Document ID: SEC-2017-1257-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-07-26T04:00Z

[Federal Register Volume 82, Number 142 (Wednesday, July 26, 2017)]
[Notices]
[Pages 34717-34719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15630]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81175; File No. SR-CBOE-2017-044]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change Relating 
to Disaster Recovery

July 20, 2017.

I. Introduction

    On May 24, 2017, the 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 to amend CBOE Rule 6.18 relating 
to disaster recovery. The proposed rule change was published for 
comment in the Federal Register on June 9, 2017.\3\ The Commission 
received no comments on the proposed rule change. This order grants 
approval of 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. 80857 (June 5, 
2017), 82 FR 26825 (``Notice'').
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II. Description of the Proposed Rule Change

    CBOE Rule 6.18 contains the Exchange's rules relating to disaster 
recovery, including provisions intended to comply with Regulation 
Systems Compliance and Integrity (``Regulation SCI'') concerning 
business continuity and disaster recovery plans.\4\ The Exchange has 
proposed to amend Rule 6.18 to provide the Exchange authority to take 
additional steps that it deems necessary to preserve the Exchange's 
ability to conduct business and maintain fair and orderly markets in 
the event of a significant systems failure, disaster, or other unusual 
circumstances. Specifically, the Exchange has proposed to amend Rule 
6.18 to allow the Exchange to: (1) Establish specified additional 
temporary requirements for Designated BCP/DR Participants \5\ during 
use of the back-up data center; (2) temporarily allow trading in its 
exclusively-licensed and/or proprietary products, on a class-by-class 
basis, in an exclusively floor-based environment via open outcry if the 
Exchange's primary and back-up data centers both are inoperable or 
otherwise unavailable; (3) temporarily deactivate certain systems or 
systems functionalities that are not essential to conducting business 
on the Exchange if there is a systems disruption or malfunction, 
security intrusion, systems compliance issue, or other unusual 
circumstances; and (4) temporarily restrict a Trade Permit Holder's or 
associated person's access to the Exchange's electronic trading systems 
if the President of the Exchange determines that, because of a systems 
issue, such access threatens the Exchange's ability to operate systems 
essential to maintenance of a fair and orderly market.
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    \4\ See Notice, supra note 3, at 26826; see also 17 CFR 
242.1000-07.
    \5\ ``Designated BCP/DR Participants'' are Trading Permit 
Holders that the Exchange has determined are, as a whole, necessary 
for the maintenance of fair and orderly markets in the event of the 
activation of the Exchange's business continuity and disaster 
recovery plans. See Rule 6.18(b)(iv)(A). ``Trading Permit Holder'' 
has the meaning set forth in Section 1.1(f) of CBOE's Bylaws. 
Designated BCP/DR Participants include, at a minimum, all Market-
Makers in option classes exclusively listed on the Exchange that 
stream quotes in such classes and all Designated Primary Market-
Makers (``DPMs'') in multiply listed option classes. See Rule 
6.18(b)(iv)(A)(2).
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    First, the Exchange has proposed to adopt new Rule 6.18(b)(iv)(B), 
which would provide that, during the use of the back-up data center, if 
necessary for the maintenance of fair and orderly markets, the Exchange 
may: (1) Establish heightened quoting obligations for Designated BCP/DR 
Participants in a class in which the Designated BCP/DR Participant is 
already an appointed Market-Maker \6\ or Lead Market-Maker \7\ up to 
the standards specified for Designated Primary Market-Makers \8\ in 
Rule 8.85(a); \9\ and/or (2) disallow BCP/DR Participants the ability 
to deselect an appointment intraday in a class in which the BCP/DR 
Participant is already an appointed Market-Maker. The Exchange would be 
required to notify market participants of any of these additional 
temporary requirements prior to implementing them.\10\
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    \6\ A Market-Maker is an individual Trading Permit Holder or TPH 
organization that is registered with the Exchange for the purpose of 
making transactions as a dealer-specialist on the Exchange in 
accordance with the provisions of Chapter VIII of the Rules. See 
Rule 8.1. A ``TPH organization'' is an organization that meets the 
requirements set forth in Rule 3.3.
    \7\ The Exchange may appoint one or more Market-Makers in a 
class to serve as Lead Market-Makers (``LMMs''). See Rule 8.15(a).
    \8\ A DPM is a TPH organization that is approved by the Exchange 
to function in allocated securities as a Market-Maker and is subject 
to the obligations under Rule 8.85. See Rule 8.80.
    \9\ With respect to their allocated series, DPMs must, among 
other things, provide continuous electronic quotes in the lesser of 
99 percent of the non-adjusted option series or 100 percent of the 
non-adjusted option series minus one call-put pair, with the term 
``call-put pair'' referring to one call and one put the cover the 
same underlying instrument and have the same expiration date and 
exercise price, and assure that its disseminated market quotations 
are accurate. See Rule 8.85(a)(i).
    \10\ See proposed Rule 6.18(b)(iv)(B). The proposal would also 
renumber existing subparagraphs (B) and (C) of Rule 6.18(b)(iv) as 
subparagraphs (C) and (D), respectively. See proposed Rule 
6.18(b)(iv)(C) and (D).
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    Next, the Exchange has proposed to adopt new Rule 6.18(c), which 
would provide that, if the Exchange's primary and back-up data centers 
become inoperable or otherwise unavailable for use due to a significant 
systems failure, disaster, or other unusual circumstances, in the 
interests of maintaining fair and orderly markets or for the protection 
of investors, the Exchange would be able to operate in an exclusively 
floor-based environment on a limited basis for certain classes. 
Specifically, the Exchange could

