Document ID: SEC-2018-0533-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe C2 Exchange, Inc.
Posted Date: 2018-04-02T04:00Z

[Federal Register Volume 83, Number 63 (Monday, April 2, 2018)]
[Notices]
[Pages 14096-14098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06570]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82952; File No. SR-C2-2018-004]

Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of a Proposed Rule 
Change Concerning an Affiliation Between the Exchange and Cboe Trading 
and To Adopt Rules To Permit Inbound Routing by Cboe Trading

March 27, 2018
    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 March 12, 2018, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2 Options'') 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 and, for the reasons discussed below, is 
approving the proposal on an accelerated basis.
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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 adopt rules related to the inbound router 
for C2 Options.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.c2exchange.com/Legal/), at the 
Exchange's Office of the Secretary, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange seeks: (1) To adopt Rule 3.18 to govern the Exchange's 
receipt of inbound options orders from the Exchange's affiliate broker-
dealer, Cboe Trading, Inc. (``Cboe Trading''), on behalf of the 
Exchange's affiliate options exchanges, Cboe EDGX Exchange, Inc. 
(``EDGX Options'') and Cboe BZX Exchange, Inc. (``BZX Options) and (2) 
approval from the Securities and Exchange Commission (the 
``Commission'') pursuant to Rule 3.2(f) for affiliate Cboe Trading to 
become a Trading Permit Holder of the Exchange.
    Proposed Rule 3.18 is based on EDGX Options Rule 2.12. Pursuant to 
proposed Rule 3.18, Cboe Trading's inbound routing services from EDGX 
Options and BZX Options to the Exchange would be subject to the 
following conditions and limitations: (1) The Exchange must enter into 
(a) a plan pursuant to Rule 17d-2 under the Exchange Act with a non-
affiliated self-regulatory organization \3\ and (b) a regulatory 
services contract with a non-affiliated SRO to perform regulatory 
responsibilities for Cboe Trading for unique Exchange rules. (2) The 
regulatory services contract must require the Exchange to provide the 
non-affiliated self-regulatory organization with information, in an 
easily accessible manner, regarding all exception reports, alerts, 
complaints, trading errors, cancellations, investigations, and 
enforcement matters (collectively, ``Exceptions'') in which Cboe 
Trading is identified as a participant that has potentially violated 
Exchange or Commission rules, and shall require that the non-affiliated 
self-regulatory organization provide a report to the Exchange 
quantifying all such exception reports, alerts, complaints, trading 
errors, cancellations, investigations and enforcement matters on not 
less than a quarterly basis. (3) The Exchange, on behalf of its parent 
company, Cboe Global Markets, must establish and maintain procedures 
and internal controls reasonably designed to ensure that Cboe Trading 
does not develop or implement changes to its systems on the basis of 
nonpublic information obtained as a result of its affiliation with the 
Exchange until such information is available generally to similarly 
situated Trading Permit Holders of the Exchange.
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    \3\ The Exchange will ensure a 17d-2 plan is in place prior to 
offering inbound routing from Cboe Trading.
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    The Exchange will comply with the above-listed conditions prior to 
offering inbound routing from Cboe Trading. In meeting the conditions, 
the Exchange will have mechanisms in place to protect the independence 
of the Exchange's regulatory responsibility with respect to Cboe 
Trading, as well as demonstrate that Cboe Trading cannot use any 
information that it may have because of its affiliation with the 
Exchange to its advantage.
    Exchange Rule 3.2(f) provides that without prior Commission 
approval, no Trading Permit Holder may be or become affiliated with the 
Exchange. The Exchange seeks Commission approval for Exchange affiliate 
Cboe Trading to become a Trading Permit Holder of the Exchange pursuant 
to Rule 3.2(f).
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\4\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \5\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \6\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
    \6\ Id.
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    In particular, the Exchange believes that the rule change promotes 
the maintenance of a fair and orderly

[[Page 14097]]

market, the protection of investors and the public interest, and is in 
the best interests of the Exchange and its Trading Permit Holders as it 
will allow the routing of orders from affiliated exchanges, BZX Options 
and EDGX Options, to the Exchange. Moreover, in meeting the 
requirements of Rule 3.18 (i.e., the 17d-2 plan, the regulatory 
services contract, and procedures and internal controls) the Exchange 
believes it will have mechanisms in place that protect the independence 
of the Exchange's regulatory responsibility with respect to Cboe 
Trading, as well as demonstrates that Cboe Trading cannot use any 
information that it may have because of its affiliation with the 
Exchange to its advantage.

