[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 4007-4011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01029]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87985; File No. SR-CboeBZX-2020-002]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Its Rules Governing the Give Up of a Clearing Member by a User
on Exchange Transactions
January 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 2, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
````BZX'''') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to amend its rules governing the give up of a Clearing Member
by a User on Exchange transactions. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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
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 Rule 21.12, which governs the give
up of a Clearing Member \5\ by a User \6\ on Exchange transactions, to
substantially conform to Cboe Exchange, Inc. (``Cboe Options'') Rule
5.10, proposed Cboe EDGX Exchange, Inc. (``EDGX Options'') Rule 21.12,
and proposed Cboe C2 Exchange, Inc. (``C2 Options'') Rule 6.30.\7\
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\5\ The term ``Clearing Member'' means an Options Member that is
self-clearing or an Options Member that clears BZX Options
Transactions for other Members of BZX Options. See Exchange Rule
16.1.
\6\ The term ``User'' means any Options Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Rule 11.3 (Access). See Exchange Rule 16.1.
\7\ See SR-CboeEDGX-2020-001 (filed January 2, 2020) and SR-C2-
2020-001 (filed January 2, 2020) (collectively referred to as the
``EDGX Options and C2 Options Proposed Give Up Rule'').
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Background
Under current Exchange rules, Users entering transactions on the
Exchange must either be a Clearing Member or must establish a clearing
arrangement with a Clearing Member, and must have a Letter of Guarantee
issued by a Clearing Member. In addition, under current Rule 21.12, a
User must give up the name of the Clearing Member through which each
transaction will be cleared. Every Clearing Member accepts financial
responsibility for all BZX Options transactions made by the guaranteed
User pursuant to Exchange Rule 22.8(b) (Terms of Letter Guarantee). The
proposed amendment will result in a more structured and coherent
streamlined give up process on the Exchange as it will align with the
give up functionality on BZX Options with that currently available on
Cboe Options, C2 Options, and EDGX Options.
Additionally, beginning in early 2018, certain Clearing Members (in
conjunction with the Securities Industry and Financial Markets
Association (``SIFMA'')) expressed concerns related to the process by
which executing brokers on U.S. options exchanges (the ``Exchanges'')
are allowed to designate or `give up' a clearing firm for purposes of
clearing particular transactions. The SIFMA-affiliated Clearing Members
have recently identified the current give up process as a significant
source of risk for clearing firms. SIFMA-affiliated Clearing Members
subsequently requested that the Exchanges alleviate this risk by
amending Exchange rules governing the give up process. \8\ Therefore,
the Exchange is now seeking to amend its Rule 21.17 to align with
applicable rules of the Exchanges and also to substantially conform to
existing Cboe Options Rule 5.10 and proposed EDGX Options Rule 22.12
and C2 Options Rule 6.30.
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\8\ Cboe Options recently modified its give up procedure under
rule 5.10 to allow clearing trading permit holders to ``Opt In''
such that the clearing trading permit holder (``TPH'') may specify
which Cboe Options TPH organizations are authorized to give up that
clearing trading permit holder. See Securities and Exchange Act
Release No. 86401 (July 17, 2019), 84 FR 35433 (July 23, 2019) (SR-
CBOE-19-036). Nasdaq PHLX LLC (``PHLX''), NYSE Arca, Inc., (``NYSE
Arca''), and NYSE American LLC (``NYSE American'') also recently
modified their respect give up rules to adopt an ``Opt In'' process;
see also Securities and Exchange Act Release No. 85136 (February 14,
2019), 84 FR 5526 (February 21, 2019) (SR-PHLX-2018-72), Securities
and Exchange Act Release No. 85871 (May 16, 2019), 84 FR 23613 (May
22, 2019) (SR-NYSEArca 2019-32) and Securities and Exchange Act
Release 85875 (May 16, 2019), 84 FR 23591 (May 22, 2019) (SR-
NYSEAMER-2019-17). The Exchange's proposal leads to the same result
of providing its Clearing Member's the ability to control risk and
includes PHLX's, NYSE Arca's and NYSE American's ``Opt In'' process,
but it otherwise differs slightly in process from their give up
rules. For example, the Exchange intends to maintain its provisions
relating to Designated Give Ups and eliminate its provisions
relating to the rejection of a trade. The Exchange's proposal is
substantially the same as the current give up process on Cboe
Options.
