Document ID: SEC-2016-2284-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2016-12-27T05:00Z

[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Notices]
[Pages 95260-95263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31114]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79622; File No. SR-ISE-2016-30]

Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend ISE Rule 803 at Supplementary Material .02 in 
Connection With Business Continuity and Disaster Recovery Plans

December 20, 2016
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 12, 2016, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 ISE Rule 803 at Supplementary 
Material .02 in connection with business continuity and disaster 
recovery plans (``BC/DR Plans'') testing requirements for certain 
Members in connection with Regulation Systems Compliance and Integrity 
(``Regulation SCI'').\3\
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    \3\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72252 (December 5, 2014) (``SCI Adopting Release'').
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    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, 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

[[Page 95261]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend ISE Rule 803 at Supplementary 
Material .02 to conform the current rule text regarding BC/DR Plans 
testing requirements with that of NASDAQ PHLX LLC (``Phlx'') Rule 
926,\4\ The NASDAQ Stock Market LLC (``Nasdaq'') Rule 1170 \5\ and 
NASDAQ BX, Inc. (``BX'') Rule 1170.\6\
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    \4\ Phlx Rule 926 is titled ``The Exchange's Business Continuity 
and Disaster Recovery Plan Testing Requirements for Member 
Organizations and PSX Participants Pursuant to Regulation SCI.''
    \5\ Nasdaq Rule 1170 is titled ``Nasdaq's Business Continuity 
and Disaster Recovery Plan Testing Requirements for Members and 
Options Participants Pursuant to Regulation SCI.''
    \6\ BX Rule 1170 is titled ``The Exchange's Business Continuity 
and Disaster Recovery Plan Testing Requirements for Members and 
Options Participants Pursuant to Regulation SCI.''
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Background
    As adopted by the Commission, Regulation SCI applies to certain 
self-regulatory organizations (including the Exchange), alternative 
trading systems (``ATSs''), plan processors, and exempt clearing 
agencies (collectively, ``SCI entities''), and requires these SCI 
entities to comply with requirements with respect to the automated 
systems central to the performance of their regulated activities. Among 
the requirements of Regulation SCI is Rule 1001(a)(2)(v), which 
requires the Exchange and other SCI entities to maintain ``[b]usiness 
continuity and disaster recovery plans that include maintaining backup 
and recovery capabilities sufficiently resilient and geographically 
diverse and that are reasonably designed to achieve next business day 
resumption of trading and two-hour resumption of critical SCI systems 
following a wide-scale disruption.'' \7\ The Exchange has put extensive 
time and resources toward planning for system failures and already 
maintains robust BC/DR Plans consistent with the Rule.
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    \7\ 17 CFR 242.1001(a)(2)(v).
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    With respect to an SCI entity's BC/DR Plans, including its backup 
systems, paragraph (a) of Rule 1004 of Regulation SCI requires each SCI 
entity to: ``[e]stablish standards for the designation of those members 
or participants that the SCI entity reasonably determines are, taken as 
a whole, the minimum necessary for the maintenance of fair and orderly 
markets in the event of the activation of such plans.'' \8\ Paragraph 
(b) of Rule 1004 of Regulation SCI further requires each SCI entity to 
``[d]esignate members or participants pursuant to the standards 
established in paragraph (a) of [Rule 1004] and require participation 
by such designated members or participants in scheduled functional and 
performance testing of the operation of such plans, in the manner and 
frequency specified by the SCI entity, provided that such frequency 
shall not be less than once every 12 months.''\9\
