Document ID: SEC-2015-0875-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2015-05-20T04:00Z

[Federal Register Volume 80, Number 97 (Wednesday, May 20, 2015)]
[Notices]
[Pages 29121-29127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12148]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74969; File No. SR-CBOE-2015-042]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Regarding Limitation of Liability

May 14, 2015.
    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 May 5, 2015, Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') 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 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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[[Page 29122]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its Rule 6.7 governing Exchange 
liability and payments to Trading Permit Holders in connection with 
certain types of losses that Trading Permit Holders may allege arose 
out of business conducted on or through the Exchange or in connection 
with the use of the Exchange's facilities. The Exchange also proposes 
conforming changes to Rules 2.24 and 6.7A, and the elimination of Rule 
7.11. The text of the proposed rule change is available on the 
Exchange's Web site (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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to amend Rule 6.7 to eliminate any implication of 
liability with respect to the Exchange and its subsidiaries or 
affiliates, or any of their directors, officers, committee members, 
other officials, employees, contractors, or agents, (including the 
Exchange, collectively, ``Covered Persons'') for losses arising out of 
the use or enjoyment of Exchange facilities. The proposed rule change 
is consistent with and supplements existing law, and would ensure that 
self-regulatory organizations (``SROs'') can operate within the sphere 
of their regulatory duties without fear of endless, costly litigation 
and potential catastrophic loss.\5\ As discussed below, the proposed 
rule change is also consistent with the rules of other exchanges 
limiting exchange liability (see, e.g., EDGA Exchange, Inc. (``EDGA'') 
Rule 11.14, BOX Options Exchange, LLC (``BOX'') Rule 7230, 
International Securities Exchange, LLC (``ISE'') Rule 705, and New York 
Stock Exchange LLC (``NYSE'') Rule 18).
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    \5\ Courts have recognized the importance of protecting 
exchanges from such loss in deciding that SROs must be absolutely 
immune from civil actions for losses arising out of the SRO 
function. See Dexter v. Depository Trust & Clearing Corp., 406 F. 
Supp. 2d 260, 263 (S.D.N.Y. 2005) (absolute immunity possessed by 
SROs ``is an integral part of the American system of self-
regulation''), aff'd 219 F. App'x 91 (2d Cir. 2007). Without such 
protection, an SRO's ``exercise of its quasi-governmental functions 
would be unduly hampered by disruptive and recriminatory lawsuits.'' 
D'Alessio v. NYSE, 258 F.3d 93, 105 (2d Cir. 2001). It is critical 
that SROs, which stand in the shoes of the SEC in performing their 
quasi-governmental regulatory function, be free from ``the fear of 
burdensome damage suits that would inhibit the exercise of their 
independent judgment.'' Dexter, 406 F.Supp. 2d at 263.
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    Under CBOE's proposal, although the Exchange would not be liable 
for losses, it would have the discretion to compensate Trading Permit 
Holders for losses alleged to have resulted from the Exchange's failure 
to correctly process an order or quote due to the acts or omissions of 
the Exchange or due to the failure of its systems or facilities (each, 
a ``Loss Event''), up to specified limits. The proposed rule change 
would also establish timeframes within which Trading Permit Holders 
would be required to bring requests for compensation (and provide 
supporting documentation), provide factors the Exchange may consider in 
determining whether to provide compensation in response to such 
requests, and establish that the Exchange's determinations on 
compensation are final and not appealable. The proposed rule change 
would also provide that claims arising under a previous version of Rule 
6.7 for losses occurring more than one year prior July 1, 2015 (the 
``Effective Date'') would not be considered valid, and that claims for 
any losses occurring prior to the Effective Date must be brought within 
one month of the Effective Date to be considered valid. Specific 
changes to Exchange Rules are discussed below.\6\
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    \6\ The Exchange notes that Rule 6.7 is cross-referenced in 
several places throughout the Exchange Rules including, for example, 
in Rules 20.5, Limitation of Liability of Exchange and of Reporting 
Authority, 22.5, Limitation of Liability of Exchange and of 
Reporting Authority, and 50.6, Liability and Legal Proceedings, as 
well as Appendix A of Chapters XLVII-XLIX and Appendix A of Chapters 
L-LIV, and generally as part of the Chapter VI cross-references 
contained in the Introductions to Chapters XX-XXIX. The Exchange 
also notes that, in accordance with Rule 50.6, the provisions of 
Rules 2.24, 6.7, and 6.7A apply to the CBOE Stock Exchange, LLC 
(``CBSX,'' CBOE's stock execution facility) to the same extent that 
they apply to CBOE and references in those rules to the Exchange are 
also deemed to be references to CBSX.
