[Federal Register: December 16, 2009 (Volume 74, Number 240)]
[Notices]
[Page 66699-66710]
[DOCID:fr16de09-106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61152; File No. 10-191]

In the Matter of the Application of C2 Options Exchange,
Incorporated for Registration as a National Securities Exchange
Findings, Opinion, and Order of the Commission

December 10, 2009.

I. Introduction

    On January 21, 2009, the Chicago Board Options Exchange,
Incorporated (``CBOE'') submitted to the Securities and Exchange
Commission (``Commission'') an Application for Registration as a
National Securities Exchange (``Form 1'') seeking registration under
Section 6 of the Securities Exchange Act of 1934 \1\ (the ``Act'') of a
second national securities exchange, referred to as C2 Options
Exchange, Incorporated (``C2'' or the ``Exchange''). Notice of the
application was published for comment in the Federal Register on March
3, 2009.\2\ The Commission received one comment letter regarding the C2
Form 1.\3\ On December 8, 2009, C2 filed Amendment No. 1 to its Form
1.\4\
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    \1\ 15 U.S.C. 78f.
    \2\ See Securities Exchange Act Release No. 59441 (February 24,
2009), 74 FR 9322 (``Notice'').
    \3\ See E-mails from Bryan Rule, dated July 8, 2009 and November
9, 2009. While the July correspondence does not contain any
substantive comments on the Form 1 application, the November
correspondence asks the Commission not to approve C2's application
for registration until CBOE ``adequately disciplines its members for
their large number of SEC Firm Quote violations * * *.'' Mr. Rule
asserted that ``the new C2 Rules seek to diminish the public's
priority in option trading.'' As discussed further below, the
Commission believes that C2's proposed rules, including provisions
relating to order execution and priority, are consistent with the
Act. In addition, as a self-regulatory organization, C2--as well as
CBOE--is required to comply with the provisions of the Act and the
rules and regulations thereunder and enforce compliance with such
provisions by its members. See 15 U.S.C. 78s(g).
    \4\ In Amendment No. 1, CBOE modified its application by:
Revising Exhibits C and D to reflect the removal of entities that do
not qualify as affiliates and to provide more current financial
information; revising its proposed Bylaws to clarify an
inconsistency in Section 3.1; revising Exhibit J to reflect current
information; and revising and clarifying the operation of certain
proposed rules. The changes proposed in Amendment No. 1 either are
not material or are otherwise responsive to the concerns of the
Commission.
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II. Statutory Standards

    Under Sections 6(b) and 19(a) of the Act,\5\ the Commission shall
by order grant an application for registration as a national securities
exchange if it finds that the proposed exchange is so organized and has
the capacity to carry out the purposes of the Act and can comply, and
can enforce compliance by its members and persons associated with its
members, with the provisions of the Act, the rules and regulations
thereunder, and the rules of the exchange.
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    \5\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that
C2's application for exchange registration meets the requirements of
the Act and the rules and regulations thereunder. Further, the
Commission finds that the proposed rules of C2 are consistent with
Section 6 of the Act in that, among other things, they are designed to:
(1) Assure fair representation of the Exchange's members in the
selection of its directors and administration of its affairs and
provide that, among other things, one or more directors shall be
representative of investors and not be associated with the exchange, or
with a broker or dealer;\6\ (2) prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system;\7\ (3) not permit unfair discrimination between customers,
issuers, or dealers;\8\ and (4) protect investors and the public
interest.\9\ Finally, the Commission finds that the proposed rules of
C2 do not impose any burden on competition not necessary or appropriate
in furtherance of the purposes of the Act.\10\
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    \6\ See 15 U.S.C. 78f(b)(3).
    \7\ See 15 U.S.C. 78f(b)(5).
    \8\ See id.
    \9\ See id.
    \10\ See 15 U.S.C. 78f(b)(8).
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    Overall, the Commission believes that approving C2's application
for exchange registration could confer important benefits on the public
and market participants. In particular, C2 will provide market
participants with an additional venue for executing orders in
standardized options and should increase competition between the
options exchanges. Consequently, investors should benefit as markets
compete on service, price, and execution.

III. Discussion and Commission Findings

A. Background

    CBOE, a national securities exchange registered under Section 6 of
the Act, has proposed the formation of C2 as a stand-alone options
exchange that will operate under a separate exchange license and have
separate access rules, separate governance, and a separate fee schedule
from that of CBOE. Unlike CBOE, which uses a hybrid model market
structure, C2 will be an all-electronic marketplace and will not
maintain a physical options trading floor. CBOE filed its C2 proposal
during a time of increasing consolidation among U.S. registered
exchanges in which exchange holding companies have sought to control
multiple, separate exchange licenses in order to offer multiple and
varied trading venues to appeal to a broad array of market
participants.\11\ The primary features of the C2 proposal, discussed in
more detail in C2's Form 1, are discussed below.
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    \11\ See, e.g., Securities Exchange Act Release Nos. 58179 (July
17, 2008), 73 FR 42874 (July 23, 2008) (File No. SR-Phlx-2008-31)
(approval order concerning changes to the governing documents of the
Philadelphia Stock Exchange, Inc. in connection with its acquisition
by The NASDAQ OMX Group, Inc.); and 58673 (September 29, 2008), 73
FR 57707 (October 3, 2008) (File Nos. SR-Amex-2008-62 and SR-NYSE-
2008-60) (approval order concerning the acquisition of the American
Stock Exchange LLC by NYSE Euronext).
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B. Corporate Structure of C2

1. Ownership
    C2 will be a wholly-owned subsidiary of its parent company, CBOE.
The C2 governing documents explicitly state that CBOE owns 100% of the
common stock of C2 and that any sale, transfer, or assignment by CBOE
of its ownership stake in C2 will not be permitted without Commission
approval pursuant to the rule filing procedures under Section 19 of the
Act.\12\ CBOE, itself a self-regulatory organization (``SRO''), will
therefore own C2, which will be a separate SRO.\13\
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    \12\ See Article Fourth of the Certificate of Incorporation of
C2 (``C2 Certificate of Incorporation''). See also 15 U.S.C. 78s.
    \13\ The acquisition of the American Stock Exchange LLC
(``Amex'') by the National Association of Securities Dealers, Inc.
(``NASD'') in 1998 involved a similar corporate structure. See
Securities Exchange Act Release No. 40622 (October 30, 1998), 63 FR
59819 (November 5, 1998) (File Nos. SR-Amex-98-32; SR-NASD-98-56;
and SR-NASD-98-67) (approval order).
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    While recent consolidation among U.S. exchanges has involved
ownership of multiple exchanges under a single holding company
structure, that structure is unavailable to CBOE, which presently is
structured as a mutually-held member-owned organization. CBOE has,
however, proposed to demutualize, though its C2 proposal