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    \8\ 17 CFR 242.1004(a).
    \9\ 17 CFR 242.1004(b).
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Proposal
    As set forth below, in connection with Regulation SCI, the Exchange 
is proposing to amend ISE Rule 803 at Supplementary Material .02 to 
conform with Phlx Rule 926, Nasdaq Rule 1170 and BX Rule 1170. Phlx 
Rule 926, Nasdaq Rule 1170 and BX Rule 1170 are similar to ISE Rule 803 
at Supplementary Material .02, which incorporates the requirements of 
Rule 1004 of Regulation SCI as part of the Exchange's rules, and sets 
forth the notice, selection criteria and obligations of Members with 
respect to BC/DR Plans testing.
    The Exchange proposes to adopt rule text from Phlx Rule 926(a), 
Nasdaq Rule 1170(a) and BX Rule 1170(a), which will set forth the 
Exchange's obligations with respect to the selection of Members for 
testing. Specifically, the proposed rule will require the Exchange to 
``[e]stablish standards for the designation of those Members that the 
Exchange reasonably determines are, taken as a whole, the minimum 
necessary for the maintenance of fair and orderly markets in the event 
of the activation of such plans.'' The proposed rule further provides 
that ``[s]uch standards may include volume-based and/or market share-
based criteria, and may be adjusted from time to time by the 
Exchange.'' Lastly, the proposed rule will require the Exchange to 
provide public notice of the standards that it adopts.
    The Exchange is proposing to revise Rule 803 at Supplementary 
Material .02, which will set forth the obligations of the Exchange and 
its Members with respect to testing, similar to Phlx Rule 926(b), 
Nasdaq Rule 1170(b) and BX Rule 1170(b). Specifically, the proposed 
rule will require the Exchange to ``designate Members pursuant to the 
standards established in paragraph (a) of this rule and require 
participation by such designated Members in scheduled functional and 
performance testing of the operation of such plans, in the manner and 
frequency specified by the Exchange, provided that such frequency shall 
not be less than once every 12 months.'' Moreover, the proposed rule 
will require the Exchange to provide at least 6 months prior notice to 
Members that are designated for mandatory testing. Lastly, the proposed 
rule will provide notice that participation in testing is a condition 
of membership for Members that are designated for testing.
    Today, ISE's Rule similarly sets forth the Exchange's obligations 
with respect to the selection of Members for testing. Like the proposed 
rule change, these standards for the designation of those Members must 
be reasonably determined by the Exchange, when taken as a whole, to 
have the minimum necessary for the maintenance of fair and orderly 
markets in the event of the activation of such plans. ISE's Rule 
requires the Exchange to provide public notice of the standards that it 
adopts. Further, ISE's Rule requires Primary Market Makers (``PMMs'') 
to participate in scheduled functional and performance testing of the 
operation of such plans with a frequency of not less than once every 12 
months. These standards remain substantially the same under the 
proposed rule change.
    Today, ISE's Rule requires that at least 3 months prior to a 
scheduled functional and performance testing of the Exchange's business 
continuity and disaster recovery plans, the Exchange publishes the 
criteria to be used by the Exchange to determine which PMMs will be 
required to participate in such testing, and notifies those PMMs that 
are required to participate based on such criteria. The Phlx, Nasdaq 
and BX rules require at least 6 months prior notice to Members that are 
designated for mandatory testing. This change would expand the notice 
period. Also, ISE has specific provisions for PMMs with respect to 
selection for testing. Today, ISE provides that PMMs that have been 
determined by the Exchange to contribute a meaningful percentage of the 
Exchange's overall volume, measured on a quarterly or monthly basis, 
will be required to participate in scheduled functional and performance 
testing. The Exchange may also consider other factors in determining 
the PMMs that will be required to participate in scheduled functional 
and performance

