Document ID: SEC-2012-0774-0001
Agency: sec
Document Type: Notice
Title: Limited Exemptions: BOX Options Exchange, LLC
Posted Date: 2012-05-17T04:00Z

[Federal Register Volume 77, Number 96 (Thursday, May 17, 2012)]
[Notices]
[Pages 29397-29398]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11931]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66976]

Order Granting Application of BOX Options Exchange, LLC for a 
Limited Exemption From Exchange Act Rule 10b-10(a)(2)(i)(A) Pursuant to 
Rule 10b-10(f)

May 11, 2012.

I. Introduction

    By letter dated May 11, 2012 (``the Application''), BOX Options 
Exchange LLC (the ``Exchange'') requests a limited exemption from the 
requirements of Rule 10b-10(a)(2)(i)(A) under the Securities Exchange 
Act of 1934 (``Exchange Act'') on behalf of its Options Participants 
that execute trades as agent for their customers (``Participants'') \1\ 
on BOX Market LLC, an options trading facility of the Exchange under 
Section 3(a)(2) of the Exchange Act (``BOX''). As discussed in the 
Application, BOX will operate a fully automated electronic book (``BOX 
Book'') for orders to buy or sell securities (``orders'') with a 
continuous, automated matching function which will provide for strict 
price-time priority execution (``Trading System'').\2\ The BOX Book and 
the Exchange Rules provide for post trade anonymity through settlement 
for trades executed on BOX.\3\
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    \1\ Unless otherwise defined in this order, defined terms used 
have the same meaning as described in the Exchange Rules.
    \2\ See Exchange Rule 7130. The Exchange notes that executions 
through the Price Improvement Period (``PIP'') as set forth in 
Exchange Rule 7150 are an exception to the strict price-time 
priority execution that occurs on the BOX Book.
    \3\ As explained in the Application, the Exchange does not 
request an exemption from Rule 10b-10(a)(2)(i)(A) for when it 
reveals the identity of a Participant or a Participant's clearing 
firm: (i) For regulatory purposes or to comply with an order of a 
court or arbitrator; or (ii) when a Clearing Corporation or Clearing 
Participant (such as the Options Clearing Corporation) ceases to act 
for a Participant or the Participant's clearing firm, and determines 
not to guarantee the settlement of the Participant's trades.
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II. Background \4\
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    \4\ Background information is derived from the Application.
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a. The Exchange

    The Exchange is registered as a national securities exchange under 
Section 6 of the Exchange Act.\5\ The Participants of the Exchange 
consist of broker-dealers registered with the Exchange, as 
Participants, for the purposes of participating in options trading. 
Participants are entitled to enter orders in, and receive executions 
through, the BOX Book or otherwise.
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    \5\ The Exchange received approval of its application for 
registration as a national securities exchange on April 27, 2012. 
See Securities Exchange Act Release No. 66871 (April 27, 2012). 
Exchange rules cited herein were approved as part of that 
application.
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    BOX, an options trading facility of the Exchange under Section 
3(a)(2) of the Exchange Act, will operate the BOX Book for orders with 
a continuous, automated matching function, in compliance with the 
Exchange's rules and Regulation NMS under the Exchange Act 
(``Regulation NMS'').\6\ Liquidity will be derived from orders to buy 
and orders to sell submitted to BOX electronically by Participants from 
remote locations.
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    \6\ See 17 CFR 242.600 et seq.
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    The BOX Book and the Exchange rules provide for strict price-time 
priority execution.\7\ Under Exchange Rule 7130, orders will be 
prioritized on a strict price-time basis, first by price and then by 
time. Incoming orders will be first matched for execution against 
orders in the BOX Book. Orders that cannot be executed are eligible for 
routing to away trading centers.\8\ All trades will be executed through 
the Trading System on an anonymous basis, except for Directed 
Orders.\9\ The transaction reports produced by the Trading System will 
indicate the details of transactions executed in the Trading System, 
but shall not reveal contra party identities. Transactions executed in 
the Trading System will also be cleared and settled anonymously.\10\
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    \7\ See supra note 2. According to the Exchange, executions 
through the PIP, as set forth in Exchange Rules 7130 and 7150, are 
an exception to the price-time priority execution that occurs on the 
BOX Book.
    \8\ See Exchange Rule 15030. The Exchange understands that the 
exemptive relief would not apply to any situation in which the 
Trading System routes an order to all away trading centers for 
execution, as such executions would be governed by the rules of the 
away trading center.
    \9\ See Exchange Rule 8040(d)(1). Directed Orders on BOX are not 
anonymous. The identity of the Participant sending the Directed 
Order is provided to the Market Maker recipient. As explained in the 
Application, Directed Orders would not be subject to the requested 
relief.
    \10\ See Exchange Rule 7130(a)(6).