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Proposed Amendment to Rule Title
    The proposed rule change would change the title of Rule 6.7 from 
``Exchange Liability'' to ``Exchange Liability Disclaimers and 
Limitations.'' The proposed amendment to the Rule title would clarify 
that the Rule does not impose liability on the Exchange, but rather 
disclaims Exchange liability for any losses that arise out of the use 
or enjoyment of the facilities afforded by the Exchange, any 
interruption in or failure or unavailability of any such facilities, or 
any action taken or omitted to be taken in respect to the business of 
the Exchange, the calculation or dissemination of specified values, or 
quotes or transaction reports for options or other securities (the 
``General Disclaimer'').\7\
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    \7\ Cross-references to Rule 6.7 contained in Appendix A of 
Chapters XLVII-XLIX and Appendix A of Chapters L-LIV are also 
proposed to be updated to reflect the new title. In addition 
Appendix A of Chapters L-LIV is proposed to be updated to delete an 
unnecessary reference to Rule 24.4 and to include a cross-reference 
to Rule 50.6.
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Proposed Amendments to Scope of General Disclaimer
    Proposed amendments to Rule 6.7(a) would clarify that 
``contractors'' are included within the term ``Covered Persons,'' and 
are therefore included within the General Disclaimer. This proposed 
change is needed because the Exchange at times contracts with outside 
firms to provide products and services to the Exchange for use by 
Trading Permit Holders in connection with regulated business conducted 
on or through the Exchange and that arise out of the use or enjoyment 
of the facilities afforded by the Exchange and/or the calculation or 
dissemination of specified values, or quotes or transaction reports for 
options or other securities. The Exchange notes that this proposed rule 
change is consistent with the exclusion from liability for contractors 
found in EDGA Rule 11.14, BOX Rule 7230 and ISE Rule 705. Proposed 
amendments to Rule 6.7(a) would also clarify that ``other officials'' 
of the Exchange or ``any subsidiaries or affiliates of the Exchange'' 
are included within the term ``Covered Persons,'' and are therefore 
included within the General Disclaimer. We note that this proposed rule 
change to include other officials and subsidiaries is consistent with 
the existing provisions of Rule 6.7A.\8\ The term ``Covered Persons''

[[Page 29123]]

would also include such subsidiaries' and affiliates' directors, 
officers, committee members, other officials, employees, contractors, 
or agents.
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    \8\ Exchange Rule 6.7A currently limits the rights of any 
Trading Permit Holder or any person associated with a Trading Permit 
Holder to institute a lawsuit or other legal proceeding against the 
Exchange or any director, officer, employee, agent or contractor, or 
other official of the Exchange, or any subsidiary of the Exchange, 
for any actions taken or omitted to be taken in connection with the 
official business of the Exchange or any subsidiary, except to the 
extent such actions or omissions constitute violations of the 
federal securities laws for which a private right of action exist. 
The rule also permits appeals of Exchange disciplinary actions as 
provided in Exchange Rule. Proposed amendments to Rule 6.7A 
(discussed below) would clarify that this limitation applies to 
committee members and affiliates of the Exchange.
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    The proposed rule change would also clarify that implicit in the 
General Disclaimer is the Exchange's disclaimer of any warranties, 
express or implied, with respect to the use or enjoyment of facilities 
afforded by the Exchange, including without limitation, of any data 
provided by the Exchange. The current language of the rule states that 
the Exchange does not warrant ``the use of any data transmitted or 
disseminated by or on behalf of the Exchange or any reporting authority 
designated by the Exchange, including but not limited to reports of 
transactions in or quotations for securities traded on the Exchange or 
underlying securities, or reports of interest rate measures or index 
values or related data.'' Under the proposed rule change, the Exchange 
would make explicit that the General Disclaimer is intended to contain 
within it a disclaimer of any warranties as to the use or enjoyment of 
the facilities offered by the Exchange. The proposed rule change would 
thereby clarify that such use or enjoyment of Exchange facilities by 
Trading Permit Holders is provided ``as is,'' without specific 
warranties of merchantability or of fitness for a particular purpose. 
For the avoidance of doubt, the explicit list of the types of data for 
which the Exchange disclaims any warranties would also include, without 
limitation, ``any current or closing index value, any current or 
closing value of interest rate options, or any report of transactions 
in or quotations for options or other securities, including underlying 
securities.'' \9\
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    \9\ The Exchange also proposes to replace the phrase 
``facilities or services'' with simply ``facilities'' in two 
locations within the existing text of Rule 6.7(a). The Exchange 
believes use of the term ``services'' is duplicative of the term 
``facilities'' and is therefore unnecessary.
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    The proposed rule change would also clarify that all limitations on 
liability and disclaimers within paragraph (a) of Rule 6.7 are in 
addition to, and not in limitation of, any limitations on liability 
otherwise existing under law. This proposed rule change is intended to 
ensure that the protection of Rule 6.7 does not circumscribe 
protections that otherwise would exist under the principles of law.\10\ 
This and other limitations on liability operate independently from, and 
in addition to, both the current and proposed amended versions of Rule 
6.7 and CBOE's other rules.