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 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. The Exchange does not believe 
the proposed rule change will impose any burden on intramarket or 
intermarket competition that is not necessary or appropriate in 
furtherance of Act as the proposed rule is based on EDGX Options Rule 
2.12 and BZX Options Rule 2.12 [sic], which allow [sic] EDGX Options 
and BZX Options to receive orders from affiliate Cboe Trading on behalf 
of affiliate exchanges. Moreover, the requirements of Rule 3.18 (i.e., 
the 17d-2 plan, the regulatory services contract, and procedures and 
internal controls) help to prevent an unfair burden on competition and 
unfair discrimination between customers, issuers, brokers, or dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. 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-C2-2018-004 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-C2-2018-004. 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 the 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-C2-2018-004, and should be submitted on 
or before April 23, 2018.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds 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.\7\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\8\ which requires, among 
other things, that a national securities exchange be so organized and 
have the capacity to carry out the purposes of the Act, and to comply 
and enforce compliance by its members and persons associated with its 
members, with the provisions of the Act, the rules and regulation 
thereunder, and the rules of the Exchange. Further, the Commission 
finds that the proposed rule change is consistent with Section 6(b)(5) 
of the Act,\9\ which requires, among other things, 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 foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b). 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).
    \8\ 15 U.S.C. 78f(b)(1).
    \9\ 15 U.S.C. 78f(b)(5).
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to which it is routing 
orders, the Exchange has proposed limitations and conditions to Cboe 
Trading's affiliation with the Exchange to permit the Exchange to 
accept routed orders that Cboe Trading would route in its capacity as a 
facility of C2.
    Specifically, as detailed above, the Exchange committed to the 
following limitations and conditions:
     The Exchange shall enter into a plan pursuant to Rule 17d-
2 under the Act with a non-affiliated self-regulatory organization 
(``SRO'') and ensure that such plan is operative before offering 
routing services through Cboe Trading. The 17d-2 plan will relieve the 
Exchange of regulatory responsibilities with respect to Cboe Trading 
for rules that are common rules between the Exchange and the non-
affiliated SRO. In addition, the Exchange shall enter into a regulatory 
services agreement (``RSA'') with a non-affiliated SRO to perform 
regulatory responsibilities for Cboe Trading for unique Exchange rules 
that are not common rules under the 17d-2 plan.
     The RSA shall require the Exchange to provide the non-
affiliated SRO with information, in an easily accessible manner, 
regarding all exception reports, alerts, complaints, trading errors, 
cancellations, investigations, and enforcement matters (collectively

[[Page 14098]]