precedes its efforts to effectuate its planned demutualization.\14\
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    \14\ CBOE's planned demutualization has been noticed for comment
but has not yet received member approval. See Securities Exchange
Act Release No. 58425 (August 26, 2008), 73 FR 51652 (September 4,
2008) (File No. SR-CBOE-2008-88) (``CBOE Demutualization Notice'').
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    The Commission notes that, while C2 will be responsible for
complying with the legal obligations that govern an exchange, CBOE, in
its capacity as the parent company with a controlling interest in C2,
also will be responsible for ensuring that C2 meets its obligations as
an SRO. In this respect, CBOE has adopted a rule to reflect and codify
CBOE's ultimate responsibility to ensure that C2 meets its statutory
obligations as an SRO.\15\ Among other things, CBOE's policy with
respect to C2 represents that CBOE will ensure that necessary and
appropriate resources are available to C2 so that it can meet the
evolving demands of operating a regulatory and supervisory compliance
program. Further, in discharging this responsibility, CBOE's policy
states it will exercise its powers and its managerial influence to
ensure that C2 fulfills its self-regulatory obligations by directing C2
to take action necessary to effectuate its purposes and functions as a
national securities exchange operating pursuant to the Act, and
ensuring that C2 has and appropriately allocates such financial,
technological, technical, and personnel resources as may be necessary
or appropriate to meet its obligations under the Act. Finally, CBOE has
committed to refrain from taking any action with respect to C2 that, to
the best of its knowledge, would impede, delay, obstruct, or conflict
with efforts by C2 to carry out its SRO obligations under the Act, and
the rules and regulations thereunder. The Commission believes that
CBOE's policy statement specifies the role and responsibility of CBOE
in the operation of C2.
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    \15\ See Securities Exchange Act Release Nos. 61140 (December
10, 2009) (File No. SR-CBOE-2009-048) (approval order); and 60307
(July 15, 2009), 74 FR 36289 (July 22, 2009) (File No. SR-CBOE-2009-
048) (notice of filing). The policy adopted by CBOE is consistent
with the resolution of similar questions in the context of the NASD-
Amex combination referenced above. See Securities Exchange Act
Release Nos. 40622 (October 30, 1998), 63 FR 59819 (November 5,
1998) (File Nos. SR-Amex-98-32; SR-NASD-98-56; and SR-NASD-98-67)
(approval order); and 40443 (September 16, 1998), 63 FR 51108
(September 24, 1998) (File No. SR-NASD-98-67) (notice of filing of
NASD's policy with respect to its authority over the Amex).
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    The Commission believes that the proposed corporate structure of C2
is consistent with the Act and that C2 will be so organized and have
the capacity to be able to carry out the purposes of the Act and to
comply and enforce compliance by its members and persons associated
with its members with all applicable rules and regulations. C2's
proposed ownership by CBOE, coupled with the explicit restriction on
any indirect or direct transfer of such control by CBOE, should
minimize the potential that any person could interfere with or restrict
the ability of C2, CBOE, or the Commission to effectively carry out
their respective regulatory oversight responsibilities. Further, the
Commission notes that CBOE has undertaken to ensure and maintain the
regulatory independence of C2 to enable C2 to operate in a manner that
complies with the Federal securities laws, including the objectives of
Sections 6(b) and 19(g) of the Act.\16\
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    \16\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g), respectively.
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2. Governance
    As part of its Form 1 application, C2 submitted a proposed
Certificate of Incorporation and Bylaws. In these documents, among
other things, C2 establishes the composition of the Exchange's board of
directors and the Exchange's governance committees.\17\
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    \17\ The governance structure of C2 is based primarily upon the
governance structure that CBOE has proposed in connection with its
demutualization. See CBOE Demutualization Notice, supra note 14, at
73 FR 51654.
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a. The C2 Board of Directors
    C2's Board of Directors (``Board'') will be the governing body of
C2 and will possess all of the powers necessary for the management of
the business and affairs of the Exchange and the execution of its
responsibilities as an SRO, including regulating the business conduct
of Trading Permit Holders (``TPHs''), imposing fees, and adopting and
amending rules.\18\ C2 has proposed the following Board composition
requirements, which are comparable to those the Commission has approved
for other SROs:\19\
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    \18\ See C2 Bylaws Article III, Section 3.3.
    \19\ See, e.g., Section 9 of the Limited Liability Company
Agreement of The NASDAQ Stock Market LLC (``Nasdaq'') and Article
III of Nasdaq's By-Laws.
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     The Board will be composed of between 11 and 23 directors
(the exact number to be fixed from time to time by the Board);\20\
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    \20\ See C2 Bylaws Article III, Section 3.1.
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     One director position will be held by the Chief Executive
Officer of C2 (``CEO'');
     The number of Non-Industry Directors \21\ will equal or
exceed the sum of the number of Industry Directors \22\ (excluding the
CEO from the calculation of Industry Directors for such purpose);
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    \21\ ``Non-Industry Director'' is defined as a person who is not
an ``Industry Director.'' See id.
    \22\ C2's Bylaws define ``Industry Director'' as a director
that: (i) Is a holder of a Trading Permit or otherwise subject to
regulation by the Exchange; (ii) is a broker-dealer or an officer,
director or employee of a broker-dealer or has been in any such
capacity within the prior three years; (iii) is, or was within the
prior three years, associated with an entity that is affiliated with
a broker-dealer whose revenues account for a material portion of the
consolidated revenues of the entities with which the broker-dealer
is affiliated; (iv) has a material ownership interest in a broker-
dealer and has investments in broker-dealers that account for a
material portion of the director's net worth; (v) has a consulting
or employment relationship with or has provided professional
services to the Exchange or any of its affiliates or has had such a
relationship or has provided such services within the prior three
years; or (vi) provides, or has provided within the prior three
years, professional or consulting services to a broker-dealer, or to
an entity with a 50% or greater ownership interest in a broker-
dealer whose revenues account for a material portion of the
consolidated revenues of the entities with which the broker-dealer
is affiliated, and the revenue from all such professional or
consulting services accounts for a material portion of either the
revenues received by the director or the revenues received by the
director's firm or partnership. See id.
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     At all times, at least one Non-Industry Director will
qualify as a Non-Industry Director other than by operation of the
limited exceptions provided for ``outside directors'' under the
definition of ``Industry Director'' and will have no material business
relationship with a broker or dealer, an entity that is affiliated with
a broker-dealer, or the Exchange or any of its affiliates;\23\
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    \23\ C2's Bylaws provide a limited exception such that a
director would not be deemed to be an ``Industry Director'' solely
because either (A) the person is or was within the prior three years
an outside director of a broker-dealer or an outside director of an
entity that is affiliated with a broker-dealer, provided that the
broker-dealer is not a holder of a Trading Permit or otherwise
subject to regulation by the Exchange, or (B) the person is or was
within the prior three years associated with an entity that is
affiliated with a broker-dealer whose revenues do not account for a
material portion of the consolidated revenues of the entities with
which the broker-dealer is affiliated, provided that the broker-
dealer is not a holder of a Trading Permit or otherwise subject to
regulation by the Exchange. At all times, however, at least one Non-
Industry Director must qualify as a Non-Industry Director exclusive
of the exceptions provided for in the immediately preceding sentence
and shall have no material business relationship with a broker or
dealer or the Exchange or any of its affiliates. C2's Bylaws specify
that the term ``outside director'' means a director of an entity who
is not an employee or officer (or any person occupying a similar
status or performing similar functions) of such entity. See id.
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     The number of Industry Directors will equal or exceed 30%
of the Board;\24\ and
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    \24\ See id.
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     At least 20% of the directors on the Board will be
nominated (or otherwise selected by a petition of C2 members) by the
Industry-Director Subcommittee of

the Nominating and Governance Committee (such directors are referred to
collectively as the ``Representative Directors'').\25\
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    \25\ Only persons who are nominated by the Nominating and
Governance Committee as Representative Directors will be eligible
for election as Representative Directors and the Nominating and
Governance Committee is bound to accept and nominate the
Representative Director nominees recommended by the Industry-
Director Subcommittee, provided that the Representative Director
nominees are not opposed by a petition candidate. If such
Representative Director nominees are opposed by a petition candidate
then the Nominating and Governance Committee is bound to accept and
nominate the Representative Director nominees who receive the most
votes pursuant to a run-off election. See C2 Bylaws Article III,
Section 3.2.
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    The initial Board will be divided into two classes. The initial
term of the Class I and II directors will end with the annual
stockholders meeting to be held by the Exchange in 2009 and 2010,
respectively. Thereafter, directors will serve two-year terms ending on
the second annual meeting following the meeting at which such directors
were elected. Class I directors will initially consist of the Chief
Executive Officer, five Non-Industry Directors, and five Industry
Directors (two of whom will be Representative Directors). Class II
directors will initially consist of seven Non-Industry Directors and
five Industry Directors (three of whom will be Representative
Directors).\26\ All directors will continue in office until their
successors are elected or appointed and qualified, except in the event
of their earlier death, resignation, or removal.\27\
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    \26\ See C2 Bylaws Article III, Section 3.1. and Amendment No.
1.
    \27\ See C2 Bylaws Article III, Section 3.1.
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    In addition, within 45 days from the date on which trading
commences on C2, the Industry-Director Subcommittee will issue a
circular to TPHs identifying a slate of Representative Director
nominees.\28\ TPHs will thereafter be able to file petitions for the
nomination of alternate Representative Directors. In the event of a
contested election, a run-off election will be held prior to the
initial Board election. The Commission notes that because CBOE intends
to seed the initial C2 Board with members of CBOE's current board of
directors, the Representative Directors on C2's initial Board will have
been subject to CBOE member input. As C2's initial permit holders will
likely consist substantially of CBOE members,\29\ the Commission
believes C2's initial Board will provide member representation
sufficient to allow the Exchange to commence operations. However, to
assure a fair representation of C2 members in the selection of C2's
directors and administration of its affairs, C2 has committed to
provide C2 members with the prompt opportunity to participate in the
selection of Representative Directors, thereby satisfying the
compositional requirements for the Board contained in the C2
Bylaws.\30\
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    \28\ See C2 Bylaws Article III, Section 3.2.
    \29\ See infra Section III.C.1.a (TPH Access).
    \30\ See C2 Bylaws Article III, Section 3.2.
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    The Nominating and Governance Committee will nominate individuals
for election as directors of the Board subsequent to the initial Board
election process set forth above.\31\ The Board will appoint the
initial Nominating and Governance Committee and thereafter the
Nominating and Governance Committee members will recommend their
successors for approval by the Board.
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    \31\ See C2 Bylaws Article III, Section 4.5. The Nominating and
Governance Committee will be comprised of at least seven directors
and will at all times have a majority of directors that are Non-
Industry Directors. See id.
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    The Industry-Director Subcommittee \32\ of the Nominating and
Governance Committee will recommend candidates to the Nominating and
Governance Committee for each new or vacant Representative Director
position on the Board.\33\ Alternate candidates for Representative
Director positions may be nominated by TPHs pursuant to a petition
process.\34\ If no candidates are nominated pursuant to a petition
process, then the Nominating and Governance Committee is bound to
accept and nominate the Representative Director nominees recommended by
the Industry-Director Subcommittee. If a petition process produces
additional candidates, then the candidates nominated pursuant to a
petition process, together with those nominated by the Industry-
Director Subcommittee, will be presented to TPHs in a contested
election to determine the final slate of nominees for Representative
Director.\35\ Candidates who receive the most votes will be nominated
as Representative Directors by the Nominating and Governance
Committee.\36\ CBOE, as the sole shareholder of C2, has committed to
elect the candidates nominated by the Nominating and Governance
Committee as Representative Directors.\37\
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    \32\ The Industry-Director Subcommittee will consist of all of
the Industry Directors then serving on the Nominating and Governance
Committee. See C2 Bylaws Article III, Section 3.2.
    \33\ The Industry-Director Subcommittee will provide a mechanism
for TPHs to provide input to the Industry-Director Subcommittee with
respect to open Representative Director positions. Once selected,
the Industry-Director Subcommittee will issue a circular to TPHs
identifying the Representative Director nominees selected by the
committee. See C2 Bylaws Article III, Section 3.2.
    \34\ See C2 Bylaws Article III, Section 3.2. TPHs may nominate
alternative candidates for election to the Representative Director
positions to be elected in a given year by submitting a petition
signed by individuals representing not less than 10% of the total
outstanding Trading Permits at that time. See id.
    \35\ See C2 Bylaws Article III, Section 3.2. Each TPH will have
one vote with respect to each Trading Permit held for each
Representative Director position to be filled that year; provided,
however, that no holder of Trading Permits, either alone or together
with its affiliates, may account for more than 20% of the votes cast
for a candidate, and any votes cast by a holder of Trading Permits,
either alone or together with its affiliates, in excess of this 20%
limitation will be disregarded. See id.
    \36\ See id.
    \37\ CBOE, as sole shareholder of C2, has entered into a voting
agreement with C2 with respect to the election by CBOE of the
Representative Directors whereby CBOE has agreed to vote in favor of
those individuals nominated by C2's Nominating and Governance
Committee for election as Representative Directors of C2.
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    The Commission believes that the requirement in the C2 Bylaws that
20% of directors be Representative Directors, together with the process
by which such directors are to be nominated and elected, provides for
the fair representation of members in the selection of directors and
the administration of C2 in a manner consistent with the requirement in
Section 6(b)(3) of the Act.\38\ As the Commission has previously noted
in the context of other exchange governance proposals, this requirement
helps to ensure that an exchange's members have a voice in the
governing body of the exchange and the corresponding exercise by the
exchange of its self-regulatory authority, and that the exchange is
administered in a way that is equitable to all who trade on its market
or through its facilities.\39\
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    \38\ 15 U.S.C. 78f(b)(3).
    \39\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No.
10-131) (``Nasdaq Exchange Registration Order''); 53382 (February
27, 2006), 71 FR 11251, 11259 (March 6, 2006) (File No. SR-NYSE-
2005-77) (``NYSE/Archipelago Merger Approval Order''); and 58375
(August 18, 2008), 73 FR 49498, 49501 (August 21, 2008) (File No.
10-182) (``BATS Exchange Registration Order'').
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    In addition, the requirement that the number of Non-Industry
Directors equal or exceed the number of Industry Directors on the Board
is designed to assure the inclusion of a significant non-industry
presence in the governance of the Exchange, which the Commission
believes is a critical element in an exchange's ability to protect the
public interest.\40\ Further, the Commission notes that at all times at
least one Non-Industry Director will qualify as not an ``Industry
Director'' without using the limited exceptions provided for ``outside
directors'' under the definition of ``Industry Director'' and will have
no

