[Federal Register Volume 84, Number 128 (Wednesday, July 3, 2019)]
[Notices]
[Pages 31956-31959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14166]
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SECURITIES AND EXCHANGE COMMISSION
[Release No 34-86226; File No. SR-CFE-2019-001]
Self-Regulatory Organizations; Cboe Futures Exchange, LLC; Notice
of a Filing of a Proposed Rule Change Regarding Trading Conduct
June 27, 2019.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 18, 2019 Cboe Futures
Exchange, LLC (``CFE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change described in Items I, II, and III below, which Items have been
prepared by CFE. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons. CFE also
has filed this proposed rule change with the Commodity Futures Trading
Commission (``CFTC''). CFE filed a written certification with the CFTC
under Section 5c(c) of the Commodity Exchange Act (``CEA'') \2\ on June
18, 2019.
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\1\ 15 U.S.C. 78s(b)(7).
\2\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule
Change
The Exchange proposes to update, clarify, and amend certain CFE
rule provisions primarily relating to trading conduct as well as to the
use of Order
[[Page 31957]]
Entry Operator IDs (``OEO IDs''), to Market Participant records
regarding activities in a reference market, and to Clearing Member
requirements with regard to customer records concerning Exchange of
Contract for Related Position (``ECRP'') transactions and Block Trades.
The scope of this filing is limited solely to the application of the
proposed rule amendments to security futures that may be traded on CFE.
Although no security futures are currently listed for trading on CFE,
CFE may list security futures for trading in the future. The text of
the proposed rule change is attached as Exhibit 4 to the filing but is
not attached to the publication of this notice.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CFE 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. CFE 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 proposed rule changes update, clarify, and amend certain CFE
rule provisions primarily relating to trading conduct as well as to the
use of OEO IDs, to Market Participant records regarding activities in a
reference market, and to Clearing Member requirements with regard to
customer records concerning ECRP transactions and Block Trades.
First, CFE is proposing to clarify when an OEO ID must be used for
a front-end trading system utilized by a natural person under CFE Rule
303A (Order Entry Operator ID) which governs the use of OEO IDs in
connection with the submission of orders to CFE's trading system.
Specifically, CFE is proposing to amend Rule 303A to clarify that if a
natural person utilizes a front-end trading system with automated
functionality (such as spreading functionality) and the use of that
functionality is ancillary to the natural person's manual trading, an
OEO ID is not required to be used for that front-end trading system. In
that event, the natural person's OEO ID may be used for the submission
of orders originating from that front-end trading system. If, however,
the automated functionality of the front-end trading system generates a
majority of the natural person's orders, that front-end trading system
will be treated as an Automated Trading System for purposes of Rule
303A and an OEO ID for the front-end trading system must be included in
each order generated by the front-end trading system in order to
differentiate those orders from manual orders submitted by the natural
person. CFE believes that this clarification will enhance CFE's rule
provisions regarding OEO IDs by providing more explicit guidance with
respect to when an OEO ID must be used for a front-end trading system
utilized by a natural person.
Second, CFE is proposing to amend CFE Rule 308(d) to add CFE Rule
501(c) as a rule that is applicable to Market Participants to the same
extent that it is applicable to CFE Trading Privilege Holders
(``TPHs''). Rule 501(c) provides that if a contract listed on the
Exchange is settled by reference to the price of a contract or
commodity traded in another venue, including a price or index derived
from prices on another designated contract market (``DCM''), TPHs are
required to make available to the Exchange upon request in a form and
manner prescribed by the Exchange and within the time frame designated
by the Exchange information and their books and records regarding their
activities in the reference market. The term ``Market Participant'' is
a new defined term that CFE is implementing under CFE rules which means
any Person subject to CFE Rule 308(c). Rule 308(c) provides that any
Person initiating or executing a transaction on or subject to the Rules
of the Exchange directly or through an intermediary, and any Person for
whose benefit such a transaction has been initiated or executed,
expressly consents to the jurisdiction of the Exchange and agrees to be
bound by and comply with the Rules of the Exchange in relation to such
transactions, including, but not limited to, rules requiring
cooperation and participation in investigatory and disciplinary
processes. CFE believes that making Rule 501(c) applicable to Market
Participants will enhance CFE's ability to conduct regulatory
investigations in relation to CFE's market that may involve activities
by a Market Participant in a reference market.