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    \10\ For example, as CBOE is organized under Delaware law, the 
principals of Delaware law also apply.
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Proposed Limits on Discretionary Payments for Alleged Losses
    Currently, Rule 6.7(b) provides that whenever custody of an 
unexecuted order is transmitted by a Trading Permit Holder to or 
through the Exchange's systems or to any other automated facility of 
the Exchange whereby the Exchange assumes responsibility for the 
transmission or execution of the order, and provided that the Exchange 
has acknowledged receipt of such order, the Exchange's liability for 
the negligent acts or omissions of its employees or for the failure of 
its systems or facilities shall not exceed certain limits set forth in 
Rule 6.7(b). The Exchange first proposes to provide that Rule 6.42(b) 
applies to quotes as well as unexecuted orders. Additionally, the 
Exchange proposes to eliminate the word ``automated'' from ``automated 
facility of the Exchange'', as not all facilities of the Exchange may 
be considered automated and the Exchange did not intend to restrict the 
scope of rule as such. The Exchange also seeks to amend Rule 6.7(b) to 
explicitly provide that, although the Exchange would not be liable with 
respect to regulated Exchange business for losses that arise out of the 
use or enjoyment of the facilities afforded by the Exchange and/or the 
calculation or dissemination of specified values, or quotes or 
transaction reports for options or other securities, as provided in 
Rule 6.7(a),\11\ the Exchange may make discretionary payments to 
Trading Permit Holders for certain losses alleged to have occurred due 
to Loss Events. Specifically, the proposed rule change would permit the 
Exchange to make discretionary payments to Trading Permit Holders for 
their losses alleged to have resulted from Loss Events up to the 
following limits. As to any one or more requests for compensation made 
by a single Trading Permit Holder that arose out of one or more Loss 
Events occurring on a single trading day, the Exchange could compensate 
the Trading Permit Holder up to but not exceeding the larger of 
$100,000 or the amount of any recovery obtained by the Exchange under 
applicable insurance maintained by the Exchange. As to the aggregate of 
all requests for compensation made by all Trading Permit Holders that 
arose out of one or more Loss Events occurring: (i) On a single trading 
day, the Exchange could compensate the Trading Permit Holders, in the 
aggregate, up to but not exceeding the larger of $250,000 or the amount 
of recovery obtained by the Exchange under any applicable insurance 
policy; and (ii) during a single calendar month, the Exchange could 
compensate the Trading Permit Holders, in the aggregate, up to but not 
exceeding the larger of $500,000 or the amount of the recovery obtained 
by the Exchange under any applicable insurance maintained by the 
Exchange. The proposed rule change would also state that no request for 
compensation by a Trading Permit Holder may be in an amount less than 
$100. Losses incurred on the same trading day and arising out of the 
same underlying act or omission of the Exchange or failure of the 
Exchange's systems or facilities may be aggregated to meet the $100 
minimum.\12\

[[Page 29124]]

This is intended as a de minimis threshold to avoid requiring the 
Exchange to devote the resources to considering relatively small 
requests for payment. The proposed rule change also would state that 
nothing in Rule 6.7 would obligate the Exchange to seek recovery under 
any applicable insurance policy. The proposed changes to Rule 6.7(b) 
would therefore, consistent with Rule 6.7(a), permit the Exchange to 
make discretionary payments to Trading Permit Holders to compensate 
them for such losses, up to specified limits, even though the Exchange 
would not be legally liable to pay for such losses.
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    \11\ Specifically, Rule 6.7(a), as proposed to be amended, would 
provide as follows:
     Neither the Exchange nor any of its directors, officers, 
committee members, other officials, employees, contractors, or 
agents, nor any subsidiaries or affiliates of the Exchange or any of 
their directors, officers, committee members, other officials, 
employees, contractors, or agents (``Covered Persons'') shall be 
liable to the Trading Permit Holders or to persons associated 
therewith for any loss, expense, damages or claims that arise out of 
the use or enjoyment of the facilities afforded by the Exchange, any 
interruption in or failure or unavailability of any such facilities, 
or any action taken or omitted to be taken in respect to the 
business of the Exchange except to the extent such loss, expense, 
damages or claims are attributable to the willful misconduct, gross 
negligence, bad faith or fraudulent or criminal acts of the Exchange 
or its officers, employees or agents acting within the scope of 
their authority. Without limiting the generality of the foregoing, 
and subject to the same exception, no Covered Person shall have any 
liability to any person or entity for any loss, expense, damages or 
claims that result from any error, omission or delay in calculating 
or disseminating any current or closing index value, any current or 
closing value of interest rate options, or any reports of 
transactions in or quotations for options or other securities, 
including underlying securities. The Exchange makes no warranty, 
express or implied, as to results to be obtained by any person or 
entity from the use or enjoyment of the facilities afforded by the 
Exchange, including without limitation, of any data transmitted or 
disseminated by or on behalf of the Exchange or any reporting 
authority designated by the Exchange, including but not limited to 
any data described in the preceding sentence, and the Exchange makes 
no express or implied warranties of merchantability or fitness for a 
particular purpose or use with respect to any such data. The 
foregoing limitations of liability and disclaimers shall be in 
addition to, and not in limitation of, the provisions of Article 
Eighth of the Exchange's Certificate of Incorporation or any 
limitations otherwise available under law.
