[Federal Register Volume 76, Number 143 (Tuesday, July 26, 2011)]
[Notices]
[Pages 44638-44640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18816]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64937; File No. SR-CHX-2011-17]
Self-Regulatory Organizations; Chicago Stock Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Regarding the
Submission by the Exchange of Clearing-Related Information for Trades
Executed on the Exchange as Well as for Trades Executed Otherwise Than
on the Exchange
July 20, 2011.
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 July 7, 2011, the Chicago Stock Exchange, Incorporated
(``Exchange'' or ``CHX'') 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 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 add new Rule 6 to Article 21 (Clearance
and Settlement) to set forth the terms upon which the Exchange shall
submit information for clearing and settlement, and to amend Article 1,
Rule 1 (Definitions), and Article 21, Rule 1 (Trade Recording with a
Qualified Clearing Agency) to define certain relevant terms. The text
of this proposed rule change is available on the Exchange's Web site at
(http://www.chx.com), at the Exchange's Office of the Secretary and in
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 CHX included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX 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 is proposing to add new Rule 6 to Article 21
(Clearance and Settlement) to set forth the terms upon which the
Exchange shall submit information for clearing and settlement, and to
amend Article 1, Rule 1 (Definitions), and Article 21, Rule 1 (Trade
Recording with a Qualified Clearing Agency) to define certain relevant
terms. New Article 21, Rule 6 provides for the submission of clearing
related information to a Qualified Clearing Agency (currently, the
National Securities Clearing Corp. or NSCC).\3\ Proposed Rule 6(a)
addresses the submission to NSCC of clearing information for trades
executed on the Exchange and is based upon the provisions of CBOE Rule
6.50 (Submission for Clearance).\4\ Proposed Rule 6(a) specifies that
all transactions executed on the Exchange shall be submitted for
clearance to a Qualified Clearing Agency, and all such transactions
shall be subject to the rules of the Qualified Clearing Agency.\5\ The
Clearing Participant shall be responsible for the clearance of the
Exchange transactions of such Clearing Participant and of each
Participant who gives up such Clearing Participant's name pursuant to
either a Letter of Guarantee filed under Article 7, Rule 10 with the
Exchange or other authorization given by such Clearing Participant to
such Participant.\6\ These provisions are typical in the clearance and
settlement of exchange transactions and fairly place the responsibility
for paying for, or delivery of, securities on the Participant in which
name the trades are submitted for clearance and settlement.
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\3\ In proposed Article 1, Rule 1 (ff), a Qualified Clearing
Agency is defined a clearing agency as defined in Section 3(a)(23)
of the Exchange Act which is registered with the Commission pursuant
to the provisions of the Section 17A(b)(2) of the Exchange Act or
has obtained from the Commission an exemption from registration
granted specifically to allow the clearing agency to provide
confirmation and affirmation services. CHX is proposing to delete
the existing, but somewhat outdated, definitions of the terms
Qualified Clearing Agency, Registered Clearing Agency and Fully
Interfaced Clearing Agency from the Interpretations and Polices
[sic] section of Article 21, Rule 1 and replace them with the
definition of Qualified Clearing Agency in Article 1, Rule 1 in
order to update its rules and ensure that the definition applies
concurrently to proposed new Rule 6.
\4\ The Exchange notes that existing Article 21, Rule 1(d)
provides that the Exchange shall submit trade data regarding every
transaction that is executed on, and reported to, the Exchange to a
Qualified Clearing Agency for recording. We propose to add Rule 6(a)
in order to provide absolute clarity regarding the nature and scope
of the Exchange's activity regarding clearing submissions.
\5\ The CHX submits clearing information to NSCC through the
Regional Interface Operation (``RIO'') system.
\6\ We proposed to define the term Clearing Participant in
Article 1, Rule 1(ee) as a Participant which has been admitted to
membership in a Qualified Clearing Agency pursuant to the provisions
of the Rules of the Qualified Clearing Agency.
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Proposed new Rule 6(b) addresses clearing submissions made via CHX
systems for transactions executed on another trading center or in the
over-the-counter marketplace and is based upon Nasdaq Rule 7038 (Step-
Outs and Sales Fee Transfers). Such submissions may be made by the
Exchange only on behalf of a CHX-registered Institutional Broker acting
as an authorized agent of a Clearing Participant.\7\ The Institutional
Broker may submit a clearing-only entry into the Exchange's systems for
the purpose of transferring securities from one Clearing Participant to
another provided that the trade has been properly reported for
transaction reporting purposes. Once all of the final clearing
allocations have been entered into the Exchange systems for submission
to NSCC, the submissions are deemed to be ``locked in'' for purposes of
comparison and settlement.
