Federal Register / Vol. 80, No. 37 / Wednesday, February 25, 2015 / Notices 10171 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 

73961(December 30, 2014), 80 FR 568 (January 6, 

2015) (SR–OCC–2014–23). 

4According to OCC, an EFP is a transaction 

between two parties in which a futures contract on 

a commodity or security is exchanged for the actual 

physical good. 

5According to OCC, a block trade is a trade 

involving a large number of shares being traded at 

an arranged price between parties, outside of the 

open markets, in order to lessen the impact of such 

a large trade being made public. 

6Cleared Contracts and Commencement Time are 

defined terms set forth in Article 1, Section 1 of 

OCC’s By-Laws. 

7See OCC’s By-Laws Article VI, Section 5. 

According to OCC, in a practical sense, however, 

most trades are novated upon proper submission to 

OCC for clearing since OCC’s By-Laws, with limited 

exception, do not permit OCC to reject any 

confirmed trade due to the failure of the purchasing 

clearing member to pay any amount due to OCC at 

or before the settlement time. See also Securities 

Exchange Act Release No. 65990 (December 16, 

2011), 76 FR 79731 (December 22, 2011) (SR–OCC– 

2011–17). 

8 Id. 

9See Securities Exchange Act Release No. 44727 

(August 20, 2001), 66 FR 45351 (August 28, 2001) 

(SR–OCC–2001–07). 

Amendment to the Plan (File No. 4–631) 

be, and it hereby is, approved. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–03875 Filed 2–24–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

Sunshine Act Meeting 

Notice is hereby given, pursuant to 

the provisions of the Government in the 

Sunshine Act, Public Law 94–409, that 

the Securities and Exchange 

Commission will hold a Closed Meeting 

on Thursday, February 26, 2015 at 2:00 

p.m. 

Commissioners, Counsel to the 

Commissioners, the Secretary to the 

Commission, and recording secretaries 

will attend the Closed Meeting. Certain 

staff members who have an interest in 

the matters also may be present. 

The General Counsel of the 

Commission, or her designee, has 

certified that, in her opinion, one or 

more of the exemptions set forth in 5 

U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) 

and 17 CFR 200.402(a)(3), (5), (7), 9(ii) 

and (10), permit consideration of the 

scheduled matter at the Closed Meeting. 

Commissioner Stein, as duty officer, 

voted to consider the items listed for the 

Closed Meeting in closed session, and 

determined that no earlier notice thereof 

was possible. 

The subject matter of the Closed 

Meeting will be: 

Institution and settlement of 

injunctive actions; 

Institution and settlement of 

administrative proceedings; and 

Other matters relating to enforcement 

proceedings. 

At times, changes in Commission 

priorities require alterations in the 

scheduling of meeting items. 

For further information and to 

ascertain what, if any, matters have been 

added, deleted or postponed, please 

contact the Office of the Secretary at 

(202) 551–5400. 

Dated: February 20, 2015. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–03947 Filed 2–23–15; 11:15 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74302; File No. SR–OCC– 

2014–23] 

Self-Regulatory Organizations; the 

Options Clearing Corporation; Order 

Approving Proposed Rule Change To 

Clarify That OCC Would not Treat a 

Futures Transaction That Is an 

Exchange-for-Physical or Block Trade 

as a Non-Competitively Executed 

Trade if the Exchange on Which Such 

Trade Is Executed Has Provided OCC 

With Representations That it Has 

Policies or Procedures Requiring That 

Such Trades Be Executed at 

Reasonable Prices and That Such 

Price Is Validated by the Exchange 

February 19, 2015. 

On December 19, 2014, the Options 

Clearing Corporation (‘‘OCC’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change File No. SR–OCC– 

2014–23 pursuant to Section 19(b)(1) of 

the Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder.2

The proposed rule change was 

published for comment in the Federal 

Register on January 6, 2015.3 The 

Commission did not receive any 

comments on the proposed rule change. 

This order approves the proposed rule 

change. 

I. Description 

OCC is modifying its By-Laws to add 

an interpretation and policy to Section 

7 of Article XII of its By-Laws to clarify 

that OCC will not treat a futures 

transaction that is an exchange-forphysical (‘‘EFP’’) 4 or block trade in 

futures (‘‘Block Trade’’) 5 as a noncompetitively executed trade, and 

therefore subject to delayed novation, if 

the exchange on which the EFP or Block 

Trade is executed has provided OCC 

with representations that it has rules, 

policies or procedures requiring that 

such trades be executed at reasonable 

prices and that such prices are validated 

by the exchange. 

