Document ID: SEC-2019-1045-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-07-23T04:00Z

[Federal Register Volume 84, Number 141 (Tuesday, July 23, 2019)]
[Notices]
[Pages 35433-35436]
From the Federal Register Online via the Government Publishing Office [http://www.gpo.gov/]
[FR Doc No: 2019-15559]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86401; File No. SR-CBOE-2019-036]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Rules Governing the Give Up of a Clearing Trading Permit Holder by 
a Trading Permit Holder on Exchange Transactions

July 17, 2019.
    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 3, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its rules governing the give up of a Clearing Trading Permit 
Holder by a Trading Permit Holder on exchange transactions. The text of 
the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 proposes to amend Rule 6.21, which governs the give up 
of a Clearing Trading Permit Holder (``Clearing TPH'') by a Trading 
Permit Holder (``TPH'') on Exchange transactions.
Background
    By way of background, Cboe Options Rule 6.21 provides that when a 
TPH executes a transaction on the Exchange, it must give up the name of 
the Clearing TPH (the ``Give Up'') through which the transaction will 
be cleared. Rule 6.21 also provides that a TPH may only give up a 
``Designated Give Up'' or its ``Guarantor.'' This limitation is 
enforced by the Exchange's trading systems.
    A ``Designated Give Up'' is currently defined as any Clearing TPH 
that a TPH (other than a Market-Maker \5\) identifies to the Exchange, 
in writing, as a Clearing TPH that the TPH would like to have the 
ability to give up. To designate a ``Designated Give Up'' a TPH must 
submit written notification, in a form and manner determined by the 
Exchange, to the Membership Services Department (``MSD''). 
Specifically, the

[[Page 35434]]