    \12\ For example, if a TPH incurs a loss of $30 on one day due 
to a certain glitch in the Exchange's systems and a loss of $75 on 
the same day due to a separate unrelated glitch in the Exchange's 
systems, the TPH could not request compensation for either loss. 
However, if for example, the TPH incurs a loss of $105 on one day 
due to a certain glitch in the Exchange's system, the TPH may 
request compensation. In this second example, the TPH may request 
compensation even if such losses were incurred over a number of 
different transactions so long as it was the result of the same 
systems issue.
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Timeframes Within Which To Notify Exchange and Submit Requests
    Proposed new Rule 6.7(c) would establish timeframes within which a 
valid request for compensation must be brought under the Rule. Under 
the proposed rule change, notice of all requests would be required to 
be in writing and to be submitted to the Exchange no later than 12:00 
p.m. Central Time on the next business day following the Loss Event 
giving rise to such request. All requests would be required to be in 
writing and to be submitted, along with supporting documentation, by 
5:00 p.m. Central Time on the third business day following the Loss 
Event giving rise to each such request.\13\ Additional information 
related to the request as demanded by the Exchange is also required to 
be provided. The proposed rule change would also specify that the 
Exchange would not consider requests for which timely notice and 
submission had not been provided as required under amended Rule 6.7(c).
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    \13\ Other exchanges have similar submission requirements. See, 
e.g., NYSE Rule 18--Compensation in Relation to Exchange System 
Failure, which provides in relevant part that NYSE members provide 
oral notice to NYSE's Division of Floor Operations by the market 
opening on the next business day following the system failure and 
written notice by the end of the third business day following the 
system failure (T+3). See also, ISE Rule 705(d)(3)--Limitation of 
Liability, which provides that all claims for compensation must be 
made in writing and submitted no later than the opening of trading 
on the next business day following the event that gave rise to such 
claim.
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    The proposed provisions of new Rule 6.7(c) would benefit Trading 
Permit Holders by providing them with clear timeframes within which to 
submit notices of requests, requests for compensation, and supporting 
documentation. The proposed changes would also provide the Exchange 
with certainty as to the deadlines by which notices of requests and 
completed requests would be required to be submitted in order for the 
Exchange to consider them for compensation under Rule 6.7.
Exchange Treatment of Aggregate Requests Exceeding Maximum Amount 
Permitted To Be Paid
    Currently, Rule 6.7(c) provides that if all of the claims cannot be 
fully satisfied because in the aggregate they exceed the applicable 
maximum amount of liability provided for in paragraph (b) [of Rule 6.7] 
[sic], then such maximum amount would be allocated among all such 
claims arising on a single trading day or during a single calendar 
month, as applicable, written notice of which has been given to the 
Exchange no later than the opening of trading on the next business day 
following the day on which the use or enjoyment of Exchange facilities 
giving rise to the claim occurred, based upon the proportion that each 
claim bears to the sum of all such claims. The Exchange proposes to 
amend existing Rule 6.7(c), which would be renumbered to Rule 6.7(d), 
to state that, ``if all of the timely requests submitted pursuant to 
paragraph (c) [of Rule 6.7] that are granted cannot be fully satisfied 
because in the aggregate they exceed the applicable maximum amount of 
payments authorized in paragraph (b) [of Rule 6.7], then such maximum 
amount shall be allocated among all such requests arising on a single 
trading day or during a single calendar month, as applicable, based 
upon the proportion that each such request bears to the sum of all such 
requests.''
    The Exchange notes that it is proposing to replace the term 
``claim'' with the term ``request'', as well as replace the reference 
to ``liability'' with ``payments authorized'' to eliminate any 
implication of liability with respect to the Exchange and other Covered 
Person resulting from the use or enjoyment of the facilities offered by 
the Exchange, any interruption in or failure or unavailability or any 
such facilities, or any action taken or omitted to be taken in respect 
of the business of the Exchange.
    Additionally, the Exchange notes that proposed Rule 6.7(d) would 
continue to provide a fair way of allocating the limited payment that 
the rule would permit the Exchange to make when the total amount of 
eligible requests exceed that maximum amount. The proposal would also 
revise the timeframe in which requests for payment must be made by a 
Trading Permit Holder.