material business relationship with a broker or dealer, an entity that
is affiliated with a broker-dealer, or the Exchange or any of its
affiliates.\41\ In other words, at least one of C2's directors will not
have any association with C2, a member of C2, or a broker or dealer,
consistent with Section 6(b)(3) of the Act.\42\
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    \40\ See, e.g., Nasdaq Exchange Registration Order, supra note
39, at 71 FR 3553.
    \41\ See C2 Bylaws Article III, Section 3.1.
    \42\ 15 U.S.C. 78f(b)(3).
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    The Commission believes that non-industry directors help ensure
that no single group of market participants has the ability to unfairly
disadvantage other market participants through the exchange governance
process. Non-industry directors can provide unique and unbiased
perspectives, which should enhance the ability of the Board to address
issues in a non-discriminatory fashion and consequently support the
integrity of C2's governance.\43\ Accordingly, the Commission finds
that C2's proposed Board satisfies the requirements in Section 6(b)(3)
of the Act,\44\ which requires that one or more directors be
representative of issuers and investors and not be associated with a
member of the exchange, or with a broker or dealer.
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    \43\ See, e.g., Nasdaq Exchange Registration Order, supra note
39, at 71 FR 3553; and NYSE/Archipelago Merger Approval Order, supra
note 39, at 71 FR 11261.
    \44\ 15 U.S.C. 78f(b)(3).
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b. C2 Exchange Committees
    C2 has proposed to establish the following standing committees of
the Board: Executive Committee; \45\ Audit Committee; \46\ Compensation
Committee; \47\ Regulatory Oversight Committee; \48\ and Nominating and
Governance Committee.\49\ The Board will appoint the initial members of
the Nominating and Governance Committee, and thereafter the Nominating
and Governance Committee will promptly act to recommend candidates for
the other committees of the Board. Members of the standing committees
will not be subject to removal except by the Board.\50\ The Commission
believes that C2's proposed committees, which are similar to the
committees maintained by other exchanges,\51\ are designed to enable C2
to carry out its responsibilities under the Act and are consistent with
the Act.
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    \45\ See C2 Bylaws, Article IV, Section 4.2. The Executive
Committee will include the Chairman of the Board, the Chief
Executive Officer (if a director), the Vice Chairman of the Board,
the Lead Director, if any, at least one Representative Director and
such other number of directors that the Board deems appropriate,
provided that in no event will the number of Non-Industry Directors
constitute less than the number of Industry Directors serving on the
Executive Committee (excluding the Chief Executive Officer from the
calculation of Industry Directors for such purpose). Members of the
Executive Committee (other than those specified in the immediately
preceding sentence) will be recommended by the Nominating and
Governance Committee for approval by the Board.
    \46\ See C2 Bylaws, Article IV, Section 4.3. The Audit Committee
will consist of at least three directors, all of whom will be Non-
Industry Directors and all of whom will be recommended by the
Nominating and Governance Committee for approval by the Board. The
exact number of Audit Committee members will be determined from time
to time by the Board. The Chairman of the Audit Committee will be
recommended by the Nominating and Governance Committee for approval
by the Board.
    \47\ See C2 Bylaws, Article IV, Section 4.4. The Compensation
Committee will consist of at least three directors, all of whom will
be Non-Industry Directors and all of whom will be recommended by the
Nominating and Governance Committee for approval by the Board. The
exact number of Compensation Committee members will be determined
from time to time by the Board. The Chairman of the Compensation
Committee will be recommended by the Nominating and Governance
Committee for approval by the Board.
    \48\ See C2 Bylaws, Article IV, Section 4.6. The Regulatory
Oversight Committee will consist of at least four directors, all of
whom will be Non-Industry Directors and all of whom will be
recommended by the Non-Industry Directors on the Nominating and
Governance Committee for approval by the Board. The exact number of
Regulatory Oversight Committee members will be determined from time
to time by the Board. The Chairman of the Regulatory Oversight
Committee will be recommended by the Non-Industry Directors of the
Nominating and Governance Committee for approval by the Board.
    \49\ See C2 Bylaws, Article IV, Section 4.5. The Nominating and
Governance Committee will consist of at least seven directors,
including both Industry Directors and Non-Industry Directors, and
will at all times have a majority of directors that are Non-Industry
Directors. All members of the committee, except for the initial
members of the committee (appointed to the committee in accordance
with Section 4.1 of the Bylaws), will be recommended by the
Nominating and Governance Committee for approval by the Board. The
exact number of Nominating and Governance Committee members will be
determined from time to time by the Board. The Chairman of the
Nominating and Governance Committee will be recommended by the
Nominating and Governance Committee for approval by the Board.
Subject to Section 3.2 and Section 3.5 of the Bylaws, the Nominating
and Governance Committee will have the authority to nominate
individuals for election as directors of the Corporation.
    \50\ See, e.g., C2 Bylaws, Article IV, Section 4.5.
    \51\ See BATS Exchange Registration Order, supra note 39, at 73
FR 49501; and Nasdaq Exchange Registration Order, supra note 39, at
71 FR 3554.
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C. Regulation of C2

    As a prerequisite for the Commission's approval of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\52\ Specifically, an
exchange must be able to enforce compliance by its members, and persons
associated with its members, with the Federal securities laws and the
rules of the exchange.\53\
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    \52\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \53\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
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    C2 has not proposed to be a party to any regulatory services
agreements or bilateral plans for the allocation of regulatory
responsibilities pursuant to Rule 17d-2 of the Act, though it will
become a party to the existing multiparty options 17d-2 plans
concerning sales practice regulation and market surveillance.\54\
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    \54\ See Securities Exchange Act Release Nos. 57987 (June 18,
2008), 73 FR 36156 (June 25, 2008) (File No. S7-966) (notice of
filing and order approving and declaring effective an amendment to
the multiparty 17d-2 plan concerning options-related sales practice
matters); and 58765 (October 9, 2008), 73 FR 62344 (October 20,
2008) (File No. 4-551) (notice of filing and order approving and
declaring effective an amendment to the multiparty 17d-2 plan
concerning options-related market surveillance). See also infra
Section III.C.3 (Multiparty 17d-2 Agreements); and 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    C2 proposes to use ``dual hat'' employees to staff its regulatory
program. In other words, current CBOE employees will also serve in a
similar capacity for C2. Similar to other exchanges, C2 has proposed a
requirement that confidential information (e.g., disciplinary matters,
trading data, trading practices, and audit information) pertaining to
the self-regulatory function of C2 will be retained in confidence by C2
and its officers, directors, employees, and agents.\55\
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    \55\ See Article Eleventh of the C2 Certificate of
Incorporation. See also, e.g., Article VII of the Second Amended and
Restated Operating Agreement of the New York Stock Exchange LLC
(containing a similar provision).
---------------------------------------------------------------------------

    As discussed further below, the Commission believes that C2's
application for registration describes a market structure that is
designed to provide for sufficient regulatory oversight of C2 members
and the operation of C2 as an SRO, as required by the Act. The
Commission notes that C2 will have the statutory authority and
responsibility to, among other things, discipline its members, amend
its Bylaws and rules, list and delist securities, and grant or deny
membership in C2. Further, the Commission believes that the use of
``dual hat'' employees by C2 is appropriate, as the operations, rules,
and management of CBOE and C2 will overlap to a considerable degree
such that C2 should benefit by leveraging the experience of current
CBOE staff. However, the Commission expects both CBOE and C2 to monitor
the workload of their dual hat employees and supplement their staffs if
necessary so that C2 maintains sufficient personnel to allow it to
carry out the purposes of the Act and enforce compliance with the rules
of C2 and the Federal securities laws.

1. Membership and Access
a. TPH Access
    Membership on C2 will be available to any registered broker or
dealer that meets the standards for membership set forth in Chapter 3
of C2's proposed rules.\56\ Members will access C2 through trading
permits, which will not convey any ownership interest in the Exchange
but will confer the ability to transact on the Exchange. There is no
limit on the number of permits that C2 is authorized to issue.\57\
Permits will not be transferable except in the event of a change in
control of a TPH, subject to meeting certain criteria.\58\ There will
be two types of TPHs: (1) Market makers with certain affirmative and
negative obligations and (2) regular TPHs.\59\
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    \56\ See C2 Rule 3.1(b). If a TPH intends to transact business
with the public, it will be required to obtain approval pursuant to
C2 Rule 9.1 or must have been previously approved to transact
business with the public by another national securities exchange.
See id.
    \57\ While C2 does not anticipate reaching any capacity limits,
it has proposed a rule that will allow C2, in the event of a
capacity restriction, to limit access to new market makers pursuant
to a filing with the Commission. See C2 Rule 8.1(c). This proposed
rule is similar to a rule of Nasdaq. See Nasdaq Rule Chapter VII,
Section 2(c).
    \58\ See C2 Rule 3.1(d).
    \59\ See C2 Rules 3.1 and 8.1. See also Exhibit E to C2's Form 1
(describing the operation of the proposed Exchange).
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    Each CBOE member in good standing will be eligible to obtain one
trading permit on C2 regardless of the number of seats owned by that
CBOE member.\60\ CBOE member applicants will not be required to submit
a full application for membership on C2, but rather will only need to
complete selected forms concerning their election to trade on C2,
consent to C2's jurisdiction, and other operational matters.\61\ This
waive-in process is similar to arrangements in place at other SROs.\62\
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    \60\ See C2 Rule 3.1(c)(1).
    \61\ See id.
    \62\ See, e.g., Nasdaq Rule 1013(a)(5)(C) (containing a similar
expedited waive-in membership process for members of the Financial
Industry Regulatory Authority, Inc. (``FINRA'')).
---------------------------------------------------------------------------