``Exceptions'') in which Cboe Trading is identified as a participant 
that has potentially violated Exchange or Commission rules, and shall 
require that the non-affiliated SRO provide a report, at least 
quarterly, to the Exchange quantifying all Exceptions in which Cboe 
Trading is identified as a participant that has potentially violated 
Exchange or Commission rules.
     The Exchange, on behalf of Cboe Trading, shall establish 
and maintain procedures and internal controls reasonably designed to 
ensure that Cboe Trading does not develop or implement changes to its 
system on the basis of non-public information regarding planned changes 
to Exchange systems, obtained as a result of its affiliation with the 
Exchange, until such information is available generally to similarly 
situated members of the Exchange in connection with the provision of 
order routing to or from the Exchange.
    As the Exchange represents above, the Exchange believes that the 
above conditions will protect the independence of the Exchange's 
regulatory responsibility with respect to Cboe Trading and ensure that 
Cboe Trading cannot use any information that it may have because of its 
affiliation with the Exchange to its advantage.
    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\10\ To address these concerns, the Exchange has proposed 
ongoing conditions applicable to Cboe Trading's routing activities in 
its capacity as a facility of C2, which are enumerated above. The 
Commission believes that these conditions are designed to mitigate 
concerns about potential conflicts of interest and unfair competitive 
advantage. In particular, the Commission believes that a non-affiliated 
SRO's oversight of Cboe Trading, combined with a non-affiliated SRO's 
monitoring of Cboe Trading's compliance with the Exchange's rules and 
quarterly reporting to the Exchange, will help to protect the 
independence of the Exchange's regulatory responsibilities with respect 
to Cboe Trading. The Commission also believes that the Exchange's 
proposal is designed to ensure that the Exchange will not permit Cboe 
Trading to have any information advantage on account of its affiliation 
with the Exchange.
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    \10\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order 
approving the combination of NYSE Euronext and the American Stock 
Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings 
of an ownership interest in DirectEdge Holdings LLC); 59281 (January 
22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order 
approving a joint venture between NYSE and BIDS Holdings L.P.); 
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-
182) (order granting the exchange registration of BATS Exchange, 
Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File 
Nos. 10-194 and 10-196) (order granting the exchange registration of 
EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 
2010), 75 FR 51295 (August 19, 2010) (File No. 10-198) (order 
granting the exchange registration of BATS-Y Exchange, Inc.).
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    Finally, Exchange Rule 3.2(f) provides that, without prior 
Commission approval, no Trading Permit Holder may be or become 
affiliated with the Exchange. The Exchange now seeks Commission 
approval for its affiliate, Cboe Trading, to become a Trading Permit 
Holder of the Exchange pursuant to Rule 3.2(f) so that its affiliate 
may provide routing services as a facility of the Exchange. Although 
the Commission continues to be concerned about potential unfair 
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interest when the exchange is 
affiliated with one of its members, for the reasons discussed above, 
the Commission believes that it is consistent with the Act to permit 
Cboe Trading to become affiliated with the Exchange, in the capacity of 
a facility of C2, for the purposes of providing routing services for 
the Exchange subject to the conditions described above.\11\
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    \11\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., Securities Exchange Act Release Nos. 
64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) (SR-BX-2011-
007); 66808 (April 13, 2012), 77 FR 23294 (April 18, 2012) (SR-BATS-
2012-013); 66807 (April 13, 2012), 77 FR 23300 (April 18, 2012) (SR-
BYX-2012-006); 67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) 
(SR-BX-2012-030); 69233 (March 25, 2013), 78 FR 19352 (March 29, 
2013) (SR-NASDAQ-2013-028); 69232 (March 25, 2013), 78 FR 19342 
(March 29, 2013) (SR-BX-2013-013); 69229 (March 25, 2013), 78 FR 
19337 (March 29, 2013) (SR-Phlx-2013-15); and 68970 (June 27, 2013), 
78 FR 40225 (July 3, 2013) (SR-EDGX-2013-17).
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    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of the notice thereof in the Federal Register. The Exchange 
stated that accelerated approval of its proposal will facilitate the 
Exchange's plans to migrate C2 Options to Bats technology in May 2018.
    The Commission notes that Cboe Trading, formerly known as Bats 
Trading, Inc.,\12\ serves as the routing facility for the Exchange's 
affiliate options exchanges, EDGX Options and BZX Options and is 
subject to substantively identical conditions and limitations by those 
exchanges.\13\ The Exchange's current proposal is intended to allow 
Cboe Trading to perform an identical role for the Exchange as to which 
it currently performs for EDGX Options and BZX Options, including 
accepting routed orders sent from EDGX Options and BZX Options to the 
Exchange.
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    \12\ See Securities Exchange Act Release No. 81952 (October 26, 
2017), 82 FR 50725 (November 1, 2017) (SR-BatsBYX-2017-27).
    \13\ See EDGX Options Rule 2.12 (Cboe Trading, Inc. as Inbound 
Router) and BZX Options Rule 2.12 (Cboe Trading, Inc. as Inbound 
Router). See also EDGX Options Rule 2.11 (Cboe Trading, Inc. as 
Outbound Router) and BZX Options Rule 2.11 (Cboe Trading, Inc. as 
Outbound Router).
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    The Commission believes that good cause exists for accelerated 
approval of the proposed rule change because it raises no novel issues, 
as the Exchange is adopting the same conditions and limitations that 
EDGX Options and BZX Options have adopted for Cboe Trading.\14\ 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\15\ to approve the proposed rule change prior to 
the 30th day after the date of publication of the notice of filing 
thereof in the Federal Register.
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    \14\ The Commission notes that it did not receive any comments 
on a substantively identical proposal from EDGX Options with respect 
to inbound routing from Cboe Trading. See Securities Exchange Act 
Release No. 69870 (June 27, 2013), 78 FR 40225 (July 3, 2013) (SR-
EDGX-2013-17).
    \15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-C2-2018-004) be, and hereby 
is, approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill Peterson,
Assistant Secretary.
[FR Doc. 2018-06570 Filed 3-30-18; 8:45 am]
 BILLING CODE 8011-01-P