[[Page 34718]]

determine, on a class-by-class basis, to temporarily allow trading in 
its exclusively-licensed and/or proprietary products \11\ in an 
exclusively floor-based environment via open outcry to preserve the 
Exchange's ability to conduct business in those option classes.\12\
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    \11\ According to the Exchange, its current proprietary and 
exclusively-licensed products include options on CBOE Volatility 
Index (VIX) futures, the S&P 500 (SPX and XSP) Index, S&P Dow Jones 
Indexes (OEX, XEO and DJX), Russell 2000 (RUT) Index, FTSE Emerging 
Index (FTEM/EMS), MSCI Emerging Markets Index (MXEF), and the MSCI 
EAFE Index (MXEA). The Exchange will maintain a current list of all 
proprietary and exclusively-licensed options products on its Web 
site. See Notice, supra note 3, at 26826 n. 8. The Exchange 
explained that options exclusively-listed on the Exchange may 
include options also listed on other CBOE Holdings Inc. affiliated 
exchanges, including C2 Options Exchange, Incorporated (``C2''), and 
that currently RUT is listed on CBOE and C2. See Notice, supra note 
3, at 26826 n. 9.
    \12\ See proposed Rule 6.18(c). The proposal also would renumber 
existing subparagraph (c) of Rule 6.18 as subparagraph (d). See 
proposed Rule 6.18(d).
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    The Exchange has also proposed to adopt new Rule 6.18(e), which 
would provide that, if there is a systems disruption or malfunction, 
security intrusion, systems compliance issue, or other unusual 
circumstances, the Exchange could temporarily deactivate certain 
systems or systems functionalities that are not essential to conducting 
business on the Exchange in accordance with the Rules or, if necessary, 
to maintain fair and orderly markets or to protect investors.\13\ The 
Exchange would notify market participants of any such deactivation and 
subsequent reactivation promptly and in a reasonable manner determined 
by the Exchange.\14\
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    \13\ See proposed Rule 6.18(e). The Exchange stated that such 
systems and systems functionalities that are non-essential to 
conducting business on the Exchange include, but are not limited to, 
Public Automated Routing (``PAR'') workstations, the Automated 
Improvement Mechanism (``AIM''), and the Solicitation Auction 
Mechanism (``SAM''). See Notice, supra note 3, at 26827-28.
    \14\ See proposed Rule 6.18(e).
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    Finally, the Exchange has proposed to adopt new Rule 6.18(f), which 
would allow the Exchange to temporarily restrict a Trading Permit 
Holder's or associated person's access to the Hybrid Trading System or 
other electronic trading systems if the President (or senior-level 
designee) \15\ of the Exchange determines that, because of a systems 
issue, such access threatens the Exchange's ability to operate systems 
essential to the maintenance of fair and orderly markets.\16\ The 
Exchange would continue to restrict such access until: (1) The end of 
the trading session; or (2) an earlier time if the President (or 
senior-level designee) of the Exchange, in consultation with the 
affected Trading Permit Holder, determines that lifting the restriction 
no longer poses a threat to the Exchange's ability to operate systems 
essential to conducting business or continuing to maintain a fair and 
orderly market on the Exchange or poses a threat to investors.\17\ In 
the Notice, the Exchange also represented that it would make efforts to 
contact the affected Trading Permit Holder immediately before or 
contemporaneously with the restriction of access to the extent possible 
while protecting the Exchange's ability to operate systems essential to 
the maintenance of fair and orderly markets.\18\
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    \15\ According to the Exchange, a designee would make 
determinations under this subsection only in the President of the 
Exchange's absence and the designee would be a senior executive 
(i.e., Vice President or above) of the Exchange. See Notice, supra 
note 3, at 26828 n. 23.
    \16\ See proposed Rule 6.18(f).
    \17\ See id.
    \18\ See Notice, supra note 3, at 26828 n. 22.
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III. Discussion and Commission Findings