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Proposed Rule
The Exchange proposes to amend Rule 21.12 by replacing the current
rule text with details regarding the give up procedure for a User
executing transactions on the Exchange. As amended, Rule 21.12 would
provide that a User may indicate, at the time of the trade or through
post trade allocation, any Options Clearing Corporation (``OCC'')
number of the Clearing Member through which the transaction will be
cleared (``give up'')
[[Page 4008]]
to either a ``Designated Give Up'' \9\ or a ``Guarantor'',\10\ as those
roles would be defined in the Rule and discussed in further detail
below.\11\ Further, Rule 21.12 would provide that Clearing Members may
elect to ``Opt In'' and restrict one or more of its OCC number(s)
(``Restricted OCC Number''), as defined in the Rule and described in
further detail below.\12\
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\9\ See proposed Exchange Rule 21.12(b)(1).
\10\ See proposed Exchange Rule 21.12(b)(2).
\11\ See proposed Exchange Rule 21.12(a); see also paragraph (a)
of the EDGX Options and C2 Options Proposed Give Up Rule. The
Exchange notes that paragraph (a) of Cboe Options 5.10 slightly
differs from the proposed paragraph (a) on the Exchange, EDGX
Options, and C2 Options; however, Cboe Options plans to amend its
paragraph (a) of Rule 5.10 to conform to proposed Exchange, EDGX
Options, and C2 Options rules with slight differences as it relates
to floor trading.
\12\ Id.
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Amended Rule 21.12(b)(1) would define the term ``Designated Give
Up'' as a Clearing Member that a User (other than a Market-Maker) \13\
identifies to the Exchange, in writing, as a Clearing Member the User
requests the ability to give up.\14\ To designate a Designated Give Up,
a User must submit written notification to the Exchange, in a form and
manner prescribed by the Exchange (``Notification Form'').\15\ A copy
of the proposed Notification Form is included with this filing in
Exhibit 3. Similarly, should a User no longer want the ability to give
up a particular Designated Give Up, the User would have to submit
written notification to the Exchange, in a form and manner prescribed
by the Exchange.\16\
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\13\ For purposes of this rule, references to ``Market-Maker''
shall refer to a Member acting in the capacity of a Market-Maker and
shall include all Market-Maker capacities.
\14\ See proposed Exchange Rule 21.12(b)(1); see also Cboe
Options 5.10(b)(1).
\15\ See proposed Exchange Rule 21.12(b)(3); see also Cboe
Options Rule 5.10(b)(3).
\16\ See proposed Exchange Rule 21.12(b)(7); see also Cboe
Options Rule 5.10(b)(7).
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The Exchange notes that, as proposed, a User may designate any
Clearing Member as a Designated Give Up, provided that the Designated
Give Up has not Opted In, or provided that the User is an Authorized
User \17\ of that Designated Give Up. Further, there would be no
maximum number of Designated Give Ups that a User can identify. The
Exchange would notify a Clearing Member, in writing and as soon as
practicable, of each User that has identified it as a Designated Give
Up.\18\
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\17\ An ``Authorized User'' refers to a User that has written
authorization as described in proposed Rule 21.12(c)(2) to give up a
Restricted OCC Number. See proposed Exchange Rule 21.12(a).
\18\ Supra note 14.
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As amended, Rule 21.12(b)(2) would define the term Guarantor as a
Clearing Member that has issued a Letter of Guarantee for the executing
User, pursuant to the Rules of the Exchange \19\ that are in effect at
the time of the execution of the applicable trade.\20\ An executing
User may give up its Guarantor without such Guarantor being a
Designated Give Up. The Exchange's Rule 22.8 provides that a Letter of
Guarantee is required to be issued and filed by each Clearing Member
through which a User clears transactions. Accordingly, a Market-Maker
would only be enabled to give up a Guarantor that had executed a Letter
of Guarantee on its behalf pursuant to Rule 22.8. Thus, Market-Makers
would not identify any Designated Give Ups.
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\19\ See Exchange Rule 22.8 (Letters of Guarantee).
\20\ See proposed Exchange Rule 21.12(b)(2); see also Cboe
Options Rule 5.10(b)(2).
