[Federal Register Volume 80, Number 214 (Thursday, November 5, 2015)]
[Notices]
[Pages 68590-68595]
[FR Doc No: 2015-28147]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76322]

Order Exempting Certain Large Traders From the Self-
Identification Requirements of Rule 13h-1 Under the Securities Exchange
Act of 1934, and Exempting Certain Broker-Dealers From the
Recordkeeping, Reporting, and Monitoring Responsibilities Under the
Rule

October 30, 2015.
    On July 27, 2011, the Securities and Exchange Commission
(``Commission'') adopted Rule 13h-1 (the ``Rule'') under the Securities
Exchange Act of 1934 (``Exchange Act'') to assist the Commission in
both identifying and obtaining information on market participants that
conduct a substantial amount of trading activity, as measured by volume
or market value, in U.S. securities (such persons are referred to as
``large traders'').\1\ The Rule requires certain large traders to
identify themselves to the Commission by filing Form 13H and separately
requires certain broker-dealers to maintain records of large trader
transaction information and report such information to the Commission
upon request as well as monitor customer trading to help promote
compliance with the Rule by traders. Since December 1, 2011, persons
whose trading activity reached or exceeded the identifying activity
level specified in the Rule have been required to identify themselves
to the Commission by filing Form 13H through the Commission's EDGAR
system. The Commission implemented the broker-dealer recordkeeping,
reporting, and monitoring requirements of the Rule in phases through a
series of exemptive orders establishing certain delayed compliance
dates,\2\ and currently certain broker-dealers are required to keep
records of and report to the Commission upon request transaction data
for certain of their customers that are either a large trader or an
Unidentified Large Trader.\3\ Most recently, the Commission established
a compliance date of November 1, 2013 for Phase Two of the Rule, which,
among other things, implemented the recordkeeping and reporting
responsibilities for an additional category of traders and also
implemented the monitoring requirements under the Rule to require
certain broker-dealers to monitor their customers' trading activity in
order to promote awareness of and foster compliance with the self-
identification requirements of the Rule.\4\ At that time, the
Commission stated that the compliance date for Phase Three of the Rule
would be November 1, 2015.\5\
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    \1\ See Securities Exchange Act Release No. 64976 (July 27,
2011), 76 FR 46960 (Aug. 3, 2011) (``Adopting Release''). The
effective date of Rule 13h-1 was October 3, 2011.
    \2\ See Securities Exchange Act Release Nos. 70150 (August 8,
2013), 78 FR 49556 (August 14, 2013) (establishing Phase Two and
providing for Phase Three); 69281 (April 3, 2013), 78 FR 20960
(April 8, 2013) (extension of the compliance date); and 66839 (April
20, 2012), 77 FR 25007 (April 26, 2012) (establishing Phase One).
    \3\ Rule 13h-1(a)(9) defines ``Unidentified Large Trader'' as
``each person who has not complied with the identification
requirements of paragraphs (b)(1) and (b)(2) of this rule that a
registered broker-dealer knows or has reason to know is a large
trader.'' The Rule provides that, for purposes of determining
whether a registered broker-dealer has reason to know that a person
is a large trader, ``a registered broker-dealer need take into
account only transactions in NMS securities effected by or through
such broker-dealer.'' Rule 13h-1(a)(9).
    \4\ See Securities Exchange Act Release No. 70150, supra note 2
(establishing the November 1, 2013 compliance date for customer
monitoring responsibilities). See also note 27, infra, and
accompanying text.
    \5\ Phase Three includes all of the remaining requirements of
Rule 13h-1 that were not implemented in either Phase One or Phase
Two. In particular, Phase Three would require reporting of execution
time on trades for additional categories of persons beyond those
covered in Phases One and Two.
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    The Commission has received a request from the Financial
Information Forum (``FIF'') to exempt options traders from the
requirements of the Rule conditioned upon such traders not exceeding
the ``identifying activity level'' (i.e., the threshold at which a
person triggers the self-identification requirements of the Rule) as
calculated based on the gross premium of the options trades.\6\ FIF
asserts that such relief would appropriately limit the identification
requirements of the Rule by exempting from the Rule a class of persons
whose options trading is unlikely to have a market impact.\7\ In
addition, FIF requested that the Commission permanently exempt broker-
dealers from the recordkeeping and reporting requirements of Phase
Three of the Rule, or alternatively postpone the compliance date of the
Phase Three requirements until November 1, 2020.\8\ The Securities
Industry and Financial Markets Association (``SIFMA'') also has
requested that the Commission permanently exempt broker-dealers from
the recordkeeping and reporting

requirements of Phase Three of the Rule, or alternatively postpone the
compliance date of the Phase Three requirements until November 1,
2020.\9\
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    \6\ See Letter from Mary Lou VonKaenel, Managing Director, FIF,
to Stephen Luparello, Director of the Division of Trading and
Markets, Commission, dated March 27, 2015 (``FIF Letter''),
available at: http://www.sec.gov/comments/s7-10-10/s71010.shtml.
Currently, the fair market value of equity options is calculated
based on the value of the underlying securities. See Rule 13h-
1(c)(1)(i).
    \7\ See FIF Letter, supra note 6, at 2-3.
    \8\ See FIF Letter, supra note 6, at 3.
    \9\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA to Stephen Luparello, Director of
the Division of Trading and Markets, Commission, dated April 9, 2015
(``SIFMA Letter''), available at: http://www.sec.gov/comments/s7-10-10/s71010.shtml.
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    For the reasons explained below, the Commission believes that
providing exemptive relief for equity options traders and deferring
Phase Three are appropriate. Accordingly, the Commission is: (1)
Conditionally exempting equity options market participants from the
self-identification requirements of the Rule if they have not met or
exceeded the alternative threshold described below that is applicable
to equity options trading; \10\ and (2) temporarily exempting broker-
dealers until November 1, 2017 from the remaining recordkeeping and
reporting obligations of the Rule beyond those established in Phases
One and Two.\11\
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    \10\ As discussed below, with respect to any persons that
previously registered as a large trader on account of their equity
options transactions, this exemption relieves those persons from
continued compliance with the periodic filing obligations as long as
they do not otherwise meet or exceed the identifying activity level
in the future.
    \11\ Phases One and Two are discussed below. See infra text
accompanying notes 53 and 54.
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I. Background

