Document ID: SEC-2014-1064-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: OneChicago, LLC
Posted Date: 2014-06-26T04:00Z

[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Notices]
[Pages 36351-36354]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14940]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72441; File No. SR-OC-2014-02]

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

June 20, 2014.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(the ``Act'') \1\, notice is hereby given that on May 14, 2014, 
OneChicago, LLC (``OneChicago,'' ``OCX,'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule changes described in Items I and II below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule changes from interested persons. OneChicago has 
previously filed these rule changes with the Commodity Futures Trading 
Commission (``CFTC''). OneChicago filed written certifications with the 
CFTC under Section 5c(c) of the Commodity Exchange Act (``CEA'') \2\ 
between June 19, 2012, and July 9, 2013 (the ``Review Period'').
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    OneChicago is proposing to file with the SEC certain rule changes 
and Notices to Members (``NTMs'') that the Exchange has previously 
filed with the CFTC, but did not file with the SEC. Those rule filings 
and NTMs relate to reporting, sales practices, and OCX's obligation to 
enforce the securities laws.

Rule Changes Relating to Reporting

    During the Review Period, OneChicago issued one NTM interpreting 
OCX's reporting requirements. NTM 2012-13, which was filed with the 
CFTC on June 19, 2012, provides guidance with regard to the requirement 
that market participants trading bilateral blocks and Exchange of 
Future for Physical (``EFPs'') on OCX report the trades ``without 
delay.''

NTM 2012-13

    Market participants trading bilateral EFPs in accordance with OCX 
Rule 416 or bilateral blocks in accordance with OCX Rule 417 must 
report their trade to the Exchange without delay. The requirement that 
bilateral block trades be reported without delay is codified in OCX 
Rule 417(c). NTM 2012-13 clarifies the term ``without delay'' with 
regard to the reporting of a block trade, and also extends the 
``without delay'' reporting requirement to EFPs.
    In order for trade prices to accurately reflect current market 
conditions, OneChicago requires market participants trading blocks and 
EFPs bilaterally to report their block and EFP trades to the Exchange 
without delay. NTM 2012-13 provides guidance by interpreting the term 
``without delay.'' NTM 2012-13 provides that the term ``without delay'' 
means that a bilateral block trade or EFP trade must be reported to the 
Exchange within five minutes of the deal being completed.
    The NTM notes that the five minute requirement exists during normal 
market conditions. There may be extenuating circumstances in which it 
is not possible for, or reasonable to expect, a market participant to 
report a trade or series of trades within five minutes. For example, 
firms may require additional time to report a trade when reporting 
multiple fills simultaneously. Furthermore, since OneChicago's Block 
and EFP Trading System (``OCX.BETS'') requires that one party post and 
the other party accept a trade, the NTM explains that the posting party 
must post the trade within five minutes, and the accepting party then 
has five minutes from the time of posting to accept the trade.

Rule Changes Relating to Sales Practices

    During the Review Period OCX made three filings related to Sales 
Practices. Two of those filings, NTM 2012-14 and NTM 2013-09, relate to 
the requirement that an executing firm fully disclose the price of EFP 
trades to its customer. These two filings apply to all EFPs executed on 
OneChicago, regardless whether executed bilaterally or electronically. 
The other filing, NTM 2013-12, relates to the requirement that a firm 
engaging in a payment for order flow arrangement disclose the existence 
of such an arrangement to its customers.

NTM 2012-14

    On July 2, 2012, OneChicago filed NTM 2012-14 with the CFTC. NTM 
2012-14 allows for the practice of ``marking up'' or ``marking down'' 
(collectively ``marking'') the cash leg of an EFP when trading an EFP 
for a customer.\3\ An EFP involves the simultaneous purchase (sale) of 
futures and sale (purchase) of stock. The price of the EFP is 
represented by the difference between the stock price and the futures 
price. For example, if an EFP buyer buys futures at $30.75 and sells 
the underlying stock at $30.25, that EFP buyer is said to have paid 
$0.50 for the EFP.
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    \3\ OCX issued NTM 2012-14 to provide guidance to its market 
participants because uncertainty had developed regarding the 
permissibility of markups and markdowns in EFP trades. Markups (and 
by extension markdowns) are generally permissible in the securities 
industry. See NASD IM-2440-1; Securities Exchange Act Release No. 
3574 (June 1, 1944); Securities Exchange Act Release No. 3623 (Nov. 
25, 1944). See also FINRA Regulatory Notice 13-07 (January 2013).
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    NTM 2012-14 imposes the requirement that a firm executing EFPs for 
a customer provide the original stock price that the executing firm 
received on the trade. This requirement allows EFP

