[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Notices]
[Pages 64618-64622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27203]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84787; File No. SR-C2-2018-024]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Amending 
Provisions Related to Its Risk Monitor Mechanism

December 11, 2018.
    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 November 30, 2018, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).

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

[[Page 64619]]

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

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to 
amend its provision related to its Risk Monitor Mechanism. The text of 
the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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 Exchange proposes to amend Rule 6.14 which governs, among other 
things, the Risk Monitor Mechanism.

Background

    By way of background, the Risk Monitor Mechanism providers Users 
\5\ with the ability to manage their order and execution risk. Each 
User may establish limits for various parameters in the Exchange's 
counting program. The system counts each of the following within a 
class (``class limit'') and across all classes for an EFID \6\ (``firm 
limit'') over a User-established time period (``interval'') on a 
rolling basis up to five minutes (except as set forth in Rule 
6.14(c)(5)(A)(iv)) and on an absolute basis for a trading day 
(``absolute limits''): (i) Number of contracts executed (``volume''); 
(ii) notional value of executions (``notional''); (iii) number of 
executions (``count''); and (iv) number of contracts executed as a 
percentage of number of contracts outstanding within an Exchange-
designated time period or during the trading day, as applicable 
(``percentage'') \7\ (collectively, ``risk parameters''). Additionally, 
when the system determines a risk parameter exceeds a User's class 
limit within the interval or the absolute limit for the class, the Risk 
Monitor Mechanism cancels or rejects such User's orders or quotes in 
all series of the class and cancels or rejects any additional orders or 
quotes from the User in the class until the counting program resets. 
Similarly, when the system determines a risk parameter exceeds a User's 
firm limit within the interval or the absolute limit for the firm, the 
Risk Monitor Mechanism cancels or rejects such User's orders or quotes 
in all classes and cancels or rejects any additional orders or quotes 
from the User in all classes until the counting program resets.
---------------------------------------------------------------------------

    \5\ The term ``User'' means any Trading Permit Holder or 
Sponsored User who is authorized to obtain access to the System 
pursuant to Rule 6.8. As discussed below, the Exchange is proposing 
to replace references to ``User'' in Rule 6.14(c)(5) with ``TPH''.
    \6\ The term ``EFID'' means an Executing Firm ID. The Exchange 
assigns an EFID to a Trading Permit Holder, which the System uses to 
identify the Trading Permit Holder and clearing number for the 
execution of orders and quotes submitted to the System with that 
EFID. See C2 Rule 6.8(b).
    \7\ The system determines the percentage by calculating the 
percentage of a TPH's [sic] outstanding contracts that executed on 
each side of the market during the time period or trading day, as 
applicable, and then summing the series percentages on each side in 
the underlying [sic].
---------------------------------------------------------------------------

Proposed Rule Change

    The Exchange proposes to amend Rule 6.14 to (i) make clarifying and 
miscellaneous non-substantive changes, (ii) provide the ability for 
Users [sic] to establish limits for a group of EFIDs, and (iii) adopt a 
new risk parameter.

Clarifying and Miscellaneous Changes

    First, the Exchange proposes to eliminate the term ``User'' in Rule 
6.14(c)(5) and replace it with the term ``TPH'' (which stands for 
Trading Permit Holder).\8\ The Exchange notes that the definition of 
User is broader than TPH, as it specifically captures Sponsored Users. 
The Exchange believes ``TPH'' is the more appropriate term to use with 
respect to the Risk Monitor Mechanism as the rule describes how the 
functionality works with respect to TPHs, and not necessarily Sponsored 
Users. The Exchange notes that it currently does not have any Sponsored 
Users, and to the extent it expects to have any in the future, it will 
revise the rule as needed to incorporate how the Risk Monitor Mechanism 
would function with respect to Sponsored Participants. The Exchange 
notes that ``User'' will be referred to herein as ``TPH''.
---------------------------------------------------------------------------