Exchange Review of Timely Requests
    Proposed new Rule 6.7(e) would provide that the Exchange, in 
determining whether to make payment in response to a request for 
compensation, may determine whether the amount requested should be 
reduced based on the actions or inactions of the requesting Trading 
Permit Holder. The proposed rule change would permit the Exchange to 
consider, without limitation, whether the actions or inactions of the 
Trading Permit Holder contributed to the Loss Event; whether the 
Trading Permit Holder made appropriate efforts to mitigate its loss; 
whether the Trading Permit Holder realized any gains as a result of a 
Loss Event; whether the losses of the Trading Permit Holder, if any, 
were offset by hedges of positions either on the Exchange or on another 
affiliated or unaffiliated market; and whether the Trading Permit 
Holder provided sufficient information to document the request and as 
demanded by the Exchange. Proposed Rule 6.7(e) would therefore provide 
reasonable factors that the Exchange may consider in determining 
whether to pay compensation in response to a request and in determining 
the amount of any such compensation.\14\
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    \14\ Another exchange considered similar factors in determining 
whether to pay compensation and in determining the amount of any 
such compensation. See NYSE Rule 18, which provides in relevant part 
that the NYSE Compensation Review Panel in its review will determine 
whether the amount should be reduced based on the actions or 
inactions of the member organization, including whether the member 
organization made appropriate efforts to mitigate its loss.
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    The Exchange represents that the determination to compensate a 
Trading Permit Holder will be made on an equitable and non-
discriminatory basis and without regard to the Exchange capacity of the 
Trading Permit Holder (including whether the Trading Permit Holder is a 
Designated Primary Market-Maker). Additionally, the Exchange represents 
that the Exchange will maintain a record of Trading Permit Holder 
requests including documentation detailing the Exchange's findings and 
details for approving or denying requests in accordance with its 
obligations under Section 17 of the Act.
Finality of Exchange Determinations Under Rule
    Proposed new Rule 6.7(f) would provide that all determinations by 
the Exchange pursuant to Rule 6.7 shall be final and not subject to 
appeal under

[[Page 29125]]

Chapter XIX of the Exchange Rules.\15\ The proposed rule would also 
provide that nothing in Rule 6.7, nor any payment made pursuant to Rule 
6.7, shall in any way limit, waive or proscribe any defenses a Covered 
Person may have to any claim, demand, liability, action or cause of 
action, whether such defense arises in law or equity, or whether such 
defense is asserted in a judicial, administrative, or other 
proceeding.\16\ These proposed changes are consistent with the 
discretionary nature of any payments that would be made under proposed 
Rule 6.7(b).
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    \15\ The Exchange notes that another exchange has a similar 
provision indicating that all determinations are final. See, NYSE 
Rule 18, which provides in relevant part that all determinations 
made pursuant to NYSE Rule 18 by NYSE's Compensation Review Panel, 
CEO or his or her designee are final.
    \16\ Another exchange has a similar provision. See e.g., Nasdaq 
Rule 4626(b)(6), which provides that nothing in its Limitation of 
Liability rule shall waive Nasdaq's limitations on, or immunities 
from, liability as set forth in its Rules or agreements, or that 
otherwise apply as a matter of law.
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Treatment of Losses Occurring Prior to Effective Date of Rule
    Proposed new paragraph 6.7(g) would establish July 1, 2015 as the 
Effective Date of revised Rule 6.7. Under proposed paragraph 6.7(g), 
claims for liability under prior versions of Rule 6.7 would not be 
considered valid if brought with respect to any acts, omissions or 
transactions occurring more than one year prior to the Effective Date, 
or if brought more than one month after the Effective Date. Proposed 
Rule 6.7(g) would thereby provide certainty to the Exchange as to any 
expense it might incur due to Loss Events that occurred prior to the 
Effective Date of the proposed rule change, while also putting Trading 
Permit Holders on notice that they must file any claims for such losses 
by a date certain.
Deletion of Existing Interpretations Under Rule 6.7
    The proposed rule change would delete existing Interpretations 
.01-.04 under Rule 6.7. Interpretation .01 states that Rule 7.11 
governs the liability of the Exchange for claims arising out of the 
errors or omissions of an Order Book Official or his or her assistants 
or clerks or a PAR Official or his or her assistants or clerks. Under 
the proposed rule change, Rule 7.11 (as well as cross-references to 
Rule 7.11) \17\ would be eliminated, making the interpretation 
unnecessary.
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    \17\ Specifically, Rules 6.7, 7.12 and 21.18 are proposed to be 
amended to delete cross-references to Rule 7.11. In addition, the 
Exchange is proposing to amend Rule 21.18 to delete an outdated 
reference to Board Brokers, a floor function that no longer exists 
on the Exchange.
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    Interpretation .02 is reserved and would therefore be deleted. 
