Document ID: SEC-2014-1275-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-07-30T04:00Z

[Federal Register Volume 79, Number 146 (Wednesday, July 30, 2014)]
[Notices]
[Pages 44229-44231]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17881]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72668; File No. SR-CBOE-2014-048]

 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change 
Relating to the Give Up of a Clearing Trading Permit Holder

July 24, 2014.

I. Introduction

    On May 23, 2014, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the ``give up'' 
process, the process by which a Trading Permit Holder (``TPH'') ``gives 
up'' or selects and indicates the Clearing Trading Permit Holder 
(``CTPH'') responsible for the clearance of an Exchange transaction. 
The proposed rule change was published for comment in the Federal 
Register on June 11, 2014.\3\ The Commission received no comment 
letters on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72325 (June 5, 
2014), 79 FR 33614 (June 11, 2014) (``Notice'').
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II. Description of the Proposal

A. Background

    CBOE proposes to amend Rules 6.21 and 6.50 that govern the give up 
of a CTPH by a TPH on Exchange transactions. In order to enter 
transactions on the Exchange, a TPH must either be a CTPH or have a 
CTPH agree to accept financial responsibility for the TPH's 
transactions. Current CBOE Rule 6.21 provides that for each transaction 
in which a TPH participates, the TPH must give up the name of the CTPH 
(the ``give up'') through which the transaction will be cleared. CBOE 
Rule 6.50 further provides that every CTPH will be responsible for the 
clearance of Exchange transactions of each TPH that gives up the CTPH's 
name pursuant to a letter of authorization, letter of guarantee, or 
other authorization given by the CTPH to the executing TPH.\4\ CBOE 
proposes to amend Rules 6.21 and 6.50 to address the give up process, 
including procedures governing that process, in greater detail.
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    \4\ See Notice, supra note 3, at 33614.
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B. Designated Give Ups and Guarantors

    CBOE proposes to amend Rule 6.21 to provide that a TPH that is not 
a market maker may only give up (i) a CTPH that has previously been 
identified and processed by the Exchange as a ``designated give up'' 
for that TPH, or (ii) a guarantor of the TPH. The Exchange proposes to 
introduce and define the term ``designated give up'' as a CTPH that a 
TPH (other than a market maker) identifies in advance to the Exchange, 
in writing, as a CTPH that the TPH would like the ability to give up on 
its trades.\5\ A TPH will be required to identify to CBOE any 
designated give ups in advance of giving up any CTPH that is not a 
guarantor for the TPH. The Exchange has proposed a standardized form 
(``Notification Form'') that a TPH will be required to submit to the 
Exchange's Registration Services Department in order to identify its 
designated give ups. If a TPH no longer wants the ability to give up a 
particular designated give up, the TPH must notify the Exchange in 
writing by submitting a Notification Form. CBOE proposes to allow a TPH 
to submit a Notification Form identifying any CTPH as a designated give 
up and does not propose any minimum or maximum number of designated 
give ups that a TPH may identify.\6\
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    \5\ See proposed Rule 6.21(b)(i).
    \6\ See Notice, supra note 3, at 33614.
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    The Exchange will notify a CTPH, in writing and as soon as 
practicable, of each TPH that has identified the CTPH as one of its 
designated give ups. In its proposal, CBOE noted that it will disregard 
any instructions from a CTPH not to permit a particular TPH to 
designate the CTPH as a designated give up and will not perform any 
subjective evaluation of a TPH's list of proposed designated give 
ups.\7\ Rather, the Exchange will only ensure that the CTPHs that a TPH 
identifies on the Notification Form as designated give ups are current 
CBOE CTPHs and will review the Notification Form for completeness and 
accuracy.\8\
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    \7\ See id. The ability of a CTPH to reject a trade on which it 
was indicated as the designated give up is discussed below.
    \8\ See id.
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    CBOE proposes to define the term ``guarantor'' for purposes of 
proposed Rule 6.21 as a CTPH that has issued a letter of guarantee or a 
letter of authorization for the executing TPH under the rules of the 
Exchange that are in effect at the time of the execution of the 
trade.\9\ An executing TPH may give up its guarantor without 
identifying the guarantor as a designated give up (i.e., the guarantor 
accepts clearing responsibility for all trades of its guarantee TPH 
pursuant to its role as the default CTPH for that TPH, unless the TPH 
indicates an alternate CTPH to be the designed give up on a particular 
trade), and the TPH therefore would not need to submit a Notification 
Form to the Exchange before indicating its guarantor as a designated 
give up. Because CBOE Rule 8.5 requires that a letter of guarantee be 
issued and filed with the Exchange by each CTPH through which a market 
maker desires to clear transactions, the Exchange proposes that a TPH 
that is a market

