Document ID: SEC-2014-1114-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: OneChicago, LLC
Posted Date: 2014-07-07T04:00Z

[Federal Register Volume 79, Number 129 (Monday, July 7, 2014)]
[Notices]
[Pages 38343-38345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15718]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72497; File No. SR-OC-2014-03]

Self-Regulatory Organizations; OneChicago, LLC; Notice of Filing 
of a Proposed Rule Change To Update OCX's Rulebook for a Filing 
Previously Made With the Commodity Futures Trading Commission

June 30, 2014.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on June 17, 2014, 
OneChicago, LLC (``OneChicago,'' ``OCX,'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons. OneChicago has previously filed the 
rule change with the Commodity Futures Trading Commission (``CFTC''). 
OneChicago filed a written certification with the CFTC under Section 
5c(c) of

[[Page 38344]]

the Commodity Exchange Act (``CEA'') \2\ on September 12, 2012.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    OneChicago is proposing to file with the SEC a Notice to Members 
(``NTM'') that the Exchange has previously filed with the CFTC, but did 
not file with the SEC. OneChicago is filing the NTM with the SEC 
because it relates to sales practices.
    On September 12, 2012, OCX filed NTM 2012-26 with the CFTC 
(originally filed as NTM 2012-24 on August 31, 2012, but refiled as NTM 
2012-26 to make a technical amendment). NTM 2012-26 updates NTM 2010-13 
by separating the issues in NTM 2012-26 (Pre-Execution Discussions and 
Cross Trades) from the general block trade issues discussed in NTM 
2010-13. NTM 2012-26 provides guidance on two issues related to trading 
and sales practices. First, NTM 2012-26 interprets and provides 
guidance on OCX Rule 614 with regard to pre-execution discussions. 
Second, NTM 2012-26 interprets and provides guidance on OCX Rules 409 
and 610 with regard to cross trades.

Pre-Execution Discussions

    OCX Rule 614 prohibits market participants from entering any Order 
into the OneChicago System which has been pre-arranged, except as 
expressly permitted by Rules 416 and 417 or in accordance with any 
policies or procedures for pre-execution discussions from time to time 
adopted by the Exchange. NTM 2012-26 establishes such a pre-execution 
discussion policy. Specifically, NTM 2012-26 permits market 
participants to engage in pre-execution discussions pursuant to which 
one party may agree in advance to take the opposite side of the other 
party's Order for a transaction to be executed on the Exchange.
    NTM 2012-26 then lays out three conditions which, if applicable, 
must be met in order for a pre-execution discussion to comply with the 
NTM. First, customers of each party engaging in a pre-execution 
discussion must consent to allow pre-execution discussions with other 
market participants. Second, any market participant who is solicited to 
participate in an OCX transaction through pre-execution discussions 
shall not (i) disclose to any other party the details of such 
discussions, or (ii) enter an order or quote through the Exchange to 
take advantage of information conveyed during such discussions. 
Finally, for any non-bilateral trade conducted on the Exchange pursuant 
to a pre-execution discussion, a period of four seconds must elapse 
between entering the first order or quote and entering the second order 
for the opposite side.

