Document ID: SEC-2011-1119-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-08-03T04:00Z

[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Notices]
[Pages 46866-46867]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19690]

[[Page 46866]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64985; File No. SR-CHX-2011-21]

Self-Regulatory Organizations; Chicago Stock Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Amend Article 
20, Rule 9 (Cancellation of Transactions) and Interpretation and Policy 
.01 Thereunder Regarding the Cancellation of the Stock Leg of Stock-
Option Transactions Done on the Exchange

July 28, 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 26, 2011, 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 amend Article 20, Rule 9 (Cancellation of 
Transactions) and Interpretation and Policy .01 thereunder regarding 
the cancellation of the stock leg of stock-option transactions done on 
the Exchange. 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 proposes to amend CHX Article 20, Rule 9 (Cancellation 
of Transactions) and Interpretation and Policy .01 thereunder in order 
to expand the circumstances in which the stock leg of a combination 
stock-option order may be cancelled and make related modifications. 
Currently, under Interpretation and Policy .01, the stock leg of stock-
option order can be cancelled only if market conditions in the options 
exchange prevented the execution of the options leg at the price agreed 
upon by the parties to the options transaction. We propose to move the 
text of the current Interpretation and Policy .01 to a separate section 
of Rule 9, since the Exchange believes that the requirements of that 
Interpretation and Policy constitute an independent basis for the 
cancellation of transactions, rather than act as an interpretation of 
the general provisions of current Rule 9.\3\
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    \3\ The Exchange proposes to renumber the text of existing Rule 
9 as subsection (a) to that rule, while Interpretation and Policy 
.01 (with the modification proposed herein) will become section (b) 
of Rule 9.
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    Through this filing, the Exchange proposes to expand the 
circumstances in which transactions executed on the CHX's facilities 
may be cancelled pursuant to provisions applicable only to combination 
stock-option orders to include situations in which the options leg is 
executed, but subsequently cancelled by the options exchange pursuant 
to their rules. In such circumstances, the cancellation of the stock 
leg at the request of the parties thereto is substantially similar to 
situations when the options trade is not executed at all. Otherwise, 
the parties would be left with an unwanted stock position, which was a 
hedge on or otherwise a component of the now-cancelled options 
transaction.\4\ The expansion of the authority to cancel transactions 
would permit a CHX Participant to cancel the unwanted stock leg of a 
stock-option order if the options trade was cancelled without having to 
resort to the open market to liquidate the stock leg.
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    \4\ As noted in note 5 to the Commission's notice of filing of 
the Exchange's proposed addition of the stock-option cancellation 
interpretation, ``the stock leg of a stock-option order is always 
presented to the CHX participant with an identified buyer and seller 
who have agreed to the terms of the trade. Both buyer and seller are 
aware of the possibility that the stock leg of a stock-option order 
may be cancelled on the CHX if the corresponding options leg is 
cancelled on an options market. Because both the buyer and seller 
are identified when the stock leg is presented to the CHX, there is 
no possibility that another CHX member's order could be matched 
against a stock-option order. Accordingly, there is no risk that an 
investor's order could be involuntarily cancelled without notice to 
the investor. * * *'' Securities Exchange Rel. No. 34-54185 (July 
20, 2006), 71 FR 42693 (July 27, 2006) (SR-CHX-2005-34).
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    The Exchange also proposes to require that any proposed 
cancellation of a transaction involving a stock-option order be made by 
or on behalf of all Participants to the transaction, rather than by any 
Participant. The Exchange believes that requiring all Participants to 
consent to the transaction will help prevent the possible abuse of the 
cancellation provisions by a single party acting unilaterally. The CHX 
understands that the ultimate parties to the cash equities transaction 
are the same parties to the equity options transaction, so any 
cancellation of the Exchange transaction will not have an impact on 
other market participants.\5\ A special trade indicator will be 
reported by the Exchange to the Consolidated Tape in order that the 
parties and other market participants are aware that the transaction 
may be cancelled by the parties if the requirements of the rule are 
satisfied.
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    \5\ In some instances, the parties to the options transactions 
may not be Exchange Participants. The orders of such firms would be 
executed on the Exchange in the name of its clearing firm, which 
must be an Exchange Participant. The clearing firm would then 
allocate the transaction to the options firm.
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    Finally, proposed Rule 9(b)(3) requires Participants acting as the 
broker in trades cancelled pursuant to proposed Rule 9(b)(1)(ii) to 
maintain records sufficient to establish that the options leg was in 
fact cancelled by the options exchange on which it was executed. 
Proposed Rule 9(b)(4) requires, among other things, that the 
Participant acting as broker on the trade identify the reason that the 
trade was cancelled. The Exchange will use such records to verify that 
the requirements imposed by the proposed rule changes have been met, 
and would treat the failure to properly document such cancellations as 
a rule violation subject to disciplinary treatment under Article 12 of 
the Exchange's rules.\6\
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    \6\ The Exchange represents that it will implement surveillance 
procedures reasonably designed to detect possible violations of 
these provisions simultaneous with the approval of the proposed rule 
changes.
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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,\7\ and furthers the objectives 
of Section 6(b)(5)

[[Page 46867]]

in particular,\8\ 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 allowing 
CHX to amend its rules to permit the cancellation of previously 
executed stock trades which are a component of a combination stock-
option order when the options exchange cancels the options leg of the 
transaction. By allowing the cancellation of the stock leg of a 
combination stock-option order when the parties desire that result, the 
proposed changes will assist in the efficient processing of such 
transactions. The cancellation of the stock leg in such circumstances 
should also result in lower fees to Exchange order senders, since they 
would otherwise have to pay additional transaction fees to execute an 
offsetting trade. Since the cancellation of a trade pursuant to the 
proposed rule changes eliminates the need for the parties to execute 
and report an offsetting trade, the proposal should bolster the 
integrity of the publicly disseminated trade reporting information by 
removing the need for duplicative trade reports. The ``double 
counting'' of the initial trade and a reported reversal of that trade 
could give an inaccurate impression of the amount of shares actually 
changing hands in the marketplace. Since the cancellation would only 
impact the parties to the options transaction, the proposed amendments 
would not impact other market participants which submit orders to the 
CHX's facilities for execution. Finally, permitting the cancellation of 
the stock leg when the options trade has been cancelled should reduce 
the credit risk to the parties involved in the transaction. Failure to 
cancel or offset the stock leg would leave the parties with an unwanted 
stock position, which was a hedge on or otherwise a component of the 
now-cancelled options transaction.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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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.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change 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 (i) As the Commission may 
designate up to 90 days of such date 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 No. SR-CHX-2011-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2011-21. 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 the Exchange. 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 available publicly. All 
submissions should refer to File Number SR-CHX-2011-21 and should be 
submitted on or before August 24, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19690 Filed 8-2-11; 8:45 am]
BILLING CODE 8011-01-P