A. Large Trader Status

    The Rule defines a large trader as a person who ``directly or
indirectly, including through other persons controlled by such person,
exercises investment discretion over one or more accounts and effects
transactions for the purchase or sale of any NMS security for or on
behalf of such accounts, by or through one or more registered broker-
dealers, in an aggregate amount equal to or greater than the
identifying activity level'' (emphasis added).\12\ The identifying
activity level contains daily and monthly share volume and fair market
value thresholds, namely: aggregate transactions in NMS securities that
are equal to or greater than (1) during a calendar day, either 2
million shares or shares with a fair market value of $20 million; or
(2) during a calendar month, either 20 million shares or shares with a
fair market value of $200 million.\13\
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    \12\ See Rule 13h-1(a)(1).
    \13\ See Rule 13h-1(a)(7).
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    In establishing the current identifying activity level for equity
derivative securities, the Commission stated that the Rule was intended
to focus on the potential impact of options transactions on the market
for the underlying security.\14\
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    \14\ See Adopting Release, supra note 1, 76 FR at 46967 (noting
that this focus reflected and was consistent with Section 13(h) of
the Exchange Act).
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    Specifically, for equity options,
     share volume is calculated by multiplying the number of
contracts by the option contract's specified multiplier; and
     fair market value is calculated using the value of the
securities underlying the option.\15\
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    \15\ Examples of how to calculate the identifying activity for
options transactions were provided in the Adopting Release, supra
note 1, 76 FR at 46967. In contrast, for index options, share volume
is not calculated because index options do not overlie shares and
fair market value is calculated by multiplying together the index
multiplier, the number of options, and the price per contract.
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    At the time the Commission adopted Rule 13h-1, the Commission
stated that this approach was consistent with Section 13(h)(1) of the
Exchange Act, which sought to promote the Commission's ability to
``monitor[ ] the impact on the securities markets of securities
transactions involving a substantial volume or a large fair market
value or exercise value . . .'' in that the methodology considers the
equivalent exercise value of the options on the date of purchase.\16\
This approach eliminates the need to track and separately consider
exercise and instead preemptively identifies traders whose options
trading may be of a sufficient magnitude to potentially affect the
underlying stock if the positions are exercised.
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    \16\ See Adopting Release, supra note 1, 76 FR at 46967, text
accompanying n.65.
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B. The Requirements of Rule 13h-1

1. Large Trader Self-Identification
    As noted above, the Rule requires large traders to self-identify to
the Commission on Form 13H and periodically update their Form 13H
submission,\17\ obtain a unique large trader identification number
(``LTID'') from the Commission,\18\ and provide this number to their
brokers and identify each account to which the LTID applies.\19\ These
large trader responsibilities are referred to collectively as the
``Self-Identification Requirements.''
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    \17\ See Rule 13h-1(b)(1)(i)-(iii). Form 13H and all updates to
it are filed electronically through the Commission's EDGAR system.
    \18\ When a large trader files its initial Form 13H filing
through EDGAR, the system sends an automatically generated
confirmation email acknowledging acceptance of the filing. That
email also contains the unique 8-digit LTID number assigned to the
large trader.
    \19\ See Rule 13h-1(b)(2). See also Large Trader Adopting
Release, supra note 1, 76 FR at 46971 (``the requirements that a
large trader provide its LTID to all registered broker-dealers who
effect transactions on its behalf, and identify each account to
which it applies, are ongoing responsibilities that must be
discharged promptly'').
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2. Broker-Dealers' Recordkeeping and Reporting Responsibilities
Regarding Unidentified Large Traders and the Customer Monitoring Safe
Harbor
    Under Rules 13h-1(d) and (e), registered broker-dealers are
responsible for, among other things, keeping records of and reporting
to the Commission upon request data for their customers that are large
traders or Unidentified Large Traders.\20\ Specifically, Rule 13h-1
requires that every registered broker-dealer maintain records of data
specified in paragraphs (d)(2) and (d)(3) of the Rule (``Transaction
Data''), including the applicable LTID(s) and execution time on each
component trade, for all transactions effected directly or indirectly
by or through: (1) An account such broker-dealer carries for a large
trader or an Unidentified Large Trader; or (2) if the broker-dealer is
a large trader, any proprietary or other account over which such
broker-dealer exercises investment discretion. Additionally, where a
non-broker-dealer carries an account for a large trader or an
Unidentified Large Trader under the Rule, the broker-dealer effecting
transactions directly or indirectly for such large trader or
Unidentified Large Trader must maintain records of all Transaction
Data.\21\ These recordkeeping obligations are referred to collectively
as the ``Recordkeeping Responsibilities.'' The Rule also requires that,
upon Commission request, every registered broker-dealer that is itself
a large trader or carries an account for a large trader or an
Unidentified Large Trader must electronically report Transaction Data
to the Commission through the Electronic Blue Sheets (``EBS'') system
for all transactions, equal to or greater than the reporting activity
level, effected directly or indirectly by or through accounts carried
by such broker-dealer for large traders or Unidentified Large
Traders.\22\ Additionally, where a non-broker-dealer carries an account
for a large trader or an Unidentified Large Trader, the broker-dealer
effecting such transactions directly or indirectly for a large trader
or Unidentified Large Trader must electronically report Transaction
Data to the Commission through the EBS system.\23\ The Rule requires
that reporting broker-dealers submit the requested Transaction Data no
later than the day and time specified in the