    After careful review, 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.\19\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the rules of a national securities 
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 
facilitating 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. 
The Commission also finds that the proposed rule change is consistent 
with Section 6(b)(7) of the Act,\21\ which requires, among other 
things, that the rules of a national securities exchange provide a fair 
procedure for the prohibition or limitation by the exchange of any 
person with respect to access to services offered by the exchange or a 
member thereof.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(7).
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    The Commission believes that the proposed rule change will provide 
the Exchange with additional tools to help ensure continuous operation 
of the Exchange and its core systems in the event of a significant 
systems failure or other unusual circumstances that threaten the 
Exchange's ability to operate its systems, maintain fair and orderly 
markets, and protect investors. The Commission notes that the authority 
provided by the proposed provisions is limited to circumstances where 
the Exchange is experiencing a disruption to its primary, or primary 
and back-up, electronic systems, or where the Exchange believes it is 
in imminent danger of experiencing such disruption. Further, the 
Commission notes that, according to the Exchange, in accordance with 
Rule 1001(a)(2)(v) of Regulation SCI, the Exchange maintains written 
policies and procedures reasonably designed to ensure that its trading 
systems, including its primary and back-up data centers, have levels of 
capacity, integrity, resiliency, availability, and security adequate to 
maintain the Exchange's operational capability and promote the 
maintenance of fair and orderly markets, including, but not limited to, 
business continuity and disaster recovery plans that are reasonably 
designed to achieve next two-hour resumption of its critical SCI 
systems, as defined in Rule 1000 of Regulation SCI.\22\ Further, the 
Exchange represents that its business continuity and disaster recovery 
standards are reasonably designed to achieve two-hour resumption of all 
trading systems that are essential to conducting business on the 
Exchange, and that the Exchange believes that its standards are 
reasonably designed to support resumption in a significantly shorter 
amount of time.\23\ As such, the Commission expects that the Exchange 
would invoke the disaster recovery provisions in this proposed rule 
change only in rare and unusual circumstances and only for very limited 
periods of time.
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    \22\ See Notice, supra note 3, at 26827 n. 12.
    \23\ See id.
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    The Commission believes that the Exchange's ability, during use of 
the back-up system, to invoke pre-determined heighted quoting 
obligations for Designated BCP/DR Participants that are Market-Makers 
(or Lead Market-Makers) in their appointed classes, or prevent them 
from dropping their appointments intraday, may help to ensure that such 
Designated BCP/DR Participants contribute to, and continue to help 
ensure, the maintenance of fair and orderly markets in the event of a 
disaster or other serious circumstances causing the Exchange to operate 
out of

[[Page 34719]]

