[Federal Register Volume 82, Number 38 (Tuesday, February 28, 2017)]
[Notices]
[Pages 12150-12153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03847]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80090; File No. SR-ISE-2017-12]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend Rule 715 and Rule 721

February 22, 2017.
    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 February 13, 2017, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 715 (Types of Orders) and Rule 
721 (Crossing Orders) to codify its Qualified Contingent Cross 
(``QCC'') with Stock Order functionality.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.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 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 purpose of the proposed rule change is to codify functionality 
currently offered to members--i.e., QCC with Stock Orders. The QCC with 
Stock Order is a piece of functionality that facilitates the execution 
of stock component of qualified contingent trades. In particular, a QCC 
with Stock Order is a QCC Order entered with a stock component to be 
communicated to a designated broker-dealer for execution.\3\ QCC with 
Stock Orders assist members in maintaining compliance with Exchange 
rules regarding the execution of the stock component of qualified 
contingent trades, and help maintain an audit trail for surveillance of 
members for compliance with such rules.
---------------------------------------------------------------------------

    \3\ See Proposed Rule 715(t).
---------------------------------------------------------------------------

    Currently, although the Exchange has rules on QCC Orders, those 
rules do not specify how the stock component of such transactions is to 
be executed. In particular, those rules do not describe how this 
process may be facilitated by the Exchange electronically communicating 
the stock component to a designated broker-dealer for execution on the 
behalf of the member. The proposed rule change will increase the 
transparency of this process to the benefit of members and other market 
participants that execute QCC Orders on the Exchange, including those 
that use the QCC with Stock Order functionality described in this 
filing.
    A QCC Order is comprised of an originating order to buy or sell at 
least 1000 contracts that is identified as being part of a qualified 
contingent trade,\4\

[[Page 12151]]

coupled with a contra-side order or orders totaling an equal number of 
contracts. QCC Orders are automatically executed upon entry provided 
that the execution (i) is not at the same price as a Priority Customer 
Order on the Exchange's limit order book and (ii) is at or between the 
national best bid or offer (``NBBO'').\5\ QCC Orders are automatically 
canceled if they cannot be executed, and may only be entered in the 
regular trading increments applicable to the options class.\6\
---------------------------------------------------------------------------

    \4\ See Rule 715(j). A ``qualified contingent trade'' is a 
transaction consisting of two or more component orders, executed as 
agent or principal, where: (a) At least one component is an NMS 
Stock, as defined in Rule 600 of Regulation NMS under the Exchange 
Act; (b) all components are effected with a product or price 
contingency that either has been agreed to by all the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (c) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (d) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined by the 
time the contingent order is placed; (e) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (f) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. See Supplementary Material .01 
to Rule 715.
    \5\ See Rule 721(b).
    \6\ See Rule 721(b)(1), (2).
---------------------------------------------------------------------------

    Since QCC Orders represent one component of a qualified contingent 
trade, each QCC Order must be paired with a stock transaction. When a 
member enters a QCC Order, the member is responsible for executing the 
associated stock component of the qualified contingent trade within a 
reasonable period of time after the QCC Order is executed. The Exchange 
conducts surveillance of members to ensure that members execute the 
stock component of a qualified contingent trade at or near the same 
time as the options component. While the Exchange does not specify how 
the member should go about executing the stock component of the trade, 
this process is often manual and is therefore a compliance risk for 
members if they do not execute the stock component within a reasonable 
time period.
    Thus, the Exchange also offers QCC with Stock Orders that 
communicate the stock component of a qualified contingent trade to a 
broker-dealer for execution in connection with the execution of a QCC 
Order on the Exchange. This functionality reduces the compliance burden 
on members by providing an automated means of executing the stock 
component of a qualified contingent trade, and also provides benefits 
for the Exchange's surveillance by providing an audit trail for the 
execution of the stock component. QCC with Stock Orders can be entered 
by members through the Exchange's front-end order and execution 
management system (``PrecISE''), or through the member's Financial 
Information eXchange (``FIX'') connection to the Exchange.
    QCC with Stock Orders are available to members on a voluntary 
basis. Members that enter QCC with Stock Orders must enter into a 
brokerage agreement with one or more broker-dealers designated by the 
Exchange.\7\ Currently, three broker-dealers have established 
connectivity for executing the stock component of QCC with Stock 
Orders. The member must designate a specific broker-dealer on each 
order if the member has entered into an agreement with more than 
one.\8\ The Exchange does not have any financial arrangement with the 
designated broker-dealers with respect to communicating stock orders to 
them.\9\ While the Exchange does not charge members a fee for the 
execution of the stock component of a QCC with Stock Order,\10\ each 
member would be responsible for whatever fees or other charges are 
imposed by their designated broker-dealer.\11\
---------------------------------------------------------------------------