Interpretation .03 states that the provision of Exchange liability in 
paragraph (b) of current Rule 6.7 for certain orders routed through the 
Exchange's Order Routing System or E-Book shall not apply. Because the 
proposed rule change would eliminate Exchange liability under paragraph 
(b), the interpretation would no longer be necessary.
    Interpretation .04 disclaims The Options Clearing Corporation 
liability to Trading Permit Holders and their associated persons with 
respect to their use, non-use or inability to use the linkage that was 
part of the old Options Intermarket Linkage Plan (the ``Old Linkage''). 
Because the Old Linkage is no longer operable, interpretation .04 is no 
longer necessary.\18\
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    \18\ The old Options Intermarket Linkage Plan was replaced by 
the Options Order Protection and Locked/Crossed Markets Plan in 
2009. See Securities Exchange Act Release No. 60405 (July 30, 2009), 
74 FR 39362 (August 6, 2009).
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Conforming Changes to Other Rules
    The proposed rule change would make conforming changes to Exchange 
Rules 2.24 and 6.7A. Rule 2.24 requires a Trading Permit Holder who 
fails to prevail in a lawsuit or other legal proceeding instituted 
against the Exchange or certain related parties to pay for the 
Exchange's reasonable costs of defending such lawsuit or proceeding if 
those costs exceed $50,000. Rule 6.7A limits the legal proceedings a 
Trading Permit Holder may bring against the Exchange and certain 
related persons for actions or omissions.
    Under the proposed amendments to Rules 2.24, contractors would be 
included within the list of related parties protected by that rule, 
just as they would be included as Covered Persons under proposed Rule 
6.7. As stated above, this proposed change is necessary because the 
Exchange at times contracts with outside firms to provide products or 
services to Trading Permit Holders in connection with regulated 
business conducted on or through the Exchange and that arise out of the 
use or enjoyment of the facilities afforded by the Exchange and/or the 
calculation or dissemination of specified values, or quotes or 
transaction reports for options or other securities.
    In addition, under the proposed amendments to Rule 2.24, other 
officials and contractors of the Exchange and any subsidiaries and 
affiliates of the Exchange and any such subsidiaries' and affiliates' 
directors, officers, committee members, other officials, employees, 
contractors, or agents would be explicitly identified/included within 
the list of related parties protected by the rule,\19\ just as they are 
proposed to be specifically identified/included within the list of 
Covered Persons under Rule 6.7. Committee members and affiliates of the 
Exchange and any subsidiaries' and affiliates' directors, officers, 
committee members, other officials, employees, contractors and agents 
would also be explicitly identified/included within the list of related 
parties under Rule 6.7A.\20\ These changes are intended to conform the 
text of the three rules and to include affiliates within all three 
rules.\21\ Moreover, under the proposed amendments to Rule 6.7A, 
committee members would be explicitly identified/included within the 
list of related parties protected by the rule, just as they are already 
specifically identified/included within the list of Covered Persons 
under existing Rule 6.7 and the similar provision in Rule 2.24. This is 
also intended to conform the text of the three rules. Finally, under 
the proposed amendments to Rule 6.7A, the title to the rule will be 
revised.\22\
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    \19\ Specifically, the phrase ``the Exchange or any of its 
directors, officers, committee members, employees or agents'' is 
proposed to be replaced with the phrase ``the Exchange or any of its 
directors, officers, committee members, other officials, employees, 
contractors, or agents, or any subsidiaries or affiliates of the 
Exchange or any of their directors, officers, committee members, 
other officials, employees, contractors, or agents'' in Rule 2.24.
    \20\ Specifically, the phrase ``the Exchange or any director, 
officer, employee, contractor, agent or other official of the 
Exchange or any subsidiary of the Exchange'' is proposed to be 
replaced with the phrase ``the Exchange or any of its directors, 
officers, committee members, other officials, employees, 
contractors, or agents, or any subsidiaries or affiliates of the 
Exchange or any of their directors, officers, committee members, 
other officials, employees, contractors, or agents'' in Rule 6.7A.
    \21\ The Commission notes CBOE's statement of the purpose of its 
proposed rule change is to eliminate any implication of liability 
for losses arising out of the use or enjoyment of Exchange 
facilities consistent with existing law where courts have recognized 
the importance of protecting exchanges from liability in the context 
of matters arising out of the SRO function. See supra note 5 and 
accompanying text.
    \22\ Specifically, the title ``Legal Proceedings Against the 
Exchange and its Directors, Officers, Employees, Contractors or 
Agents'' is proposed to be changed to simply ``Legal Proceedings 
Against the Exchange.'' Cross-references to Rule 6.7A contained in 
Appendix A of Chapters XLVII-XLIX and Appendix A of Chapters L-LIV 
Appendix A are also proposed to be updated to reflect the new title. 