Third, CFE is proposing to revise CFE Rule 414 (Exchange of
Contract for Related Position) and CFE Rule 415 (Block Trades) to
clarify certain recordkeeping and reporting requirements relating to
ECRP transactions and Block Trades, respectively. Specifically, the
Exchange is proposing to amend Rules 414(h) and 415(e) to clarify that
each clearing member carrying a customer account for which an ECRP
transaction or Block Trade is executed shall be responsible for
obtaining and submitting to CFE in a timely and complete manner the
records of its customer regarding the ECRP transactions or Block
Trades, as applicable.
Fourth, CFE is proposing to amend CFE Rule 601 (Fraudulent Acts),
CFE Rule 602 (Fictitious Transactions), CFE Rule 603 (Market
Manipulation), CFE Rule 604 (Adherence to Law), CFE Rule 610 (Priority
of Customers' Orders), CFE Rule 611 (Trading Against Customers'
Orders), CFE Rule 612 (Withholding Orders), CFE Rule 613 (Disclosing
Orders), CFE Rule 614 (Pre-Arranged Trades), CFE Rule 617 (Money
Passes), CFE Rule 618 (Accommodation Trading), CFE Rule 619 (Front-
Running), and CFE Rule 620 (Disruptive Practices) to specifically
reference in those rules that they are applicable to Market
Participants. CFE is proposing to revise the above-referenced rules to
provide that they apply to Market Participants, consistent with the
existing provisions of CFE Rule 308(d) which already provide that any
Person subject to Rule 308(c) that is not a TPH or a Related Party of a
TPH is bound by and required to comply with the above-referenced rules
to the same extent that a TPH or Related Party is bound by and required
to comply with those rules.
Fifth, CFE is proposing to amend Rule 601, Rule 603, Rule 619 as
well as Policy and Procedure XVIII of the Policies and Procedures
Section of the CFE Rulebook relating to Rule 620 to make clear that
provisions of those rules prohibiting fraudulent acts, market
manipulation, front-running, and disruptive practices in any contract
traded on CFE also apply with respect to any commodity, security,
index, or benchmark that underlies any CFE contract, regardless of the
exchange on or market in which the underlying is transacted, when that
activity has an impact upon or nexus in relation to a CFE contract.
Fraudulent acts, market manipulation, front-running, and disruptive
practices in the underlying for a CFE contract can also impact the
market in the CFE contract or improperly benefit a Person holding that
CFE contract. Accordingly, consistent with similar rules on other DCMs
which encompass activity in the underlying cash market and underlying
[[Page 31958]]
commodities or securities,\3\ it is important that CFE be able to bring
disciplinary action for such activity by those subject to CFE
disciplinary jurisdiction under CFE Rule 308 if warranted under the
circumstances. In particular:
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\3\ See, e.g., Chicago Mercantile Exchange Inc. Rule 432H, The
Board of Trade of the City of Chicago, Inc. Rule 432H, New York
Mercantile Exchange, Inc. Rule 432H, and Commodity Exchange, Inc.
Rule 432H.
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CFE is proposing to amend Rule 601 to make clear that
fraudulent acts and attempted fraudulent acts encompassed by Rule 601
may be committed in connection with or related to any CFE contract,
either directly through activity in the market for that CFE contract,
or indirectly through activity in the market of any commodity,
security, index, or benchmark underlying that CFE contract, regardless
of the exchange on or market in which the underlying is transacted.
CFE is proposing to amend Rule 603 to make clear that no
TPH, Related Party, or Market Participant shall (i) manipulate, or
attempt to manipulate, the price of any CFE contract, either directly
by engaging in activity in the market for that contract, or indirectly
by engaging in activity in the market of any commodity, security,
index, or benchmark underlying that contract, regardless of the
exchange on or market in which the underlying is transacted; (ii)
purchase or sell, or offer to purchase or sell, any CFE contract, or
any commodity, security, index, or benchmark that underlies any CFE
contract, regardless of the exchange on or market in which the
underlying is transacted, for the purpose of creating a condition in
which prices of the contract do not or will not reflect fair market
values; or (iii) intentionally or recklessly use or employ, or attempt
to use or employ, any manipulative device, scheme, or artifice to
defraud, relating to any CFE contract either directly by engaging in
activity in the market for that contract, or indirectly by engaging in
activity in the market of any commodity, security, index, or benchmark
underlying that contract, regardless of the exchange on or market in
which the underlying is transacted. The rules of other DCMs \4\ and
CFTC Regulation 180.1 \5\ also include a prohibition on the employment,
or attempted employment, of manipulative and deceptive devices.
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\4\ See, e.g., ICE Futures U.S., Inc. Rule 4.02(d) and the rules
cited in footnote 3 above.
\5\ 17 CFR 180.1.