Background 

According to OCC, under OCC’s ByLaws, the novation of confirmed trades 

(i.e., transactions in options, futures, or 

other ‘‘cleared contracts’’ effected 

through an exchange and submitted to 

OCC for clearing) occurs at the 

‘‘commencement time’’ for such 

transactions.6 The ‘‘commencement 

time’’ for most confirmed trades is when 

daily position reports are made 

available to clearing members.7

However, transactions in certain cleared 

products and certain types of 

transactions, including noncompetitively executed EFPs and Block 

Trades, have delayed commencement 

times that are tailored to address risks 

specific to such products or 

transactions,8 including, but not limited 

to, those risks presented by off-market 

transactions. 

When OCC began clearing EFPs and 

Block Trades, it established that the 

commencement time for such 

transactions is expressly conditioned 

upon the receipt by OCC of variation 

payments due from purchasing and 

selling clearing members because EFPs 

and Block Trades could be executed 

away from the market and be executed 

at other than market prices. These 

factors were viewed as creating 

heightened exposure to OCC if a 

clearing member defaults on a trade 

executed at an off-market price and, as 

a result, Article XII, Section 7 of OCC’s 

By-Laws establishes that the 

commencement time for an EFP or 

Block Trade is the time of the first 

variation payment after the trade is 

reported to OCC (typically 9:00 a.m. 

Central Time the following business 

day).9 OCC delays its novation of these 

non-competitively executed futures 

trades because OCC is bound to pay the 

first variation settlement amount to the 

counterparty once novation has 

occurred, and if the agreed-upon price 

at which the trade is entered differs 

from the competitive market price, there 

is an increased likelihood that OCC may 


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10172 Federal Register / Vol. 80, No. 37 / Wednesday, February 25, 2015 / Notices 

10See 17 CFR 1.73. According to OCC, Regulation 

1.73 requires FCMs to: (1) Establish risk-based 

limits in the proprietary account and in each 

customer account based on position size, order size, 

margin requirements, or similar factors; (2) screen 

orders for compliance with the risk-based limits; 

and (3) monitor for adherence to the risk based 

limits intra-day and overnight. 

11According to OCC, the CFTC has proposed 

regulations requiring Designated Contract Markets 

(i.e., futures exchanges) to determine whether or not 

the price of a block trade is fair and reasonable 

considering: (1) The size of the block trade, (2) the 

price and size of other block trades in any relevant 

markets at the applicable time, and (3) the 

circumstances of the market or the parties to the 

block trade. See proposed CFTC Regulation 38.503. 

75 FR 80572, 80592. See also proposed Appendix 

B of part 38 of the CFTC’s proposed regulations 

concerning Core Principle 9. 75 FR 80572, 80630. 

The CFTC has also proposed to adopt similar 

regulations concerning EFP trades. See proposed 

CFTC Regulation 38.505. 75 FR 80572, 80593. 

12For example, according to OCC, OneChicago 

LLC (‘‘OCX’’) Rule 417 governs EFP and Block 

Trades executed on OCX and provides that such 

trades be executed on a designated trading platform 

that will automatically verify that EFPs and Block 

Trades were executed at competitive prices by price 

verification software for price reasonableness. 

13 15 U.S.C. 78s(b)(2)(C). 

experience a loss if it is required to 

close out a defaulting purchaser’s 

position. Accordingly, OCC does not 

novate, and thereby become a 

counterparty to, a non-competitively 

executed trade if OCC fails to receive 

the first variation payment when due. 

EFP and Block Trades Subject to Price 

Checks 

According to OCC, in the time since 

OCC adopted Article XII, Section 7 of its 

By-Laws, the Commodity Futures 

Trading Commission (‘‘CFTC’’) has 

adopted Regulation 1.73, which requires 

clearing futures commission merchants 

(‘‘FCMs’’) to establish certain risk 

controls, including risk based limits for 

bilaterally executed transactions and for 

Block Trades.10 In light of this 

requirement and other proposed 

regulatory developments that may affect 

EFPs and Block Trades,11 certain futures 

exchanges requested that OCC review its 

By-Laws regarding delayed novation of 

these trades to reassess the impact of the 

recently implemented rules, supported 

by policies and procedures, which 

require the exchanges’ market 

participants to execute s EFPs and Block 

Trades at reasonable prices that are 

verified by the exchange. These rules, 

policies and procedures leverage risk 

controls implemented by FCMs, as 

applicable. OCC undertook such a 

review of its practices with respect to 

delayed novation of EFPs and Block 

Trades, and determined that it is 

appropriate to novate these trades when 

daily position reports are made 

available, provided that the exchange 

that submitted such trades to OCC 

represents to OCC that the exchange has 

in place rules, policies and procedures 

to verify the reasonableness of the 

transaction price of EFPs and Block 

Trades it submits to OCC for clearance 

and settlement, and that such price is 

validated by the exchange. 