Cross Trades

    OCX Rule 409 states that the Exchange may from time to time adopt 
procedures to facilitate the crossing of Orders through the OneChicago 
System. OCX Rule 610 lays out the requirements for market participants 
executing customers' orders, and more specifically, explains that 
customers' orders are treated with higher priority than proprietary 
orders.
    NTM 2012-26 expands upon OCX Rules 409 and 610 and permits the 
crossing of Orders so long as one side of the trade is entered into the 
OneChicago System at least four seconds before the opposite side. In 
addition, if the market participant crossing the Orders is taking the 
opposite side of a customer Order, that market participant must enter 
the customer's side of the trade into the OneChicago System first.
    The NTM then goes on to add that market participants shall not be 
in violation of either OCX Rule 409 or OCX Rule 610 if no Person on 
whose behalf the orders are being crossed has knowledge of the other 
side's Order and there is no coordination or prearrangement of the 
cross trade. In such a circumstance, both sides of the trade are 
responsible for demonstrating to OCX staff that neither side had 
knowledge of the other's Order.
    The NTM is attached as Exhibit 4 to the filing submitted by the 
Exchange, but is not attached to the published notice of the filing.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, OneChicago 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 self-regulatory organization 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 purpose of OneChicago's filing is to update the OCX Rulebook to 
account for a filing OneChicago has previously made with the CFTC, but 
has not made concurrently with the SEC. Specifically, the purpose of 
the NTM is to clarify the obligations of market participants regarding 
pre-execution discussions and cross trades, and to require that certain 
conditions are met in order to engage in pre-execution discussions or 
cross trades.
    The purpose of the pre-execution discussion section in NTM 2012-26 
is to explain to market participants how a pre-execution discussion may 
be effected within the bounds of OCX Rule 614. The NTM lays out three 
conditions that must be met in order to engage in a pre-execution 
discussion. These three conditions have been imposed for two purposes: 
(1) To protect customers, and (2) to preserve the integrity of OCX's 
markets. Regarding customer protection, market participants engaging in 
pre-execution discussions on behalf of customers must receive consent 
from their customers to engage in such discussions. This requirement 
ensures that customers are aware of the method by which their Orders 
are being executed. With regard to preserving the integrity of OCX's 
markets, market participants are prohibited from entering any Order on 
the basis of information gained through a pre-execution discussion. 
This prohibition preserves market integrity by ensuring that market 
participants are not trading on the basis of non-public information 
that is not freely available.
    The purpose of the cross trade section in NTM 2012-26 is to explain 
to market participants how a cross trade may be effected within the 
bounds of OCX Rule 409 and 610. The NTM preserves market integrity be 
requiring cross trades to be exposed to market risk for a period of at 
least four seconds. This delay ensures that the trade to be crossed has 
the chance to execute competitively with other market participants. 
Additionally, the four second delay rule requires market participants 
to enter the customer side of the trade (if the market participant is 
taking the opposite side of a customer order) first, allowing the 
customer to be executed against a third party market participant. This 
requirement ensures that customers receive fair and reasonable prices 
for their trades.

[[Page 38345]]

2. Statutory Basis
    OneChicago believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\3\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\4\ in particular in that it 
is 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 facilitating 
transactions in securities, and 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.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78(f)(b)(5).
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    NTM 2012-26 promotes just and equitable principles of trade and 
fosters cooperation and coordination with persons engaged in 
facilitating transactions in securities by explaining the method by 
which these market participants may engage in two distinct trading 
practices that are permitted by the Exchange. The NTM sets forth 
requirements for market participants effecting pre-execution 
discussions and cross trades. The Exchange also believes that the rule 
change benefits investors and market participants because it enhances 
customer protection and helps preserve the integrity of OCX's market.

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

    OneChicago does not believe that the rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. The Exchange believes that the proposed rule 
change is equitable and promotes the principles of trade because it is 
designed to prevent manipulative acts and protect investors. 
Additionally, all of the conditions to engage in pre-execution 
discussions and cross trades apply equally to all market participants 
and are not enforced in a discriminatory manner.

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

    Comments on the OneChicago proposed rule change have not been 
solicited and none have been received.

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

    OneChicago filed the proposed rule change with the CFTC on 
September 12, 2012. OneChicago did not file the proposed rule change 
concurrently with the SEC. Instead, OneChicago filed the proposed rule 
change on June 17, 2014.\5\
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    \5\ Section 19(b)(7)(B) of the Act provides that a proposed rule 
change filed with the SEC pursuant to section 19(b)(7)(A) of the Act 
shall be filed concurrently with the CFTC.
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    At any time within 60 days of the date of effectiveness \6\ of the 
proposed rule change, the Commission, after consultation with the CFTC, 
may summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.\7\
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    \6\ Section 19(b)(7)(C) of the Act provides, inter alia, that 
``[a]ny proposed rule change of a self-regulatory organization that 
has taken effect pursuant to [Section 19(b)(7)(B) of the Act] may be 
enforced by such self-regulatory organization to the extent such 
rule is not inconsistent with the provisions of this title, the 
rules and regulations thereunder, and applicable Federal law.''
    \7\ 15 U.S.C. 78s(b)(1).
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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 rule-comments@sec.gov. Please include 
File Number SR-OC-2014-03 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-OC-2014-03. 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 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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices 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-OC-2014-03, 
and should be submitted on or before July 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15718 Filed 7-3-14; 8:45 am]
BILLING CODE 8011-01-P