Commission's request.\24\ These reporting obligations are referred to
collectively as the ``Reporting Responsibilities.'' The Commission has
implemented the Recordkeeping and Reporting Responsibilities in phases,
as discussed in greater detail below.\25\
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    \20\ See note 3, supra.
    \21\ See Rule 13h-1(d)(1)(iii).
    \22\ See Rule 13h-1(e).
    \23\ See id.
    \24\ See id.
    \25\ See Section II.D, infra.
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    Rule 13h-1(f) provides a safe harbor that is designed to reduce
broker-dealers' recordkeeping and reporting burdens with respect to
Unidentified Large Traders by, among other things, providing relief for
when a broker-dealer shall be deemed to know or have reason to know
that a person is a large trader and thus subject to reporting
obligations related to Unidentified Large Traders under Rule 13h-1.
Under the safe harbor, a registered broker-dealer is deemed not to know
or have reason to know that a person is a large trader if it does not
have actual knowledge that a person is a large trader and it
establishes policies and procedures reasonably designed to identify
customers whose transactions at the broker-dealer equal or exceed the
identifying activity level and, if so, to treat such persons as
Unidentified Large Traders and notify them of their potential reporting
obligations under this Rule.\26\ Collectively, these broker-dealer
undertakings are referred to as the ``Customer Monitoring
Obligations.'' The Customer Monitoring Obligations are intended to
promote awareness of and foster compliance with the Rule among persons
who might not otherwise be aware of the large trader reporting
requirements.\27\
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    \26\ See Rule 13h-1(f).
    \27\ See Adopting Release, supra note 1, 76 FR at 46997.
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    As noted above, the Commission previously granted broker-dealers
temporary exemptions from the Customer Monitoring Obligations.\28\ As
of November 1, 2013, to avail themselves of the safe harbor, broker-
dealers with recordkeeping and reporting responsibilities were required
to implement the Customer Monitoring Obligations.
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    \28\ See Securities Exchange Act Release Nos. 66839 and 69281,
supra note 2.
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II. Exemptive Relief

    Pursuant to Section 13(h)(6) of the Exchange Act and Rule 13h-1(g)
thereunder,\29\ the Commission, by order, may exempt from the
provisions of Rule 13h-1, upon specified terms and conditions or for
stated periods, any person or class of persons or any transaction or
class of transactions from the provisions of Rule 13h-1 to the extent
that such exemption is consistent with the purposes of the Exchange
Act.
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    \29\ See 15 U.S.C. 78m and 17 CFR 240.13h-1(g), respectively.
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    FIF requests that the Commission grant exemptive relief for options
traders that would be conditioned upon such traders' activity not
exceeding the Rule's identifying activity threshold based on the gross
premiums paid for the options as opposed to the value of the underlying
stock at the time of the trade.\30\ FIF notes that some of its members,
particularly brokers with retail customers, have identified through
their Customer Monitoring Obligations a number of retail customers that
met or exceeded the threshold based primarily on such customers' equity
options trading, particularly in deep out-of-the-money options on high
priced underlying stocks.\31\ According to FIF, customers that meet the
``underlying value'' threshold rarely exercise their options, and many
of them would be unable to do so based on their account balances.\32\
FIF argues that exemptive relief for all options traders conditioned
upon a premium-based threshold calculation would appropriately focus
the Rule on traders who are more significant participants in the U.S.
securities markets and who are more likely to trade options at levels
and in a manner that could have a market impact.\33\
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    \30\ FIF requests that the alternative ``options premium''
threshold be consistent with Rule 13h-1(a)(7), which establishes the
daily and monthly market value thresholds of the identifying
activity level as $20 million and $200 million, respectively. See
FIF Letter, supra note 6, at 2.
    \31\ See FIF Letter, supra note 6, at 1.
    \32\ See FIF Letter, supra note 6, at 2.
    \33\ See FIF Letter, supra note 6, at 2-3.
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    In addition, both FIF and SIMFA request that the Commission
permanently exempt broker-dealers from the additional recordkeeping and
reporting requirements of Phase Three of the Rule, which have not yet
been implemented.\34\ In the alternative, FIF requests an extension of
Phase Three by an additional five years \35\ and SIFMA requests an
extension to the earlier of full implementation of a Consolidated Audit
Trail (``CAT'') or November 1, 2020.\36\ Both FIF and SIFMA stated that
their request would allow firms to focus their resources on
implementing a CAT.\37\
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    \34\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra
note 9, at 2-3.
    \35\ See FIF Letter, supra note 6, at 3.
    \36\ See SIFMA Letter, supra note 9, at 2. See also Rule 613;
Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR
45722 (Aug. 1, 2012).
    \37\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra
note 9, at 2.
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A. Exemption From the Self-Identification Requirements for Equity
Options Traders