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[[Page 29398]]

    The BOX Book's matching system algorithm permits orders originated 
by a Participant to execute against other orders from the same 
Participant on the same basis as orders from other Participants. In the 
BOX Book's handling of displayed orders, which is based on strict 
price-time priority, a Participant could receive an execution against 
itself, and under the Exchange's Rules, the Participant would not know 
that it was the contra-side of the trade at the time of execution. BOX 
does, however, permit a Participant to prevent its incoming orders from 
being executed against its own trading interest. Specifically, 
Participants have the ability to use Participant match trade 
prevention. A Participant may direct that its Market Maker or Principal 
Orders entered on BOX not execute against its own Market Maker quotes 
or orders, or its Principal Orders that are resting on the BOX Book. In 
such a case, the quantity of the incoming order that would otherwise 
trade against the quote/order from the same Participant will be 
cancelled back to the entering party.\11\
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    \11\ See Exchange Rule 7130(a)(4).
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b. Rule 10b-10

    Rule 10b-10 under the Exchange Act generally requires broker-
dealers effecting a customer transaction in securities (other than U.S. 
savings bonds or municipal securities) \12\ to provide a written 
notification to its customer, at or before completion of a securities 
transaction, that discloses information specific to the transaction. In 
particular, under Rule 10b-10(a)(2)(i)(A), when a broker-dealer acts as 
agent for a customer, some other person, or for both the customer and 
some other person, the broker-dealer must disclose ``[t]he name of the 
person from whom the security was purchased, or to whom it was sold, 
for such customer or the fact that the information will be furnished 
upon written request of such customer'' (the ``Contra-Party Identity 
Requirement'').
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    \12\ Municipal securities are subject to the transaction 
confirmations requirements under Rule G-15 of the Municipal 
Securities Rulemaking Board.
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III. Relief Sought

    As explained in the Application, trades are executed with total 
anonymity on BOX, where the identity of the actual contra-party is not 
revealed when the trade is executed, except with respect to Directed 
Orders.\13\ Because of this, Participants will not know the identity of 
the party to whom they sold securities or from whom they purchased 
securities. Without this information, Participants would not be able to 
comply with the Contra-Party Identity Requirement of Rule 10b-10. To 
permit Participants to utilize BOX without violating Rule 10b-10, the 
Exchange, on behalf of such Participants, is seeking an exemption under 
Rule 10b-10(f), from the Contra-Party Identity Requirement of Rule 10b-
10 when Participants execute transactions on BOX, as described in the 
Application.
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    \13\ See supra note 9.
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IV. Conclusion

    Based on the facts and representations contained in the 
Application, we find that it is appropriate and in the public interest 
and consistent with the protection of investors to grant the Exchange, 
on behalf of its Participants, a limited exemption from the Contra-
Party Identity Requirement in Rule 10b-10(a)(2)(i)(A).
    It is hereby ordered, pursuant to Rule 10b-10(f) of the Exchange 
Act, that Exchange Participants, based on the representations and facts 
contained in the Application, are exempt from the requirements of Rule 
10b-10(a)(2)(i)(A) of the Exchange Act, to the extent that Participants 
execute trades for their customers on the Exchange using the BOX 
Trading System. This exemption is limited to trades that Participants 
execute on BOX using the post trade anonymity feature described in the 
Application.\14\
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    \14\ This exemption does not apply: (a) To orders routed to an 
away trading center for execution; (b) to Directed Orders; (c) under 
the situation described in note 3 supra; or (d) to the situation 
described in note 13 of the Application.
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    The foregoing exemption is subject to modification or revocation if 
at any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act.

    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(32).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11931 Filed 5-16-12; 8:45 am]
BILLING CODE 8011-01-P