[[Page 95262]]

testing, including average daily volume traded on the Exchange measured 
on a quarterly or monthly basis, or PMMs who collectively account for a 
certain percentage of market share on the Exchange. The proposed rule 
text does not require a different treatment for PMMs as compared to 
other market participants. Today, Phlx, Nasdaq and BX select market 
participants based on volume and/or market share, regardless of market 
making activity. The proposed rule text would not specifically mandate 
PMMs however, given the importance of market makers on the Exchange and 
the volume they traditionally trade, they are likely to be required to 
participate in business continuity and disaster recovery plans under 
the proposed rule change as they are today.
    The Exchange would continue to encourage all Members to connect to 
the Exchange's backup systems and to participate in testing of such 
systems; \10\ however, certain Members will be obligated to participate 
in BC/DR Plans testing. In adopting the rule text of Phlx Rule 926, 
Nasdaq Rule 1170 and BX Rule 1170, the Exchange will require mandatory 
participation in BC/DR Plans testing by those Members that the Exchange 
reasonably determines are, taken as a whole, the minimum necessary for 
the maintenance of fair and orderly markets in the event of the 
activation of such plans on the Exchange. The Exchange believes that 
using overall participation on its markets (by volume and/or market 
share) as a measure to select Members for mandatory participation in 
BC/DR Plans testing is a reasonable means by which it can determine 
which Members are necessary for the maintenance of fair and orderly 
markets in the event of the activation of such plans. For each BC/DR 
Plans test cycle, the Exchange will select the top ten Members on the 
Exchange based on the Exchange's measure of overall participation. The 
Exchange notes that when considering volume, it will exclude contracts 
traded on PrecISE[supreg].\11\ The Exchange has provided notice of the 
initial selection criteria and measurement period to its Members.\12\ 
All notices concerning BC/DR Plans testing will be posted on the 
Exchange's Web site.
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    \10\ In this regard, the Exchange will allow any Member to 
participate in the testing of the Exchange's BC/DR Plans, which is 
consistent with the BC/DR Plans. See SCI Adopting Release, supra 
note 3 at 72350. The Exchange will provide instructions on how a 
Member must inform the Exchange of its interest in participating in 
an upcoming BC/DR Plans test via the announcement of the test date. 
A Member must provide the Exchange notice of its interest to 
participate at least a week prior to the test date and must have the 
appropriate connection for testing in place.
    \11\ PrecISE is [sic] front-end order and execution management 
system for trading options and stock-option combinations.
    \12\ See ISE Circular 2016-08.
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    The Exchange is proposing to initially select Members with the 
highest levels of trading volume on the Exchange over four calendar 
months (``Measurement Period'') as mandatory testing for Members 
[sic].\13\ Specifically, the Measurement Period will be the four 
calendar months of trading immediately prior to the Exchange's 
announcement of the next BC/DR Plans test date. The Measurement Period 
will always begin at a point after the Exchange announces the criteria 
to be used in the next BC/DR Plans test. By way of example, if on 
October 6, 2017 the Exchange announced the BC/DR Plans test selection 
criteria and on March 2, 2018 the Exchange announced a BC/DR Plans test 
date of September 8, 2018, the Measurement Period used to select Member 
subject to mandatory testing would be November 2017 through February 
2018. Members not obligated to participate that wish to participate in 
this test must inform the Exchange no later than September 1, 2018, 
based on the aforementioned timeline.\14\
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    \13\ The Exchange may change the total number of Members 
selected from time to time.
    \14\ See supra note 10.
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    The proposed rule change is intended to provide consistency across 
the six options exchanges operated by Nasdaq, Inc. in regard to the 
standards established for the designation of Members that are required 
to participate in the Exchange's business continuity and disaster 
recovery testing. In turn, participants that are Members on multiple 
exchanges operated by Nasdaq, Inc. will be provided greater uniformity 
and ease of testing with the establishment of consistent standards 
across the multiple Nasdaq exchanges.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\15\ in general, and furthers the objectives 
of Section 6(b)(5) of the Act,\16\ in particular, in that it is 
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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The proposal will ensure that the Members 
necessary to ensure the maintenance of fair and orderly markets are 
properly designated consistent with Rule 1004 of Regulation SCI. 
Specifically, the proposal will adopt clear and objective criteria with 
respect to the designation of Members that are required to participate 
in the testing of the Exchange's BC/DR Plans, as well as appropriate 
notification regarding such designation. As set forth in the SCI 
Adopting Release, ``SROs have the authority, and legal responsibility, 
under Section 6 of the Exchange Act, to adopt and enforce rules 
(including rules to comply with Regulation SCI's requirements relating 
to BC/DR testing) applicable to their members or participants that are 
designed to, among other things, 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.'' \17\ The Exchange believes 
that this proposal is consistent with such authority and legal 
responsibility.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ See SCI Adopting Release, supra note 3 at 72350.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. To 
the contrary, the proposal is not a competitive proposal but rather is 
necessary for the Exchange's compliance with Regulation SCI.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on

[[Page 95263]]

which it was filed, or such shorter time as the Commission may 
designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) 
of the Act \18\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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 rule-comments@sec.gov. Please include 
File Number SR-ISE-2016-30 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-ISE-2016-30. 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 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; 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-ISE-2016-30 and should be 
submitted on or before January 17, 2017.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31114 Filed 12-23-16; 8:45 am]
 BILLING CODE 8011-01-P