[[Page 36352]]

customers to be fully informed as to amounts they are being charged by 
the executing firm for transacting an EFP. Pursuant to NTM 2012-14, if 
an EFP executing firm is able to execute the EFP for $0.40, but wishes 
to charge a $0.10 execution fee/commission, the firm may adjust the 
stock portion of the EFP to account for the fee. For example, if the 
stock price of the EFP is $30.35, the executing firm may give the 
customer a stock sell price of only $30.25. However, that executing 
firm must disclose to the customer that it was able to sell the stock 
for $30.35. Essentially, NTM 2012-14 requires firms executing EFPs on 
behalf of customers to fully disclose the ``built in'' commissions they 
are charging their customers.
    The NTM goes on to allow member firms facilitating EFP trades to 
execute the stock leg of the transaction as principal, provided that 
the member firm can demonstrate that the stock leg was passed through 
to the customer who traded the EFP.

NTM 2013-09

    On April 3, 2013, OCX filed NTM 2013-09 with the CFTC. NTM 2013-09 
expands upon the disclosure requirement imposed by NTM 2012-14. In 
addition to providing the execution price to customers, the executing 
firm must also provide the net and gross price of executing the EFP. In 
other words, the EFP customer must be provided with the EFP execution 
price on its own, and the EFP execution price including the markup or 
markdown. In the example above, the EFP executing firm built its 
commission into the stock leg of the EFP. The firm received a stock 
sale price of $30.35 (for a gross EFP cost of $0.40 to the customer), 
but marked the sale price down to $30.25 (for a net EFP cost of $0.50 
to the customer) in order to receive its $0.10 commission. In such a 
case, the executing firm must provide the gross EFP price ($0.40) and 
the net EFP price ($0.50), which includes any markup or markdown. 
OneChicago believes imposing this additional requirement allows 
customers to be fully informed as to the commissions they are paying to 
transact an EFP because displaying the gross and net EFP price makes it 
easy for customers to determine fees they have been charged.

NTM 2013-12

    On July 9, 2013, OCX filed NTM 2013-12 with the CFTC. NTM 2013-12 
requires market participants engaging in payment for order flow 
arrangements to disclose such arrangements to its customers. Payment 
for order flow commonly refers to the practice whereby a firm routes 
orders to a liquidity provider in exchange for a fee paid from the 
liquidity provider to the referring firm. Before issuing NTM 2013-12, 
OneChicago became aware that firms trading OCX products were engaging 
in payment for order flow arrangements. Without endorsing or 
prohibiting such arrangements, NTM 2013-12 imposes the requirement that 
firms engaging in payment for order flow must disclose that fact to 
their customers. The NTM goes on to explain how firms may comply with 
the disclosure requirement, including (i) by providing notice within 
the customer confirmation; (ii) by placing a notice on the firm's 
public Web site; or (iii) by incorporating the disclosure within its 
customer account agreements.

Rule Changes Effectuating OneChicago's Obligation To Enforce the 
Securities Laws

    During the Review Period, OneChicago filed several rule changes 
relating to its obligation to enforce the securities laws. OCX Rule 701 
provides the Exchange authority to enforce Exchange Rules and 
Applicable Law, which the OCX Rulebook defines as ``the CEA, [CFTC] 
Regulations, the [Securities] Exchange Act [of 1934], Exchange Act 
Regulations and margin rules adopted by the Board of Governors of the 
Federal Reserve System, all as amended from time to time.'' \4\ 
Therefore, rule changes to OCX's disciplinary process, which is 
generally contained in OCX Rulebook Chapter 7, relate to OneChicago's 
obligation to enforce the securities laws. Between July 20, 2012 and 
March 4, 2013, OneChicago made a series of rule changes to its rules 
relating to its disciplinary process. OneChicago made the below rule 
changes to generally comply with the Core Principles and Other 
Requirements for Designated Contract Markets,\5\ which implements 
Section 735 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010.\6\
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    \4\ OCX Rule 104.
    \5\ 77 FR 36612 (June 19, 2012).
    \6\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
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July 20, 2012 Rule Changes

