[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Notices]
[Pages 29953-29956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13707]



[[Page 29953]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81022; File No. SR-OC-2017-02]


Self-Regulatory Organizations; OneChicago, LLC; Notice of Filing 
of Proposed Rule Change To Implement Four Decimal Pricing for Outright 
Transactions in Single Stock Futures

June 26, 2017.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(the ``Act'')\1\, notice is hereby given that on June 16, 2017, 
OneChicago, LLC (``OneChicago'' or the ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons. OneChicago has also filed this rule 
change with the Commodity Futures Trading Commission (``CFTC''). 
OneChicago filed a written certification with the CFTC under Section 
5c(c) of the Commodity Exchange Act (``CEA'') on June 16, 2017.
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    \1\ 15 U.S.C. 78s(b)(7).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    OneChicago is proposing to amend OneChicago Rule 902 (Contract 
Specifications) to decrease the minimum price increment for outright 
Single Stock Futures (``SSFs'')\2\ quotes and trades from $0.01 to 
$0.0001 per share, which results in a minimum price fluctuation of 
$0.01 per contract. OneChicago is proposing this change to permit 
market participants to more precisely price the interest rate component 
of SSFs. Unlike their underlying securities, which are typically priced 
directly by the value of the security itself, SSF prices are derived by 
adding an interest rate component to the price of the underlying 
security. As described in more detail below, interest rates are 
commonly quoted in basis points (``bps''), and the forward value of 
SSFs must accurately reflect these interest rates. As such, OneChicago 
believes that four decimal quoting and trading may assist market 
participants in pricing SSFs with the precision necessary to reflect 
the actual value of the interest rate component of the contract.
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    \2\ An ``outright'' SSF trade is a non-block, non-EFP, non-
spread trade.
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    The minimum price fluctuation is set forth in OneChicago Rule 902, 
which provides general contract specifications for all OneChicago SSFs. 
Because the minimum price increment for blocks, EFPs, and spread 
transactions was already set at $0.0001, upon amending OneChicago Rule 
902(e), all SSF trade types, including outright trades, will quote and 
trade with minimum fluctuations of $0.0001 (i.e., one basis point per 
dollar).
    Further, as currently drafted, OneChicago Rule 902(e) provides that 
the Exchange may amend the minimum price fluctuation for SSFs without 
amending the text of the rule itself. Specifically, the clause ``or as 
otherwise stated by the Exchange'' effectively permits the Exchange to 
set a minimum price fluctuation by notice or other means. OneChicago is 
now proposing to amend OneChicago Rule 902(e) to delete this clause, 
thereby providing certainty to market participants that the minimum 
price fluctuation is stated solely in OneChicago Rule 902, and will not 
be amended other than through the rule change process.
    The text of the proposed rule change is attached as Exhibit 4 to 
the filing submitted by the Exchange but is not attached to the 
published notice of the filing.