Exchange uses a standardized form (``Notification Form'') that a TPH 
needs to complete and submit to MSD. The Exchange notes that a TPH may 
currently designate any Clearing TPH as a Designated Give Up. 
Additionally, there is no minimum or maximum number of Designated Give 
Ups that a TPH must identify. Rule 6.21 also requires that the Exchange 
notify a Clearing TPH, in writing and as soon as practicable, of each 
TPH that has identified it as a Designated Give Up. The Exchange 
however, will not accept any instructions from a Clearing TPH to 
prohibit a TPH from designating the Clearing TPH as a Designated Give 
Up. Additionally, there is no subjective evaluation of a TPH's list of 
proposed Designated Give Ups by the Exchange.
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    \5\ For purposes of this rule, references to ``Market-Maker'' 
shall refer to Trading Permit Holders acting in the capacity of a 
Market-Maker and shall include all Exchange Market-Maker capacities 
(e.g., Designated Primary Market-Makers and Lead Market-Makers).
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    Rule 6.21 also defines ``Guarantor''. For purposes of Rule 6.21, a 
``Guarantor'' refers to a Clearing TPH that has issued a Letter of 
Guarantee or Letter of Authorization for the executing TPH under the 
Exchange Rules that is in effect at the time of the execution of the 
applicable trade.\6\ An executing TPH may give up its Guarantor without 
having to first designate it to the Exchange as a ``Designated Give 
Up.'' \7\ Additionally, the Exchange notes that a Market-Maker is only 
enabled to give up the Guarantor of the Market-Maker pursuant to Cboe 
Options Rule 8.5 and also does not need to identify any Designated Give 
Ups.
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    \6\ See Cboe Options Rule 3.28, Cboe Options Rule 6.72, and Cboe 
Options Rule 8.5.
    \7\ The Exchange already knows each TPH's Guarantor and as such, 
no further designation or identification is required of TPHs to 
enable their respective Guarantors.
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    Beginning in early 2018, certain Clearing TPHs (in conjunction with 
the Securities Industry and Financial Markets Association (``SIFMA'')) 
expressed concerns related to the process by which executing brokers on 
U.S. options exchanges (the ``Exchanges'') are allowed to designate or 
`give up' a clearing firm for purposes of clearing particular 
transactions. The SIFMA-affiliated Clearing Members have recently 
identified the current give-up process as a significant source of risk 
for clearing firms. SIFMA-affiliated Clearing Members subsequently 
requested that the Exchanges alleviate this risk by amending Exchange 
rules governing the give up process.\8\
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    \8\ Nasdaq PHLX LLC (``Phlx'') recently modified its give up 
procedure to allow clearing members to ``opt in'' such that the 
clearing member may specify which Phlx member organizations are 
authorized to give up that clearing member. See Phlx Rule 1037. See 
also Securities and Exchange Act Release Nos. 84624 (November 19. 
2018), 83 FR 60547 (Notice); 85136 (February 14, 2019), 84 FR 5526 
(February 21, 2019) (SR-Phlx-2018-72) (Approval Order). NYSE Arca, 
Inc., (``Nyse Arca'') and NYSE American LLC (``NYSE American'') also 
recently submitted rule filings to modify their respective give up 
rules to adopt an ``opt in'' process. See SR-NYSEArca 2019-32 and 
SR-NYSEAMER-2019-17. The Exchange's proposal leads to the same 
result of providing its Clearing TPHs the ability to control risk 
and includes Phlx's, NYSE Arca's and NYSE American's ``opt in'' 
process, but it otherwise differs slightly in process from their 
give up rules. For example, the Exchange intends to maintain its 
provisions relating to Designated Give Ups and eliminate its 
provisions relating to the rejection of a trade.
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Proposed Rule Change
    Based on the above, the Exchange now seeks to amend its rules 
regarding the current give up process in order to allow a Clearing TPH 
to ``opt in'', at The Options Clearing Corporation (``OCC'') clearing 
number level, to a feature that, if enabled by the Clearing TPH, will 
allow the Clearing TPH to specify which TPH organizations are 
authorized to give up that OCC clearing number. As proposed, Rule 6.21, 
will continue to provide that for each transaction in which a TPH 
participates, the TPH must immediately give up the name of the Clearing 
Trading Permit Holder through which the transaction will be cleared 
(``give up''). Rule 6.21 will also continue to require that TPHs 
identify to the Exchange, via the Notification Form, all Clearing TPHs 
that the TPH would like to have the ability to give up (i.e., 
Designated Give Ups). However, the Exchange proposes to also add to 
Rule 6.21(a) that Clearing TPHs may elect to ``Opt In,'' as defined in 
paragraph (c) of the proposed Rule and described further below, and 
restrict one or more of its OCC number(s) (``Restricted OCC Number''). 
A TPH may Give Up a Restricted OCC Number provided the TPH has written 
authorization as described in paragraph (c)(ii) (``Authorized TPH''). 
The Exchange notes that if a TPH identifies a particular Clearing TPH 
as a Designated Give Up, but that Clearing TPH has restricted its OCC 
number(s) and has not authorized the TPH to give it up, then the 
Exchange will not give effect to the designation on the Notification 
Form (i.e., the TPH will not be able to give up that Clearing TPH even 
though it was identified as a Designated Give Up). Similarly, if a 
Clearing TPH authorizes a TPH to give up its Restricted OCC Number(s), 
the Exchange will not enable that Clearing TPH as a give up for that 
TPH until and unless the TPH identifies that Clearing TPH as a 
Designated Give Up on a Notification Form. In light of Clearing TPHs 
having the ability to restrict their OCC numbers from being given up by 
particular TPHs, the Exchange also proposes to eliminate the process 
for Clearing TPHs to ``reject'' trades. As such, the Exchange proposes 
to eliminate subparagraphs (e) and (f) of Rule 6.21 and any other 
references to the process in Rule 6.21.
    Proposed Rule 6.21(c) provides that Clearing TPHs may request the 
Exchange restrict one or more of their OCC clearing numbers (``Opt 
In'') from being given up unless otherwise authorized. If a Clearing 
TPH Opts In, the Exchange will require written authorization from the 
Clearing TPH permitting a TPH to give up a Clearing TPH's Restricted 
OCC Number. An Opt In would remain in effect until the Clearing TPH 
terminates the Opt In as described in subparagraph (iii). If a Clearing 
TPH does not Opt In, that Clearing TPH's OCC number may be subject to 
being given up by any TPH that has designated it as a Designated Give 
Up. Proposed Rule 6.21(c)(i) will set forth the process by which a 
Clearing TPH may Opt In. Specifically, a Clearing TPH may Opt In by 
sending a completed ``Clearing TPH Restriction Form'' listing all 
Restricted OCC Numbers and Authorized TPHs.\9\ A copy of the proposed 
form is included in Exhibit 3. A Clearing TPH may elect to restrict one 
or more OCC clearing numbers that are registered in its name at OCC. 
The Clearing TPH would be required to submit the Clearing TPH 
Restriction Form to the Exchange's MSD as described on the form. Once 
submitted, the Exchange requires ninety days before a Restricted OCC 
Number is effective within the System. This time period is to provide 
adequate time for the TPH users of that Restricted OCC Number who are 
not initially specified by the Clearing TPH as Authorized TPHs to 
obtain the required written authorization from the Clearing TPH for 
that Restricted OCC Number. Such member users would still be able to 
give up that Restricted OCC Number during this ninety day period (i.e., 
until the number becomes restricted within the System).
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    \9\ This form will be available on the Exchange's website. The 
Exchange will also maintain, on its website, a list of the 
Restricted OCC Numbers, which will be updated on a regular basis, 
and the Clearing TPH's contact information to assist TPH 
organizations (to the extent they are not already Authorized TPH 
Organizations) with requesting authorization for a Restricted OCC 
Number. The Exchange may utilize additional means to inform its 
members of such updates on a periodic basis.
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    Proposed Rule 6.21(c)(ii) will set forth the process for TPHs to 
give up a Clearing TPH's Restricted OCC Number. Specifically, a TPH 
desiring to give up a Restricted OCC Number must become an Authorized 
TPH. The Clearing TPH will be required to authorize a TPH as described 
in subparagraph (i) or (iii) of