    Non-CBOE members could apply for a C2 trading permit by submitting
a full application to the Exchange in a manner similar to the current
process for firms applying to membership on CBOE.\63\ C2 will
establish, and will distribute via regulatory circular, procedures that
outline submission deadlines and payment of any applicable application
fees.\64\ Pursuant to C2's rules, every applicant must have and
maintain membership in another options exchange that is registered
under the Act and that is not registered solely under Section 6(g) of
the Act.\65\
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    \63\ See C2 Rule 3.1(c)(2).
    \64\ See id. The Commission notes that C2 will be required to
file any such proposed fees pursuant to Section 19(b) of the Act and
Rule 19b-4 thereunder, 15 U.S.C. 78s(b) and 17 CFR 240.19b-4,
respectively.
    \65\ See C2 Rule 3.1(c)(2)(G).
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    The Exchange will receive and review all trading permit
applications, and will provide to the applicant written notice of the
Exchange's determination, specifying in the case of disapproval of an
application the grounds thereof.\66\ The Exchange also will register
and qualify associated persons of permit holders.\67\ Once an applicant
becomes a TPH or a person associated with a TPH, it must continue to
satisfy all of the qualifications set forth in the C2 rules.\68\ When
the Exchange has reason to believe that a member or associated person
or a member fails to meet such qualifications, the Exchange may suspend
or revoke such person's membership or association.\69\ Appeals from any
denial, suspension, or conditional approval will be heard pursuant to
the appeals process specified in Chapter 19.\70\
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    \66\ See C2 Rule 3.1(c)(2)(E) and (F). The Exchange also could
condition an applicant's approval for the reasons specified in C2
Rule 3.2.
    \67\ See C2 Rules 3.3 and 3.4. See also Amendment No. 1.
    \68\ See C2 Rule 3.2(c)(1).
    \69\ See, e.g., C2 Rule 3.2 (Denial of and Conditions to Being a
Permit Holder or an Associated Person); 3.4 (Qualification and
Registration); and 3.5 (Permit Holders and Persons Associated with a
Permit Holder Who Are or Become Subject to a Statutory
Disqualification). See also Amendment No. 1.
    \70\ See infra note 117 (regarding Chapter 19). C2's Chapter 19
rules (Hearings and Review) incorporate by reference CBOE's Chapter
19 rules and C2 participants will be required to comply with CBOE
Chapter 19 rules, as such rules may be in effect from time to time,
as if such rules were part of the C2 rules.
---------------------------------------------------------------------------

    The Commission finds that C2's membership rules are consistent with
Section 6 of the Act,\71\ including Section 6(b)(2) of the Act \72\ in
particular, which requires that a national securities exchange have
rules that provide that any registered broker or dealer or natural
person associated with such broker or dealer may become a member and
any person may become associated with an exchange member. The
Commission notes that pursuant to Section 6(c) of the Act,\73\ an
exchange must deny membership to any person, other than a natural
person, that is not a registered broker or dealer, any natural person
that is not, or is not associated with, a registered broker or dealer,
and registered broker-dealers that do not satisfy certain standards,
such as financial responsibility or operational capacity. As a
registered exchange, C2 must independently determine if an applicant
satisfies the standards set forth in the Act, regardless of whether an
applicant is a member of another SRO (e.g., CBOE).\74\
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    \71\ 15 U.S.C. 78f.
    \72\ 15 U.S.C. 78f(b)(2).
    \73\ 15 U.S.C. 78f(c).
    \74\ See, e.g., BATS Exchange Registration Order, supra note 39,
at 73 FR 49502; and Nasdaq Exchange Registration Order, supra note
39, at 71 FR 3555.
---------------------------------------------------------------------------

b. Non-TPH Access
    C2 proposes to permit access to non-TPH ``Sponsored Users'' whose
access is authorized in advance by a TPH (``Sponsoring
Participant'').\75\ C2's proposed ``Sponsored Users'' rule is similar
to rules of other SROs that provide for sponsored access.\76\
Specifically, the Sponsoring Participant must agree to be responsible
for all orders entered into on C2 by the Sponsored User. In addition,
Sponsored Users must agree to comply with all applicable rules of C2
governing the entry, execution, reporting, clearing, and settling of
orders in securities eligible for trading on C2 and the Sponsored User
must agree that it will be bound by and comply with the Exchange's
rules as if the Sponsored User were a Permit Holder.\77\ Sponsored
Participants will also be required by C2 rules to enter into a
``Sponsored User Agreement'' with their Sponsoring Permit Holder
setting forth the obligations of both parties.
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    \75\ See C2 Rule 3.15.
    \76\ See, e.g., CBOE Rule 6.20A (Sponsored Users).
    \77\ See C2 Rule 3.15(b)(1)(B)(iii).
---------------------------------------------------------------------------

c. Linkage
    C2 intends to become a participant in the Plan Relating to Options
Order Protection and Locked/Crossed Markets or any successor plan
(``Linkage Plan'').\78\ If admitted as a participant to the Linkage
Plan, other plan participants (including CBOE) would be able to send
orders to C2 in accordance with the terms of the Linkage Plan.
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (order
approving the national market system Plan Relating to Options Order
Protection and Locked/Crossed Markets Submitted by the Chicago Board
Options Exchange, Incorporated, International Securities Exchange,
LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.) (``Linkage Plan'').
---------------------------------------------------------------------------

    C2 will incorporate by reference the Intermarket Linkage rules
contained in Section E of Chapter VI of CBOE's rulebook, as such rules
may be in effect from time to time. Accordingly, C2's proposed Linkage
rules will include relevant definitions, establish the conditions
pursuant to which members may enter Linkage orders, impose obligations
on the Exchange regarding how it must process incoming Linkage

orders, establish a general standard that members and the Exchange
should avoid trade-throughs, establish potential regulatory liability
for members that engage in a pattern or practice of trading through
other exchanges, and establish obligations with respect to locked and
crossed markets.
    The Commission believes that C2 has proposed rules that are
designed to comply with the requirements of the Linkage Plan.\79\
Further, before C2 can commence operations as an exchange, C2 must
become a participant in the Linkage Plan.
---------------------------------------------------------------------------

    \79\ The Commission notes that it has approved CBOE rules to
accommodate the Linkage Plan. See Securities Exchange Act Release
No. 60551 (August 20, 2009), 74 FR 43196 (August 26, 2009) (File No.
SR-CBOE-2009-040). These amended rules will be incorporated by
reference into C2's rulebook. See C2 Rules Chapter 6, Section E
(Intermarket Linkage). See also infra Section IV (discussing the
Section 36 exemption).
---------------------------------------------------------------------------

d. Market Makers
i. Registration of Market Makers
    A TPH may register with C2 as a market maker by filing a written
application with C2, which will consider an applicant's market making
ability and other factors it deems appropriate in determining whether
to approve an applicant's registration.\80\ All market makers will be
designated as specialists on C2 for all purposes under the Act and
rules thereunder.\81\ C2 will not limit the number of qualifying
entities that may become market makers.\82\ The good standing of a
market maker may be suspended, terminated, or withdrawn if the
conditions for approval cease to be maintained or if the market maker
violates any of its agreements with C2 or any provisions of the C2
rules.\83\
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    \80\ See C2 Rule 8.1(a). In considering a TPH's application for
registration as a market maker on C2, the provision permitting the
Exchange to consider ``such other factors as the Exchange deems
appropriate'' must be applied consistent with the Act, including
that the Exchange's rules must not be unfairly discriminatory.
    \81\ See C2 Rule 8.1.
    \82\ See C2 Rule 8.1(c). However, C2 may limit access to the C2
system based on system constraints, capacity restrictions, or other
factors relevant to protecting the integrity of the system, pending
action required to address the issue of concern. To the extent that
C2 places limitations on access to the system on any TPH, such
limits will be objectively determined and submitted to the
Commission via a proposed rule change filed under Section 19(b) of
the Act. See id.
    \83\ See C2 Rule 8.4(b).
---------------------------------------------------------------------------

    The Commission finds that C2's proposed market maker qualifications
requirements are consistent with the Act. In particular, C2's rules
provide an objective process by which a TPH could become a market maker
on C2 and provide for appropriate continued oversight by the Exchange
to monitor for continued compliance by market makers with the terms of
their application for such status. The Commission notes that C2's
proposed market maker registration requirements are similar to those of
other options exchanges.\84\
---------------------------------------------------------------------------

    \84\ See, e.g., Nasdaq Rules, Chapter VII, Sections 2 and 4;
Boston Options Exchange Rules, Chapter VI, Section 2; and
International Securities Exchange Rule 804.
---------------------------------------------------------------------------

ii. Market Maker Obligations
    Pursuant to C2 rules, the transactions of a market maker in its
market making capacity must constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market.\85\ Among other things, a market maker must: (1) Maintain a
two-sided market on a continuous basis (defined as 99% of the time) in
60% of the series of each registered class that have a time to
expiration of less than nine months; \86\ (2) engage in dealings for
their own accounts when there is a lack of price continuity, a
temporary disparity between the supply of and demand for a particular
option contract, or a temporary distortion of the price relationships
between options contracts of the same class; (3) compete with other
market makers; (4) update quotations in response to changed market
conditions; (5) maintain active markets; and (6) make markets that will
be honored for the number of contacts entered.\87\ C2 will impose an
upper limit on the aggregate number of market makers that may quote in
each product (``Class Quoting Limit'' or ``CQL''). The CQL will be set
at 50 market makers, and could be increased or decreased for an
existing or new product.\88\ If C2 finds any substantial or continued
failure by a market maker to engage in a course of dealings as
specified in Rule 8.5(a), then such market maker will be subject to
disciplinary action, suspension, or revocation of registration in one
or more of the securities in which the market maker is registered.\89\
In addition, market makers must maintain minimum net capital in
accordance with Commission and C2 rules.\90\ Market makers must also
maintain information barriers that are reasonably designed to prevent
the misuse of material, non-public information.\91\
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    \85\ See C2 Rule 8.5(a).
    \86\ While not specified in the rule text, the Commission notes
that a market maker's quote would need to be represented by a size
of at least 1 contract.
    \87\ See C2 Rule 8.5(a) and Amendment No. 1.
    \88\ See C2 Rule 8.11. Any such changes to the CQL would be
announced by C2 in an Information Circular, and would be filed with
the Commission pursuant to Section 19(b)(1) of the Act (15 U.S.C.
78s(b)). See C2 Rule 8.11(b) and (c).
    \89\ See C2 Rule 8.5(c).
    \90\ See C2 Rule 8.4(a)(1).
    \91\ See C2 Rule 8.9. The Commission notes that, as with any
rule of an exchange, C2 will be responsible, pursuant to Sections 6
and 19 of the Act (15 U.S.C. 78f and 15 U.S.C. 78s, respectively),
for enforcing compliance with Rule 8.9, which will require C2 to
conduct periodic examinations of its market maker members with this
rule.
---------------------------------------------------------------------------