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

    In its filing with the Commission, OneChicago 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 self-regulatory organization has prepared a summary 
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
    OneChicago is proposing to amend OneChicago Rule 902 (Contract 
Specifications) to decrease the minimum fluctuation for outright SSF 
quotes and trades from $0.01 to $0.0001 per share effective July 10, 
2017.\3\ Previously, the minimum price fluctuation for each contract 
was located in the OneChicago Rule 905 supplement. In 2011, OneChicago 
amended the pricing of block and EFP transactions in OneChicago Rule 
905 to permit four decimal point trade prices.\4\ In 2015, OneChicago 
similarly amended OneChicago Rule 905 to permit quoting and trading of 
spread transactions in four decimal places as well.\5\ This expansion 
allowed these trades to be more precisely priced because, as described 
in detail below, the interest rate component of SSFs is expressed in 
basis points, and four decimal pricing would permit market participants 
to quote or trade at prices that translate to their desired basis point 
level.
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    \3\ OneChicago's outright SSFs are currently quoted and traded 
in two decimal places, and are therefore settled on a per-contract 
basis with a minimum price fluctuation of $1.00 due to the 100 share 
per-contract multiplier. The Commission notes that the proposed rule 
change has become effective on June 16, 2017 and will be implemented 
on July 10, 2017.
    \4\ See Securities Exchange Act Release No. 65053 (August 8, 
2011) (SR-OC-2011-01).
    \5\ See Securities Exchange Act Release No. 75464 (July 16, 
2015) (SR-OC-2015-02).
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    This change will harmonize the pricing of all OneChicago trade 
types to four decimal places, and permit the same level of precision in 
central limit order book (``CLOB'') outright trades as is currently 
available for block trades. This change may also remove a potential 
barrier to entry to OneChicago's competitive marketplace, and could 
encourage market participants to transition away from the block 
marketplace and to the CLOB.
    OneChicago acknowledges that sub-penny pricing is currently 
prohibited in NMS securities.\6\ Although SSFs are not NMS securities, 
OneChicago believes it is warranted to discuss why four decimal pricing 
is appropriate in the SSF market, as well as why certain concerns 
highlighted by the rule's sub-penny prohibition would not apply to the 
SSFs listed by OneChicago.\7\
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    \6\ 17 CFR 242.612.
    \7\ OneChicago notes that equity options, like SSFs, also have a 
multiplier of 100 underlying shares, but are currently only quoted 
and traded in two decimal places. OneChicago believes it is 
appropriate to distinguish SSFs from equity options with regard to 
decimal quoting and trading. In OneChicago's view, unlike equity 
options, which are primarily used for hedging or speculating, the 
primary uses of SSFs are to (1) refinance equity positions by 
replacing them with positions in SSFs at more favorable interest 
rates, (2) loan or borrow securities, or (3) loan or borrow cash 
with securities as collateral. In each case, the ability for the SSF 
trade price to precisely target the desired interest rate of the 
transaction is a necessary component. Accordingly, providing for 
four decimal quoting and trading supports the key uses of SSFs.
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Interest Rate Component of SSFs
    Unlike securities--which are assets--SSFs are contingent 
liabilities that represent the forward value of the underlying 
security. The primary