Additionally, cross-references to Rule 2.24 contained in Appendix A 
of Chapters XLVII-XLIX and Appendix A of Chapters L-LIV Appendix A 
are proposed to be updated to include consistent capitalization of 
words in the Rule's title.
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    The proposed rule change would also delete Rule 7.11 in its 
entirety. Rule

[[Page 29126]]

7.11 currently governs the liability of the Exchange relating to losses 
resulting from the errors or omissions of Exchange Order Book Officials 
and PAR Officials. Rule 7.11 provides that the Exchange's liability 
arising out of any errors or omissions of an Order Book Official or PAR 
Official (or their assistants or clerks) shall be subject to the 
limitations set forth in paragraph (a) of existing Rule 6.7, and to 
further limitations set forth in paragraph (b) and (c) of Rule 7.11. 
Under paragraph (b) of Rule 7.11, absent reasonable justification or 
excuse, any single claim \23\ by a Trading Permit Holder or person 
associated with a Trading Permit Holder for losses arising from errors 
or omissions of an Order Book Official or PAR Official, and any claim 
by the Exchange made pursuant to paragraph (d) of the Rule,\24\ must be 
presented in writing to the opposing party within ten business days 
following the transaction giving rise to the claim.\25\ All disputed 
claims shall be referred to binding arbitration before an arbitration 
panel whose resolution of the dispute shall be final, and there shall 
be no appeal to the Board of Directors from a decision of such panel. 
Under paragraph (c), liability under Rule 7.11 is limited as follows: 
Should a Trading Permit Holder, TPH organization or the Exchange fail 
to close out an uncompared trade in the period of time provided by Rule 
10.1, then the opposing party's liability with respect to any claims 
arising from such trade shall be limited to the lesser of (i) the loss 
which would have been experienced by the claimant if the uncompared 
trade had been closed out at the opening of trading on the day provided 
in Rule 10.1 for the closing out of such uncompared trade; or (ii) the 
actual loss realized by the claimant.
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    \23\ Under paragraph (b), the term ``transaction'' means any 
single order or instruction which is placed with an Order Book 
Official or PAR Official, or any series of orders or instructions 
which is placed with an Order Book Official or a PAR Official at 
substantially the same time by the same Trading Permit Holder and 
which relates to any one or more series of options of the same 
class. All errors and omissions made by an Order Book Official or 
PAR Official with respect to or arising out of any transaction shall 
give rise to a ``single claim'' against the Exchange for losses 
resulting therefrom as provided in paragraph (b) and in paragraph 
(c), and the Exchange is free to assert any defense to such claim it 
may have. No claim shall arise as to errors or omissions which are 
found to have resulted from any failure by a Trading Permit Holder 
(whether or not the Trading Permit Holder is claiming against the 
Exchange pursuant to paragraph (b)), or by any person acting on 
behalf of a Trading Permit Holder, to enter or cancel an order with 
such Order Book Official or PAR Official on a timely basis or 
clearly and accurately to communicate to such Order Book Official or 
PAR Official: (i) The description or symbol of the security 
involved; (ii) the exercise price or option contract price; (iii) 
the type of option; (iv) the number of trading units; (v) the 
expiration month; or (vi) any other information or data which is 
material to the transaction. In addition, no claim shall be allowed 
if, in the opinion of the arbitration panel, the Trading Permit 
Holder or other person making such claim did not take promptly, upon 
discovery of the errors or omissions, all proper steps to correct 
such errors or omissions and to establish the loss resulting 
therefrom. See Rule 7.11(b)(1).
    \24\ Under paragraph (d), if any damage is caused by an error or 
omission of an Order Book Official or PAR Official which is the 
result of any error or omission of a TPH organization, then such TPH 
organization shall indemnify the Exchange and hold it harmless from 
any claim of liability resulting from or relating to such damage. 
See Rule 7.11(d).
    \25\ Provided, that if an error or omission has resulted in an 
unmatched trade, then any claim based thereon shall be presented 
after the unmatched trade has been closed out in accordance with 
Rule 10.1, Disagreement on Unmatched Trades, but within ten business 
days following such resolution of the unmatched trade. See Rule 
7.11(b)(2).
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    Under the proposed rule change, Rule 6.7 would govern the liability 
of the Exchange for claims arising out of any errors or omissions by 
agents of the Exchange, which would include Order Book Officials, PAR 
Officials and their respective assistants or clerks. Rule 7.11 
therefore would be rendered superfluous. The Exchange does note that, 
with the elimination of Rule 7.11, both the Exchange's reciprocal right 
to bring a claim against Trading Permit Holders and the arbitration 
process for disputed claims will be eliminated. The Exchange no longer 
believes it is necessary to single out the errors or omissions of Order 
Book Officials and PAR Officials in the manner described under Rule 
7.11 as compared to other errors and omissions that are subject to Rule 
6.7.\26\ As simplified and revised, Rule 6.7 would apply equally to all 
types of claims by Trading Permit Holders against Covered Persons, 
including Order Book Officials and PAR Officials.