    The Commission notes that market makers receive certain benefits
for carrying out their responsibilities.\92\ For example, a lender may
extend credit to a broker-dealer without regard to the restrictions in
Regulation T of the Board of Governors of the Federal Reserve System if
the credit is used to finance the broker-dealer's activities as a
specialist or market maker on a national securities exchange.\93\ In
addition, market makers are excepted from the prohibition in Section
11(a) of the Act.\94\ The Commission believes that a market maker must
have sufficient affirmative obligations, including the obligation to
hold itself out as willing to buy and sell options for its own account
on a regular or continuous basis, to justify this favorable
treatment.\95\ The Commission further believes that the rules of all
U.S. options markets need not provide the same standards for market
maker participation, so long as they impose affirmative obligations
that are consistent with the Act.\96\ The Commission believes that C2's
market maker participation requirements impose sufficient affirmative
obligations on C2 market makers and, accordingly, that C2's
requirements are consistent with the Act. In particular, the Commission
notes that the Act does not mandate a particular market model for
exchanges, and while market makers may become an important source of
liquidity on C2, they will likely not be the only source as C2 is
designed to match buying and selling interest of all participants on
C2.\97\ The Commission therefore believes that C2's proposed structure
is consistent with the Act.
---------------------------------------------------------------------------

    \92\ See, e.g., Securities Exchange Act Release No. 57478 (March
12, 2008), 73 FR 14521, 14526 (March 18, 2008) (File No. SR-NASDAQ-
2007-004) (approval order concerning the establishment of the NASDAQ
Options Market LLC (``NOM'')) (``NOM Approval Order'') (discussing
the benefits and obligations of market makers).
    \93\ 12 CFR 221.5(c)(6).
    \94\ 15 U.S.C. 78k(a).
    \95\ See NOM Approval Order, supra note 92, at 73 FR 14526.
    \96\ See id.
    \97\ See, e.g., NOM Approval Order, supra note 92, at 73 FR
14527 (discussing NOM's single market maker requirement).
---------------------------------------------------------------------------

2. Regulatory Independence
    C2 has proposed several measures to help ensure the independence of
its

regulatory function from its market operations and other commercial
interests. The regulatory operations of C2 will be monitored by the
Regulatory Oversight Committee (``ROC''). The ROC will consist of at
least four directors, all of whom will be Non-Industry Directors and
all of whom will be recommended by the Non-Industry Directors on the
Nominating and Governance Committee for approval by the Board. The ROC
generally will be responsible for monitoring the adequacy and
effectiveness of the Exchange's regulatory program, assessing the
Exchange's regulatory performance, and assisting the Board in reviewing
the Exchange's regulatory plan and the overall effectiveness of the
Exchange's regulatory functions.\98\ Further, a Chief Regulatory
Officer of the Exchange will have general supervision over the
Exchange's regulatory operations.\99\ In addition, any revenues
received by the Exchange from fees derived from its regulatory function
or regulatory penalties will not be used for non-regulatory
purposes.\100\
---------------------------------------------------------------------------

    \98\ See C2 Bylaws Article IV, Section 4.6.
    \99\ See Cover letter accompanying Amendment No. 1 (representing
that, while not specified as an officer in the proposed Bylaws, C2
will have a Chief Regulatory Officer).
    \100\ See C2 Rule 2.3 and Amendment No. 1.
---------------------------------------------------------------------------

    The Commission continues to be concerned about the potential for
unfair competition and conflicts of interest between an exchange's
self-regulatory obligations and its commercial interests that could
exist if an exchange were to otherwise become affiliated with one of
its members, as well as the potential for unfair competitive advantage
that the affiliated member could have by virtue of informational or
operational advantages, or the ability to receive preferential
treatment.\101\ To this end, C2 Rule 3.2(f) provides that without the
prior approval of the Commission, C2 or any entity with which it is
affiliated will not directly acquire or maintain an ownership interest
in a C2 member, and a C2 member will not be or become an affiliate of
C2 or an affiliate of C2.\102\
---------------------------------------------------------------------------

    \101\ See, e.g., NYSE/Archipelago Merger Approval Order, supra
note 39, at 71 FR 11263.
    \102\ See C2 Rule 3.2(f). The rule would not prohibit a TPH from
acquiring an equity interest in CBSX LLC and would not prohibit a
TPH from being affiliated with One Chicago, LLC under limited
conditions. See id.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed provisions
relating to the regulatory independence of the Exchange are consistent
with the Act, particularly with Section 6(b)(1), which requires an
exchange to be so organized and have the capacity to carry out the
purposes of the Act.\103\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

3. Multiparty 17d-2 Agreements
    Section 19(g)(1) of the Act \104\ requires every SRO to examine its
members and persons associated with its members and to enforce
compliance with the Federal securities laws and the SRO's own rules,
unless the SRO is relieved of this responsibility pursuant to Section
17(d) of the Act.\105\ Section 17(d) was intended, in part, to
eliminate unnecessary multiple examinations and regulatory duplication
with respect to members of more than one SRO (``common members'').\106\
Rule 17d-2 of the Act permits SROs to propose joint plans allocating
regulatory responsibilities concerning common members.\107\ These
agreements, which must be filed with and approved by the Commission,
generally cover such regulatory functions as personnel registration and
sales practices. Commission approval of a 17d-2 plan relieves the
specified SRO of those regulatory responsibilities allocated by the
plan to another SRO.\108\ Many SROs have entered into 17d-2
agreements.\109\ C2 currently does not intend to enter into any
bilateral 17d-2 agreements, but rather will retain direct
responsibility for all aspects of its operations as an SRO through the
use of CBOE ``dual hat'' employees.\110\ C2 does, however, plan to join
the existing multiparty agreements concerning intermarket options
surveillance.\111\ Under these agreements, the examining SROs will
examine firms that are common members of C2 and the particular
examining SRO for compliance with certain provisions of the Act,
certain rules and regulations adopted thereunder, and certain C2 rules.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78s(g)(1).
    \105\ 15 U.S.C. 78q(d).
    \106\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting
Release'').
    \107\ 17 CFR 240.17d-2.
    \108\ See Rule 17d-2 Adopting Release, supra note 106.
    \109\ See, e.g., Securities Exchange Act Release Nos. 59218
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575)
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange,
Inc.); 55755 (May 14, 2007), 72 FR 28057 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') n/
k/a FINRA and CBOE concerning the CBOE Stock Exchange); 55367
(February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529)
(NASD/International Securities Exchange, LLC); and 54136 (July 12,
2006), 71 FR 40759 (July 18, 2006) (File No. 4-517) (NASD/Nasdaq).
    \110\ See supra text accompanying note 55 (regarding dual hat
employees).
    \111\ See Securities Exchange Act Release Nos. 57987 (June 18,
2008), 73 FR 36156 (June 25, 2008) (File No. S7-966) (notice of
filing and order approving and declaring effective an amendment to
the multiparty 17d-2 plan concerning options-related sales practice
matters) and 58765 (October 9, 2008), 73 FR 62344 (October 20, 2008)
(File No. 4-551) (notice of filing and order approving and declaring
effective an amendment to the multiparty 17d-2 plan concerning
options-related market surveillance). See also Cover letter
accompanying Amendment No. 1 (representing that C2 intends to join
the options multiparty agreements).
---------------------------------------------------------------------------

4. Discipline and Oversight of Members
    As noted above, one prerequisite for Commission approval of an
exchange's application for registration is that a proposed exchange
must be organized and have the capacity to carry out the purposes of
the Act. Specifically, an exchange must be able to enforce compliance
by its members and persons associated with its members with Federal
securities laws and the rules of the exchange.\112\
---------------------------------------------------------------------------

    \112\ See 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    C2 proposed to incorporate by reference \113\ Chapter 17 of the
CBOE rulebook relating to member discipline. As such, C2 members will
be required to comply with Chapter 17 of the CBOE rulebook as such
rules may be in effect from time to time, as if such rules were part of
the C2 rulebook. In addition, C2 proposes to use ``dual hat''
employees, i.e., current CBOE employees who will also serve in a
similar capacity for C2, to administer its disciplinary and oversight
functions. These C2 employees will, among other things, investigate
potential securities laws violations, issue complaints, conduct
hearings, and issue disciplinary decisions pursuant to C2 rules.\114\
---------------------------------------------------------------------------

    \113\ See infra Section IV (discussing an exemption from Section
19(b) of the Act for CBOE rules incorporated by reference by C2).
Citations to incorporated CBOE rules herein are referred to as
``C2'' rules.
    \114\ See C2 Rules 17.2--17.9.
---------------------------------------------------------------------------

    Upon petition, appeals from disciplinary decisions rendered by C2
will be heard by the Board (or a committee of the Board composed of at
least three directors whose decision will need to be ratified by the
Board) and the Board's decision will be final.\115\ In addition, the
Board may on its own initiative order review of a disciplinary
decision.\116\
---------------------------------------------------------------------------

    \115\ See C2 Rule 17.10(b).
    \116\ See C2 Rule 17.10(c).
---------------------------------------------------------------------------

    Appeal of a denial, suspension, or termination of a trading permit
will be heard by the Exchange's Appeals Committee.\117\ Decisions of
the Appeals

Committee will be made in writing and will be sent to the parties to
the proceeding.\118\ The decisions of the Appeals Committee will be
subject to review by the Board, on its own motion, or upon written
request by the aggrieved party, the President of C2, or by the Chairman
of the committee whose action was subject to the prior review of the
Appeals Committee.\119\ The Board, or a committee of the Board, will
have sole discretion to grant or deny the request.\120\ The Board, or a
committee of the Board, will conduct the review of the Appeals
Committee's decision and the Board may affirm, reverse, or modify the
Appeals Committee's decision.\121\
---------------------------------------------------------------------------