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difference in pricing between securities and the SSFs that overlay them 
is the interest rate component of the forward contract. The interest 
rate of an SSF represents the cost for an individual to hold the 
underlying equity--or in other words, the cost of carry. Interest rates 
are described in basis points, which are hundredths of one percentage 
point. For example, an interest rate of 1.25% can also be expressed as 
125 basis points. Interest rates are relative, not static, values. 
Consequently, 125 basis points can represent a different dollar value 
depending on the notional amount the interest rate is applied to. Four 
decimal pricing is a necessary step towards allowing SSFs to be priced 
in the dollar value that translates to the desired basis point 
equivalent.
    Since a trade in an SSF is not the purchase of an asset, but 
instead allows the individual to carry a position to a future time, the 
most accurate way to price the interest rate of the trade is in basis 
points. In order to trade in basis points, market participants need the 
ability to price trades to the fourth numerical decimal point.\8\ The 
decimal pricing expressed in dollars and cents can simply be viewed as 
a translation tool to permit market participants to trade at their 
desired level of basis points.
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    \8\ OneChicago notes that the greater number of numerical 
decimal places available in a trade price, the more precisely the 
basis point rate of a trade may be targeted. OneChicago believes 
that four decimal point pricing is currently sufficient to provide 
interest rate precision, while also avoiding increased complexity 
that may be associated with five or six (or greater) decimal point 
pricing. Due to the 100 share multiplier, per-share trade prices in 
four decimals would permit contract settlement in two decimal 
places.
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    OneChicago believes that two decimal pricing is not sufficient to 
translate a dollar value to an interest rate with precision. For 
example, an SSF bid-ask spread of $4.01 by $4.02 on a $4.00 underlying 
stock with sixty-four days left until expiration would represent a 
1.40% (140 bps) difference between the best bid and best ask. 
Specifically, the bid at $4.01 translates to a 1.41% (141 bps) interest 
rate, whereas the offer at $4.02 translates to a 2.81% (281 bps) 
interest rate.\9\ A market participant desiring to enter into a long 
position in the SSF at any interest rate between 140 bps and 281 bps 
would be prohibited from doing so by two decimal pricing, even if the 
seller was also willing to enter into a short position at that level.
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    \9\ As an ancillary matter, OneChicago notes that the Exchange 
trading platform does not support market orders partly to protect 
market participants from inadvertently crossing these large interest 
rate spreads and executing at an unexpected or undesired interest 
rate. Limit orders are the only order type that allow participants 
to precisely target an interest rate with their order price.
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    Although SSF trade prices are represented in dollar values, they 
also encompass interest rate and time until expiration. By using the 
trade price and time until expiration, market participants can 
determine the corresponding interest rate of the trade. Likewise, if a 
market participant is seeking a particular interest rate, that market 
participant can calculate the trade price by taking into account the 
desired interest rate and days until expiry. This is distinguished from 
trading in the underlying securities where the trade price directly 
represents the value of the asset itself. Accordingly, when market 
participants trade an SSF, they are calculating the futures trade price 
by considering not only the stock price, but also the days left to 
expiry and the prevailing interest rate.\10\
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    \10\ Interest rates are typically expressed in five decimal 
places (or alternatively, in basis points out to three decimal 
places). See e.g., ICE Libor Historical Rates, available at https://www.theice.com/marketdata/reports/170.
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Concerns Raised by Reg NMS
    OneChicago has considered whether permitting market participants to 
quote and trade SSFs in up to four decimals will impose any burdens on 
or otherwise negatively impact the SSF marketplace.\11\ OneChicago does 
not believe that permitting quoting and trading SSFs in up to four 
decimals will cause market participants to step ahead of each other's 
limit orders for nominal amounts, and thereby cause resting limit 
orders to lose their execution priority in the CLOB. Since $0.0001 in 
an SSF trade price may represent varying notional amounts depending on 
the trade price, quantity, and days left until expiry, OneChicago does 
not believe it is appropriate to prohibit four decimal pricing based on 
such a concern.\12\ This is especially true in a low interest rate 
environment where market participants need to tailor their SSF trade 
prices with accuracy such that the resulting interest rate is in line 
with their expectations.
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    \11\ Rule 612 of Regulation NMS, 17 CFR 242.612, prohibits 
national securities exchanges from accepting or ranking orders in 
any NMS security priced greater than $1.00 per share in an increment 
smaller than $0.01. By prohibiting sub-penny pricing, Regulation NMS 
sought to prevent market participants from stepping ahead of each 
other for a nominal or infinitesimally small amount, thereby 
discouraging the use of limit orders, and also to prevent 
overburdening market participants' systems due to increased 
messaging traffic resulting from sub penny orders. Although SSFs are 
not NMS securities, OneChicago has considered the prohibition on 
sub-penny pricing in NMS securities, and has concluded that the 
concerns raised by sub-penny pricing are not applicable to SSFs and 
unnecessary to impose on the SSF market.
    \12\ The average trade quantity on the CLOB is 5 contracts. 
Accordingly, the fourth decimal place would represent, on average, a 
$0.05 difference in trade value, which may translate to a meaningful 
interest rate, depending on the trade price and time until 
expiration. On a typical CLOB trade, the fourth decimal place may 
represent 0.1 to 3 bps in interest. By way of example, a 5 contract 
trade at a futures trade price of $13.9835 results in a notional 
value of $6991.75. Without the third and fourth decimal places (a 
futures trade price of $13.98), the notional value would be 
$6990.00, a difference of $1.75.
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    Additionally, unlike the equity markets in which hundreds of trades 
occur every second, OneChicago's markets are strictly governed to limit 
order frequency. The overwhelming majority of volume executed on the 
exchange occurs through the use of manual front-end systems, whereby 
the individual trader fills out each order ticket with the relevant 
order parameters. Further, even market participants trading 
programmatically (and who are not market-makers) are limited to a 
maximum of ten orders per second across all products, which minimizes 
the potential that any one market participant would repeatedly enter 
and modify orders in one particular product.
    Accordingly, OneChicago believes that it is unlikely that limit 
orders will be frequently stepped ahead of due to the low messaging 
quantity threshold permitted by the Exchange. OneChicago notes on this 
topic that if a limit order loses execution priority to another limit 
order priced exactly $0.0001 above (in the case of a buy order) or 
$0.0001 below (in the case of a sell order) the resting order, this 
loss of priority typically would not have occurred for a nominal 
amount.\13\ As described above, the fourth decimal place of an SSF 
trade can represent a different dollar value depending on the price of 
the underlying security and the days left until expiry of the futures 
contract. Accordingly, the Exchange believes that in most instances, 
the new limit order would have provided actual interest rate 
improvement over the resting order. In fact, the Exchange predicts that 
this rule change will encourage the entry of more competitive orders 
due to increased participation by both retail investors and market 
makers.\14\
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    \13\ As described in footnote 12, $0.05 may represent a spectrum 
of interest rates, depending on the futures trade price and days 
remaining until expiry.
    \14\ OneChicago notes that its spread marketplace has been 
trading on a centralized order book in four decimal places since 
July 20, 2015. Since that time, OneChicago has not observed any 
instance in which a limit order for a spread transaction was stepped 
ahead of.
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    Furthermore, OneChicago does not anticipate any capacity burden 
generated as a result of permitting four