    As discussed above, the current identifying activity level
methodology for equity options was designed to focus on the potential
impact of options transactions on the market for the underlying
securities. Based on its experience and the experience of its member
firms, however, FIF suggests that the current methodology designates as
large traders some persons who rarely exercise their options and whose
aggregate equity options transactions, considering the actual premium
paid for the options, are not of a large enough fair market value to
have an impact either on the options market or the underlying equities
markets.
    In particular, FIF notes that this issue appears to be especially
pronounced for market participants, particularly individual non-
professional investors, who transact in deep out-of-the money options
on high-priced securities.\38\ While such transactions may have large
exercise values, the premium paid for the options may be modest due to
the deep-out-of-the-money nature of the contract, and, importantly,
exercise among these traders is very infrequent, according to FIF.
FIF's members reported that, among their customers that became large
traders as a result of options transactions, such customers very rarely
exercised their options,\39\ and FIF asserts that many may have lacked
the resources to do so.\40\ In other words, the current methodology for
calculating the fair market value of equity options has resulted in the
self-identification as large traders of a number of investors who trade
equity options, yet such investors' activity is

unlikely to have a material impact either on the options market or the
underlying equities markets for the purposes of Rule 13h-1.
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    \38\ See FIF Letter, supra note 6, at 1.
    \39\ FIF reports that it surveyed its members and found that
customers that became large traders as a result of options
transactions (``Equity Options LT Customers'') exercised their
options less than 2% of the time on average. See FIF Letter, supra
note 6, at 2.
    \40\ FIF states that, ``[g]iven the account size associated with
this class of investor it is unlikely that they would have the
ability to exercise these out of the money options.'' See id. To
support this conclusion, FIF provides anecdotal data: A firm with
approximately 2,000 Equity Options LT Customers reported that the
average account value was $835,000. Another FIF member firm reported
that: The average account size for 90% of its Equity Options LT
Customers was less than $555,000; the average value across all
Equity Options LT Customer accounts was $2.5 million; and excluding
the top 50% of its Equity Options LT Customer accounts, the average
account size was under $56,000. See id. FIF suggests that without
sufficient assets or collateral, such customers would not be able to
outright purchase or otherwise finance their acquisition of the
underlying securities in an amount that equals or exceeds the $20
million threshold.
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    In order to alleviate the burdens on these persons without
undermining the purposes of Section 13(h), the Commission hereby is
providing a conditional exemption from the Self-Identification
Requirements for persons that trade equity options if: (1) The
aggregate value of their equity option transactions based on premium
paid,\41\ combined with the aggregate value of their transactions in
all other NMS securities (if any), does not reach or exceed the current
fair market value thresholds of the identifying activity level; and (2)
they also do not reach or exceed the share volume thresholds of the
identifying activity level.\42\ Accordingly, this exemptive relief
makes the calculation of fair market value for equity options
consistent with how index options are valued under the identifying
activity level.\43\
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    \41\ To calculate premium paid for an options trade, multiply
together the number of options contracts involved, the premium paid,
and the applicable multiplier. For an example, see infra Section
II.A.3.
    \42\ Neither FIF nor SIFMA have requested exemptive relief for
persons who become large traders as a result of reaching the
identifying activity level share volume thresholds applicable to
equity options, and the Commission is not herein granting such
relief.
    \43\ See Rule 13h-1(c)(1)(ii) (concerning the fair market value
of index options). See also Adopting Release, supra note 1, 76 FR at
46967 (noting, in footnote 64 and the accompanying text, how to
determine the fair market value of index (and equity) options).
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    This relief utilizes the existing fair market value thresholds of
the identifying activity level and references premium paid instead of
the price of the underlying at the time of the trade.\44\ The
Commission is persuaded that valuing equity options using premium paid
and applying the existing fair market value thresholds appropriately
focuses the Rule on persons whose transactions are more likely to have
a market impact and therefore warrant triggering the Self-
Identification Requirements. In particular, as FIF has stated, the
current methodology impacts a number of equity options traders, many of
whom reach the threshold by purchasing options that are deep out of the
money and who do not otherwise trade in an amount required to reach the
identifying activity level. When these options expire out of the money
and are not exercised, the position does not result in any trading in
the underlying securities, and thus valuing such options with reference
to the price of the underlying security is unlikely to be a useful
method to identify traders with the potential to have a market impact
on the underlying equities.\45\ Using premium paid to value equity
options instead will focus the identification requirement on options
traders who trade options in larger amounts that thus may be more
likely to have a market impact regardless of whether the positions are
ultimately exercised. In addition, employing the existing fair market
value thresholds to the new premium-based methodology for equity
options allows all trading in NMS securities to be easily aggregated
for purposes of determining large trader status.\46\ For these reasons,
the Commission believes that calculating the fair market value for
equity options by referencing the premium paid for the options is a
better overall indicator, for purposes of Rule 13h-1, of potential
market impact and provides appropriate relief to equity options
traders. Accordingly, the Commission finds the exemptive relief to be
consistent with the purposes of the Exchange Act.
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    \44\ See Rule 13h-1(c)(1)(i) (concerning the fair market value
of equity securities underlying transactions in stock options).
    \45\ Only purchases and sales of equity options and not
transactions in the underlying securities pursuant to exercises or
assignments count toward the identifying activity level. See Rule
13h-1(a)(6). Purchases and sales pursuant to exercises or
assignments were expressly excluded from the identifying activity
level calculation to avoid double-counting. See Adopting Release,
supra note 1, 76 FR at 46967. The Commission notes that traders may
trigger the Self-Identification Requirements when they trade out of
the position they obtained by exercising their options.
    \46\ Further, as noted above, for purposes of the identifying
activity level under Rule 13h-1(c) (i) and (ii), fair market value
of equity options is calculated differently than that for index
options; the fair market value of equity options is calculated based
on the value of the underlying security, while the fair market value
of index options is calculated based on the premium paid for the
contract. As a result, it is easier to reach the identifying
activity level by transacting in options on an exchange-traded fund
overlying a securities index than it is to transact in index options
on the same securities index. This relief harmonizes the fair market
value calculations for equity options overlying index-tracking
securities (such as index-based exchange traded funds) with the
calculations for index options, thereby eliminating the Self-
Identification Requirements as a consideration for investors
choosing between options products with comparable exposures.
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    Applying the Threshold Permitted by this Conditional Exemption.
Equity Option Transactions Example. For example, during a calendar day,
a person purchases 200 call options on ABC stock, each with a 100
multiplier, for a premium of $15 per share, where the underlying stock
is trading at $1,000 at the time of the transaction. This transaction
reaches the identifying activity level under the current calculation
methodology,\47\ pursuant to which the options are valued as follows:
200 contracts x 100 shares per contract x $1,000 (the market price of
the underlying stock at the time of the trade) = $20 million.
Therefore, this transaction would cause the person to qualify as a
large trader. However, under this exemptive relief, the fair market
value of the options trade would be calculated as follows: 200
contracts x 100 shares per contract x $15 premium price = $300,000. In
this case, the transaction price of $300,000 is less than the
identifying activity level of $20 million. Further, the daily share
volume would be calculated as follows: 200 contracts x 100 shares of
the underlying per contract = 20,000 shares, which also is less than
the identifying activity level of 2 million shares. Therefore, the
person would qualify for this exemption from the Self-Identification
Requirements and would not be required to register as a large trader on
the basis of this particular options trade alone.
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    \47\ The daily market value threshold of the identifying
activity level is $20 million.
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    ``Mixed'' Transactions Example. By way of another example, consider
a person that, during a calendar day, (1) purchases: (a) 100 call
options, each with a 100 multiplier, for a premium of $15 per share,
where the underlying stock is trading at $1,000 at the time of the
transaction; and (b) 100 contracts of puts on an index, where each
option uses a $100 multiplier, for $50 per unit; and (2) sells 100,000
shares of an exchange-traded fund (``ETF'') for $100 per share. Under
the current method, the fair market value of each transaction would be
calculated as follows:

 100 call option contracts x 100 (contract multiplier) x $1,000
(price of the underlying stock) = $10 million
 100 index puts x $100 (contract multiplier) x $50 (price per
unit) = $500,000
 100,000 ETF shares x $100 (price per share) = $10 million

    Collectively, for purposes of the identifying activity level, the
transactions would be valued at $20,500,000 ($10 million + $500,000 +
$10 million), which is greater than the daily value threshold ($20
million). Accordingly, the person would be required to self-identify to
the Commission as a large trader.
    To determine whether the large trader qualifies for this exemptive
relief, the equity options would be valued as follows:

 100 call option contracts x 100 (contract multiplier) x $15
(premium price) = $150,000
 100 index puts x $100 (contract multiplier) x $50 (price per
unit) = $500,000

 100,000 ETF shares x $100 (price per share) = $10 million

    The person qualifies for exemption from the Self-Identification
Requirements (i.e., does not have to identify as a large trader based
on this day's transactions alone) because: (1) The daily share volume
threshold of the identifying activity level (2 million shares) is not
reached; \48\ and (2) the value of the equity options under the
alternative methodology ($150,000), when combined with the fair market
value of the index option and ETF transactions ($500,000 and $10
million, respectively), is less than the daily identifying activity
level threshold ($20 million).\49\
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    \48\ The share volume calculation of the three transactions is
as follows: (100 call option contracts x 100 contract multiplier) +
0 (index options have no underlying shares) + 100,000 ETF shares =
110,000 shares.
    \49\ $150,000 + $500,000 + $10 million = $10,650,000, which is
less than the daily market threshold of the identifying activity
level ($20 million).
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B. Broker-Dealers May Update Their Monitoring Safe Harbor Policies and
Procedures To Use the New Methodology

    Paragraph (f) of Rule 13h-1 provides a safe harbor to reduce
broker-dealers' burdens in connection with monitoring their customers'
trading for purposes of identifying possible large traders. To take
advantage of the safe harbor, broker-dealers must have policies and
procedures reasonably designed to identify persons who have reached or
exceeded the identifying activity level \50\ but not identified
themselves to the broker-dealer as a large trader, treat such persons
as Unidentified Large Traders, and inform such persons of the
obligations under Rule 13h-1. A broker-dealer that updates its policies
and procedures to reflect the terms of the exemptive relief described
above will be able to avail itself of the monitoring safe harbor.
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    \50\ See Rule 13h-1(f)(1).
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C. Relief for Equity Options Large Traders Who Already Self-Identified

