Document ID: SEC-2018-1329-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2018-08-23T04:00Z

[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42751-42754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18160]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83872; File No. SR-CBOE-2018-55]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Amend Rule 6.21., Give Up 
of a Clearing Trading Permit Holder

August 17, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 7, 2018, 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 
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 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 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 CTPH (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 CTPH that a 
TPH (other than a Market-Maker \3\) identifies to the Exchange, in 
writing, as a CTPH that the TPH would like to have the ability to give 
up. To designate a ``Designated Give Up'' a TPH must submit written

[[Page 42752]]

notification, in a form and manner determined by the Exchange, to the 
Membership Services Department (``MSD''). Specifically, the 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 CTPH 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 CTPH, 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 CTPH to prohibit a TPH from designating the CTPH 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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    \3\ 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 CTPH 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.\4\ An executing TPH may give up its Guarantor without having to 
first designate it to the Exchange as a ``Designated Give Up.'' \5\ 
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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    \4\ See Cboe Options Rule 3.28, Cboe Options Rule 6.72, and Cboe 
Options Rule 8.5.
    \5\ 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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    Recently, several bank-affiliated clearing firm members of 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 member clearing firms indicated that the 
Federal Reserve has recently identified the current give-up process as 
a significant source of risk for clearing firms. SIFMA member clearing 
firms subsequently requested that the Exchanges alleviate this risk by 
amending Exchange rules governing the give up process.
Proposed Rule Change
    The Exchange proposes to amend Rule 6.21 to provide that TPHs will 
no longer be able to designate any CTPH for which they desire to give 
up. Rather, the Exchange proposes to provide that TPHs must first have 
received written authorization from a CTPH before it may give up that 
CTPH.
    In connection with this proposed change, the Exchange first 
proposes to eliminate the term ``Designated Give Up'' throughout Rule 
6.21 and replace it with the term ``Authorized Give Up'' and make other 
corresponding changes. The Exchange also proposes to amend subparagraph 
(b)(i) to explicitly define ``Authorized Give Up''. For purposes of 
Rule 6.21, an Authorized Give Up of a TPH will refer to a CTPH which 
has authorized that TPH to have the ability to give up that CTPH and 
which has been processed by the Exchange.
    The Exchange next proposes to amend subparagraph (b)(iii) of Rule 
6.21, which governs the identification of Authorized Give Ups. Going 
forward, CTPHs must identify, in a form and manner prescribed by the 
Exchange, any TPH which will be authorized to give up that CTPH (other 
than a Market-Maker or TPH for which it is the Guarantor).\6\ To 
facilitate this identification, the Exchange proposes to eliminate the 
current Notification Form and replace it with a new standardized 
authorization form titled ``Cboe Options Exchange Clearing Trading 
Permit Holder Give Up Authorization Form'' (``Authorization Form''), 
which both the TPH and CTPH would need to complete and subsequently 
submit to the Exchange. A copy of the proposed Authorization Form is 
attached in Exhibit 3.
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    \6\ As a Guarantor of a TPH has already provided a Letter of 
Guarantee or Letter of Authorization for that TPH's trading 
activities on the Exchange, no further authorization is necessary.
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    The Exchange also proposes to amend subparagraph (b)(iv) of Rule 
6.21. Currently Rule 6.21(b)(iv) provides that any TPH (other than a 
Market-Maker) may designate any CTPH as a Designated Give Up. In light 
of the proposed change to require authorization from CTPHs, the 
Exchange proposes to revise Rule 6.21(b)(iv) accordingly to make clear 
that any CTPH may authorize any TPH to use it as an Authorized Give Up. 
The Exchange also proposes to eliminate the language in subparagraph 
(b)(iv) that provides that the Exchange will not accept instructions 
with respect to its designation as a Designated Give Up. Particularly, 
Rule 6.21(b)(iv) provides that the Exchange will not accept any 
instructions, or give effect to any previous instructions, from a CTPH 
not to permit a TPH to designate the CTPH as a Designated Give Up. The 
proposal to require authorization from a CTPH prior to being able to 
give them up renders this provision obsolete and unnecessary. The 
Exchange accordingly proposes to eliminate this language.
    The Exchange next proposes to amend subparagraph (b)(vi) of Rule 
6.21 to make clear that a Guarantor for a TPH will be enabled to be 
given up for that TPH without any further action by the CTPH as well as 
the TPH.
    The Exchange proposes to amend subparagraph (b)(vii), which 
currently governs the removal of Designated Give Ups. Currently, if a 
TPH (other than a Market-Maker) no longer wants the ability to give up 
a particular Designated Give Up, the TPH must notify the Exchange, in a 
form and manner prescribed by the Exchange. The Exchange proposes to 
update this provision in light of the proposed requirement to receive 
authorization from a CTPH. Particularly, the Exchange proposes to 
provide that if a CTPH no longer wants a particular TPH (for which it 
is not the Guarantor) \7\ to have the ability to give them up as an 
Authorized Give Up, the CTPH must notify the Exchange, in a form and 
manner prescribed by the Exchange. The Exchange anticipates utilizing 
the same Authorization Form noted above to facilitate revocations of 
give up authorization.
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    \7\ As discussed above, all TPHs will be enabled to give up 
their respective Guarantor without further action from the CTPH or 
TPH. This does not preclude a Guarantor from revoking a Letter of 
Guarantee or Letter of Authorization for any TPH pursuant to Cboe 
Options Rules 3.28. 6.72, and 8.5.
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    The Exchange notes that its trading system is currently configured 
to only accept orders from a TPH which identify a Designated Give Up or 
Guarantor for that TPH and will reject any order entered by a TPH which 
designates a Give Up that is not at the time a Designated Give Up or 
Guarantor of the TPH. The Exchange notes that its systems will continue 
to be configured to enforce its Give-Up rule. Particularly, going 
forward, the Exchange's trading system will reject any order entered by 
a TPH which designates a Give Up that is not an Authorized Give Up or 
Guarantor for that TPH.\8\
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    \8\ See proposed changes to Rule 6.21(c).
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    The Exchange will also continue to provide certain notices to TPHs. 
Currently, pursuant to subparagraph (d) of Rule 6.21, the Exchange 
provides notice to a TPH in writing when an identified Designated Give 
Up becomes ``effective'' (i.e., when a CTPH that has been identified by 
the TPH as a Designated Give Up has been enabled by the Exchange's 
trading systems to be