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decimal quoting and trading, as OneChicago does not expect its 
messaging traffic to increase as a result of this change. Therefore, 
the Exchange does not believe quote submission or market data receipt 
will be impacted in any anyway. Moreover, four decimal pricing is 
currently commonplace in the futures industry outside of SSFs.\15\
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    \15\ Many futures products tied to interest rates trade in 
greater than two decimals. Although the per-contract notional value 
in these products are usually larger than the typical outright SSF 
notional value, OneChicago believes the need for interest rate 
precision is consistent across all of these products.
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Impact on Retail Investors
    OneChicago believes that the primary beneficiaries of this rule 
change will be retail investors. OneChicago's SSFs offer retail 
investors an alternative to financing their equity securities positions 
via margin loan from their brokers, and offer these investors the 
ability to acquire synthetic exposure to equity securities at 
competitive financing rates. OneChicago believes the lack of four 
decimal pricing for outright trades has hampered the ability of the 
Exchange's market makers to make competitive markets which would allow 
retail investors to transact at competitive financing rates. With four 
decimal pricing in the CLOB for outright trades, OneChicago anticipates 
that new market makers will enter the marketplace and make more 
competitive markets, increasing trading activity on the CLOB.
    Further, as stated above, this rule change will encourage market 
participants to transact in OneChicago's CLOB, rather than in the block 
marketplace, thereby increasing competition in trading and quoting 
these products. Currently, block trades, which are privately negotiated 
transactions available only to eligible contract participants, as that 
term is defined in section 1a(18) of the CEA,\16\ are already priced in 
four decimals. This change will place retail investors, who may not 
access the block marketplace, on equal footing with these more 
sophisticated participants by permitting them to price their SSF trades 
in up to four decimals. As a result of this bifurcated structure in 
which sophisticated parties can transact blocks in four decimals, but 
retail investors may not, retail investors are at a disadvantage as 
they receive less competitive interest rates on their CLOB trades.\17\ 
In addition to permitting retail investors to trade in four decimals, 
OneChicago anticipates this rule change will cause sophisticated 
participants who can already transact in four decimal places in the 
block marketplace to begin to transition their activity to the CLOB. By 
aggregating and concentrating more SSF activity in the CLOB, OneChicago 
expects that all market participants will transact at more competitive 
levels than those present today.
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    \16\ 7 U.S.C. 1a(18).
    \17\ Although block trades typically have greater trade 
quantities than outright trades, block trades may trade in minimum 
quantities as low as five contracts for OneChicago's NoDivRisk 
products. Currently, participants in the block marketplace receive 
more favorable interest rates than those in the outright CLOB 
marketplace due to (1) the ability to pre-hedge block trades, and 
(2) four decimal pricing, which is currently available in blocks but 
not for outright trades.
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Monitoring of Four Decimal Trading
    As stated above, OneChicago does not anticipate that the transition 
of outright SSF trading to four decimals will harm or disadvantage any 
market participant. Nonetheless, in order to address any concerns 
related to stepping ahead, the Exchange plans to monitor its trading 
activity to determine whether permitting outright SSFs to trade in up 
to four decimal places has caused any harm to investors or 
deterioration in market quality. OneChicago plans to monitor this in 
two ways. First, the Exchange plans to monitor its trading directly for 
any incidence of stepping ahead. To do so, the Exchange will implement 
surveillance procedures that identify instances in which a market 
participant uses the third or fourth decimal place to step ahead of 
limit orders on the CLOB. OneChicago will review such activity and 
determine whether there is a pattern or practice of conduct not in line 
with just and equitable principles of trade. Second, OneChicago will, 
on a periodic basis, assess its market quality by looking to various 
factors such as spreads, market depth, and number and diversity of 
market participants. Using this two-pronged approached, the Exchange 
can determine whether permitting quoting and trading of SSFs in up to 
four decimals has promoted market quality, while ensuring market 
integrity. If OneChicago makes the determination that four decimal 
pricing has harmed either market quality or integrity, the Exchange 
will amend OneChicago Rule 902 to return to two decimal pricing. In 
order to provide its market participants with sufficient notice 
regarding this this [sic] change, OneChicago plans to distribute a 
Notice to Members before implementing the change to permit its market 
participants to make any necessary technology or operational changes, 
which OneChicago anticipates will be minimal.
2. Statutory Basis
    OneChicago believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(5) \19\ in particular. The proposed rule 
change furthers the objectives of Section 6(b)(5) because it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is equitable 
and not unfairly discriminatory because it would apply equally to all 
market participants. The ability to trade outright transactions in up 
to four decimal places will not be limited to any class of market 
participant, and all market participants are eligible to trade on 
OneChicago's CLOB. The requirements to trade on the CLOB are no more 
restrictive than the requirements to trade block, EFP, or spread 
transactions. Permitting outright transactions to trade in up to four 
decimal allows all OneChicago participants to trade in the same way, 
thereby promoting just and equitable principles of trade.
    OneChicago has considered whether permitting SSFs to quote and 
trade in up to four decimal places could permit manipulation or other 
violative activity in either the underlying equity or SSF, and has 
determined that no such concern exists. Four decimal pricing for SSFs 
would not present any new methods for market participants to engage in 
behavior that may be violative of Exchange Rules or any applicable law.
    Further, as currently drafted, OneChicago Rule 902(e) provides that 
the Exchange may amend the minimum price fluctuation for SSFs without 
amending the text of the rule itself. Specifically, the clause ``or as 
otherwise stated by the Exchange'' effectively permits the Exchange to 
set a minimum price fluctuation by notice or other means. OneChicago is 
now proposing to amend OneChicago Rule 902(e) to delete