    For any person that previously reached the identifying activity
level as a result of the fair market value of their equity options
transactions and previously self-identified to the Commission as a
large trader, but who otherwise does not presently meet the identifying
activity level as calculated under the exemptive relief provided
herein, the Commission finds that it is consistent with the purposes of
the Exchange Act to allow such person to file for inactive status
without waiting the required full calendar year provided in paragraph
(b)(3)(iii) of Rule 13h-1.
    To take advantage of this relief, a large trader must file for
inactive status by submitting Form 13H electronically through
EDGAR.\51\ After filing for inactive status, the large trader is
relieved from the Self-Identification Requirements, and thereafter is
not required to file any further amendments or annual updates to Form
13H through EDGAR, unless and until the large trader subsequently
effects transactions that reach or exceed the identifying activity
level, accounting for the relief granted herein for calculating equity
options activity. If a large trader that has filed for inactive status
later reaches or exceeds the identifying activity level, using premium
paid to calculate the fair market value of subsequent equity options
transactions, then the large trader must promptly file Form 13H with
the Commission for reactivated status and promptly thereafter notify
its broker-dealers of its reactivated status and update them regarding
the applicability of the large trader's LTID and the accounts to which
it applies.
---------------------------------------------------------------------------

    \51\ The specific form type in EDGAR to file for inactive status
is Form 13H-I. After filing for inactive status, the large trader
also may inform the broker-dealers through which it transacts of its
inactive status. Broker-dealers are not required to keep records of
transactions by inactive large trader customers after receiving
notice of inactive status from such trader with respect to
transactions effected subsequent to such notification. See Adopting
Release, supra note 1, 76 FR at 46976.
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D. Temporary Exemption From Phase Three of the Recordkeeping and
Reporting Responsibilities

    As noted above, the Commission has implemented the Recordkeeping
and Reporting Responsibilities applicable to clearing brokers for large
traders in phases. In Phase One, which began on November 30, 2012, the
Commission required clearing brokers for large traders (including the
large trader itself if it is a self-clearing broker-dealer) to keep
records and report Transaction Data for large traders' transactions
that were either (1) proprietary trades by a U.S. registered broker-
dealer; or (2) effected through a ``sponsored access'' arrangement;
\52\ otherwise, broker-dealers were temporarily exempted from the
Recordkeeping and Reporting Responsibilities.\53\ In Phase Two, which
began on November 1, 2013, the Commission again temporarily exempted
broker-dealers, until November 1, 2015, from the Recordkeeping and
Reporting Responsibilities, except for: (1) The clearing broker-dealer
for a large trader, with respect to (a) proprietary transactions by a
large trader broker-dealer; (b) transactions effected pursuant to a
``sponsored access'' arrangement; and (c) transactions effected
pursuant to a ``direct market access'' arrangement; and (2) a broker-
dealer that carries an account for a large trader, with respect to
transactions other than those set forth above, and for Transaction Data
other than the execution time.\54\ The Commission also established
Phase Three, which requires full compliance with the Recordkeeping and
Reporting Responsibilities for all applicable broker-dealers starting
November 1, 2015.\55\
---------------------------------------------------------------------------

    \52\ See Securities Exchange Act Release No. 66839, supra note
2, 77 FR at 25008-9. A sponsored access arrangement is one where a
broker-dealer permits a customer to enter orders into a trading
center without using the broker-dealer's trading system (i.e., using
the customer's own technology or that of a third party provider). At
the time, FIF indicated that broker-dealer compliance would be
easier for sponsored access customers because those arrangements
typically are distinct from all other business lines of the broker-
dealer, with infrastructure that processes this order flow that is
separate from the platforms that handle other client and proprietary
flows. See id., 77 FR at 25008, n.16.
    \53\ See id., 77 FR at 25010.
    \54\ See Securities Exchange Act Release No. 70150, supra note
2, 78 FR at 49558-9.
    \55\ See id., 78 FR at 49560.
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    When the Commission adopted the Rule, it characterized the large
trader reporting requirements as ``relatively modest steps'' to
``address the Commission's near-term need for access to more
information about large traders and their trading activities. . . .''
\56\ After the Commission adopted the Rule, industry commenters began
to identify specific implementation challenges and offered more
detailed estimates of the cost of full compliance with the
Recordkeeping and Reporting Responsibilities. Such concerns led the
Commission to implement the Recordkeeping and Reporting
Responsibilities in phases.\57\
---------------------------------------------------------------------------

    \56\ See Adopting Release, supra note 1, 76 FR at 46963.
    \57\ See note 2, supra.
---------------------------------------------------------------------------

    Additionally, since adopting the Rule, the Commission adopted Rule
613, which directed the self-regulatory organizations (``SROs'') to
jointly submit a plan to create a comprehensive CAT that would allow
regulators to efficiently and accurately track all activity throughout
the U.S. markets in National Market System (NMS) securities.\58\ When
the Commission adopted that rule, it stated that, while certain aspects
of Rule 13h-1 are not addressed by Rule 613, Rule 613 may

supersede certain of the broker-dealer Recordkeeping and Reporting
Responsibilities of Rule 13h-1.\59\ Specifically, the Commission
stated: ``[t]o the extent that . . . data reported to the central
repository under Rule 613 obviates the need for the EBS system, the
Commission expects that the separate [trade] reporting requirements of
Rule 13h-1 related to the EBS system would be eliminated.'' \60\
---------------------------------------------------------------------------

    \58\ Among other things, Rule 613 requires the self-regulatory
organizations to jointly submit an NMS plan to create, implement and
maintain a consolidated audit trail, and specifies the type of data
to be collected and reported to a central repository.
    \59\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722, 45734 (August 1, 2012).
    \60\ Id., text accompanying n.95.
---------------------------------------------------------------------------

