[Federal Register Volume 81, Number 148 (Tuesday, August 2, 2016)]
[Notices]
[Pages 50757-50759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78424; File No. SR-ISE Gemini-2015-17]
Self-Regulatory Organizations; ISE Gemini, LLC; Order
Disapproving a Proposed Rule Change To Amend Rule 804(g)
July 27, 2016.
I. Introduction
On November 12, 2015, ISE Gemini, LLC (``ISE Gemini'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to require Clearing Member \3\ approval for a
market maker \4\ to resume trading after the activation of a market-
wide speed bump under ISE Gemini Rule 804(g). The proposed rule change
was published for comment in the Federal Register on November 30,
2015.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ A ``Clearing Member'' is a Member that is self-clearing or
an Electronic Access Member that clears Exchange Transactions for
other Members of the Exchange. See ISE Gemini Rule 100(a)(8). An
``Electronic Access Member'' is an Exchange Member that is approved
to exercise trading privileges associated with EAM Rights. See
Article XIII, Section 13.1(j) of the Constitution of ISE Gemini,
LLC.
\4\ ISE Gemini has two categories of market makers: Primary
Market Makers (``PMMs'') and Competitive Market Makers (``CMMs''). A
PMM is appointed to each options class traded on the Exchange, but a
CMM may or may not be appointed to each such options class. See ISE
Gemini Rule 802.
\5\ See Securities Exchange Act Release No. 76505 (November 23,
2015), 80 FR 74824 (``Notice'').
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On January 13, 2016, the Commission extended the time period within
which to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change to February 28, 2016.\6\ On February 26, 2016, the
Commission instituted proceedings under Section 19(b)(2)(B) of the Act
\7\ to determine whether to approve or disapprove the proposed rule
change.\8\ Specifically, the Commission instituted proceedings to allow
for additional analysis of, and input from commenters with respect to,
the proposed rule change's consistency with Section 6(b)(5) of the
Act.\9\ On May 26, 2016, the Commission extended the time period for
Commission action on the proceedings to determine whether to disapprove
the proposed rule change.\10\ The Commission did not receive any
comments on the proposed rule change and the Exchange did not submit a
response to the Commission's order instituting proceedings. This order
disapproves the proposed rule change.
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\6\ See Securities Exchange Act Release No. 76894, 81 FR 3213
(January 20, 2016).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 77247, 81 FR 11309
(March 3, 2016) (``Order Instituting Proceedings'').
\9\ 15 U.S.C. 78f(b)(5).
\10\ See Securities Exchange Act Release No. 77927, 81 FR 35411
(June 2, 2016).
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II. Description of the Proposal
The Exchange has an automated quotation adjustment functionality
that is governed by its Rule 804(g). Pursuant to these Rules, the
Exchange will automatically remove a market maker's quotations in all
series of an options class when, during a specified time period, the
market maker exceeds certain execution parameters.\11\ All market
makers are required by ISE Gemini to provide these specific parameters.
Additionally, the Exchange will automatically remove a market maker's
quotes in all classes when, during a specified time period, the total
number of quote removal events (``curtailment events'') described in
Rule 804(g)(1) exceed a specified market-wide parameter (``market-wide
speed bump'').\12\ As with the functionality to remove all option
series of an options class, all market makers are required by ISE
Gemini to specify a market-wide parameter. The market-wide speed bump
is available for quotes only on ISE Gemini or across both ISE Gemini
and ISE Gemini's affiliated exchange, International Securities
Exchange, LLC.\13\ The Exchange states that, after a market-wide speed
bump is triggered and the trading system removes all of a market
maker's quotes, the market maker may re-enter the market and resume
trading upon notification to the Exchange's Market Operations.\14\
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\11\ See ISE Gemini Rule 804(g)(1) for a description of the
parameters. The time period is specified by the market maker.
\12\ See ISE Gemini Rule 804(g)(2). The time period for a
market-wide speed bump is also specified by the market maker.
\13\ Id.
\14\ See Notice, supra note 5, at 74824.
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Under the proposal, the Exchange seeks to amend the process by
which market makers can re-enter the market. Specifically, the proposal
requires Clearing Member approval before a market maker can resume
trading after triggering a market-wide speed bump.\15\ Following a
market-wide speed bump, the proposed rule requires: (1) A market maker
to notify its Clearing Member(s) when it is ready to resume trading;
and (2) each applicable Clearing Member to
[[Page 50758]]
inform the Exchange directly when its authorization has been given for
the market maker to resume trading.\16\ In order to ``facilitate a
better response time'' from Clearing Members so that a market maker can
re-enter the market, the proposal also allows the Exchange staff to
notify Clearing Member(s) when a market maker's quotes have been
removed pursuant to the market-wide speed bump.\17\
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\15\ See proposed Rule 804(g)(2).
\16\ See id.
\17\ See id.
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III. Discussion and Commission Findings
Under Section 19(b)(2)(C) of the Act,\18\ the Commission shall
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to such organization.\19\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\20\ Rule 700(b)(3) of the Commission's Rules of Practice
states that the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change'' and that a ``mere assertion that the proposed rule
change is consistent with those requirements . . . is not sufficient.''
\21\
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\18\ 15 U.S.C. 78s(b)(2)(C).
\19\ See 15 U.S.C. 78s(b)(2)(C)(i).
\20\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3).