OCC has determined that EFPs and 

Block Trades that are subject to price 

reasonability checks do not present the 

same settlement risks discussed above 

in relation to non-competitively 

executed EFPs and Block Trades. 

Specifically, should a clearing member 

that executed a reasonably priced EFP 

or Block Trades fail to pay its first 

variation payment to OCC on the trade, 

OCC anticipates it will liquidate the 

futures positions at the prevailing 

market price and obtain sufficient 

funds, or OCC will already have 

sufficient funds in its clearing fund, to 

pay or reimburse itself for the first 

variation settlement to the counterparty 

to the trade. This is the same risk 

management methodology OCC 

currently uses for other competitively 

executed trades in cleared contracts that 

OCC accepts for clearance and 

settlement on a daily basis. 

Accordingly, OCC is amending Article 

XII, Section 7, of its By-Laws by adding 

an interpretation and policy to exclude 

EFPs and Block Trades from the delayed 

novation and to provide for the 

treatment of these trades as 

competitively executed trades, provided 

that the s EFPs and Block Trades are 

reported by an exchange that represents 

to OCC that it performs a price 

reasonableness check on the trade, and 

that such price is validated by the 

exchange. 

Verification of Exchange Rules, Policies 

and Procedures Related to Price 

Reasonableness 

Before permitting an exchange to 

submit EFPs and Block Trades that will 

not be subject to delayed novation, OCC 

will require an exchange to provide 

OCC with a certification that the 

exchange has rules, policies or 

procedures as they relate to verifying 

the reasonableness of the price of the 

EFP and Block Trade. Specifically, OCC 

will require an exchange to certify that 

its rules, policies or procedures provide 

that the price at which a EFP or Block 

Trade is executed must be fair and 

reasonable in light of: (i) The size of the 

EFP or Block Trade; (ii) the prices and 

sizes of other transactions in the same 

contract at the relevant time; and (iii) 

the prices and sizes of transactions in 

other relevant markets, including, 

without limitation, the underlying cash 

market or related futures markets, at the 

relevant time.12 An exchange will also 

have to certify that its rules, policies or 

procedures require one or both parties 

to an EFP or Block Trade to report the 

trade details of the trade to the exchange 

within a reasonable period of time (i.e., 

within 10 minutes of the time of 

execution or, if the EFP or Block Trade 

is executed outside of regular trading 

hours, within 15 minutes of the 

commencement of trading on the next 

business day). OCC believes that it is 

appropriate to rely on price 

reasonableness checks performed by 

exchanges trading futures because they 

are self-regulatory organizations subject 

to regulatory oversight, including 

routine examinations. Moreover, OCC 

will presume that all EFPs and Block 

Trades submitted by an exchange that 

represents that it has price 

reasonableness rules, policies or 

procedures in place will submit to OCC 

EFPs and Block Trades that have 

undergone a price reasonableness check. 

In addition to exchanges 

implementing rules, policies or 

procedures regarding the price 

reasonableness checks for EFPs and 

Block Trades, exchanges may continue 

to use their existing authority to notify 

OCC pursuant to Article VI, Section 7(c) 

of OCC’s By-Laws, to disregard any EFP 

or Block Trade submitted to OCC that 

was executed at an unreasonable price. 

The notification will be delivered to 

OCC along with other trades ‘‘busted’’ 

by an exchange, in accordance with an 

operational process that currently 

occurs every day before daily position 

reports are distributed. Such trades 

could not be properly cleared under 

amended Article XII, Section 7, but 

instead would fall within the noncompetitively executed category and 

therefore be subject to delayed novation. 

Taken together, OCC believes that these 

measures appropriately protect OCC in 

the event OCC receives a EFP or Block 

Trade at an unreasonable price. 

Moreover, OCC and the exchanges will 

continue to maintain an ongoing 

dialogue about operational matters, 

which OCC will use to confirm the 

continued application of price 

reasonableness controls. 

II. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 13

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds that 

the proposed rule change is consistent 

with the requirements of the Act and the 


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Federal Register / Vol. 80, No. 37 / Wednesday, February 25, 2015 / Notices 10173 

14 15 U.S.C. 78q–1(b)(3)(F). 