    The SROs submitted the initial CAT NMS plan to the Commission on
September 30, 2014, and filed an amended plan on February 27, 2015.\61\
As of the date of this Order, an NMS plan for a CAT has not yet been
published for notice and comment. Accordingly, the Commission continues
to rely on, among other things, information available through the
Recordkeeping and Reporting Responsibilities as implemented through
Phases One and Two. In light of the fact that there is no approved CAT
NMS plan, the Commission is hesitant at this time to require broker-
dealers to incur the costs associated with the remaining Phase Three
Large Trader data while the timing of a CAT remains unclear.
---------------------------------------------------------------------------

    \61\ Pursuant to Rule 613, the SROs were required to file the
CAT NMS Plan on or before April 28, 2013. At the SROs' request, the
Commission granted exemptions to extend the deadline for filing the
CAT NMS Plan to December 6, 2013, and then to September 30, 2014.
See Securities Exchange Act Release Nos. 69060 (Mar. 7, 2013), 78 FR
15771 (Mar. 12, 2013) and 71018 (Dec. 6, 2013), 78 FR 75669 (Dec.
12, 2013).
---------------------------------------------------------------------------

    However, the Commission finds that it is consistent with the
purposes of the Exchange Act to delay Phase Three, temporarily
exempting broker-dealers until November 1, 2017 from the Recordkeeping
and Reporting Responsibilities, except for: (1) The clearing broker-
dealer for a large trader, with respect to (a) proprietary transactions
by a large trader broker-dealer; (b) transactions effected pursuant to
a ``sponsored access'' arrangement; and (c) transactions effected
pursuant to a ``direct market access'' arrangement; and (2) a broker-
dealer that carries an account for a large trader, with respect to
transactions other than those set forth above, and for Transaction Data
other than the execution time. While FIF and SIFMA have requested a
permanent exemption, or alternatively an additional 5-year deferment of
the compliance date for Phase Three,\62\ the Commission believes at
this time that a 2-year extension of the Phase Three compliance date
provides sufficient time for the Commission to consider whether to
revisit compliance with all of the Recordkeeping and Reporting
Responsibilities. Specifically, two years will give the Commission
enough time to evaluate future developments, including any investment
in or progress on a CAT.\63\
---------------------------------------------------------------------------

    \62\ See FIF Letter, supra note 6, at 3 and SIFMA Letter, supra
note 9, at 2-3.
    \63\ See note 60, supra, and accompanying text.
---------------------------------------------------------------------------

III. Conclusion

    It is hereby ordered, pursuant to Section 13(h)(6) of the Exchange
Act and Rule 13h-1(g) thereunder, that:
    (1) Persons transacting in equity options are exempt from the Self-
Identification Requirements if: (1) The aggregate value of their equity
option transactions, calculated based on premium paid, combined with
the aggregate value of their transactions in all other NMS securities
(if any), does not reach or exceed the fair market value thresholds of
the identifying activity level; and (2) they also do not reach or
exceed the share volume thresholds of the identifying activity level.
    (2) A large trader whose transactions in NMS securities since
October 3, 2011 reached the identifying activity level one or more
times because of the fair market value of its equity options
transactions and who would have qualified in each instance for relief
under this exemption is exempt from its responsibilities under Rule
13h-1(b)(1)(ii), 13h-1(b)(1)(iii), and 13h-1(b)(2), if such trader
files for inactive status by submitting Form 13H and does not
subsequently effect transactions that reach or exceed the identifying
activity threshold using premium paid to calculate the fair market
value of equity options transactions.
    (3) Broker-dealers are exempted temporarily until November 1, 2017
from the recordkeeping and reporting requirements of Rule 13h-1(d) and
(e), except for (1) clearing broker-dealers for large traders with
respect to (a) proprietary transactions by a large trader broker-
dealer, (b) transactions effected pursuant to a ``sponsored access''
arrangement, and (c) transactions effected pursuant to a ``direct
market access'' arrangement; and, for other types of transactions, (2)
broker-dealers that carry an account for a large trader for Transaction
Data other than the execution time.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-28147 Filed 11-4-15; 8:45 am]
 BILLING CODE 8011-01-P


Email from Charles Moulis 2/ 10/ 2004 04: 57 PM To:" Kokrda, Kevin" < kkokrda@ emamail. org>

cc: Cleophas Jackson/ AA/ USEPA/ US@ EPA Subject: Nonroad Reg Text Attached is draft reg language for two minor compliance issues. This language r epresents current staff level thinking on determining engine power and aftertrea tment shipment. L. Engine Power Ratings Currently, rated power and power rating are undefined, and we are concer ned that this makes the applicability of the standards too subjective and confus ing. One manufacturer may choose to define rated power as the maximum measured power output, while another may define it as the maximum measured power at a spe cific engine speed. Using this second approach, an engine's rated power may be somewhat less than the true maximum power output of the engine. Given the impor tance of engine power in defining which standards an engine must meet and when, we believe that it is critical that a singular power value be determined objecti vely according to a specific regulatory definition.

To address this, we proposed to add a definition of " maximum engine powe r" to the regulations. This term was to be used instead of previously undefined terms such as " rated power" or " power rating" to specify the applicability of t he standards. The addition of this definition was intended to allow for more ob jective applicability of the standards. More specifically, we proposed that:

Maximum engine power means the measured maximum brake power output of an engine. The maximum engine power of an engine configuration is the average max imum engine power of the engines within the configuration. The maximum engine p ower of an engine family is the highest maximum engine power of the engines with in the family.