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    \26\ The Exchange also notes that, in practice, there have not 
been any disputed claims submitted to the arbitration process under 
Rule 7.11 for several years.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act'') \27\ in general and 
furthers the objectives of Section 6(b)(5) of the Act \28\ in 
particular, which requires that the rules of an exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and to perfect the mechanism of a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest. In particular, the proposal would amend Exchange Rule 
6.7 to eliminate any implication of liability with respect to the 
Exchange and other Covered Person resulting from the use or enjoyment 
of the facilities offered by the Exchange, any interruption in or 
failure or unavailability or any such facilities, or any action taken 
or omitted to be taken in respect of the business of the Exchange. The 
proposed rule change is consistent with and supplements existing law, 
and would assist the Exchange in fulfilling its role as a national 
securities exchange by avoiding the risk of tempering this critical 
regulatory function to avoid the disruption and expense of unnecessary 
litigation or potential catastrophic loss.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    The proposal would also permit the Exchange to compensate Trading 
Permit Holders for their losses incurred due to a Loss Event, even 
though the Exchange would not have legal liability for those losses. 
The proposed rule change would therefore facilitate the Exchange's 
ability to make discretionary payments to redress a situation in which 
Trading Permit Holders suffer losses due to a Loss Event. As stated 
above, the Exchange represents that the determination to compensate a 
Trading Permit Holder will be made on an equitable and non-
discriminatory basis without regard to the Exchange capacity of the 
Trading Permit Holder, including whether the Trading Permit Holder is a 
Designated Primary Market-Maker. The Exchange therefore believes the 
proposed rule change is consistent with the Act, and Section 6(b)(5) of 
the Act in particular, in that it is designed to promote just and 
equitable principles of trade, to remove impediments to and to perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
    The Exchange also believes that these policies would promote 
fairness in the national market system. The proposed rule change would 
allow CBOE to address Trading Permit Holder requests for compensation 
under various circumstances and would allow CBOE to act in a fashion 
similar to many of its competitors. As stated above, several exchanges 
have substantially similar rules to those proposed here, and the 
Exchange believes that the proposed rule change would place CBOE in a 
similar position to address Trading Permit Holder requests.\29\ The 
Exchange believes that to the extent there are any

[[Page 29127]]

differences, such differences are not substantive and are still 
consistent with the scope of prior self-regulatory organization 
rulemaking.
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    \29\ See BOX Rule 7230 and EDGA Rule 11.14; see also NASDAQ 
Stock Market LLC (``Nasdaq'') Rule 4626, ISE Rule 705, BATS 
Exchange, Inc. Rule 11.16, and NYSE Rule 18.
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    Finally, the Exchange believes that as Rule 6.7 will now govern the 
liability of the Exchange for claims arising out of any errors or 
omissions by agents of the Exchange (which would include Order Book 
Officials, PAR Officials and their respective assistants or clerks), 
Rule 7.11 is superfluous and unnecessary to maintain in the rules. 
Additionally, the Exchange no longer believes it is necessary to single 
out the errors or omissions of Order Book Officials and PAR Officials 
in the manner described under Rule 7.11 as compared to other errors and 
omissions that are subject to Rule 6.7. The Exchange notes that 
although the Exchange's reciprocal right to bring a claim against 
Trading Permit Holders and the arbitration process for disputed claims 
will be eliminated, such language is no longer necessary.\30\ As such, 
the Exchange believes that eliminating Rule 7.11 maintains clarity in 
the rules and avoids potential confusion, which removes impediments and 
perfects the mechanism of a free and open market and a national market 
system, and, in general, protects investors and the public interest.
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    \30\ In practice, there have not been any disputed claims 
submitted to the arbitration process under Rule 7.11 for several 
years.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that this proposed rule change does not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. As stated above, the 
Exchange believes that these policies would promote fairness in the 
national market system. The proposed rule change would allow CBOE to 
address Trading Permit Holder requests for compensation under various 
circumstances and would allow CBOE to act in a fashion similar to many 
of its competitors. In addition, as stated above, several exchanges 
have substantially similar rules to those proposed here, except as 
otherwise noted, and the Exchange believes that the proposed rule 
change would place CBOE in a similar position to address Trading Permit 
Holder requests.\31\
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    \31\ Id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
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 \32\ and Rule 19b-
4(f)(6) \33\ 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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    \32\ 15 U.S.C. 78s(b)(3)(A).
    \33\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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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-CBOE-2015-042 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2015-042. 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 
St. 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 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-
CBOE-2015-042, and should be submitted on or before June 10, 2015.
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    \34\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12148 Filed 5-19-15; 8:45 am]
BILLING CODE 8011-01-P