\21\ See 17 CFR 201.700(b)(3). ``The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. Any failure of a self-regulatory organization to
provide the information elicited by Form 19b-4 may result in the
Commission not having a sufficient basis to make an affirmative
finding that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization.'' Id.
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After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\22\ In particular, the Commission does not find
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\23\ which, among other things, requires that the rules of a
national securities exchange be designed 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.
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\22\ In disapproving the proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78f(b)(5).
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The Commission has stated in the past that, because market makers
receive favorable treatment from an exchange, they must also be subject
to sufficient and commensurate affirmative obligations, including the
obligation to hold themselves out as willing to buy and sell options
for their own account on a regular or continuous basis.\24\
Accordingly, under ISE Gemini's current rules, a market maker must
enter continuous quotations for the options classes to which it is
appointed.\25\ In return, the market maker receives certain benefits,
including participation entitlements-\26\ and an exception from the
prohibition in Section 11(a) of the Act.\27\
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\24\ See, e.g., Securities Exchange Act Release No. 68341
(December 3, 2012), 77 FR 73065, 73076 (December 7, 2012) (approving
the application of Miami International Securities Exchange, LLC for
registration as a national securities exchange); Securities Exchange
Act Release No. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013)
(approving the application of Topaz Exchange, LLC for registration
as a national securities exchange); Securities Exchange Act Release
No. 76998 (January 29, 2016), 81 FR 6066 (February 4, 2016)
(approving the application of ISE Mercury, LLC for registration as a
national securities exchange).
\25\ See ISE Gemini Rule 804(e).
\26\ See, e.g., ISE Gemini Rule 713.
\27\ 15 U.S.C. 78k(a).
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The Exchange proposes to require Clearing Member approval before a
market maker can resume trading after triggering a market-wide speed
bump. The Exchange states in its filing that the Clearing Member should
approve a market maker's re-entry into the market after a market-wide
speed bump because the Clearing Member guarantees the market maker's
trades and bears the ultimate financial risk associated with the
transactions.\28\ The Exchange notes that, while not all market makers
are Clearing Members, all market makers require a Clearing Member's
consent to clear transactions on their behalf in order to conduct
business on the Exchange.\29\ The Exchange asserts that the proposed
rule change will permit Clearing Members to better monitor and manage
the potential risks assumed by market makers and will provide Clearing
Members with greater control and flexibility over their risk tolerance
and exposure.\30\ The Exchange further contends that, ``[w]hile in some
cases [the proposed rule change] may result in a minimal delay for a
market maker that wants to reenter the market quickly following a
market-wide speed bump, the Exchange believes that Clearing Member
approval. . .ensure[s] that the market maker does not prematurely enter
the market without adequate safeguards. . .'' \31\
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\28\ See Notice, supra note 5, at 74824.
\29\ Each market maker authorized to trade on the Exchange must
obtain from a Clearing Member a ``Letter of Guarantee'' wherein the
Clearing Member accepts financial responsibility for all Exchange
transactions made by the market maker. See ISE Gemini Rule 808.
\30\ See Notice, supra note 5, at 74825. Under ISE Gemini's
current rules, the Exchange may share any Member-designated risk
settings in the trading system with the Clearing Member that clears
transactions on behalf of the Member. See ISE Gemini Rule 706(a).
\31\ See Notice, supra note 5, at 74825.
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As noted above, on February 26, 2016, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Act \32\ to determine
whether to approve or disapprove the proposed rule change.\33\ In the
order instituting proceedings, the Commission noted that the Exchange
does not address how the proposal would impact the continuous quoting
obligations of market makers and provided no basis for its statement
that the proposed rule would result in only a ``minimal delay'' for a
market maker seeking to resume quoting following a market-wide speed
bump. Accordingly, the Commission stated that the proposed rule change
raises questions regarding the ability of market makers to meet their
quoting obligations, and whether the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act. The Exchange did
not respond to the issues raised in the Commission's order instituting
proceedings.
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\32\ 15 U.S.C. 78s(b)(2)(B).
\33\ See Securities Exchange Act Release No. 77247, 81 FR 11309
(March 3, 2016) (``Order Instituting Proceedings'').
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The Commission does not believe the Exchange has met its burden to
demonstrate that the proposed rule change is consistent with the Act
and the rules and regulations issued thereunder. The Exchange proposes
to require Clearing Member approval before a market maker can resume
trading following a market-wide speed bump so that Clearing Members can
better monitor and manage their potential risks. Providing this
additional risk management tool to Clearing Members, however,
necessarily will delay the resumption of quoting by market makers and
the resulting potential market quality benefits to all users of the
Exchange. Although the Exchange states that any delay would be minimal,
it provides no evidence to support that assertion. The Exchange also
has not explained why Clearing
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Member risks cannot effectively be addressed through other means, such
as bilateral, contractual arrangements between Clearing Members and
market makers that do not impede a market maker's ability to promptly
resume quoting and enhance the Exchange's market quality.
Accordingly, the Commission does not believe that the Exchange has
met its burden to demonstrate that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder. In particular, the Commission does not find
that the proposed rule change is consistent with the requirements of
Section 6(b)(5) of the Act, which requires that the rules of an
exchange, among other things, be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.\34\
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\34\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
For the foregoing reasons, the Commission does not find that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b)(5) of the Act.
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (SR-ISE Gemini-2015-17) be,
hereby is, disapproved.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18202 Filed 8-1-16; 8:45 am]
BILLING CODE 8011-01-P