 26, 2016, the 
Commission instituted proceedings under Section 19(b)(2)(B) of the Act 
\7\ to determine whether to approve or disapprove the proposed rule 
change.\8\ Specifically, the Commission instituted proceedings to allow 
for additional analysis of, and input from commenters with respect to, 
the proposed rule change's consistency with Section 6(b)(5) of the 
Act.\9\ On May

[[Page 50760]]

26, 2016, the Commission extended the time period for Commission action 
on the proceedings to determine whether to disapprove the proposed rule 
change.\10\ The Commission did not receive any comments on the proposed 
rule change and the Exchange did not submit a response to the 
Commission's order instituting proceedings. This order disapproves the 
proposed rule change.
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    \6\ See Securities Exchange Act Release No. 76893, 81 FR 3217 
(January 20, 2016).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 77246, 81 FR 11305 
(March 3, 2016) (``Order Instituting Proceedings'').
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See Securities Exchange Act Release No. 77928, 81 FR 35409 
(June 2, 2016).
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II. Description of the Proposal

    The Exchange has an automated quotation adjustment functionality 
that is governed by its Rule 804(g)(1) (for regular orders) and 
Supplementary Material .04 to Rule 722 (for complex orders). Pursuant 
to these Rules, the Exchange will automatically remove a market maker's 
quotations in all series of an options class or in all complex order 
strategies of an options class when, during a specified time period, 
the market maker exceeds certain execution parameters.\11\ All market 
makers are required by ISE to provide these specific parameters. 
Additionally, the Exchange will automatically remove a market maker's 
quotes in all classes when, during a specified time period, the total 
number of quote removal events (``curtailment events'') described in 
Rule 804(g)(1) and in Supplementary Material .04 to Rule 722 exceed a 
specified market-wide parameter (``market-wide speed bump'').\12\ As 
with the functionality to remove all option series of an options class 
or complex order strategies of an options class, all market makers are 
required by ISE to specify a market-wide parameter. The market-wide 
speed bump is available for quotes only on ISE or across both ISE and 
ISE's affiliated exchange, ISE Gemini, LLC.\13\ The Exchange states 
that, after a market-wide speed bump is triggered and the trading 
system removes all of a market maker's quotes, the market maker may re-
enter the market and resume trading upon notification to the Exchange's 
Market Operations.\14\
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    \11\ See ISE Rule 804(g)(1) and Supplementary Material .04 to 
Rule 722 for a description of the parameters. The time period is 
specified by the market maker.
    \12\ See ISE Rule 804(g)(2). The time period for a market-wide 
speed bump is also specified by the market maker.
    \13\ Id.
    \14\ See Notice, supra note 5, at 74830.
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    Under the proposal, the Exchange seeks to amend the process by 
which market makers can re-enter the market. Specifically, the proposal 
requires Clearing Member approval before a market maker can resume 
trading after triggering a market-wide speed bump.\15\ Following a 
market-wide speed bump, the proposed rule requires: (1) A market maker 
to notify its Clearing Member(s) when it is ready to resume trading; 
and (2) each applicable Clearing Member to inform the Exchange directly 
when its authorization has been given for the market maker to resume 
trading.\16\ In order to ``facilitate a better response time'' from 
Clearing Members so that a market maker can re-enter the market, the 
proposal also allows the Exchange staff to notify Clearing Member(s) 
when a market maker's quotes have been removed pursuant to the market-
wide speed bump.\17\
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    \15\ See proposed Rule 804(g)(2).
    \16\ See id.
    \17\ See id.
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III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act,\18\ the Commission shall 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to such organization.\19\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\20\ Rule 700(b)(3) of the Commission's Rules of Practice 
states that the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not sufficient.'' 
\21\
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    \18\ 15 U.S.C. 78s(b)(2)(C).
    \19\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \20\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 
201.700(b)(3).
    \21\ See 17 CFR 201.700(b)(3). ``The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. Any failure of a self-regulatory organization to 
provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization.'' Id.
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    After careful consideration, the Commission does not find that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\22\ In particular, the Commission does not find 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\23\ which, among other things, requires that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to 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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    \22\ In disapproving the proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Commission has stated in the past that, because market makers 
receive favorable treatment from an exchange, they must also be subject 
to sufficient and commensurate affirmative obligations, including the 
obligation to hold themselves out as willing to buy and sell options 
for their own account on a regular or continuous basis.\24\ 
Accordingly, under ISE's current rules, a market maker must enter 
continuous quotations for the options classes to which it is 
appointed.\25\ In return, the market maker receives certain benefits, 
including participation entitlements \26\ and an exception from the 
prohibition in Section 11(a) of the Act.\27\
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    \24\ See, e.g., Securities Exchange Act Release No. 68341 
(December 3, 2012), 77 FR 73065, 73076 (December 7, 2012) (approving 
the application of Miami International Securities Exchange, LLC for 
registration as a national securities exchange); Securities Exchange 
Act Release No. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013) 
(approving the application of Topaz Exchange, LLC for registration 
as a national securities exchange); Securities Exchange Act Release 
No. 76998 (January 29, 2016), 81 FR 6066 (February 4, 2016) 
(approving the application of ISE Mercury, LLC for registration as a 
national securities exchange).
    \25\ See ISE Rule 804(e).
    \26\ See, e.g., ISE Rule 713.
    \27\ 15 U.S.C. 78k(a).
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    The Exchange proposes to require Clearing Member approval before a 
market maker can resume trading after triggering a market-wide speed 
bump. The Exchange states in its filing that the Clearing Member should 
approve a market maker's re-entry into the market after a market-wide 
speed bump because the Clearing Member guarantees the market maker's 
trades and bears the ultimate financial risk associated with the 
transactions.\28\ The Exchange notes that, while not all market makers 
are Clearing Members, all market makers require a Clearing Member's 
consent to clear transactions on their behalf in order to conduct 
business on the Exchange.\29\ The Exchange asserts that