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Proposed Rule 21.12(c) would provide that Clearing Members may
request the Exchange restrict one or more of their OCC numbers (``Opt
In'') from being given up unless otherwise authorized.\21\ If a
Clearing Member Opts In, the Exchange will require written
authorization from the Clearing Member permitting a User to give up a
Clearing Member's Restricted OCC number.\22\ An Opt In would remain in
effect until the Clearing Member terminates the Opt In as described in
proposed subparagraph (c)(3).\23\ If a Clearing Member does not Opt In,
that Clearing Member's OCC number may be subject to being given up by
any User that has designated it as a Designated Give Up.\24\ Proposed
Rule 21.12(c)(1) will set forth the process by which a Clearing Member
may Opt In.\25\ Specifically, a Clearing Member may Opt In by sending a
completed ``Clearing Member Restriction Form'' listing all Restricted
OCC Numbers and Authorized Users.\26\ A copy of the proposed form is
included in Exhibit 3. A Clearing Member may elect to restrict one or
more OCC clearing numbers that are registered in its name at the
OCC.\27\ The Clearing Member would be required to submit the Clearing
Member Restriction Form to the Exchange's MSD as described on the form.
Once submitted, the Exchange requires ninety days before a Restricted
OCC Number is effective within the System.\28\ This time period is to
provide adequate time for the Users of that Restricted OCC Number who
are not initially specified by the Clearing Member as Authorized Users
to obtain the required written authorization from the Clearing Member
for that Restricted OCC Number. Such Users would still be able to give
up that Restricted OCC Number during this ninety day period (i.e.,
until the number becomes restricted within the System).
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\21\ See proposed Exchange Rule 21.12(c); see also Cboe Options
Rule 5.10(c).
\22\ Id.
\23\ Id.
\24\ Id.
\25\ See proposed Exchange Rule 21.12(c)(1); see also Cboe
Options Rule 5.10(c)(1).
\26\ This form will be available on the Exchange's website. The
Exchange will also maintain, on its website, a list of the
Restricted OCC Numbers, which will be updated on a regular basis,
and the Clearing Member's contact information to assist Users (to
the extent they are not already Authorized Users) with requesting
authorization for a Restricted OCC Number. The Exchange may utilize
additional means to inform its Members of such updates on a periodic
basis.
\27\ Supra note 29.
\28\ Supra note 29.
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Proposed Rule 21.12(c)(2) will set forth the process for Users to
give up a Clearing Member's Restricted OCC Number.\29\ Specifically, a
User desiring to give up a Restricted OCC Number must become an
Authorized User.\30\ The Clearing Member will be required to authorize
a User as described in subparagraph (1) or (3) of Rule 21.12(c) (i.e.,
through a Clearing Member Restriction Form), unless the Restricted OCC
Number is already subject to a Letter of Guarantee that the User is a
party to, as set forth in Rule 21.12(b)(6).\31\ Pursuant to proposed
Rule 21.12(c)(3), a Clearing Member may amend the list of its
Authorized Users or Restricted OCC Numbers by submitting a new Clearing
Member Restriction Form to the Exchange's MSD indicating the amendment
as described on the form.\32\ Once a Restricted OCC Number is effective
within the System pursuant to Rule 21.12(c)(1), the Exchange may permit
the Clearing Member to authorize, or remove authorization for, a User
to give up the Restricted OCC Number intra-day only in unusual
circumstances, and on the next business day in all regular
circumstances.\33\ The Exchange will promptly notify Users if they are
no longer authorized to give up a Clearing Member's Restricted OCC
Number.\34\ If a Clearing Member removes a Restricted OCC Number, any
User may give up that OCC clearing number once the removal has become
effective on or before the next business day, provided that Clearing
Member has been designated as a Designated Give Up.\35\
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\29\ See proposed Exchange Rule 21.12(c)(2); see also Cboe
Options Rule 5.10(c)(2).
\30\ Id.
\31\ Id.
\32\ See proposed Exchange Rule 21.12(c)(3) and (e); see also
Cboe Options Rule 5.10(c)(3) and (e).
\33\ Id.
\34\ Id.
\35\ Id.