[[Page 42753]]

given up).\9\ Under the proposed rule, the Exchange will continue to 
provide notice to a TPH in writing when an Authorized Give Up becomes 
``effective''. The Exchange also proposes to notify a TPH, in writing 
and as soon as practicable, of each CTPH that has revoked its 
authorization for that TPH.
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    \9\ Currently, a Guarantor for a TPH is always enabled to be 
given up for a TPH without any action by the TPH. As previously 
discussed, under the proposed rule a TPH's Guarantor will continue 
to be enabled for that TPH without further action from the Guarantor 
or the TPH.
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    The Exchange lastly notes that other than updating references from 
``Designated Give Up'' to ``Authorized Give Up'', it is not changing 
its rules relating to acceptance and rejection of a trade by a Give 
Up.\10\
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    \10\ Similarly, no changes are being proposed to the Give Up 
Change Form and Give Up Change Form for Accepting Clearing Trading 
Permit Holders.
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    The Exchange believes the proposed rule changes will help limit 
clearing firm risk and thereby enable clearing firms to continue to 
provide the listed options market with vital clearing services, which 
helps protect investors and the public interest consistent with the 
Securities Exchange Act of 1934 (the ``Act'').
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 Commission approval. The implementation 
date will be no later than sixty (60) days following Commission 
approval. The Exchange notes this additional time gives CTPHs time to 
provide authorization of all TPHs that they would like to authorize as 
having the ability to give the CTPH up and gives the Exchange time to 
process those lists and configure its system accordingly.
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.\11\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \12\ 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) \13\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    Particularly, as discussed above, several bank-affiliated clearing 
firm members have recently expressed concerns relating to the current 
give up process which permits TPHs to identify any CTPH as a Designated 
Give Up for purposes of clearing particular transactions. Also as noted 
above, the CTPHs have relayed that the Federal Reserve has recently 
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 the proposed changes to Rule 6.21 help alleviate this 
risk by requiring TPHs to receive affirmative authorization from CTPHs 
in order to be able to use that CTPH for purposes of clearing 
transactions. The Exchange believes this authorization provides proper 
safeguards and protections for CTPHs as it alleviates CTPHs of certain 
risks that can be associated with any TPH giving them up and of which 
they have no control. The Exchange also believes its proposed 
Authorization Form allows the Exchange to receive in a uniform fashion, 
written and transparent authorization from CTPHs, which ensures 
seamless administration of the Rule.
    The Exchange believes that its proposed change to its give up rule 
strikes the right balance between the various views and interests 
across the industry. For example, although the proposed change now 
requires TPHs to seek authorization from CTPHs (other than their 
Guarantors) in order to have the ability to give them up, each TPH will 
still have the ability to give up their Guarantor without obtaining 
further authorization. Additionally, the Exchange notes that CTPH 
authorization will not be on a trade-by-trade basis. Accordingly, the 
rule still provides for a procedure for a CTPH to ``reject'' a trade in 
accordance with the Rules, both on the trade date and T+1, which 
provides recourse to those CTPHs which, notwithstanding prior 
authorization to use them generally as a Give Up, should not be 
obligated to clear certain trades for which they are given up (provided 
they have a valid reason to reject the trade). The Exchange also notes 
that ultimately, the trade can always be assigned to the Guarantor of 
the executing TPH.\14\ Accordingly, the Exchange believes the proposed 
rule change is reasonable and continues to provide certainty that a 
CTPH will always be responsible for a trade, which protects investors 
and the public interest.
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    \14\ As noted in the filing that originally adopted current Rule 
6.21, the Exchange believes that the executing TPH's Guarantor, 
absent a CTPH that agrees to accept the trade, should become the 
Give Up on any trade which an Authorized Give Up determines to 
reject in accordance with the rule, because the Guarantor, by virtue 
of having issued a Letter of Guarantee or Authorization, has already 
accepted financial responsibility for all Exchange transactions made 
by the executing TPH. See Securities Exchange Act Release No. 72668 
(July 24, 2014), 79 FR 44229 (July 30, 2014) (SR-CBOE-2014-048).
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    The Exchange believes the corresponding changes to Rule 6.21, makes 
clear the proposed change to the give up process and maintains clarity 
in the rules, thereby protecting investors and the public interest.

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 that is 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 will apply equally to all 
similarly situated TPHs and CTPHs. The Exchange also notes that, should 
the proposed changes make Cboe Options more attractive for trading, 
market participants trading on other exchanges can always elect to 
become TPHs on Cboe Options to take advantage of the trading 
opportunities.

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

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

III. 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 up to 90 days (i) as the 
Commission may designate 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

[[Page 42754]]

    (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 email to [email protected]. Please include 
File Number SR-CBOE-2018-55 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-2018-55. 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-2018-55, and should be submitted on 
or before September 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18160 Filed 8-22-18; 8:45 am]
BILLING CODE 8011-01-P