    \117\ See C2 Rule 19.4. The Commission notes that C2's Chapter
19 rules (Hearings and Review) incorporate by reference CBOE's
Chapter 19 rules and C2 participants will be required to comply with
CBOE Chapter 19 rules, as such rules may be in effect from time to
time, as if such rules were part of the C2 rules. Further, the
Commission notes that C2 will establish its own Appeals Committee
that includes C2 participants. See Cover letter accompanying
Amendment No. 1 (representing that C2 will establish its own Appeals
Committee).
    \118\ See C2 Rule 19.4(e).
    \119\ See C2 Rule 19.5(a).
    \120\ See id.
    \121\ See C2 Rule 19.5(b). Decisions concerning denial of
membership in an exchange are subject to review by the Commission.
---------------------------------------------------------------------------

    C2 rules codify the Exchange's disciplinary jurisdiction over its
members, thereby facilitating its ability to enforce its members'
compliance with its rules and the Federal securities laws.\122\ The
Exchange's rules also permit it to sanction members for violations of
its rules and violations of the Federal securities laws by, among other
things, expelling or suspending members; limiting members' activities,
functions, or operations; fining or censuring members; suspending or
barring a person from being associated with a member; or any other
appropriate sanction.\123\
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    \122\ See generally C2 Rule 17.1.
    \123\ See C2 Rule 17.11.
---------------------------------------------------------------------------

    The Commission finds that C2's proposed disciplinary and oversight
rules and structure are consistent with the requirements of Sections
6(b)(6) and 6(b)(7) of the Act \124\ in that they provide fair
procedures for the disciplining of members and persons associated with
members. The Commission further finds that the proposed C2 rules are
designed to provide the Exchange with the ability to comply, and with
the authority to enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulations thereunder, and the rules of C2.\125\
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    \124\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \125\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

D. The C2 Trading System

1. Order Display, Execution, and Priority
    C2 will operate a fully-automated electronic platform for trading
standardized options with a continuous, automated matching function.
Liquidity will be derived from market maker quotes as well as orders to
buy and sell submitted to C2 electronically by users (collectively,
``Participants''). There will be no physical trading floor.
    All orders/quotes submitted to C2 will be displayed unless
designated otherwise by the Participant submitting the order (e.g., the
non-displayed portion of a Reserve Order). The Exchange has represented
that any top-of-book feed (or comparable market data feed) that it
makes available to C2 members will also be made available to other
market participants.\126\
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    \126\ See Cover letter accompanying Amendment No. 1
(representing that the Exchange will offer the data feed to all
market participants). The Exchange noted that it may adopt fees for
non-member access to a C2 data feed. See id. The Commission notes
that C2 would be required to file any such proposed fees pursuant to
Section 19(b) of the Act and Rule 19b-4 thereunder, 15 U.S.C. 78s(b)
and 17 CFR 240.19b-4, respectively.
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    Non-displayed orders will not be displayed to any Participants and
will not have time priority over displayed orders.\127\ While orders
will generally be submitted on an anonymous basis, C2 will allow
Participants on a voluntary basis to submit Attributable Orders, which
will display the firm's identity along with the order to all market
participants simultaneously.\128\ In addition, Participants will be
able to submit the following types of orders to C2: Day; Good `til
Canceled; Contingency (including All-Or-None, Immediate Or Cancel,
Market On Close, Fill Or Kill, Stop, and Reserve); and Complex Orders
(including Spreads, Combination, Straddle, Strangle, Ratio, Butterfly,
Box/Roll, Collar and Risk Reversal).\129\ The Commission notes that
these order types are substantially similar to the order types offered
by CBOE.\130\
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    \127\ See C2 Rule 6.12(a).
    \128\ NOM offers a similar attributable order type. See NOM
Approval Order, supra note 92, at 73 FR 14528 (discussing NOM's
attributable order type).
    \129\ See C2 Rule 6.10 (Order Types Defined) for additional
information on each order type. See also Amendment No. 1 (revising
the definition of Ratio Order).
    \130\ See CBOE Rules 6.53 and 6.53C.
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    The Commission believes that C2's proposed order types are
consistent with the Act. Among other things, the Commission believes
that C2's proposed order types appropriately provide priority to
displayed orders and portions of orders over non-displayed orders and
portions of orders, thereby encouraging the posting of displayed
orders, which contribute visible depth to the displayed market.\131\
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    \131\ See, e.g., Securities Exchange Act Release Nos. 37619A
(September 6, 1996), 61 FR 48290, 48294 (September 12, 2006) (File
No. S7-30-95) (adopting Rule 11Ac1-4) (``The Commission believes
that limit orders are a valuable component of price discovery. The
uniform display of such orders will encourage tighter, deeper, and
more efficient markets.''); and 57441 (March 6, 2008), 73 FR 13267
(March 12, 2008) (File No. SR-ISE-2007-95) (noting the incentive for
market participants to display their trading interest in the context
of reserve orders).
---------------------------------------------------------------------------

    After the open, trades on C2 will execute when a buy order/quote
and a sell order/quote match on C2's order book. All orders will be
matched according to one of two priority structures, as determined by
C2 on a class-by-class basis: (1) Price-time priority or (2) pro-rata
priority.\132\ In addition, public customer and/or market turner
priority \133\ overlays will also be available at C2's discretion on a
series-by-series basis.\134\ In the event that less than the full size
of an order is executed, the unexecuted portion of the order will
continue to reside on C2's order book. The non-reserve portion of any
partially-executed order will retain priority at the same price.
Regardless of the priority structure, Contingency Orders will be last
in priority because they are not displayed.
---------------------------------------------------------------------------

    \132\ Under pro rata priority, orders will be prioritized
according to price. If there are two or more orders at the best
price then trades will be allocated proportionally according to
size. See C2 Rule 6.12(a)(2).
    \133\ C2 defines a ``market turner'' as a party that was the
first to enter an order or quote at a better price than the previous
best disseminated Exchange price and the order/quote is continuously
in the market until it trades. The market turner priority at a given
price could only be established after the opening rotation and would
remain with the order once it is earned and last until the
conclusion of the trading session. See C2 Rule 6.12(b)(2).
    \134\ C2 will issue a Regulatory Circular periodically that will
specify which series are subject to these additional priorities, and
will update the Regulatory Circular any time it makes a change to
any of the designated priorities. See C2 Rule 6.12(b).
---------------------------------------------------------------------------

    C2 will limit a Participant's ability to trade as principal with an
order it represents as agent, unless the agency order is first given
the opportunity to interact with other trading interest on the
Exchange. Specifically, in order to trade as principal with an agency
order a Participant represents, either: (1) The agency order is first
exposed on C2 for at least 1 second; \135\ (2) the Participant has been
bidding or offering for at least 1 second prior to receiving an agency
order that is executable against its bid or offer; or (3) the
Participant uses the Automated Improvement Mechanism or Solicitation
Auction Mechanism.\136\
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    \135\ All-or-none contingency orders on C2 will not be deemed
``exposed'' for purposes of Rule 6.50. See C2 Rule 6.50(c) and
Amendment No. 1.
    \136\ See C2 Rule 6.50. See also proposed C2 Rule 1.1 (defining
NBBO as the national best bid or offer). For purposes of the order
exposure requirements contained in C2 Rule 6.50, all-or-none orders
are not deemed exposed. See C2 Rule 6.50(c). The 1 second exposure
period is consistent with the operation of the CBOE Hybrid System.
See CBOE Rule 6.45A Interpretations and Policies .01 and .02
(regarding the 1 second exposure on the CBOE Hybrid System).

---------------------------------------------------------------------------

    C2 may offer a Simple Auction Liaison (``SAL'') system to auction
eligible agency orders and provide the opportunity for price
improvement better than the NBBO.\137\ C2 would designate the eligible
order size, order type, and origin code (i.e., public customer, non-
market maker broker-dealer, or market maker order), and classes in
which SAL may be activated. For classes in which SAL is activated, SAL
will automatically initiate an auction process for a non-contingency
order that is marketable against C2's NBBO quote, except when C2's
disseminated quote on the opposite side does not contain sufficient
market-maker quotation size to satisfy the entire order. Prior to
commencing an auction, SAL would stop the order at the NBBO against the
market maker quotes displayed at the NBBO on the opposite side. SAL
auctions will last for a period of time not to exceed 2 seconds.
Auction responses could be submitted by any Participant.\138\ At the
end of the auction, the agency order will first be allocated against
public customer interest at the best price. Any remaining balance of
the agency order will then be allocated pursuant to the matching
algorithm in effect for the class.\139\
---------------------------------------------------------------------------

    \137\ See C2 Rule 6.14. C2's SAL is based on CBOE's SAL rule.
See CBOE Rule 6.13A.
    \138\ See C2 Rule 6.14(b) and Amendment No. 1.
    \139\ See C2 Rule 6.14. See also CBOE Rule 6.13A.
---------------------------------------------------------------------------

    The Automated Improvement Mechanism (``AIM'') will allow
Participants to cross an agency order they hold against principal
interest or a solicited order provided that they first expose the
agency order to a 1-second auction.\140\ To be eligible for an AIM
auction, at least three market makers must be quoting in the applicable
series.\141\ If the agency order is greater than 50 contracts, the
Participant must stop the agency order at the NBBO (or the order's
limit price if better), and if it is less than 50 contracts, the
Participant must stop the agency order at the NBBO improved by one
minimum increment (or the order's limit price if better).\142\ When
initiating an auction, a Participant submitting an agency orders to AIM
must either indicate a single-price at which it seeks to cross the
order or must indicate that it will match as principal the price and
size of all auction responses.\143\ Request for responses will then be
sent to any Participant that has elected to receive such requests, and
the exposure period will last for 1 second.\144\ If the auction
attracts responses (which may be submitted by Participants),\145\ the
agency order will be allocated at the best price(s), and public
customer orders in the book will have priority.\146\ If the best price
equals the initiating Participant's single-price submission, then the
initiating Participant will be allocated 40% of the order (or 50% in
the case of a single price submission where only one other market maker
matches the price).\147\ C2's proposed AIM is based on CBOE's AIM
rule.\148\
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    \140\ See C2 Rule 6.51.
    \141\ See C2 Rule 6.51(a)(4).
    \142\ See C2 Rule 6.51(a)(2) and (3).
    \143\ See C2 Rule 6.51(b)(1).
    \144\ See id.
    \145\ See C2 Rule 6.51(b)(1)(D) and Amendment No. 1.
    \146\ See C2 Rule 6.51(b)(3) and Amendment No. 1.
    \147\ See id.
    \148\ See C2 Rule 6.51. See also CBOE Rule 6.74A.
---------------------------------------------------------------------------