[[Page 44230]]

maker only be enabled to give up a guarantor of the market maker.\10\
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    \9\ See proposed Rule 6.21(b)(ii).
    \10\ See Rule 8.5; see also Notice, supra note 3, at 33614.
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    In its proposal, CBOE states that it will configure its trading 
systems to only accept orders that identify a designated give up or a 
guarantor for the TPH.\11\ The Exchange further states that this 
configuration is intended to prevent a TPH from erroneously giving up 
the name of a CTPH that it had no intention of using as a designated 
give up.\12\
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    \11\ See Notice, supra note 3, at 33614-15. Conversely, CBOE 
states in its proposal that its systems will reject any order that 
designates a give up that is not at the time a designated give up or 
is otherwise the guarantor for the TPH. See id.
    \12\ See id. The Exchange states that it will notify a TPH in 
writing when one of its designated give ups becomes effective in the 
Exchange's trading systems following the submission by the TPH of 
the required Notification Form. See id.
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C. Non-Acceptance of a Trade

    CBOE proposes to allow a designated give up or a guarantor, in 
certain circumstances, to not accept a trade for which its name was 
given up. A designated give up may determine not to accept a trade if 
it believes in good faith that it has a valid reason not to accept the 
trade, in which case it may reject the trade by following the 
procedures set forth in proposed Rule 6.21, which are described 
below.\13\ Where a designated give up determines not to accept a trade 
for which its name was given up, the executing TPH's guarantor or 
another CTPH that has agreed to be the give up on the trade will become 
the give up. With respect to guarantors, CBOE proposes to permit a 
guarantor to not accept a non-market maker trade for which its name was 
given up only if another CTPH agrees to be the give up on the trade and 
has notified the Exchange and executing TPH in writing of its intent to 
accept the trade. Only a designated give up or guarantor whose name was 
initially given up on a trade may determine not to accept a trade. 
Therefore, a CTPH or guarantor that becomes the give up on a rejected 
trade may not subsequently reject the trade themselves.\14\
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    \13\ According to CBOE, examples of valid reasons include that 
the designated give up does not have a customer for the particular 
trade or that another CTPH has agreed to be the give up on the trade 
and has notified the Exchange and executing TPH of its intent to 
accept the trade. See Notice, supra note 3, at 33615.
    \14\ See id.
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D. Procedures to Reject on Trade Date

    A designated give up that rejects a trade on the trade date must 
notify, in writing, the executing TPH or its designated agent as soon 
as possible and attempt to resolve the disputed give up.\15\ If no 
resolution is reached and the designated give up still intends to 
reject the trade, then the designated give up will be required to 
complete and submit to the Exchange a standardized form (``Give Up 
Change Form'') in which it is required to identify the new give up. As 
long as the Exchange is able to process the form before the trade input 
cutoff time established by the Clearing Corporation (or fifteen minutes 
thereafter if the Exchange receives and is able to process a request to 
extend its time of final trade submission to the Clearing Corporation) 
(``Trade Date Cutoff Time''), the Exchange will allow the designated 
give up to change the give up on the trade to either (i) another CTPH 
that has agreed to accept the trade, or (ii) the executing TPH's 
guarantor.\16\ If another CTPH has agreed to step in as the give up, 
the new CTPH must complete and submit to the Exchange another 
standardized form (``CBOE Give-Up Change Form For Accepting Clearing 
Trading Permit Holders'') reflecting its intent to accept the trade. A 
designated give up may change the give up on a trade to a guarantor for 
the executing TPH so long as the designated give up has first notified 
the guarantor in writing.\17\ As discussed above, where a designated 
give up has rejected a trade, neither a CTPH that has agreed to become 
the give up on a trade nor a guarantor that becomes the give up may 
subsequently reject the trade. This prohibition prevents a trade from 
being repeatedly reassigned from one CTPH to another.\18\
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    \15\ See proposed Rule 6.21(f)(i).
    \16\ See Notice, supra note 3, at 33615.
    \17\ See proposed Rule 6.21(f)(ii). In such case, the guarantor 
does not need to notify the Exchange of its intent to accept the 
trade or submit any form to the Exchange. See Notice, supra note 3, 
at 33615.
    \18\ See Notice, supra note 3, at 33615.
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    A guarantor may reject a non-market maker trade for which its name 
was initially given up only if another CTPH agrees to be the give up 
and the new CTPH has first notified in writing both the Exchange and 
the executing TPH of its willingness to accept the trade.\19\ If a 
guarantor rejects a trade on the trade date, it also is required to 
follow the same procedures that a designated give up uses to change the 
give up, which includes submitting the Give Up Change Form to the 
Exchange.
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    \19\ See proposed Rule 6.21(e)(ii).
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    The designated give up or guarantor that changes the give up must 
notify the Exchange, the parties to the trade, and the new CTPH in 
writing immediately after making the change.\20\
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    \20\ See id.
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E. Procedures to Reject on T+1

