Document ID: SEC-2011-1070-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-07-26T04:00Z

[Federal Register Volume 76, Number 143 (Tuesday, July 26, 2011)]
[Notices]
[Pages 44638-44640]
From the Federal Register Online via the Government Printing 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 rule-comments@sec.gov. 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