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CFE is proposing to amend Rule 619 to make clear that no
TPH, Related Party, or Market Participant shall take a position in a
CFE contract based upon non-public information regarding an impending
transaction by another person in the same or a related CFE contract, or
in any commodity, security, index, or benchmark underlying that CFE
contract regardless of the exchange on or market in which the
underlying is transacted, subject to certain existing exceptions
enumerated in Rule 619. These existing enumerated exceptions include
activity permitted under CFE Rule 407 (Crossing Trades), Rule 414, Rule
415, and Rule 611 or under any policies and procedures for pre-
execution discussions from time to time adopted by the Exchange.
CFE is proposing to amend Policy and Procedure XVIII to
make clear that prohibited activity under Rule 620 may occur directly
or indirectly. In particular, prohibited activity encompassed by Rule
620 in relation to any CFE contract may occur directly through any
trading, practice, or conduct in the market for that contract that is
prohibited by Rule 620. Additionally, the proposed rule change makes
clear that prohibited activity encompassed by Rule 620 in relation to
any CFE contract may also occur indirectly through any trading,
practice, or conduct in the market of any commodity, security, index,
or benchmark underlying that contract, regardless of the exchange on or
market in which the underlying is transacted, that would be prohibited
by Rule 620 if it were done in that contract and that has an impact in
relation to that contract or the market in that contract.
Sixth, the Exchange proposes to amend Rule 610 to delete
superfluous references to the qualifier that actions in violation of
Rule 610 must be ``knowingly'' committed. Rule 610 describes various
circumstances under which priority must be given to customer orders.
Rule 610(d) already provides for more detailed safe harbors from those
provisions making this qualifier unnecessary. In particular, Rule
610(a) currently prohibits knowingly buying (selling) a contract for a
personal or proprietary account when holding an order to buy (sell) the
same contract for any other person at the same price or at the market
price. Rule 610(b) also currently prohibits knowingly executing a
discretionary order for an immediate family member or for a personal or
proprietary account when holding a customer market order for the same
contract open as to time and price. The qualifier that these
prohibitions be knowingly committed is already addressed by the safe
harbors under Rule 610(d) that there is not a violation of these
prohibitions when appropriate ``firewall'' or separation of function
procedures are in place or an individual has no direct knowledge of the
other relevant order.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\6\ in general, and furthers the
objectives of Sections 6(b)(1) \7\ and 6(b)(5) \8\ in particular, in
that it is designed:
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(1).
\8\ 15 U.S.C. 78f(b)(5).
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To enable the Exchange to enforce compliance by its TPHs
and persons associated with its TPHs with the provisions of the rules
of the Exchange,
to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a
free and open market and a national market system,
and in general, to protect investors and the public
interest.
The Exchange believes that the proposed rule change would
strengthen CFE's ability to carry out its responsibilities as a self-
regulatory organization by providing further clarity and guidance with
regard to provisions of the Exchange's rules that relate to trading
conduct by TPHs, their related parties, and Market Participants. In
particular, the proposed rule change would update, clarify, and augment
CFE rules that prohibit abusive trading practices on CFE's market by
TPHs, their related parties, and Market Participants, including CFE
rules that address fraudulent acts, fictitious transactions, market
manipulation, adherence to law, priority of customer orders, trading
ahead of customer orders, withholding orders, disclosing orders, pre-
arranged trades, simultaneous buying and selling orders, money passes,
accommodation trading, front-running, and disruptive practices.
The proposed rule change would also clarify the application of CFE
requirements relating to the use of OEO IDs when a natural person
utilizes a front-end trading system with automated functionality, which
would contribute to the accuracy of CFE's audit trail. Additionally,
the proposed rule change would contribute to CFE's ability to obtain
information in connection with the regulation of CFE's market by
requiring clearing members carrying customer accounts to obtain and
submit to CFE customer records
[[Page 31959]]
regarding ECRP transactions and Block Trades by providing that Market
Participants are required to make available to CFE upon request
information and their books and records regarding their activities in a
reference market.
B. Self-Regulatory Organization's Statement on Burden on Competition
CFE 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, in that the proposed rule change will enhance
CFE's ability to carry out its responsibilities as a self-regulatory
organization. The Exchange believes that the proposed rule change is
equitable and not unfairly discriminatory in that the rule amendments
included in the proposed rule change would apply equally to all TPHs,
their related parties, and Market 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 will become operative on July 2, 2019. 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.\9\
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\9\ 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-CFE-2019-001 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-CFE-2019-001. 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-CFE-2019-001, and should be submitted on
or before July 24, 2019.
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(73).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14166 Filed 7-2-19; 8:45 am]
BILLING CODE 8011-01-P