    C2's Solicitation Auction Mechanism (``SAM'') is based on CBOE's
SAM.\149\ The SAM will allow Participants to execute agency orders of
500 or more contracts against solicited orders after a 1-second auction
exposure. The orders must be designated as all-or-none, and the
initiating Participant must signify a single price at which it seeks to
cross the order. At the conclusion of the auction, the agency order
will trade with the solicited order provided that the trade price of
the agency order is equal to or better than C2's best bid or
offer.\150\ Further, if there are any public customer orders resting in
the book on the opposite side at the execution price with sufficient
size to fill the agency order, then the agency order will be executed
against the public customer interest and the solicited order will be
cancelled. If the public customer order lacks sufficient size, then the
agency order and solicited order will be cancelled. Likewise, if the
auction generates a response at an improved price that contains
sufficient size to fill the agency order, then the agency order will
execute against the improved price and the solicited order will be
cancelled.\151\
---------------------------------------------------------------------------

    \149\ See C2 Rule 6.52. See also CBOE Rule 6.74B.
    \150\ See C2 Rule 6.52(b)(2)(A)(i). If the trade would take
place at a price outside of the C2 best bid or offer, then the
agency order and solicited order would cancel. See id.
    \151\ See C2 Rule 6.52(b)(2)(A)(ii)-(iii). If the response does
not contain sufficient size, then the agency order will trade with
the solicited order. See id.
---------------------------------------------------------------------------

    C2 also will make available certain additional order processing and
matching features. For example, C2 will maintain a complex order book
(``COB'') that permits any C2 market participant to enter complex
orders into the COB to automatically execute against marketable orders
and quotes resting in the book or against other complex orders in the
COB.\152\ In addition, C2 will offer an optional complex order auction
that will allow orders, prior to routing to the COB, to be auctioned
for price improvement through an automated request for response auction
process, subject to certain conditions.\153\ C2's complex order
execution rule is based on CBOE's rule.\154\
---------------------------------------------------------------------------

    \152\ See C2 Rule 6.13(b). See also C2 Rule 6.12(g) and
Amendment No. 1 (regarding complex order priority). Orders entered
by any C2 market participant also may rest in the COB.
    \153\ See C2 Rule 6.13(c). See also C2 Rule 6.12(g) and
Amendment No. 1 (a complex order may be executed at a net debit or
credit price without giving priority to equivalent bids (offers) in
the individual series legs that are represented in the System
provided at least one leg of the order betters the best
corresponding public customer bid (offer) in the system by at least
one minimum trading increment or, if COB or COA are activated for
all market participants in the subject option class, a $0.01
increment to be determined by C2 on a class-by-class basis); and C2
Rule 4.18 (prohibiting the misuse of material, nonpublic information
as such would be applicable in the context of preventing the
disclosure of nonpublic information about a complex order auction).
    \154\ See CBOE Rule 6.53C. As on CBOE, on C2, a member seeking
to trade with its customer's complex order would be required to
comply with C2 Rule 6.50(a), and a member seeking to cross its
customer's complex order with solicited orders would be required to
comply with C2 Rule 6.50(b). In addition, the complex order priority
provision in C2 Rule 6.12(g) will apply to complex orders.
---------------------------------------------------------------------------

    Finally, C2 has proposed a rule prohibiting trading on knowledge of
imminent undisclosed solicited transactions, otherwise known as the
``anticipatory hedge'' rule.\155\ Pursuant to this rule, it will be
considered conduct inconsistent with just and equitable principles of
trade and a violation of Rule 4.1 for any Participant or person
associated with a Participant, who has knowledge of all material terms
and conditions of an original order and a solicited order, including a
facilitation order, that matches the original order's limit, the
execution of which are imminent, to enter, based on such knowledge, an
order to buy or sell an option of the same class as an option that is
the subject of the original order, or an order to buy or sell the
security underlying such class, or an order to buy or sell any related
instrument until either (i) all the terms and conditions of the
original order and any changes in the terms and conditions of the
original order of which that member or associated person has knowledge
are disclosed to the trading crowd or (ii) the solicited trade can no
longer reasonably be considered imminent in view of the passage of time
since the solicitation.
---------------------------------------------------------------------------

    \155\ See C2 Rule 6.55. See also Amendment No. 1 (containing the
proposed rule).
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission believes that C2's
proposed display, execution, and priority rules

are consistent with the Act. In particular, the Commission finds that
the proposed rules are consistent with Section 6(b)(5) of the Act,\156\
which, among other things, requires that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest, and to not permit unfair discrimination between
customers, issuers, or dealers. The Commission also finds that the
proposed rules are consistent with Section 6(b)(8) of the Act,\157\
which requires that the rules of an exchange not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. In particular, the Commission believes that the
proposed matching mechanisms should facilitate the prompt execution of
orders, while providing Participants with an opportunity to compete for
exposed bids and offers.\158\
---------------------------------------------------------------------------

    \156\ 15 U.S.C. 78f(b)(5).
    \157\ 15 U.S.C. 78f(b)(8).
    \158\ See, e.g., Securities Exchange Act Release No. 58088 (July
2, 2008), 73 FR 39747 (July 10, 2008) (File No. CBOE-2008-16) (order
approving a proposal to reduce certain order exposure times).
---------------------------------------------------------------------------

2. Opening
    C2 will employ an opening process that is designed to match the
greatest number of pending buy and sell orders.\159\ Prior to opening a
series, C2 will make available to all Participants the expected opening
price and size, which should help attract additional orders that, in
turn, could offset any imbalances at the open.\160\ After the start of
trading in the underlying security, the Exchange will open each series
at a price that executes the greatest amount of pre-opening interest
and that does not trade-through the NBBO (if one exists).\161\ The
Commission believes that C2's opening rules are designed to conduct the
opening on C2 in a fair and orderly fashion and are consistent with the
Act.
---------------------------------------------------------------------------

    \159\ C2 will accept pre-opening orders. See C2 Rule 6.11(a).
    \160\ See C2 Rule 6.11(a) and Amendment No. 1.
    \161\ See C2 Rule 6.11.
---------------------------------------------------------------------------

3. Obvious and Catastrophic Errors
    C2 proposed an obvious and catastrophic error rule based on the
corresponding rule of the International Securities Exchange, LLC.\162\
The Commission believes that in most circumstances trades that are
executed between parties should be honored. On rare occasions, the
price of the executed trade indicates an ``obvious'' or
``catastrophic'' error may exist, suggesting that it is unlikely that
the parties to the trade had come to a meeting of the minds regarding
the terms of the transaction. In the Commission's view, the
determination of whether an error has occurred should be based on
specific and objective criteria and subject to specific and objective
procedures.\163\ The Commission believes that C2's proposed obvious
error rule provides clear and objective standards and procedures for
determining whether an obvious error has occurred, is consistent with
the Act, and is substantively the same as obvious error rules
previously approved by the Commission for other exchanges.\164\
---------------------------------------------------------------------------

    \162\ See C2 Rule 6.15 and Amendment No. 1. See also
International Stock Exchange Rule 720. With respect to no bid
series, C2's rule provides that transactions in series quoted no bid
and $0.05 or less offer can be nullified provided, among other
things, that at least one strike price below (for calls) or above
(for puts) in the same options class was quoted zero bid and $0.05
or less offer at the time of execution. ISE Rule 720 requires two
such strikes below (for calls) or above (for puts). See Securities
Exchange Act Release No. 59548 (March 10, 2009), 74 FR 11147 (March
16, 2009) (File No. SR-ISE-2009-10) (notice of filing and immediate
effectiveness of proposed rule change to amend ISE's obvious error
rule). C2's rule is similar to NYSE Arca Rule 6.87 (Obvious Errors
and Catastrophic Errors) in that it only provides for one strike.
See also CBOE Rule 6.25 (Nullification and Adjustment of Equity
Options Transactions).
    \163\ See NOM Approval Order, supra note 92, at 73 FR 14532.
    \164\ See, e.g., Securities Exchange Act Release No. 57398
(February 28, 2008), 73 FR 12240 (March 6, 2008) (File No. SR-ISE-
2007-112) (order approving amendments to ISE Rule 720).
---------------------------------------------------------------------------

4. Section 11(a) of the Act
    Section 11(a)(1) of the Act\165\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\166\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)(a)(2)'s
conditions, a member: (i) May not be affiliated with the executing
member; (ii) must transmit the order from off the exchange floor; (iii)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution;\167\ and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule.
---------------------------------------------------------------------------

    \165\ 15 U.S.C. 78k(a)(1).
    \166\ 17 CFR 240.11a2-2(T).
    \167\ The member may, however, participate in clearing and
settling the transaction. See 1978 Release, infra note 173.
---------------------------------------------------------------------------

    In a letter to the Commission, C2 requests that the Commission
concur with C2's conclusion that Participants that enter orders into C2
satisfy the requirements of Rule 11a2-2(T).\168\ For the reasons set
forth below, the Commission believes that Participants entering orders
into C2 would satisfy the conditions of the Rule.
---------------------------------------------------------------------------

    \168\ See Letter from Angelo Evangelou, Assistant General
Counsel, CBOE, to Elizabeth King, Associate Director, Division of
Trading and Markets, Commission, dated October 16, 2009 (``C2 11(a)
Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order.\169\ The Commission has stated that this requirement is
satisfied when automated exchange facilities, such as the C2 system,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\170\ C2 has
represented that the design of the C2 system ensures that no member has
any special or unique trading advantage in the handling of its orders
after transmitting its orders to C2.\171\ Based on C2's representation,
the Commission believes that the C2 system satisfies this requirement.
---------------------------------------------------------------------------

    \169\ 17 CFR 240.11a2-2(T)(a)(2)(i).
    \170\ See, e.g., NOM Approval Order, supra note 92, at note 269
(citing to the 1979 Release). In considering the operation of
automated execution systems operated by an exchange, the Commission
noted that while there is not an independent executing exchange
member, the execution of an order is automatic once it has been
transmitted into the systems. Because the design of these systems
ensures that members do not possess any special or unique trading
advantages in handling their orders after transmitting them to the
exchange, the Commission has stated that executions obtained through
these systems satisfy the independent execution requirement of Rule
11a2-2(T). See 1979 Release, infra note 173.
    \171\ See C2 11(a) Letter, supra note 168.
---------------------------------------------------------------------------