15 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

16 15 U.S.C. 78s(b)(2). 

17 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release Nos. 73999 

(January 6, 2015), 80 FR 1559 (January 12, 2015) 

(SR–ISE–2014–52); 74016 (January 8, 2015), 80 FR 

1976 (January 14, 2015) (SR–BOX–2015–01). 

4See Exchange Rule 404, Interpretations and 

Policies .02(a). 

rules and regulations thereunder 

applicable to such organization. 

The Commission finds that the 

proposed rule change is consistent with 

Section 17A(b)(3)(F) of the Act 14 which 

requires the rules of a clearing agency 

to, among other things, assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible. OCC is amending Article 

XII, Section 7, to include a new policy 

and interpretation setting forth the 

specific criteria a futures exchange must 

meet in order for EFPs and Block Trades 

to not be subject to the delayed novation 

times set forth in Article XII of OCC’s 

By-Laws. Specifically the exchange 

must provide OCC with a certification 

that the exchange has rules, policies or 

procedures as they relate to verifying 

the reasonableness of the price of the 

EFP and Block Trade. OCC’s proposal, 

as approved, does not affect the 

novation time for any securities 

transactions. 

OCC has determined that EFPs and 

Block Trades that are subject to price 

reasonability checks do not present the 

same settlement risks as those executed 

on exchanges without price 

reasonability checks, and as such has 

determined that OCC’s requirement that 

exchanges certify price reasonableness 

policies and procedures are sufficiently 

appropriate to mitigate the risks 

associated with non-competitively 

executed trades. In addition, in the 

event a clearing member fails to its first 

variation payment to OCC on an EFP or 

Block Trade that was executed on an 

exchange with price reasonability 

checks, OCC will employ the same risk 

management methodology used for all 

other competitively executed trades 

accept for clearing at OCC, which 

should in turn reduce settlement risks 

that could expose OCC to loss if it is 

required to close out a defaulting 

purchaser’s EFP or Block Trade 

position. Combining OCC’s price 

reasonableness requirements for 

exchanges and OCC’s ability to liquidate 

futures positions or use its clearing fund 

to management risks associated with 

non-payment of premiums for those 

trades accepted for clearance and 

settlement, OCC should have sufficient 

risk management controls in place in to 

assure the safeguarding of securities and 

funds which are in the custody of 

control of OCC or for which it is 

responsible. 

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act and in particular with the 

requirements of Section 17A of the 

Act 15 and the rules and regulations 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,16 that the 

proposed rule change File No. SR–OCC– 

2014–23 be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.17

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–03811 Filed 2–24–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74301; File No. SR–MIAX– 

2015–10] 

Self-Regulatory Organizations; Miami 

International Securities Exchange LLC; 

Notice of Filing and Immediate 

Effectiveness of a Proposed Rule 

Change To Amend Exchange Rule 404 

February 19, 2015. 

Pursuant to the provisions of Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that, 

on February 9, 2015, Miami 

International Securities Exchange LLC 

(‘‘MIAX’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) a 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is filing a proposal to 

amend Exchange Rule 404. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://www.miaxoptions.com/filter/ 

wotitle/rule_filing, at MIAX’s principal 

office, 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 

Exchange Rule 404, Interpretations and 

Policies .02, to extend current $0.50 

strike price intervals in non-index 

options to short term options with strike 

prices less than $100. This is a 

competitive filing that is based on 

proposals recently submitted by the 

International Securities Exchange, LLC 

(‘‘ISE’’) and BOX Options Exchange LLC 

(‘‘BOX’’).3

The Exchange proposes to amend its 

rules governing the Short Term Option 

Series Program to introduce finer strike 

price intervals for certain Short Term 

Option Series. In particular, the 

Exchange proposes to amend Rule 404, 

Interpretations and Policies .02(e), to 

extend $0.50 strike price intervals in 

non-index options to Short Term 

Options Series with strike prices less 

than $100 instead of the current $75. 

This proposed change is intended to 

eliminate gapped strikes between $75 

and $100 that result from conflicting 

strike price parameters under the Short 

Term Option Series and $2.50 Strike 

Price Programs as described in more 

detail below. 

Under the Exchange’s rules, the 

Exchange may list Short Term Option 

Series in up to fifty option classes in 

addition to option classes that are 

selected by other securities exchanges 

that employ a similar program under 

their respective rules.4 On any Thursday 

or Friday that is a business day, the 

Exchange may list Short Term Option 

Series in designated option classes that 

expire at the close of business on each 


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