    On July 20, 2012, OneChicago filed (revised filing submitted August 
1, 2013) rule changes to amend OCX Rules 701 (General), 702 (Respondent 
Review of Evidence), 703 (Conducting Hearings of Disciplinary 
Proceedings), 704 (Decision of Disciplinary Panel), 705 (Sanctions), 
and 706 (Appeal from Disciplinary Panel Decision, Summary Impositions 
of Fines and Other Summary Actions).
    Rule 701 generally grants the Exchange jurisdiction to enforce its 
rules as well as Applicable Law. The Rule specifically permits Exchange 
staff to carry out investigations and requires market participants to 
comply with those investigations. Rule 701(d) in particular allows 
market participants to be represented by counsel during any OCX 
inquiry, investigation, or disciplinary proceeding. OneChicago proposes 
to amend Rule 701 by prohibiting market participants from choosing 
counsel that may have a conflict of interest. Specifically, the rule 
provides that ``counsel may not be a member of the Board [of Directors 
of OneChicago] or disciplinary panel, any employee of the exchange or 
any person substantially related to the underlying investigation such 
as a material witness or respondent.''
    OCX Rule 712(a) allows respondents in a disciplinary hearing 
commenced by OneChicago to ``review all books, records, documents, 
papers, transcripts of testimony and other tangible evidence in the 
possession or under the control of the Exchange that the Department 
will use to support the allegations and proposed sanctions in the 
notice of charges or which the chairman of the Disciplinary Panel deems 
relevant to the disciplinary proceedings.'' OneChicago proposes to 
amend Rule 712(a) by clarifying that although respondents in 
disciplinary hearings are permitted broad access to OCX documents that 
will be entered in a disciplinary proceeding against the respondent, 
the respondent will not have the right to inspect documents prepared by 
an Exchange employee that will not be entered into evidence in the 
disciplinary proceedings, any documents that may disclose guidelines or 
investigative techniques, or any other documents from a confidential 
source. OneChicago believes this rule change will allow respondents to 
access documents related to a disciplinary proceeding, without 
compromising Exchange work product, investigatory techniques, or 
confidential sources. The proposed rule change preserves the Exchange's 
ability as a self-regulatory organization to enforce its rules and the 
securities laws.
    OCX Rule 713 generally outlines the procedure OneChicago staff must 
follow in conducting a disciplinary proceeding. OCX Rule 713(g) allows 
for the recording or transcription of any hearing conducted in 
connection with a disciplinary proceeding. OneChicago is proposing to 
amend Rule 713(g) to state

[[Page 36353]]

that such recordings will become part of the record of the proceedings.
    OCX Rule 714 describes the process by which the Disciplinary Panel 
must issue an order rendering its decision. Rule 714(b) requires that 
an order contain certain items and lists those items. OneChicago is 
proposing to make technical amendments to Rule 714(b) to more 
specifically describe the items required to be included in an order. 
The amendments proposed by OneChicago do not materially alter the 
contents of the order; rather, the amendments will require more 
specificity from the order, particularly with regard to an explanation 
of the evidentiary basis for the Disciplinary Panel's finding.
    OCX Rule 715 grants OneChicago authority to impose sanctions on a 
respondent after notice and opportunity for a hearing in accordance 
with the OCX Rulebook. Rule 715 lists the type of sanctions that the 
Exchange may impose on a respondent. OneChicago is proposing to add 
subparagraph (c) to OCX Rule 715 in order to clarify that any sanction 
imposed by the Exchange against a respondent must be sufficient to 
deter recidivism and must take into account the respondent's 
disciplinary history.
    OCX Rule 716 allows a respondent to appeal from a Disciplinary 
Panel Decision. Rule 716(i) requires the Appeals Panel to render its 
decision in a statement of findings of fact and conclusions. OneChicago 
is proposing to amend Rule 716(i) to require, in addition to such 
statement of findings of fact and conclusions, a complete explanation 
of the evidentiary and other basis for such finding and conclusions.

August 3, 2012 Rule Changes

    On August 3, 2012, OneChicago filed (revised filing submitted 
August 6, 2012) rule changes to amend OCX Rule 307 and the cover page 
of the OCX Rulebook. OCX Rule 307 lays out OneChicago's jurisdiction 
and requires market participants to be bound by all Exchange Rules. The 
list of market participants over whom OneChicago has jurisdiction is 
specified in OCX Rule 307(a). OCX Rule 307(a) imposes jurisdiction on 
Clearing Members, Exchange Members or Access Persons who access or 
enter any order into the OneChicago System. OneChicago is proposing to 
expand its jurisdiction to capture ``any person initiating or executing 
a transaction on or subject to the Rules of the Exchange directly or 
through an intermediary, and any Person for whose benefit such a 
transaction has been initiated or executed.'' The proposed amendment 
further states that such persons are subject to the requirement that 
they comply with investigations and disciplinary processes initiated by 
OneChicago. This amendment will expand the scope of OneChicago's 
jurisdiction and allow it to gather more information in its 
investigations in order to more accurately and fairly enforce Exchange 
Rules.
    In addition to modifying OCX Rule 307, the amendment adds a 
disclaimer to the cover page of the OCX Rulebook. That disclaimer 
mirrors the language of the amendment to OCX Rule 307(a). The purpose 
of this amendment is to make clear the scope of OCX's jurisdiction to 
market participants upon first accessing the OCX Rulebook.
    The foregoing amendments were prepared and filed in consultation 
and in unison with other Designated Contract Markets registered with 
the CFTC. Additionally, the language of the above rule changes was 
approved by the CFTC prior to filing.