    \7\ See Proposed Supplementary Material .02 to Rule 721.
    \8\ Id. The Exchange does not have any role with respect to 
determining where to route the stock component of a QCC with Stock 
Order if the member has entered into an agreement with more than one 
broker-dealer.
    \9\ Id. The Exchange also represents that the designated broker-
dealers that execute the stock component of QCC with Stock Orders do 
not receive other special benefits related to trading on the 
Exchange.
    \10\ Members that enter their QCC with Stock Orders through 
PrecISE are charged a fee for the use of the front end terminal but 
are not charged transaction fees for the execution of the stock 
component of the trade.
    \11\ These fees are billed directly by the member's designated 
broker-dealer.
---------------------------------------------------------------------------

    Members can enter QCC with Stock Orders with separate prices for 
the stock and options components, or with a net price for both.\12\ QCC 
Orders may not be executable on entry if priced at the same price as a 
Priority Customer Order, or at a price that is outside of the NBBO. The 
stock component of a qualified contingent trade, however, is permitted 
to trade through the stock NBBO pursuant to an exemption granted by the 
Commission from the order protection requirements of Rule 611(a) of 
Regulation NMS.\13\ Net priced QCC with Stock Orders reduce the chance 
that members miss the market since the Exchange will calculate a price 
for the stock and options components that honors the net price of the 
package and current market prices, if possible. At the same time, the 
Exchange permits members to submit QCC with Stock Orders with separate 
stock and options prices for members that want specific prices for each 
individual component.
---------------------------------------------------------------------------

    \12\ See Proposed Supplementary Material .01 Rule 721.
    \13\ See Securities Exchange Act Release Nos. 54389 (August 31, 
2006), 71 FR 52829 (September 7, 2006) (Order Granting an Exemption 
for Qualified Contingent Trades From Rule 611(a) of Regulation NMS 
Under the Securities Exchange Act of 1934); 57620 (April 4, 2008), 
73 FR 19271 (April 9, 2008) (Order Modifying the Exemption for 
Qualified Contingent Trades from Rule 611(a) of Regulation NMS Under 
the Securities Exchange Act of 1934).
---------------------------------------------------------------------------

    When a member enters a QCC with Stock Order, a QCC Order is entered 
on the Exchange.\14\ That QCC Order is automatically executed upon 
entry provided that the conditions of Rule 721(b) are met. If the QCC 
Order is executed, the Exchange will automatically communicate the 
stock component to the member's designated broker-dealer for 
execution.\15\ Although QCC Orders are eligible for automatic 
execution, it is possible that the QCC Order may not be executable 
based on market prices at the time the order is entered. If the QCC 
Order is not capable of being executed, the entire QCC with Stock 
Order, including both the stock and options components, is 
cancelled.\16\ This prevents members from executing the stock component 
of a qualified contingent trade where the options component has not 
been successfully executed.
---------------------------------------------------------------------------

    \14\ See Proposed Rule 721(c)(1).
    \15\ See Proposed Rule 721(c)(2).
    \16\ See Proposed Rule 721(c)(3).
---------------------------------------------------------------------------

    Furthermore, it is possible that the member will receive an 
execution for the QCC Order but not the stock component communicated to 
the broker-dealer. Once the stock component is communicated to the 
member's designated broker-dealer for execution, the broker-dealer is 
responsible for determining whether the stock component may be executed 
in accordance with all of the rules applicable to execution of such 
orders. Members that execute the options component of a qualified 
contingent trade entered as a QCC with Stock Order remain responsible 
for the execution of the stock component if they do not receive an 
execution from their designated broker-dealer.\17\ In such cases, the 
Exchange will inform the member that the stock component of the trade 
has not been executed, and that they must find an alternative means of 
executing the stock component. The Exchange conducts surveillance to 
ensure that members execute the stock component of their qualified 
contingent trades; this surveillance also extends to

[[Page 12152]]

QCC with Stock Orders where the options component is successfully 
executed but the stock component is not.
---------------------------------------------------------------------------

    \17\ See Proposed Supplementary Material .03 to Rule 721.
---------------------------------------------------------------------------