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As noted above, amended Rule 21.12 would provide that a User may
only give up (A) a Clearing Member that has
[[Page 4009]]
previously been identified and processed by the Exchange as a
Designated Give Up for that User, provided that the Designated Give Up
has not Opted In, or provided that the User is an Authorized User of
that Designated Give Up, or (B) a Guarantor for that user.\36\ This
proposed requirement would be enforced by the Exchange's trading
systems.\37\ Specifically, the Exchange has configured its trading
systems to only accept orders from a User that identifies a Designated
Give Up or Guarantor for that User. For any Restricted OCC Number, the
Exchange's trading systems will only accept orders for that number from
an Authorized User that has also designated that Clearing Member as a
Designated Give Up. The System would reject any order entered by a User
not meeting the aforementioned criteria. The Exchange notes that it
would notify a User in writing when an identified Designated Give Up
becomes effective (i.e., when a Clearing Member has been identified by
the User as a Designated Give Up, has been enabled by the Exchange's
trading systems to be given up).\38\ A Guarantor for a User, by virtue
of having an effective Letter of Guarantee on file with the Exchange,
would be enabled to be given up for that User without any further
action by the User.\39\ The Exchange notes that this configuration
(i.e., the trading systems accepting only orders that identify a
Designated Give Up or a Guarantor) is intended to help reduce keypunch
errors (errors involving erroneous data entry), and prevent the User
from mistakenly giving up the name of a Clearing Member that it does
not have the ability to give up a trade. However, in light of Clearing
Members having the ability to restrict their OCC numbers from being
given up by unauthorized Users, the Exchange does not propose to adopt
a process for Clearing Members to ``reject'' trades.\40\
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\36\ See proposed Exchange Rule 21.12(b)(3); see also Cboe
Options Rule 5.10(b)(3).
\37\ See proposed Exchange Rule 21.12(d); see also Cboe Options
Rule 5.10(d).
\38\ See proposed Exchange Rule 21.12(e); see also Cboe Options
Rule 5.10(e).
\39\ See proposed Exchange Rule 21.12(b)(6); see also Cboe
Options Rule 5.10(b)(6).
\40\ See paragraph (f) of existing EDGX Options Rule 21.12 and
C2 Options Rule 6.30(f). The Exchange notes, that the EDGX Options
and C2 Options Proposed Give Up Rule seeks to eliminate existing
paragraph (f). Further, Cboe Options Rule 5.10 does not have a
process for Clearing Members to ``reject'' trades.
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The Exchange also proposes in Rule 21.12(f) three scenarios in
which a give up on a transaction may be changed without Exchange
involvement.\41\ First, if an executing User has the ability through an
Exchange system to do so, it could change the give up on a trade to
another Designated Give Up, provided it's an Authorized User for any
Restricted OCC Number, or its Guarantor.\42\ The Exchange notes that
Users often make these changes when, for example, there is a keypunch
error. The ability of the executing User to make any such change would
end at the ``Trade Date Cutoff Time''.\43\ Next, the modified rule
would provide that, if a Designated Give Up has the ability to do so,
it may change the give up on a transaction for which it was given up to
(A) another Clearing Member affiliated with the Designated Give Up or
(B) a Clearing Member for which the Designated Give Up is a back office
agent.\44\ The ability to make such a change would end at the Trade
Date Cutoff Time.\45\ The Exchange notes that often Clearing Members
themselves have the ability to change a give up on a trade for which it
was given up to another Clearing Member affiliate or Clearing Member
for which the Designated Give Up is a back office agent. Therefore,
Exchange involvement in these instances is not necessary. In addition,
the proposed rule provides that if both a Designated Give Up or
Guarantor and a Clearing Member have the ability through an Exchange
system to do so, the Designated Give Up or Guarantor and Clearing
Member may each enter trade records into the Exchange's systems on the
next trading day (``T+1'') that would effect a transfer of the trade in
a non-expired option series from that Designated Give Up (or Guarantor)
to that Clearing Member.\46\ The Designated Give Up or Guarantor could
not make any such change after the T+1 Cutoff Time.\47\ The Exchange
notes that a Designated Give Up or Guarantor must notify, in writing,
the Exchange and all the parties to the trade, of any such change made
pursuant to this provision.\48\ This notification alerts the parties
and the Exchange that a change to the give up has been made. Finally,
the Designated Give Up or Guarantor would be responsible for monitoring
the trade and ensuring that the other Clearing Member has entered its
side of the transaction timely and correctly. If either a Designated
Give Up (or Guarantor) or Clearing Member cannot themselves enter trade
records into the Exchange's systems to effect a transfer of the trade
from one to the other, the Designated Give Up (or Guarantor) may
request the ability from the Exchange to enter both sides of the
transaction in accordance with amended Rule 21.12(f)(3).
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\41\ See proposed Exchange Rule 21.12(f); see also Cboe Options
Rule 5.10(f).
\42\ See proposed Exchange Rule 21.12(f)(1); see also Cboe
Options Rule 5.10(f)(1).
\43\ The ``Trade Date Cutoff Time'' is established by the
Clearing Corporation (or 15 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). Id.
\44\ See proposed Exchange Rule 21.12(f)(2); see also Cboe
Options Rule 5.10(f)(2).
\45\ Id.
\46\ See proposed Exchange Rule 21.12(f)(3); see also Cboe
Options Rule 5.10(f)(3).