[[Page 35435]]

Rule 6.21(c) (i.e., through a Clearing TPH Restriction Form), unless 
the Restricted OCC Number is already subject to a Letter of Guarantee 
that the TPH is a party to, as set forth in Rule 6.21(b)(vi). Pursuant 
to proposed Rule 6.21(c)(iii), a Clearing TPH may amend the list of its 
Authorized TPHs or Restricted OCC Numbers by submitting a new Clearing 
TPH Restriction Form to the Exchange's MSD indicating the amendment as 
described on the form. Once a Restricted OCC Number is effective within 
the System pursuant to Rule 6.21(c)(i), the Exchange may permit the 
Clearing TPH to authorize, or remove authorization for, a TPH to give 
up the Restricted OCC Number intra-day only in unusual circumstances, 
and on the next business day in all regular circumstances. The Exchange 
will promptly notify TPH organizations if they are no longer authorized 
to give up a Clearing TPH's Restricted OCC Number. If a Clearing TPH 
removes a Restricted OCC Number, any TPH may give up that OCC clearing 
number once the removal has become effective on or before the next 
business day, provided that Clearing TPH has been designated as a 
Designated Give Up.
    The Exchange also proposes to amend current subparagraph (c) 
(System) (to be renumbered to subparagraph (d)) of Rule 6.21 to clarify 
that in addition to the Exchange's system not accepting orders that 
identify a give up that is not at the time a Designated Give Up or a 
Guarantor, the System will also reject any order that designates a 
Restricted OCC Number for which the Trading Permit Holder is not an 
Authorized TPH.
    The Exchange proposes to amend current subparagraph (d) (Notice to 
Clearing Trading Permit Holders) (to be renumbered to subparagraph (e)) 
of Rule 6.21 to provide that the Exchange will provide notice to TPHs 
that they are authorized or unauthorized by Clearing TPHs.
    The Exchange also proposes to adopt subparagraph (g) of Rule 6.21 
to provide that an intentional misuse of this Rule is impermissible, 
and may be treated as a violation of Rule 4.1, titled ``Just and 
Equitable Principles of Trade''. This language will make clear that the 
Exchange will regulate an intentional misuse of this Rule, and that 
such behavior would be a violation of Exchange rules. The proposed 
language is similar to corresponding provisions in other exchanges' 
give-up rules.\10\
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    \10\ See e.g., Phlx Rule 1037(e).
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    Lastly, the Exchange proposes to amend its current Trading Permit 
Holder Notification of Designated Give-Ups Form (``Designated Give-Ups 
Form''), effective October 7, 2019. The Exchange notes that it will be 
migrating its trading platform onto new technology on October 7, 2019. 
Following the technology migration, the Exchange and each of its 
affiliated options exchanges (i.e., Cboe C2 Exchange, Inc., Cboe BZX 
Exchange, Inc. and Cboe BYX Exchange, Inc. (collectively, ``Cboe 
Markets'') will be on the same technology platform. To provide further 
harmonization across the Cboe Markets and provide more seamless 
administration of the Give-Up rule, the Exchange proposes to eliminate 
the current Designated Give Ups Form and adopt a new form which would 
be applicable to all Cboe Markets going forward.\11\ The proposed 
Designated Give-Ups Form is included in Exhibit 3.
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    \11\ The Exchange notes that it will not give effect to any 
instructions on the Designated Give-Ups Form for a particular Cboe 
Market until and unless such market files a rule change to adopt the 
new form. The Exchange anticipates filing copycat rule filings for 
each of its affiliated options exchange in the near future.
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Implementation Date
    The Exchange proposes to announce the implementation date of the 
proposed rule change in an Exchange Notice, to be published no later 
than thirty (30) days following the operative date. The implementation 
date will be no later than sixty (60) days following the operative 
date.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\12\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \13\ 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 
facilitation 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) \14\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    Particularly, as discussed above, several clearing firms affiliated 
with SIFMA have recently expressed concerns relating to the current 
give up process, which permits member organizations to identify any 
Clearing TPH as a Designated Give Up for purposes of clearing 
particular transactions, and have identified the current give up 
process (i.e., a process that lacks authorization) as a significant 
source of risk for clearing firms. The Exchange believes that the 
proposed changes to Rule 6.21 help alleviate this risk by enabling 
Clearing TPHs to `Opt In' to restrict one or more of its OCC clearing 
numbers (i.e., Restricted OCC Numbers), and to specify which Authorized 
TPHs may give up those Restricted OCC Numbers. As described above, all 
other TPHs would be required to receive written authorization from the 
Clearing TPH before they can give up that Clearing TPH's Restricted OCC 
Number. The Exchange believes that this authorization provides proper 
safeguards and protections for Clearing TPHs as it provides controls 
for Clearing TPHs to restrict access to their OCC clearing numbers, 
allowing access only to those Authorized TPHs upon their request. The 
Exchange also believes that its proposed Clearing Trading Permit Holder 
Restriction Form allows the Exchange to receive in a uniform fashion, 
written and transparent authorization from Clearing TPHs, which ensures 
seamless administration of the Rule.
    The Exchange believes that the proposed Opt In process strikes the 
right balance between the various views and interests across the 
industry. For example, although the proposed rule would require TPHs 
(other than Authorized TPHs) to seek authorization from Clearing TPHs 
in order to have the ability to give them up, each TPH will still have 
the ability to give up a Restricted OCC Number that is subject to a 
Letter of Guarantee without obtaining any further authorization if that 
TPH is party to that arrangement. The Exchange also notes that to the 
extent the executing TPH has a clearing arrangement with a Clearing TPH 
(i.e., through a Letter of Guarantee), a trade can be assigned to the 
executing TPH's guarantor. Accordingly, the Exchange believes that the 
proposed rule change is reasonable and continues to provide certainty 
that a Clearing TPH would be responsible for a trade, which protects 
investors and the public interest.