    \8\ See Exchange Rule 1.1 (``Trading Permit Holder'' or 
``TPH''). The term ``Trading Permit Holder'' or ``TPH'' mean an 
Exchange-recognized holder of a Trading Permit. A Trading Permit 
Holder is deemed a ``member'' under the Exchange Act.
---------------------------------------------------------------------------

    Next, the Exchange proposes to eliminate the term ``class'' and 
replace it with ``underlying''. Specifically, the Exchange notes that 
the Risk Monitor Mechanism is configured to count the risk parameters 
across underlying securities or indexes. As an example, any option 
related to Apple (AAPL), would be considered to have the same 
underlying. Accordingly, if a corporate action resulted in AAPL1, AAPL 
and APPL1 one [sic] would be considered to share the same underlying 
symbol AAPL. Only a single symbol-level rule for underlying AAPL would 
be configurable by the Risk Monitor Mechanism. The Exchange notes that 
the term ``underlying'' is also utilized in the Exchange's technical 
specification documents. The Exchange therefore believes underlying is 
a more accurate term to use.
    The Exchange also proposes to eliminate the requirement that the 
``interval'' time periods be on a rolling basis up to five minutes. The 
Exchange notes that its system is not configured to limit intervals to 
5 minutes and as such believes the proposal to eliminate the language 
will alleviate confusion and more accurately reflect current 
functionality.
    The Exchange also proposes to clarify and codify what were to occur 
in the event a TPH does not reactivate its ability to send quotes or 
orders after its configured risk parameter limits have been reached. 
Currently, subparagraph (c)(5)(D) of Rule 6.14 governs how the counting 
program is reset. In the event an underlying limit, EFID limit or EFID 
Group limit (as proposed), is exceeded, the rules provide that the 
System will not accept new orders or quotes from that TPH (in a 
underlying, from an EFID, or EFID Group, as applicable) until the TPH 
instructs the System or Exchange, as applicable, to reset the counting 
program. The Exchange proposes to add new subparagraph (c)(5)(D)(v) to 
explicitly provide that if the Exchange cancels all of a TPH's quotes 
and orders resting in the Book, and the TPH does not reactivate its 
ability to send quotes or orders, the block will be in effect only for 
the trading day that the TPH reached its underlying, EFID and/or EFID 
Group limit. The Exchange notes this is not a substantive change, but 
rather current practice, and that its affiliated Exchange, Cboe 
Options, includes

[[Page 64620]]

similar language in its rules.\9\ The Exchange believes adding this 
provision to the rules provides further transparency in its rules and 
reduces potential confusion as to what would happen in the situation 
where a TPH fails to reset the counting program.
---------------------------------------------------------------------------

    \9\ See Cboe Options Rule 8.18.
---------------------------------------------------------------------------

    The Exchange also proposes to add language regarding resets from 
its affiliated Exchanges' rules governing their Risk Monitor Mechanism 
functionality, which is substantively the same as the Risk Monitor 
Mechanism functionality on C2. Particularly, Cboe EDGX and Cboe BZX 
Rule 21.16(d) currently provides that the System will reset the 
counting period for absolute limits when a TPH refreshes its risk limit 
thresholds and the System will reset the counting program and commence 
a new interval time period when (i) a previous interval time period has 
expired and a transaction occurs in any series of a underlying [sic] or 
(ii) a TPH refreshes its risk limit thresholds prior to the expiration 
of the interval time period. The Exchange proposes to add this language 
under subparagraph (D)(vi) of C2 Rule 6.14(c)(5) (``Counting Program 
Reset''), which provision would govern ``other resets'' (i.e., resets 
that are not a result from a limit being reached). The Exchange 
believes adding this provision to C2's rules provides transparency in 
the rules that TPH's may refresh their limits for both absolute and 
interval time periods (which results in a ``reset of the counting 
program'') and also clarifies that the interval time periods are reset 
after the prior interval time period ended and a transaction in a 
series of a underlying occurred. The Exchange notes this is not a 
substantive change, but rather current practice. The Exchange believes 
adding this provision to the rules provides further transparency in its 
rules and reduces potential confusion as to whether a TPH can refresh 
its limits and when interval time periods commence.
    The Exchange also proposes to include language from BZX and EDGX 
Rule 21.16(e) that provides that a TPH may engage the Risk Monitor 
Mechanism to cancel resting bids and offers, as well as subsequent 
orders as set forth in Rule 6.14(c)(7), which adds transparency in the 
rules that the Risk Monitor Mechanism may be utilized in this context. 
The Exchange notes this is not a substantive change, but rather current 
practice.
    The Exchange also proposes other non-substantive clarifying 
changes. For example, the Exchange proposes to replace references to 
``firm limit'' with ``EFID limit''; clarify that resets will occur when 
limits are reached, instead of ``exceeded''; and replace certain 
references to ``User'' with ``EFID''. The Exchange notes that the 
proposed changes do not reflect a change in practice, but rather are 
intended to adopt language the Exchange believes is more accurate and 
would be less confusing to investors.