\47\ The ``T+1 Cutoff Time'' is 1:00 p.m. Eastern Time on T+1;
see proposed Exchange Rule 21.12(f)(3); see also Cboe Options Rule
5.10(f)(3) (which provides a cutoff time of 12:00 p.m. Central
Time).
\48\ Id.
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The Exchange proposes Rule 21.12(g) to state that a Clearing Member
would be financially responsible for all trades for which it is the
give up at the Applicable Cutoff Time (for purposes of the proposed
rule, the ``Applicable Cutoff Time'' shall refer to the T+1 Cutoff Time
for non-expiring option series and to the Trade Date Cutoff Time for
expiring option series).\49\ The Exchange notes, however, that nothing
in the proposed rule shall preclude a different party from being
responsible for the trade outside of the Rules of the Exchange pursuant
to OCC Rules, any agreement between the applicable parties, other
applicable rules and regulations, arbitration, court proceedings or
otherwise.\50\ Additionally, the proposed Rule does not preclude these
factors from being considered in a different forum (e.g., court or
arbitration), nor does it preclude any Clearing Member that violates
any provision of amended Rule 21.12 from being subject to disciplinary
actions in accordance with Exchange rules.
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\49\ See proposed Exchange Rule 21.12(g); see also Cboe Options
Rule 5.10(g).
\50\ See proposed Interpretation and Policy .01 to Exchange Rule
21.12 (``Nothing herein will be deemed to preclude the clearance of
Exchange transactions by a non-User pursuant to the By-Laws of the
Options Clearing Corporation so long as a Clearing Member who is a
User is also designated as having responsibility under these Rules
for the clearance of such transactions.''); see also Interpretation
and Policy .01 to Cboe Options Rule 5.10.
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The Exchange also proposes to adopt subparagraph (h) of Rule 21.12
to provide that an intentional misuse of this Rule is impermissible,
and may be treated as a violation of Rule 3.1, titled ``Business
Conduct of Members''.\51\ This language will make clear that the
Exchange will regulate an intentional
[[Page 4010]]
misuse of this Rule, and that such behavior would be a violation of
Exchange rules. The proposed language is similar to corresponding
provisions in other exchanges' give up rules.\52\
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\51\ See Cboe Options Rule 5.10(h), which states that
intentional misuse of Rule 5.10 may be treated as a violation of
Rule 8.1 (Just and Equitable Principles of Trade).
\52\ See e.g., Cboe Options Rule 5.10(h).
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Lastly, the Exchange proposes to amend its current Member
Notification of Designated Give ups Form (``Designated Give ups
Form''). As of October 7, 2019 the Cboe affiliated Options Exchanges
are on the same technology platform. To provide further harmonization
across the Cboe affiliated Options Exchanges and provide more seamless
administration of the Give Up rule, the Exchange proposes to adopt the
forms currently applicable to the Cboe Exchange, Inc., which will be
applicable to all Cboe affiliated Options Exchanges. The proposed
Designated Give Up forms are included in Exhibit 3.
Implementation Date
The Exchange proposes to announce the implementation date of the
proposed rule change in an Exchange Notice, to be published no later
than thirty (30) days following the operative date. The implementation
date will be no later than sixty (60) days following the operative
date.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\53\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \54\ requirements that the rules
of an 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
facilitation 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \55\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\53\ 15 U.S.C. 78f(b).
\54\ 15 U.S.C. 78f(b)(5).
\55\ Id.
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Detailing in the rules how Users would give up Clearing Members
provides transparency and operational certainty. The Exchange believes
additional transparency removes a potential impediment to, and would
contribute to perfecting, the mechanism of a free and open market and a
national market system, and, in general, would protect investors and
the public interest. Moreover, the Exchange notes that amended Rule
21.12 requires Users to adhere to a standardized process to ensure a
seamless administration of the Rule. For example, all notifications
relating to a change in give up must be made in writing. The Exchange
believes that these requirements will aid the Exchange's efforts to
monitor and regulate Users and Clearing Members as they relate to
amended Rule 21.12 and changes in give ups, thereby protecting
investors and the public interest.