[[Page 50761]]

the proposed rule change will permit Clearing Members to better monitor 
and manage the potential risks assumed by market makers and will 
provide Clearing Members with greater control and flexibility over 
their risk tolerance and exposure.\30\ The Exchange further contends 
that, ``[w]hile in some cases [the proposed rule change] may result in 
a minimal delay for a market maker that wants to reenter the market 
quickly following a market-wide speed bump, the Exchange believes that 
Clearing Member approval . . . ensure[s] that the market maker does not 
prematurely enter the market without adequate safeguards . . . '' \31\
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    \28\ See Notice, supra note 5, at 74830.
    \29\ Each market maker authorized to trade on the Exchange must 
obtain from a Clearing Member a ``Market Maker Letter of Guarantee'' 
wherein the Clearing Member accepts financial responsibility for all 
Exchange transactions made by the market maker. See ISE Rule 808.
    \30\ See Notice, supra note 5, at 74830. Under ISE's current 
rules, the Exchange may share any Member-designated risk settings in 
the trading system with the Clearing Member that clears transactions 
on behalf of the Member. See ISE Rule 706(a).
    \31\ See Notice, supra note 5, at 74830.
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    As noted above, on February 26, 2016, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act \32\ to determine 
whether to approve or disapprove the proposed rule change.\33\ In the 
order instituting proceedings, the Commission noted that the Exchange 
does not address how the proposal would impact the continuous quoting 
obligations of market makers and provided no basis for its statement 
that the proposed rule would result in only a ``minimal delay'' for a 
market maker seeking to resume quoting following a market-wide speed 
bump. Accordingly, the Commission stated that the proposed rule change 
raises questions regarding the ability of market makers to meet their 
quoting obligations, and whether the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act. The Exchange did 
not respond to the issues raised in the Commission's order instituting 
proceedings.
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    \32\ 15 U.S.C. 78s(b)(2)(B).
    \33\ See Securities Exchange Act Release No. 77246, 81 FR 11305 
(March 3, 2016) (``Order Instituting Proceedings'').
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    The Commission does not believe the Exchange has met its burden to 
demonstrate that the proposed rule change is consistent with the Act 
and the rules and regulations issued thereunder. The Exchange proposes 
to require Clearing Member approval before a market maker can resume 
trading following a market-wide speed bump so that Clearing Members can 
better monitor and manage their potential risks. Providing this 
additional risk management tool to Clearing Members, however, 
necessarily will delay the resumption of quoting by market makers and 
the resulting potential market quality benefits to all users of the 
Exchange. Although the Exchange states that any delay would be minimal, 
it provides no evidence to support that assertion. The Exchange also 
has not explained why Clearing Member risks cannot effectively be 
addressed through other means, such as bilateral, contractual 
arrangements between Clearing Members and market makers that do not 
impede a market maker's ability to promptly resume quoting and enhance 
the Exchange's market quality.
    Accordingly, the Commission does not believe that the Exchange has 
met its burden to demonstrate that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder. In particular, the Commission does not find 
that the proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act, which requires that the rules of an 
exchange, among other things, be designed to promote just and equitable 
principles of trade, 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.\34\
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    \34\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    For the foregoing reasons, the Commission does not find that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b)(5) of the Act.
    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (SR-ISE-2015-30) be, hereby is, 
disapproved.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18207 Filed 8-1-16; 8:45 am]
 BILLING CODE 8011-01-P