EFID Groups

    The Exchange next proposes to provide in the rules that in addition 
to underlying limits and EFID limits, the System will be able to count 
each of the risk parameters across all underlyings for a group of EFIDs 
(``EFID Group'')(``EFID Group limit'').\10\ Similar to when a 
underlying limit or EFID limit are reached, when a TPH's EFID Group(s) 
limit is reached, the Risk Monitor Mechanism will cancel or reject such 
TPH's orders or quotes in all underlyings and cancel or reject any 
additional orders or quotes from any EFID within the EFID Group(s) in 
all underlyings until the counting program resets. The System will not 
accept new orders or quotes from any EFID within an EFID Group after an 
EFID Group limit is reached until the TPH manually notifies the Trade 
Desk to reset the counting program for the EFID Group, unless the TPH 
instructs the Exchange to permit it to reset the counting program by 
submitting an electronic message to the System. The Exchange believes 
each TPH is in the best position to determine risk settings appropriate 
for its firm based on its trading activity and business needs and that 
it may be based on a single EFID or EFID Group(s). The Exchange notes 
that its affiliate Exchange, Cboe Exchange, Inc. (``Cboe Options'') 
similarly allows its members to set similar risk parameters at the 
acronym-level (which is similar to an EFID) or firm level (similar to 
an EFID Group).\11\
---------------------------------------------------------------------------

    \10\ An EFID may not belong to more than one EFID Group. The 
Exchange notes that the Users [sic] determine how many, if any, EFID 
Groups to establish and determine which EFIDs belong to a particular 
EFID Group, if any.
    \11\ See Cboe Options Rule 8.18.
---------------------------------------------------------------------------

New Risk Parameter

    The Exchange lastly proposes to adopt a new risk parameter. 
Specifically, under the proposed functionality, a TPH may specify a 
maximum number of times that the risk parameters (i.e., volume, 
notional, count and/or percentage) are reached over a specified 
interval or absolute period (``risk trips''). When a risk trip limit 
has been reached, the Risk Monitor Mechanism will cancel or reject a 
TPH's orders or quotes pursuant to subparagraph (c)(5)(B) of Rule 6.14. 
The Exchange notes that a similar risk parameter (i.e., a parameter 
based on the number of risk ``incidents'' that occur over a specified 
time) is available on its affiliate Exchange, Cboe Options.\12\ The 
Exchange believes the proposed changes to its Risk Monitor Mechanism 
rule sufficiently allows TPHs to adjust and adopt parameter inputs in 
accordance with their business models and risk management needs.
---------------------------------------------------------------------------

    \12\ See Cboe Options Rule 8.18, which provides that a Hybrid 
Market Maker or a TPH Organization may specify a maximum number of 
Quote Risk Monitor Mechanism (``QRM'') QRM Incidents on an Exchange-
wide basis.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ requirements that the rules of an exchange be 
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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
---------------------------------------------------------------------------

    First, the Exchange believes its changes to codify existing 
functionality alleviates potential confusion, provides transparency in 
the rules and makes the rules easier to read. For example, the proposal 
to remove the reference to the requirement that the interval time 
periods be on a rolling basis up to five minutes alleviates confusion 
as the system is in fact not configured to have a five minute limit. 
Providing language regarding (i) a TPH's failure to reset or initiate a 
reset of the counting program, (ii) other resets due to a TPH's refresh 
of its limits or a new interval time period commencing and (iii) the 
use of the Risk Monitor Mechanism with respect to C2 Rule 6.14(c)(7), 
provides