Example 1:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
    Member submits a QCC with Stock Order buying 1,000 puts and 100,000 
shares of stock with a net price of $101.50.
    QCC Order is entered on the Exchange and executed at a price of 
$1.50.
    Stock component is routed to member's designed broker-dealer at a 
price of $100.
    The stock component is executed successfully, or the member remains 
responsible for executing the stock component elsewhere.
Example 2:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
    Member submits a QCC with Stock Order buying 1,000 puts at $1.99 
and 100,000 shares of stock at $100.
    QCC Order is entered on the Exchange and executed at a price of 
$1.99.
    Stock component is routed to the member's designed broker-dealer at 
a price of $100.
    The stock component is executed successfully, or the member remains 
responsible for executing the stock component elsewhere.
Example 3:
Stock NBBO: $100 x $101
ABBO: $1.00 x $1.05
Exchange BBO: $1.00 (Priority Customer) x 1.01 (Priority Customer)
    Member submits a QCC with Stock Order buying 1,000 puts at $1.01 
and 100,000 shares of stock at $100.
    QCC Order is entered on the Exchange at a price of $1.01 and is 
cancelled due to being at the same price as a Priority Customer order 
on the Exchange.
    Because the QCC Order is not successfully executed the entire QCC 
with Stock Order is cancelled.
2. Statutory Basis
    The Exchange believes that the proposed rule change 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.\18\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\19\ because is designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
promote just and equitable principles of trade because it will increase 
transparency for members and other market participants with respect to 
how the Exchange facilitates the execution of the stock component of 
qualified contingent trades. The QCC with Stock Order is an optional 
piece of functionality offered to members to communicate the stock 
component of a qualified contingent trade to a designated broker-dealer 
for execution. Members that do not wish to use QCC with Stock 
functionality can enter QCC Orders on the Exchange and separately 
execute the stock component of their trades on another venue. Members 
can also build their own technology to electronically communicate the 
stock component of a qualified contingent trade to a broker-dealer for 
execution. QCC with Stock Orders reduce members' compliance burden 
because it allows for the automatic submission of the stock component 
of a qualified contingent trade in connection with the execution of the 
options component(s) as a QCC Order on the Exchange. It also provides 
benefits to the Exchange by establishing an audit trail for the 
execution of the stock component of such trades within a reasonable 
period of time after the execution of the QCC Order. Members remain 
responsible for ensuring the execution of the stock component of a 
qualified contingent trade. Nevertheless, the Exchange believes that 
members have found the QCC with Stock Order functionality useful for 
ensuring compliance with the requirement that they execute the stock 
component of a qualified contingent trade within a reasonable period of 
time after executing the option component(s) on the Exchange as a QCC 
Order. The Exchange therefore believes that QCC with Stock Orders are 
designed to remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and in general, to 
protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\20\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. QCC with Stock 
Orders facilitate member compliance with the requirements associated 
with executing QCC Orders on the Exchange, and are not designed to 
impose any unnecessary burden on competition. Members are not required 
to use QCC with Stock Orders, and can either create similar 
functionality, or manually communicate the stock component of their 
qualified contingent trades to a broker-dealer for execution. In 
addition, QCC with Stock Orders are available to all members either 
through the Exchange's PrecISE front end or the member's FIX 
connection.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

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

    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 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)(iii) of the Act \21\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\22\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
The Exchange has met this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) \23\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. In its filing with the Commission, 
the Exchange requests that the Commission waive the 30-day operative 
delay. The Exchange states that it currently offers QCC with Stock 
Order functionality to aid members in their compliance with qualified 
contingent trade obligations, and for the surveillance benefits that 
this functionality provides. According to the Exchange, waiving the 
operative delay will allow the Exchange to update its rules immediately 
to reflect this

[[Page 12153]]

functionality, to the benefit of members and other market participants. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The QCC with Stock Order functionality is designed to help ISE members 
that choose to use the functionality comply with their qualified 
contingent trade obligations in connection with a QCC Order,\24\ as 
well as help the Exchange surveil its members for compliance with the 
Exchange's rules for QCC Orders. Therefore, the Commission designates 
the proposed rule change operative upon filing.\25\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ See supra note 4 and accompanying text.
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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-ISE-2017-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2017-12. 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 also will 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-ISE-2017-12 and should be 
submitted on or March 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-03847 Filed 2-27-17; 8:45 am]
 BILLING CODE 8011-01-P