August 29, 2012 Rule Changes

    The August 29, 2012 rule change further modifies OCX Rule 307. 
Specifically, OneChicago proposes to add subparagraph (d) to OCX Rule 
307. Subparagraph (d) clarifies that any person who is not a Clearing 
Member, Exchange Member, or Access Person, but who is still subject to 
OneChicago's jurisdiction pursuant to OCX Rule 307, is bound to comply 
with Exchange Rules to the same extent that the aforementioned market 
participants are. Proposed OCX Rule 307(d) then lists the Exchange 
Rules that such market participants are bound to comply with. The 
listed rules span most of the Exchange Rulebook, including chapters 4, 
5, and 6, which generally deal with business practices and trading 
rules.

February 27, 2013 Rule Changes

    OCX Rule 127 defines the Disciplinary Panel, which oversees 
Disciplinary Proceedings. Previously, Rule 127 required that the 
Disciplinary Panel consist of three individuals from the Exchange's 
Board and/or Exchange Members. The February 27, 2013 amendment 
(substantively revised March 3, 2013) proposes to remove the 
requirement that Disciplinary Panel members be Exchange Members, and 
allows for Disciplinary Panel members to be selected from the public 
(and who would otherwise meet the requirements of selection as a Public 
Director). OneChicago believes this amendment will broaden the scope of 
market participants and members of the public that are eligible to 
serve as members of the Disciplinary Panel, thereby increasing the 
diversity of views and interests represented by the panel.
    The rule filings and NTMs are attached as Exhibit 4 to the filing 
submitted by the Exchange but are not attached to the published notice 
of the filing.

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

    In its filing with the Commission, OneChicago included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received on the proposed rule changes. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The purpose of OneChicago's filing is to update the OCX Rulebook to 
account for various filings OneChicago has previously made with the 
CFTC, but has not made concurrently with the SEC. Specifically, the 
purpose of rule filings and NTMs are to (1) clarify the obligations of 
market participants with regard to reporting requirements; (2) require 
certain disclosures relating to sales practices; and (3) update 
OneChicago's disciplinary process to comply with the Core Principles 
and Other Requirements for Designated Contract Markets, which 
implements Section 735 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010.
2. Statutory Basis
    OneChicago believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\8\ in particular, in that it 
is designed to foster cooperation and coordination with persons engaged 
in facilitating transactions in securities, and remove impediments to 
and perfect the mechanism of a free and open market and national market 
system. OneChicago believes that clarifying its reporting requirements 
helps foster regulatory certainty for its market participants who trade 
bilateral blocks and EFPs. Furthermore, requiring

[[Page 36354]]

certain disclosures be made by firms trading on behalf of customers 
helps ensure a free and open market in which customers are made fully 
aware of transactions executed by executing firms on their behalf. 
Finally, the changes to OCX's disciplinary process will allow the 
Exchange to more effectively regulate trading activity.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OneChicago does not believe that the rule changes will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. The Exchange believes that the proposed rule 
changes are equitable and not unfairly discriminatory because they 
merely clarify the obligations of parties that transact EFPs, enhance 
customer protection through disclosure, apply to all market 
participants equally, and strengthen OCX's disciplinary process to 
ensure that trading activity and the disciplinary processes on the 
Exchange remains fair, equitable, and competitive.

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

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

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

    OneChicago filed the proposed rule changes with the CFTC between 
June 19, 2012 and July 9, 2013. OneChicago did not file the proposed 
rule changes concurrently with the SEC. Instead, OneChicago filed the 
proposed rule changes on May 14, 2014.\9\
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    \9\ Section 19(b)(7)(B) of the Act provides that a proposed rule 
change filed with the SEC pursuant to section 19(b)(7)(A) of the Act 
shall be filed concurrently with the CFTC.
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    At any time within 60 days of the date of effectiveness \10\ of the 
proposed rule change, the Commission, after consultation with the CFTC, 
may summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.\11\
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    \10\ Section 19(b)(7)(C) of the Act provides, inter alia, that 
``[a]ny proposed rule change of a self-regulatory organization that 
has taken effect pursuant to [Section 19(b)(7)(B) of the Act] may be 
enforced by such self-regulatory organization to the extent such 
rule is not inconsistent with the provisions of this title, the 
rules and regulations thereunder, and applicable Federal law.''
    \11\ 15 U.S.C. 78s(b)(1).
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 IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-OC-2014-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-OC-2014-02. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices of the Exchange. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-OC-2014-02, 
and should be submitted on or before July 17, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14940 Filed 6-25-14; 8:45 am]
BILLING CODE 8011-01-P