[[Page 64621]]

transparency in the rules as to what occurs in those situations, 
harmonizes rule language with that of the Exchange's affiliated 
Exchanges, and reduces potential confusion. The alleviation of 
confusion removes impediments to, and perfects the mechanism of, a free 
and open market and a national market system, and, in general, protects 
investors and the public interest. Similarly, the Exchange believes 
using the term ``underlying'' instead of ``class'' and ``TPH'' instead 
of ``User'' alleviates potential confusion as the proposed terms more 
accurately reflect how the Risk Monitor Mechanism operates.
    The Exchange believes providing TPHs the ability to configure 
certain risk parameters across underlyings for an EFID Group is also 
appropriate because it permits a TPH to protect itself from inadvertent 
exposure to excessive risk on an additional level (i.e., on an EFID 
group-level, not just underlying- or EFID-level). Reducing such risk 
will enable TPHs to enter quotes and orders with protection against 
inadvertent exposure to excessive risk, which in turn will benefit 
investors through increased liquidity for the execution of their 
orders. Such increased liquidity benefits investors because they may 
receive better prices and because it may lower volatility in the 
options market. The Exchange also believes each TPH is in the best 
position to determine risk settings appropriate for its firm based on 
its trading activity and business needs and that that may be based on 
an EFID Group(s). Additionally, as discussed above, Cboe Options 
similarly allows its TPHs to set risk parameters at the acronym-level 
(which is similar to an EFID) or firm-level (similar to an EFID 
Group).\16\
---------------------------------------------------------------------------

    \16\ See Cboe Options Rule 8.18.
---------------------------------------------------------------------------

    Lastly, the Exchange believes the proposal to adopt the new risk 
parameter based on number of times a risk parameter or group of risk 
parameters are reached will provide TPHs with an additional tool for 
managing risks. Furthermore, as noted above, the Exchange's affiliated 
exchange offers similar functionality.\17\ Overall, the proposed rule 
change provides TPHs more protections that reduce the risks from 
potential system errors and market events. As a result, the proposed 
changes, including the new risk parameter for the Risk Monitor 
Mechanism, have the potential to promote just and equitable principles 
of trade. Additionally, the proposed changes apply to all TPHs.
---------------------------------------------------------------------------

    \17\ See Cboe Options Rule 8.18.
---------------------------------------------------------------------------

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. Rather, the Exchange 
believes that the proposed changes with respect to its Risk Monitor 
Mechanism help promote fair and orderly markets and provide clarity and 
transparency the Rule. For example, the proposed rule change adds an 
additional risk control parameter and flexibility to help further 
prevent potentially erroneous executions, which benefits all market 
participants. The proposed changes apply uniformly to all TPHs and the 
Exchange notes that the proposed changes apply to all quotes and orders 
in the same manner. Additionally, the Exchange does not believe that 
the proposed rule change will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act because the proposed enhancements apply only to 
trading on the Exchange. Additionally, the Exchange notes that it is 
voluntary for the TPHs to determine whether to make use of the new 
enhancements of the Risk Monitor Mechanism. To the extent that the 
proposed changes may make the Exchange a more attractive trading venue 
for market participants on other exchanges, such market participants 
may elect to become Exchange market participants.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give 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. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay to provide 
TPHs with additional tools and greater flexibility for managing their 
potential risk as soon as possible. Accordingly, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Therefore, the 
Commission hereby waives the operative delay and designates the 
proposal as operative upon filing.\22\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission also 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 change 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-C2-2018-024 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.


[[Page 64622]]


All submissions should refer to File Number SR-C2-2018-024. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-C2-2018-024, and should be submitted on 
or before January 7, 2019.
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27203 Filed 12-14-18; 8:45 am]
BILLING CODE 8011-01-P