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\7\ CHX-registered Institutional Brokers are an elective sub-
category of Exchange Participants requiring registration with the
Exchange and are subject to the obligations of Article 17 of the CHX
rules, in addition to the other provisions of Exchange rules.
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These submissions of non-Exchange executions may occur in several
circumstances. First, an Institutional Broker may buy or sell
securities on another trading center as a correspondent of a clearing
member of that trading center. Any resulting execution report would be
``flipped'' from the executing clearing member via entries in the
Exchange's systems to the trading account of the Institutional Broker
or the CHX Clearing Participant on whose behalf it is acting. Second,
an Institutional Broker may instruct a third party broker-dealer (which
is not an Institutional Broker) to execute a cross transaction in the
over-the-counter market and report the transaction to a Trade Reporting
Facility (``TRF'') using its trading symbol or the symbol of its
[[Page 44639]]
clearing firm for purposes of reporting it to the Consolidated Tape.
The Institutional Broker may then enter the transaction information
into the Exchange's systems, and transfer the positions from its own
trading account (or the account of its clearing firm) to the accounts
of ultimate beneficiaries of the trade. Once all components of the
transaction are properly allocated, the information will be forwarded
to the National Securities Clearing Corp. (``NSCC'') via the Exchange's
systems for clearance and settlement. Third, transactions may be
executed on another trading center by a third party broker-dealer,
which then utilizes an Institutional Broker as its agent for handling
the allocation of the clearing information. These third party
transactions may include both cross transactions executed in the over-
counter-market [sic] and reported to a TRF by the third party broker-
dealer, as well as purchases or sales of securities by the third party
broker-dealer on another exchange or other trading center.\8\ The third
party broker-dealer instructs an Institutional Broker to handle any
substitution of Clearing Participants and allocation of the trade.
Clearing information for third party cross trades and single-sided
purchases or sales is then processed within the CHX Brokerplex[supreg]
system \9\ and submitted to NSCC in the same manner as if the trades
had been executed by an Institutional Broker as described above.
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\8\ The Institutional Broker may be instructed to allocate the
trades at an average price of the transactions executed by the third
party broker-dealer.
\9\ The Brokerplex[supreg] system is an order entry, management
and recordation system provided by the Exchange for use by
Institutional Brokers.
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In order to ensure that the actions of the Institutional Broker are
fully authorized by the Clearing Participant, proposed Rule 6(b)
requires that Institutional Brokers making such submissions must be a
party to an agreement with the Clearing Participant in which name the
entries are submitted under which the Institutional Broker has received
authorization from the Clearing Participant to act on its behalf.\10\
Copies of these agreements shall be filed by the Institutional Broker
with the Exchange. The Exchange represents that it will monitor
clearing submissions made pursuant to Rule 6(b) to ensure that the
Institutional Brokers involved in those transactions have the
appropriate agreements in place, and will take disciplinary action to
enforce this requirement in appropriate circumstances.
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\10\ In addition, the Exchange requires Clearing Participants to
sign a clearing agreement by which the latter accepts responsibility
for non-Exchange transactions submitted to NSCC through the auspices
of an authorized Institutional Broker.
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The Exchange notes that while the systems used by the CHX in making
such clearance submissions do not contain fully-automated comparison
features, there are procedural safeguards which occur as part of these
submissions to ensure that the manual comparison is valid. For example,
many of these transactions represent the cash equities component of
combination stock-options orders or a hedge on a derivatives position.
The Institutional Broker entering into Brokerplex the clearing
information it receives from its customer is responsible for ensuring
that all of the final allocations made via the step-out process are
accurate and complete. Clearing information will not normally be
forwarded to the Clearing Agency until all of the allocations are
confirmed with the order sender. Institutional Brokers shall be
required to maintain agreements with both Clearing Participants and any
non-Participant customers which authorize the Institutional Broker to
make the clearing-only submissions and bind the Parties to the trade.
Furthermore, the Institutional Broker normally communicates the
allocation information to the Clearing Participant in which name the
submissions are made to NSCC in order to prevent breaks or disputes
regarding the allocations.