During the comment period, manufacturers correctly pointed out that they cannot know the average actual power of production engines when they certify an engine family, because certification typically occurs before production begins. Therefore the definition of " maximum engine power" being finalized today relie s primarily upon the manufacturer's design specifications and the maximum torque curve that the manufacturer expects to represent the actual production engines. This provision is specified in a new section 1039.140. Under this approach th e manufacturer would take the torque curve that is projected for an engine confi guration, based on the manufacturer's design and production specifications, and convert it into a " nominal power curve" that would relate the maximum power that would be expected to engine speed when a production engine is mapped according our specified mapping procedures. The maximum engine power is being defined as the maximum power point on that nominal power curve.

Manufacturers will be required to report the maximum engine power of eac h configuration in their applications for certification. As with other engine p arameters, manufacturers will be required to ensure that the engines that they p roduce under the certificate have maximum engine power consistent with those des cribed in their applications. However, since we recognize that variability is a normal part of engine production, we will not require that all production engin es have exactly the power specified in the application. Instead, we will only r equire that the power specified in the application be within the normal range of powers of the production engines. Typically, we would expect the specified pow er to be within one standard deviation of the mean power of the production engin es. If a manufacturer determines that the specified power is outside of the nor mal range, we may require the manufacturer to amend the application for certific ation. In deciding whether to require such amendment, we would consider the deg ree to which the specified power differed from the production engines, the norma l power variability for those engines, whether the engine used or generated emis sion credits, and whether the error affected which standards applied to the engi ne.

The preceding discussion presumes that each manufacturer will develop it s production processes to produce the engines described in the application. If a manufacturer were to intentionally produce engines different than those descri bed in the application, we would consider the application to be fraudulent, and could void the certificate ab initio for those engines. For example, for engine s that use emission credits, this could occur if a manufacturer deliberately bi ased its production variability so that the engines have higher average power th an described in the application. If we voided the certificate for those engines the manufacturer would be subject to large fines for each engine. 1039.140 What is the maximum engine power of my engine?

( a) The maximum engine power of an engine configuration is the maximum power po int on the nominal power curve for the engine configuration as defined in this s ection. ( b) The nominal power curve of an engine configuration is the relationship betw een maximum available engine power and engine speed for an engine, using the e ngine mapping procedures of 40 CFR part 1065, based on the manufacturer's design and production specifications for the engine. This information may also be exp ressed by a torque curve that relates maximum available engine torque with engin e speed. ( c) The nominal power curve must be within the range of the actual power curve s of production engines considering normal production variability. If after pro duction begins it is determined that your nominal power curve is not representat ive of productions engines, you may be required to amend your application for ce rtification under § 1039.225. 1068.260 What are the provisions for temporarily exempting engines for delegated final assembly?

( a) Shipping an engine without an aftertreatment component that you have specifi ed as part of its certified configuration will not be a violation of the prohibi tions in § 1068.101( a)( 1), if you do all the following: ( 1) Apply for and receive a certificate of conformity for the engine and its emission control system before shipment. ( 2) Provide installation instructions in enough detail to ensure that th e engine will be in its certified configuration if someone follows these instruc tions. ( 3) Have a contractual agreement with another person obligating that per son to complete the final assembly of the engine so it is in its certified confi guration when installed in the equipment. ( 4) Include the cost of all aftertreatment components in the cost of the engine. ( 5) Ship the aftertreatment components directly to the person completing the final assembly, or arrange for separate shipment by the component manufactu rer directly to the person completing the final assembly. ( 6) Take appropriate additional steps to ensure that all engines will be in their certified configuration before final installation. At a minimum, this must include an annual audit of each assembling company's facilities, procedure s, and production records to monitor their compliance with your instructions. F or example, this would involve investigation of some assembled engines and confi rmation that the number of catalysts shipped were sufficient for the number of e ngines produced. ( 7) Describe in your application for certification how you plan to use t he provisions of this section and what steps you will take under paragraph ( a)( 6 ) of this section. ( 8) Keep records to document how many engines you produce under this exe mption. Also, keep records to document your contractual agreements under paragr aph ( a)( 3) of this section. Keep all these records for five years after the end of the model year and make them available to us upon request. ( 9) Apply a temporary label that identifies the engine as incomplete. A pply the label in a way that makes it unlikely that the engine will be installed in equipment other than in its certified configuration. ( b) This exemption covers only uninstalled engines; it does not cover equipment or engines that have been installed in equipment. If the engine does not confor m with its certified configuration after installation in the equipment because o ne or more aftertreatment components were not properly installed, this exemption is void for that engine. ( c) We may suspend, revoke, or void an exemption under this section, as follows: ( 1) We may suspend or revoke your exemption for the entire engine famil y if we determine that any of the engines are not in their certified configurati on after installation in the equipment, or if you fail to comply with the requir ements of this section. If we suspend or revoke the exemption for any of your e ngine families under this paragraph ( c), this exemption will not apply for futur e certificates unless you demonstrate that the factors causing the nonconformity do not apply to the other engine families. We may suspend or revoke the exempt ion for a single facility where final assembly occurs. ( 2) We may void your exemption for the entire engine family if you inte ntionally submit false or incomplete information or fail to keep and provide to EPA the records required by this section. ( d) You are liable for the in use compliance of any engine that is exempt under this section. It is also a violation of § 1068.101( b)( 1) for any person to complet e assembly of the exempted engine without complying fully with the installation instructions.