[[Page 35436]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
that the proposed rule change will impose an unnecessary burden on 
intramarket competition because it would apply equally to all similarly 
situated TPHs. The Exchange also notes that, should the proposed 
changes make the Exchange more attractive for trading, market 
participants trading on other exchanges can always elect to become TPHs 
on the Exchange to take advantage of the trading opportunities. 
Furthermore, the proposed rule change does not address any competitive 
issues and ultimately, the target of the Exchange's proposal is to 
reduce risk for Clearing TPHs under the current give up model. Clearing 
firms make financial decisions based on risk and reward, and while it 
is generally in their beneficial interest to clear transactions for 
market participants in order to generate profit, it is the Exchange's 
understanding from SIFMA and clearing firms that the current process 
can create significant risk when the clearing firm can be given up on 
any market participant's transaction, even where there is no prior 
customer relationship or authorization for that designated transaction. 
In the absence of a mechanism that governs a market participant's use 
of a Clearing TPH's services, the Exchange's proposal may indirectly 
facilitate the ability of a Clearing TPH to manage their existing 
customer relationships while continuing to allow market participant 
choice in broker execution services. While Clearing TPHs may compete 
with executing brokers for order flow, the Exchange does not believe 
this proposal imposes an undue burden on competition. Rather, the 
Exchange believes that the proposed rule change balances the need for 
Clearing TPHs to manage risks and allows them to address outlier 
behavior from executing brokers while still allowing freedom of choice 
to select an executing broker.

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 written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) \16\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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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 email to [email protected]. Please include 
File Number SR-CBOE-2019-036 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-CBOE-2019-036. 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-CBOE-2019-036 and should be submitted on 
or before August 13, 2019.

    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 M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15559 Filed 7-22-19; 8:45 am]
 BILLING CODE 8011-01-P