A Participant is prohibited from using a non-tape, clearing-only
submission for the purpose of effecting a transaction required to be
trade reported and that has not been trade reported or reporting a
trade for regulatory purposes.\11\ Submission of non-tape, clearing-
only records to the Exchange by a Participant does not satisfy any
obligation such members may have to report transactions as required by
the applicable rules of other self-regulatory organizations. New
Interpretation and Policy .01 to Rule 6 will require that an
Institutional Broker submitting an entry for a transaction executed
otherwise than on the Exchange obtain documentary evidence of the non-
Exchange trade execution no later than the close of trading. This will
ensure that, irrespective of historical practices described above, the
Institutional Broker will have to receive written evidence of the non-
Exchange trade it submitted for clearing, thus strengthening the
safeguards imbedded in the process of submitting such trades for
comparison. New Interpretation and Policy .02 reinforces the implied
requirement that .02 [sic] when an Institutional Broker enters a non-
tape, clearing-only record, the Institutional Broker shall be
responsible for ensuring that all clearing information is accurate and
complete prior to its submission.
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\11\ The Exchange plans to monitor the activity of Participants
which make clearing-only submissions for compliance with applicable
trade reporting rules.
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Section (c) of Proposed Rule 6 governs non-tape riskless
submissions.\12\ These provisions would permit an Institutional Broker
registered with the Exchange to make non-tape submissions into the
Exchange's systems for submission to clearing to facilitate riskless
transactions taking place on other national securities exchanges, or
the over-the-counter market. For riskless transactions in which an
Institutional Broker, after having received an order to buy a security,
purchases the security at the same price to satisfy the order to buy
or, after having received an order to sell, sells the security at the
same price to satisfy the order to sell, the Institutional Broker may
submit, for the offsetting ``riskless'' portion of the transaction, a
clearing-only report. The Exchange will also obtain and keep a record
identifying transactions which are handled as ``riskless principal.''
The Exchange believes that the provisions of Section (c) of proposed
Rule 6 would govern the activity of Institutional Brokers when they buy
or sell securities on another national securities exchange, or in the
over-the-counter marketplace, on behalf of another client and when the
addition of new Clearing Participants via the step-in process as
described above is not required. Nothing in the provisions of Section
(c) of proposed Rule 6 relieves any Participant or other party from its
obligation to fully and properly report transactions as required by the
applicable rules of other self regulatory organizations.
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\12\ Article 9, Rule 14 (Reporting Riskless Principal
Transactions) describes the manner in which Exchange Participants
are required to report riskless principal transactions for trade
reporting purposes.
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Proposed Section (d) of Rule 6 provides that the Exchange shall not
be responsible or liable in any way whatsoever to any member, member
organization, clearing member organization, Qualified Clearing Agency
or securities depository for compared trades, the failure to compare
trades or for any delays, errors or omissions in the comparison process
or for the production and delivery of or for the failure to produce and
deliver lists and reports.
Each Clearing Participant which is a party to a non-tape, clearing-
only submission under this rule will pay a Trade Processing Fee in the
amount
[[Page 44640]]
specified in the Exchange's Fee Schedule.\13\ As part of this filing,
we propose to retain the Trade Processing Fee charged to Participants
for the clearing submission service.
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\13\ Proposed Article 21, Rule 6(e). The Trade Processing Fees
are specified in Section E.7. of the CHX Schedule of Fees and
Assessments.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\14\ and furthers the
objectives of Section 6(b)(5) in particular,\15\ in that it is designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transaction in securities, to remove impediments and perfect the
mechanisms of a free and open market, and, in general, to protect
investors and the public interest by setting forth the rules and
principles governing the submission of clearing information to a
Qualified Clearing Agency. By facilitating the submission for both CHX
and non-CHX executed trades, the Exchange is providing a safe, reliable
means of submitting such information to a Qualified Clearing Agency,
responding to the preferences of certain Participants to have CHX make
such clearing-related submissions, and introducing competition with
other exchanges, such as Nasdaq, which provide similar services.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of 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.
C. Self-Regulatory Organization's Statement on Comments Regarding the
Proposed Rule Changes Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) As the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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 e-mail to [email protected]. Please include
File Number SR-CHX-2011-17 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CHX-2011-17. This file
number should be included on the subject line if e-mail 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of CHX. 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-CHX-2011-17 and should be
submitted on or before August 16, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-18816 Filed 7-25-11; 8:45 am]
BILLING CODE 8011-01-P