    Recognizing that some firms may take longer to reconcile their 
trades, CBOE also has proposed to establish procedures for a designated 
give up or guarantor of a TPH that is not a market maker to reject a 
trade and change the give up by entering trade records into the 
Exchange's trading system on the day after the trade date (``T+1'') in 
order to effect a transfer of the trade to the new give up.\21\ The 
ability of a designated give up or guarantor to make such changes ends 
at 12:00 p.m. CST (``T+1 Cutoff Time'').\22\ This process is not 
applicable to, and no changes to the give up may be made for, 
transactions in expiring options series that take place on the last 
trading day prior to its expiration.
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    \21\ The procedures for rejecting a trade and change the give up 
on T+1 are substantially similar to the procedures for making such 
changes on the trade date. See Notice, supra note 3, at 33615-16; 
see also proposed Rule 6.21(f)(ii-iii).
    \22\ See Notice, supra note 3, at 33616.
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F. Other Give Up Changes

    CBOE's proposal also sets forth three situations in which a give up 
may be changed without Exchange involvement (other than after-the-fact 
notice to the Exchange).\23\ First, if the executing TPH has the 
ability through an Exchange system to do so, the TPH may change the 
give up on the trade to another designated give up or to the TPH's 
guarantor if done before the Trade Date Cutoff Time. In addition, if a 
designated give up has the ability through an Exchange system to do so, 
it may change the give up on a trade to another CTPH affiliated with 
the designated give up or to a CTPH that is a back office agent for the 
designated give up if done before the Trade Cutoff Time. Finally, if 
both a designated give up (or guarantor) and an accepting CTPH have the 
ability through an Exchange system to do so, they may each enter trade 
records into the Exchange's systems on T+1 (if done before the T+1 
Cutoff Time) that would effect a transfer of the trade in a non-expired 
options series from that designated give up (or guarantor) to that new 
accepting CTPH. A designated give up (or guarantor) must notify the 
Exchange and all parties to the trade, in writing, of any such change.
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    \23\ See proposed Rule 6.21(g).
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G. Financial Responsibility for Trades

    In its proposal, CBOE notes that a CTPH is financially responsible 
for all trades for which it is the give up as of the applicable cutoff 
time (Trade Date Cutoff Time or T+1 Cutoff Time). However, CBOE notes 
in its proposal that its proposed rule changes do not

[[Page 44231]]

preclude a different party from being responsible for the trade 
pursuant to the rules of the Clearing Corporation, any agreement 
between the applicable parties, or other applicable rules, regulations, 
arbitration, court proceedings, or otherwise.\24\
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    \24\ See Notice, supra note 3, at 33617.
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    Finally, CBOE proposes to eliminate language in Rule 6.50 that 
addresses financial responsibility of transactions clearing through 
CTPHs because financial responsibility is now addressed in new 
paragraph (h) to Rule 6.21.\25\
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    \25\ See id.
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\26\ and, in particular, the requirements 
of Section 6 of the Act.\27\ Specifically, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\28\ which requires, among other things, that the rules of a 
national securities exchange be designed 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 facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market, and, in general, to protect investors and the 
public interest.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f.
    \28\ 15 U.S.C. 78f(b)(5).
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    In particular, the Commission believes that by providing more 
detailed requirements relating to the give up process, the proposal is 
designed to bring greater operational certainty and efficiency to that 
process. For example, requiring TPHs and CTPHs to use standardized 
forms to designate give ups, reject a trade and change the give up on a 
trade, and accept a trade as a new give up should enhance CBOE's 
ability to efficiently monitor and enforce compliance with its rules 
relating to the give up process. Use of standardized forms also may 
make it easier for TPHs and CTPHs to comply with the proposed rules, 
and should benefit all members by providing a written confirmation to 
evidence any changes in clearing responsibility for a particular trade. 
In addition, the process specified in the proposed rule should provide 
greater transparency and certainty to members about the expectations 
and requirements attendant to the give up process, and should help 
facilitate a common process among exchange members in the event that a 
change to a designated give up becomes necessary.
    The Commission believes that the proposal addresses the role of 
different parties involved in the give up process in a balanced manner 
and is designed to provide a fair and reasonable methodology for the 
give up process. For example, the proposed rule change allows executing 
TPHs to designate any current CBOE CTPH as a designated give up while 
also obligating the Exchange to notify CTPHs of each TPH that has 
identified the CTPH as a designated give up. Moreover, the proposal 
creates procedures for a CTPH to reject a trade where the CTPH has a 
good faith belief that it has a valid reason not to accept the trade. 
Although a CTPH with a valid reason may reject a trade, the proposal 
ensures that there is finality to this process by prohibiting a CTPH 
that agrees to become the give up on a trade (or a guarantor that is 
assigned the trade) from subsequently rejecting the trade. In this 
manner, the proposed rule change is designed to ensure that there will 
always be a CPTH that will be financially responsible for a trade, 
which should promote greater operational certainty and facilitate 
cooperation and coordination with persons engaged in clearing 
transactions.
    Accordingly, the Commission finds that the Exchange's proposal is 
consistent with the Act, including Section 6(b)(5) thereof, in that it 
is designed 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 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market, and in general, 
protect investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-CBOE-2014-048), be, and 
hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17881 Filed 7-29-14; 8:45 am]
BILLING CODE 8011-01-P