    Second, the Rule requires that orders for covered accounts be
transmitted from off the exchange floor.\172\ The C2 system receives
orders electronically through remote terminals or computer-

to-computer interfaces. In the context of other automated trading
systems, the Commission has found that the off-floor transmission
requirement is met if a covered account order is transmitted from a
remote location directly to an exchange's floor by electronic
means.\173\ Because the C2 system receives orders electronically
through remote terminals or computer-to-computer interfaces, the
Commission believes that the C2 system satisfies the off-floor
transmission requirement.\174\
---------------------------------------------------------------------------

    \172\ 17 CFR 240.11a2-2(T)(a)(2)(ii).
    \173\ See, e.g., NOM Approval Order, supra note 92, at 73 FR
14538; Nasdaq Exchange Registration Order, supra note 39, at 71 FR
3560; and Securities Exchange Act Release Nos. 49068 (January 13,
2004), 69 FR 2775 (January 20, 2004) (File No. SR-BSE-2002-15)
(order approving the rules of the Boston Options Exchange); 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001) (File No. SR-PCX-
00-25) (order approving the Archipelago Exchange as an electronic
trading facility of the Pacific Exchange (``PCX'')); 29237 (May 24,
1991), 56 FR 24853 (May 31, 1991) (File Nos. SR-NYSE-90-52 SR-NYSE-
90-53) (regarding NYSE's Off-Hours Trading Facility); 15533 (January
29, 1979), 44 FR 6084 (January 31, 1979) (File No. S7-163)
(regarding the American Stock Exchange Post Execution Reporting
System, the Amex Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the Cincinnati Stock
Exchange, the PCX Communications and Execution System, and the
Philadelphia Stock Exchange's Automated Communications and Execution
System (``1979 Release'')); and 14563 (March 14, 1978) 43 FR 11542
(March 17, 1978) (File No. S7-163) (regarding the NYSE's Designated
Order Turnaround System (``1978 Release'')).
    \174\ See, e.g., NOM Approval Order, supra note 92, at 73 FR
14538-39.
---------------------------------------------------------------------------

    Third, the Rule requires that the member not participate in the
execution of its order.\175\ C2 represented that at no time following
the submission of an order is a Participant able to acquire control or
influence over the result or timing of an order's execution. According
to C2, the execution of a member's order is determined solely by what
other orders, bids, or offers are present in the C2 system at the time
the Participant submits the order and on the priority of those orders,
bids, and offers.\176\ Based on these representations, the Commission
believes that a Participant does not participate in the execution of an
order submitted to the C2 system.
---------------------------------------------------------------------------

    \175\ 17 CFR 240.11a2-2(T)(a)(iii).
    \176\ See C2 11(a) Letter, supra note 168. The Participant may
cancel or modify the order, or modify the instruction for executing
the order, but only from off the floor. The Commission has stated
that the non-participation requirement is satisfied under such
circumstances so long as such modifications or cancellations are
also transmitted from off the floor. See 1978 Release, supra note
173 (stating that the ``non-participation requirement does not
prevent initiating members from canceling or modifying orders (or
the instructions pursuant to which the initiating member wishes
orders to be executed) after the orders have been transmitted to the
executing member, provided that any such instructions are also
transmitted from off the floor'').
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\177\ Participants trading for covered accounts over which they
exercise investment discretion must comply with this condition in order
to rely on the rule's exemption.\178\
---------------------------------------------------------------------------

    \177\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 173 (stating ``[t]he contractual and disclosure requirements
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests.'').
    \178\ See C2 11(a) Letter, supra note 168.
---------------------------------------------------------------------------

E. Listing Procedures

    C2 will incorporate by reference CBOE's listing rules for
options.\179\ As such, the Commission finds that C2's proposed initial
and continued listing rules, which are based on CBOE rules previously
approved by the Commission, are consistent with the Act, including
Section 6(b)(5), in that they are designed to protect investors and the
public interest and to promote just and equitable principles of trade.
The Commission notes that, before beginning operation, C2 will need to
become a participant in the Plan for the Purpose of Developing and
Implementing Procedures Designed to Facilitate the Listing and Trading
of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of
the Securities Exchange Act of 1934 (``OLPP''). In addition, before
beginning operation, C2 will need to become a participant in the
Options Clearing Corporation.
---------------------------------------------------------------------------

    \179\ See infra Section IV (discussing an exemption from Section
19(b) of the Act for CBOE rules incorporated by reference by C2).
See also C2 Rules Chapter 5.
---------------------------------------------------------------------------

IV. Exemption From Section 19(b) of the Act With Regard to CBOE Rules
Incorporated by Reference

    C2 proposes to incorporate by reference certain CBOE rules as C2
rules, including Chapters 4 (Business Conduct), 5 (Securities Dealt
In), 6 Section E (Intermarket Linkage), 9 (Doing Business with the
Public), 10 (Closing Transactions), 11 (Exercises and Deliveries), 12
(Margins), 13 (Net Capital Requirements), 15 (Records, Reports and
Audits), 16 (Summary Suspension by Chairman of the Board or Vice
Chairman of the Board), 17 (Discipline), 18 (Arbitration), 19 (Hearings
and Review), and 24 (Index Options). In each Chapter including
incorporated rules, C2 states that these such rules ``as such rules may
be in effect from time to time, shall apply to C2 and are hereby
incorporated into this Chapter'' and that C2 members shall comply with
a C2 rule by complying with the CBOE rules incorporated by reference
``as if such rules were part of the C2 Rules.'' \180\ In connection
with its proposal to incorporate certain CBOE rules by reference, C2
requested, pursuant to Rule 0-12,\181\ an exemption under Section 36 of
the Act \182\ from the rule filing requirements of Section 19(b) of the
Act for changes to those C2 rules that are affected solely by virtue of
a change to a cross-referenced CBOE rule. C2 proposes to incorporate by
reference categories of rules (rather than individual rules within a
category) that are not trading rules. C2 also agrees to provide written
notice to its members whenever CBOE proposes a rule change to a CBOE
rule that C2 has incorporated by reference.\183\
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    \180\ See, e.g., C2 Rules Chapter 4 (Business Conduct).
    \181\ See 17 CFR 240.0-12.
    \182\ 15 U.S.C. 78mm.
    \183\ See Letter from Angelo Evangelou, Assistant General
Counsel, CBOE, to Elizabeth M. Murphy, Secretary, Commission, dated
October 16, 2009.
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    Using its authority under Section 36 of the Act, the Commission
previously exempted several other SROs from the requirement to file
proposed rule changes under Section 19(b) of the Act.\184\ Each such
exempt SRO agreed to be governed by the incorporated rules, as amended
from time to time, but is not required to file a separate proposed rule

change with the Commission each time the SRO whose rules are
incorporated by reference seeks to modify its rules. In addition, each
such exempt SRO incorporated by reference only regulatory rules (i.e.,
margin, suitability, arbitration), not trading rules, and incorporated
by reference whole categories of rules. Each such exempt SRO had
reasonable procedures in place to provide written notice to its members
each time a change is proposed to the incorporated rules of another SRO
in order to provide its members with notice of a proposed rule change
that affects their interests, so that they would have an opportunity to
comment on it.
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    \184\ See, e.g., Securities Exchange Act Release No. 49260
(February 17, 2004), 69 FR 8500 (February 24, 2004) (order granting
application for exemptions pursuant to Section 36(a) of the Act by
the American Stock Exchange LLC, the International Securities
Exchange, Inc., the Municipal Securities Rulemaking Board, the
Pacific Exchange, Inc., the Philadelphia Stock Exchange, Inc., and
the Boston Stock Exchange, Inc.); and Nasdaq Exchange Registration
Order, supra note 39, at 71 FR 3565-66.
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    The Commission is granting C2's request for exemption, pursuant to
Section 36 of the Act, from the rule filing requirements of Section
19(b) of the Act with respect to the rules that C2 proposes to
incorporate by reference. This exemption is conditioned upon C2
providing written notice to its members whenever CBOE proposes to
change a rule that C2 has incorporated by reference. The Commission
believes that this exemption is appropriate in the public interest and
consistent with the protection of investors because it will promote
more efficient use of Commission and SRO resources by avoiding
duplicative rule filings based on simultaneous changes to identical
rules sought by more than one SRO. Consequently, the Commission grants
C2's exemption request.

V. Conclusion

    It is ordered that the application of C2 for registration as a
national securities exchange be, and hereby is, granted.
    It is further ordered that operation of C2 is conditioned on the
satisfaction of the following requirements:
    A. Participation in National Market System Plans Relating to
Options Trading. C2 must join: (1) The Plan for the Reporting of
Consolidated Options Last Sale Reports and Quotation Information (i.e.,
the Options Price Reporting Authority); (2) the OLPP; (3) the Linkage
Plan; \185\ and (4) the Plan of the Options Regulatory Surveillance
Authority.
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    \185\ See Linkage Plan, supra note 78.
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    B. Participation in Multiparty 17d-2 Plans. C2 must become a party
to the multiparty 17d-2 agreements concerning sales practice regulation
and market surveillance.\186\
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    \186\ See supra note 111 (citing to the most recent versions of
the two plans). See also infra Section III.C.3 (Multiparty 17d-2
Agreements); and 17 CFR 240.17d-2.
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    C. Participation in the Options Clearing Corporation. C2 must join
the Options Clearing Corporation.
    D. Participation in the Intermarket Surveillance Group. C2 must
join the Intermarket Surveillance Group.
    E. Examination by the Commission. C2 must have, and represent in a
letter to the staff in the Commission's Office of Compliance
Inspections and Examinations that it has, adequate procedures and
programs in place to effectively regulate C2.
    It is further ordered, pursuant to Section 36 of the Act,\187\ that
C2 shall be exempt from the rule filing requirements of Section 19(b)
of the Act \188\ with respect to the CBOE rules C2 proposes to
incorporate by reference into C2's rules, subject to the conditions
specified in this Order.
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    \187\ 15 U.S.C 78mm.
    \188\ 15 U.S.C 78s(b).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-29877 Filed 12-15-09; 8:45 am]

BILLING CODE 8011-01-P