its back-up data center. Moreover, the Commission notes that such 
additional requirements will be imposed only on Designated BCP/DR 
Participants, which are market participants that the Exchange has 
determined that, taken as a whole, are necessary for the maintenance of 
fair and orderly markets in the event of the activation of the 
Exchange's business continuity and disaster recovery plans pursuant to 
Regulation SCI.\24\ The Commission believes that, through the adoption 
of this rule, Designated BCP/DR Participants will be on notice that 
they might be called upon to meet heightened quoting obligations up to 
the levels currently required for Designated Primary Market-Makers in 
CBOE Rule 8.85(a) \25\ during unusual circumstances when the back-up 
data center is in use and notes that the Exchange would provide 
specific notice prior to invoking this new authority. The Commission 
further notes that, as described above, Regulation SCI requires the 
Exchange to have business continuity and disaster recovery plans 
reasonably designed to achieve two-hour resumption of critical SCI 
systems and next business day resumption of trading,\26\ and the 
Exchange represented that its procedures are reasonably designed to 
achieve two-hour resumption of all trading systems that are essential 
to conducting business on the exchange and that they are designed to 
support resumption in a significantly shorter amount of time.\27\ As 
such, the additional requirements imposed by this provision should be 
in effect for relatively short periods of time if they are ever 
invoked. In addition, to the extent the Exchange invokes this authority 
when necessary to support fair and orderly markets when its systems are 
in back-up mode, then the additional requirements may help support 
quote activity during a disruption and thereby may help protect 
investors and the public interest.
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    \24\ See Notice, supra note 3, at 26826 n. 7.
    \25\ These heighted quoting obligations could include providing 
continuous electronic quotes in up to the lesser of 99 percent of 
the non-adjusted option series or 100 percent of the non-adjusted 
option series minus one call-put pair in classes in which the 
Designated BCP/DR Participant is already an appointed LMM or Market-
Maker. See supra note 9.
    \26\ 17 CFR 242.1001(a)(v).
    \27\ See supra notes 22-23 and accompanying text.
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    The Commission believes that the Exchange's ability to temporarily 
operate in an exclusively floor-based environment via open outcry in 
certain proprietary and exclusively-licensed products if the Exchange's 
primary and back-up data centers become inoperable or otherwise 
unavailable could help ensure that the market for these securities 
would continue to be available and functioning, which should protect 
investors by providing the ability to continue to trade these products 
until such time as the Exchange can resume normal trading. The 
Commission notes that this provision would be invoked only if the 
Exchange's primary and back-up data centers were both inoperable or 
otherwise unavailable due to a significant systems failure, disaster, 
or other unusual circumstances, and will only apply to the Exchange's 
exclusively-licensed and proprietary products, which only trade on CBOE 
and, in some instances, its affiliated exchanges. The Commission notes 
that the period of operation for this exclusively floor-based 
environment should be minimal based on Regulation SCI's requirements 
and the Exchange's two-hour resumption standard for its trading 
systems.\28\
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    \28\ See supra notes 26 and 27 and accompanying text.
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    The Commission believes that the Exchange's ability to temporarily 
deactivate certain non-core systems or systems functionalities in the 
event of a systems disruption or malfunction, security intrusion, 
systems compliance issue, or other unusual circumstances could help 
prevent systems issues from spreading and potentially causing harm to 
investors or impeding the Exchange's ability to maintain fair and 
orderly markets. The Commission notes that this authority will only 
extend to those systems not essential to conducting business on the 
Exchange. The Commission further notes that the new rule provides that 
the Exchange will notify market participants of any such deactivation 
and any subsequent reactivation promptly.
    The Commission believes that the Exchange's ability to temporarily 
restrict a Trading Permit Holder's or associated person's access to the 
Hybrid Trading System or other electronic trading system as provided in 
the rule is designed to allow the Exchange to prevent a Trading Permit 
Holder's systems issues from spreading across the Exchange's systems 
and potentially causing a more widespread problem implicating the 
Exchange's ability to maintain fair and orderly markets and thus 
potentially impacting other market participants. The Commission 
believes that this connectivity restriction is consistent with Section 
6(b)(7) of the Act,\29\ as the proposed limitation on access is 
exceptionally limited in duration and the rule provides a fair 
procedure for imposing such restrictions. Specifically, the Commission 
notes that the Exchange's authority under this provision is limited to 
when, due to a systems issue, a Trading Permit Holder's activity poses 
a present threat to the Exchange's ability to operate systems essential 
to maintaining a fair and orderly market. The Commission also notes 
that the decision to restrict access would be made by the highest 
levels of Exchange management, namely the President (or his or her 
senior-level designee), and this restriction would be temporary, 
lasting only until the end of the trading session or such earlier time 
that it is determined by the President, in consultation with the 
affected Trading Permit Holder, that the access no longer poses a 
threat. Consistent with the Exchange's representations, the Commission 
expects that the Exchange would make reasonable efforts to contact the 
affected Trading Permit Holder immediately before, or, if that is not 
possible, contemporaneously with, any restriction of access.\30\
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    \29\ 15 U.S.C. 78f(b)(7).
    \30\ See supra note 18 and accompanying text.
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    Accordingly, for the reasons discussed above, the Commission 
believes that the Exchange's proposal is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-CBOE-2017-044) be, and 
hereby is, approved.
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15630 Filed 7-25-17; 8:45 am]
 BILLING CODE 8011-01-P