Further, as discussed above, several clearing firms affiliated with
SIFMA have recently expressed concerns relating to the current give up
process, which permits Users to identify any Clearing Member as a
Designated Give Up for purposes of clearing particular transactions,
and have identified the current give up process (i.e., a process that
lacks authorization) as a significant source of risk for clearing
firms. The Exchange believes that the proposed changes to Rule 21.12
help alleviate this risk by enabling Clearing Members to `Opt In' to
restrict one or more of its OCC clearing numbers (i.e., Restricted OCC
Numbers), and to specify which Authorized Users may give up those
Restricted OCC Numbers. As described above, all other Users would be
required to receive written authorization from the Clearing Member
before they can give up that Clearing Member's Restricted OCC Number.
The Exchange believes that this authorization provides proper
safeguards and protections for Clearing Members as it provides controls
for Clearing Members to restrict access to their OCC clearing numbers,
allowing access only to those Authorized Users upon their request. The
Exchange also believes that its proposed Clearing Member Restriction
Form allows the Exchange to receive in a uniform fashion, written and
transparent authorization from Clearing Members, which ensures seamless
administration of the Rule.
The Exchange believes that the proposed Opt In process strikes the
right balance between the various views and interests across the
industry. For example, although the proposed rule would require Users
(other than Authorized Users) to seek authorization from Clearing
Members in order to have the ability to give them up, each User will
still have the ability to give up a Restricted OCC Number that is
subject to a Letter of Guarantee without obtaining any further
authorization if that User is party to that arrangement. The Exchange
also notes that to the extent the executing User has a clearing
arrangement with a Clearing Members (i.e., through a Letter of
Guarantee), a trade can be assigned to the executing User's Guarantor.
Accordingly, the Exchange believes that the proposed rule change is
reasonable and continues to provide certainty that a Clearing Members
would be responsible for a trade, which protects investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that the proposed rule change will impose an unnecessary burden on
intramarket competition because it would apply equally to all similarly
situated Members. The Exchange also notes that, should the proposed
changes make the Exchange more attractive for trading, market
participants trading on other exchanges can always elect to become
Members on the Exchange to take advantage of the trading opportunities.
Furthermore, the proposed rule change does not address any competitive
issues and ultimately, the target of the Exchange's proposal is to
provide transparency and operational certainty to the Exchange's give
up process, and also to reduce risk for Clearing Members. Clearing
firms make financial decisions based on risk and reward, and while it
is generally in their beneficial interest to clear transactions for
market participants in order to generate profit, it is the Exchange's
understanding from SIFMA and clearing firms that the current process
can create significant risk when the clearing firm can be given up on
any market participant's transaction, even where there is no prior
customer relationship or authorization for that designated transaction.
In the absence of a mechanism that governs a market participant's use
of a Clearing Member's services, the Exchange's proposal may indirectly
facilitate the ability of a Clearing Member to manage their existing
customer relationships while continuing to allow market participant
choice in broker execution services. While Clearing Members may compete
with executing brokers for order flow, the Exchange does not believe
this proposal imposes an undue burden on competition. Rather, the
Exchange believes that the proposed
[[Page 4011]]
rule change balances the need for Clearing Members to manage risks and
allows them to address outlier behavior from executing brokers while
still allowing freedom of choice to select an executing broker.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received written comments on the
proposed rule change.
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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \56\ and Rule 19b-4(f)(6) \57\
thereunder.
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\56\ 15 U.S.C. 78s(b)(3)(A).
\57\ 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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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of the filing. However,
Rule 19b-4(f)(6)(iii) \58\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing, the Exchange
requested that the Commission waive the 30-day operative delay. The
Exchange represented that the proposal establishes a rule regarding the
give up of a Clearing Member in order to help clearing firms manage
risk while continuing to allow market participants choice in broker
execution services. The Commission notes that it recently approved a
substantially similar proposed rule change from Phlx, after which other
options exchanges subsequently adopted subatantially similarly
rules.\59\ The Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest, because the Exchange's proposal raises no new issues.
Further, such waiver will permit the Exchange, without further delay,
to begin implementing the new standardized give up process, thus
aligning its give up process with that of the other option exchanges.
Accordingly, the Commission waives the 30-day operative delay and
designates the proposed rule change operative upon filing.\60\
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\58\ 17 CFR 240.19b-4(f)(6)(iii).
\59\ See Securities Exchange Act Release No. 85136 (February 14,
2019), 84 FR 5526 (February 21, 2019) (Phlx-2018-72) (order
approving a proposed rule change to establish rules governing give
ups). See also supra note 18 (citing the filings in which other
options exchanges adopted substantially similar rules).
\60\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
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 [email protected]. Please include
File Number SR-CboeBZX-2020-002 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-CboeBZX-2020-002. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2020-002 and should be submitted
on or before February 13, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
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\61\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01029 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P