[Federal Register Volume 82, Number 50 (Thursday, March 16, 2017)]
[Notices]
[Pages 14041-14043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80212; File No. SR-ISE-2017-18]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Harmonize Liability Caps and Related Reimbursement 
Requirements

March 10, 2017.
    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 February 28, 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, II, and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 705 (Limitation of Liability) 
to harmonize its liability caps and related reimbursement requirements 
with those of NASDAQ BX, Inc. (``BX''), NASDAQ PHLX LLC (``Phlx'') and 
NASDAQ Stock Market LLC (``NSM'' and together with BX and Phlx, the 
``Nasdaq Exchanges'').
    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 this proposed rule change is to amend Rule 705 
(Limitation of Liability) to harmonize the Exchange's existing 
liability caps and related reimbursement requirements for claims under 
Rule 705(d) with the caps and requirements set forth in the rules of 
the Nasdaq Exchanges.\3\ The Exchange and its affiliates, ISE Gemini, 
LLC and ISE Mercury, LLC (together, the ``ISE Exchanges''), were 
recently acquired (the ``Acquisition'') by Nasdaq, Inc. 
(``HoldCo'').\4\ In the context of the Acquisition, the ISE Exchanges 
are working to align certain rules with rules of the Nasdaq Exchanges 
in order to provide consistent standards across the six exchanges 
operated by HoldCo (the ``HoldCo Affiliated Exchanges''). As part of 
this effort, the proposal set forth below harmonizes the Exchange's 
liability caps and the related reimbursement requirements with those of 
the Nasdaq Exchanges in order to provide uniform standards and 
requirements for users of the HoldCo Affiliated Exchanges.\5\
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    \3\ See BX Rule 4626(b) and Phlx Rule 1015. See also NSM Rule 
4626(b).
    \4\ See Securities Exchange Act Release No. 78119 (June 21, 
2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISEGemini-
2016-05; SR-ISEMercury-2016-10).
    \5\ ISE Gemini, LLC and ISE Mercury, LLC will each file a 
proposed rule change with the Commission to adopt similar 
requirements.
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    Rule 705 in its current form generally states that the Exchange is 
not liable for any losses due to the Exchange's negligence or 
unintentional actions, but also provides in Rule 705(d) that 
notwithstanding this general limitation on liability, the Exchange may 
compensate its members for losses resulting directly from the 
malfunction of the Exchange's physical equipment, devices and/or 
programming. Subsections (d)(1)-(d)(3) of Rule 705 contains express 
conditions governing the voluntary payments made by the Exchange under 
these limited circumstances. Specifically, the Exchange's payments for 
any and all system failures on a single trading day are capped at 
$250,000 under subsection (d)(1). The rule text states that for the 
aggregate of all claims made by all market participants related to the 
use of the Exchange on a single trading day, the Exchange's payments 
shall not exceed $250,000. Subsection (d)(2) further provides that if 
the cumulative claims exceed the $250,000 cap, this

[[Page 14042]]