[[Page 29956]]

this clause, thereby providing certainty to market participants that 
the minimum price fluctuation is stated solely in OneChicago Rule 902, 
and will not be amended other than through the rule change process. 
OneChicago believes that its existing surveillance systems and capacity 
is sufficient to monitor and review trading activity for any violative 
trading in the SSF market.

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

    OneChicago does not believe that the rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act, in that the rule change simply allows an 
additional type of transaction to be priced in up to four decimal 
places. This change will allow all market participants to more 
precisely price the interest rate component of their outright 
transactions. By pricing futures trades more precisely, market 
participants will be able to submit more competitive bids and offers on 
the Exchange. Further, as described above, OneChicago believes this 
rule change will increase competition in that it will allow all market 
participants to transact at four decimal places, and not just 
sophisticated parties who qualify as eligible contract participants.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The proposed rule change has become effective on June 16, 2017 and 
will be implemented on July 10, 2017.
    At any time within 60 days of the date of effectiveness of the 
proposed rule change, the Commission, after consultation with the CFTC, 
may summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.\20\
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    \20\ 15 U.S.C. 78s(b)(1).
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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-OC-2017-02 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-OC-2017-02. 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 publicly available. All 
submissions should refer to File Number SR-OC-2017-02 and should be 
submitted on or before July 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13707 Filed 6-29-17; 8:45 am]
BILLING CODE 8011-01-P