amount would be proportionally allocated among all such claims. 
Finally, subsection (d)(3) specifies that in order for a member to be 
eligible to receive payment under this Rule, claims for payment must be 
made in writing and submitted no later than the opening of trading on 
the next business day after the loss. Once in receipt of a claim, the 
Exchange is required to verify that: (i) A valid order was accepted 
into the Exchange's systems; and (ii) an Exchange system failure 
occurred during the execution or handling of that order. A system 
failure will be deemed to have occurred when there is a malfunction of 
the Exchange's physical systems, devices or software.
    The Exchange now proposes to amend the existing rule text in Rule 
705(d) to adopt the same liability caps and reimbursement requirements 
as the Nasdaq Exchanges.\6\ Proposed Rule 705(d) would provide that the 
Exchange may, notwithstanding the general limitations on liability 
contained in Rule 705(a), compensate users of the Exchange for losses 
directly resulting from the actual failure of the System,\7\ or any 
other Exchange quotation, transaction reporting, execution, order 
routing or other systems or facility to correctly process an order, 
quote, message, or other data, provided that the Exchange has 
acknowledged receipt of the order, quote, message, or data. This 
limited exception in proposed Rule 705(d) would be subject to certain 
conditions and requirements contained in proposed subsections (d)(1)-
(3).
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    \6\ See note 4 above.
    \7\ ``System'' means the electronic system operated by the 
Exchange that receives and disseminates quotes, executes orders and 
reports transactions. See the Second Amended and Restated 
Constitution of ISE, Section 13.1(gg).
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    Subsection (d)(1) proposes that the aggregate payments for all 
compensation claims made by all market participants related to the use 
of the Exchange during a single calendar month would not exceed the 
larger of $500,000, or the amount of the recovery obtained by the 
Exchange under any applicable insurance policy.\8\ Under this proposal, 
the Exchange will eliminate the existing $250,000 daily cap on 
liability and consider all such claims on a monthly basis, subject to 
proposed $500,000 monthly liability cap. Each Nasdaq Exchange currently 
analyzes total eligible liability claims on a per-month look-back 
basis. The Exchange's proposal to adopt an identical claims process, in 
effect, would allow ISE an increased capability to compensate a market 
participant up to the monthly cap of $500,000 even though the losses 
occurred on a single day or were across multiple days for a single 
participant.
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    \8\ See BX Rule 4626(b)(1), Phlx Rule 1015(1), and NSM Rule 
4626(b)(1) for substantially similar provisions.
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    Proposed subsection (d)(2) specifies how the reimbursement funds 
would be allocated in the event all of the compensation claims 
submitted during a single calendar month exceed the $500,000 monthly 
cap. Specifically, if all of the claims arising out of the use of the 
Exchange cannot be fully satisfied because in the aggregate they exceed 
the limitations provided for in the Rule ($500,000), then the maximum 
permitted amount would be proportionally allocated among all such 
claims arising during a single calendar month.\9\ This is substantially 
similar to the existing process where the maximum amount is 
proportionally allocated among all such claims, except it would be for 
all claims arising during a one-month period under the proposed rule 
change rather than during a single trading day under the existing Rule.
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    \9\ See BX Rule 4626(b)(2), Phlx Rule 1015(2), and NSM Rule 
4626(b)(5) for substantially similar provisions.
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    Finally, proposed subsection (d)(3) specifies the requirements and 
procedures applicable to the submission of reimbursement claims. 
Specifically, all claims for compensation must be submitted in writing 
no later than 12:00 p.m. ET on the next business day following the day 
on which the use of the Exchange gave rise to such claims.\10\ As such, 
the Exchange is proposing to extend the deadline to submit compensation 
claims from the opening of trading on the next business day to 12:00 
p.m. ET. The Exchange believes that the extension of time to make such 
compensation claims increases the ability of market participants to 
submit claims in a timely manner. Proposed subsection (d)(3) also 
states that nothing in the Rule obligates the Exchange to seek recovery 
under any applicable insurance policy. If the Exchange does seek and 
receive an insurance recovery that is larger than $500,000, the amount 
of that recovery would limit the reimbursement funds available for the 
incident supporting the recovery to the greater recovery amount.\11\
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    \10\ See BX Rule 4626(b)(3) and Phlx Rule 1015(3) for 
substantially similar provisions. See also NSM Rule 4626(b)(6).
    \11\ There are no other practical differences between the 
Exchange's existing reimbursement rule and this proposal than as 
described above. Specifically these differences are: The liability 
caps (i.e. the greater of $500,000 or, if the Exchange opts to seek 
recovery, the recovery amount under any applicable insurance 
policy), the look-back analysis period of one month, and the later 
claims deadline of 12:00 p.m. ET.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, in that it is 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. The proposal supports this policy by establishing a fair and 
transparent process by which the Exchange can accommodate claims for 
reimbursement for the failure of specified systems in specified 
facilities and under specified conditions. The Exchange believes that 
its proposal to amend Rule 705(d) will continue to promote fairness in 
the marketplace in situations where one or more firm's claim results 
from a problem in a function performed by the Exchange's trading system 
that is solely the fault of the Exchange. As noted above, the proposal 
would allow the Exchange an increased capability to compensate a market 
participant up to the monthly cap of $500,000 even though the losses 
occurred on a single day or were across multiple days for a single 
participant. Furthermore, the proposed expansion of time to make such 
compensation claims would increase the ability of market participants 
to submit claims in a timely manner.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Lastly, the proposed rule change is intended to align the liability 
caps and compensation claims requirements with the caps and 
requirements currently provided by the Nasdaq Exchanges in order to 
provide consistent rules across the six HoldCo Affiliated 
Exchanges.\14\ Consistent rules, in turn, would simplify the regulatory 
requirements for members of the Exchange that are also participants on 
the Nasdaq Exchanges. The Exchange believes that the proposed rule 
change would provide greater harmonization among similar rules of the 
HoldCo Affiliated Exchanges, resulting in greater uniformity and more 
efficient regulatory compliance. As such, the proposed rule change 
would foster cooperation and coordination with persons engaged in 
facilitating transactions in securities and would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
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    \14\ See note 4 above.

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[[Page 14043]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act because all members would be 
subject to the same liability caps and reimbursement requirements. The 
proposed rule change is designed to provide greater harmonization among 
similar rules across the six HoldCo Affiliated Exchanges, resulting in 
more efficient regulatory compliance for common members.

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 \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 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 satisfied this requirement.
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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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2017-18 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-ISE-2017-18. 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 such 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-2017-18, and should be 
submitted on or before April 6, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05219 Filed 3-15-17; 8:45 am]
 BILLING CODE 8011-01-P