[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21931-21932]
[FR Doc No: 2016-08426]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77553; File No. SR-CBOE-2016-009]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to LMMs
and DPMs

April 7, 2016.

I. Introduction

    On February 8, 2016, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to amend its rules
relating to Lead Market-Makers (``LMMs''), Designated Primary Market-
Makers (``DPMs'') and Supplemental Market-Makers (``SMMs''). The
proposed rule change was published for comment in the Federal Register
on February 26, 2016.\3\ The Commission received no comments on the
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77200 (February 22,
2016), 81 FR 9910 (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ A more detailed description of the proposed rule change
appears in the Notice. See Notice, supra note 3.
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    The Exchange proposes to (i) reorganize, simplify and make
consistent certain text relating to LMM and DPM obligations generally,
(ii) amend its Rules related to LMMs, (iii) delete outdated references
in its Rules to SMMs and other obsolete language and (iv) make other
clarifying changes.
    Specifically, the Exchange proposes to make modifications to Rules
8.15 (pertaining to LMMs in Hybrid 3.0 classes), 8.15A (pertaining to
LMMs in Hybrid classes) and 8.85 (pertaining to DPMs) to modify the
descriptions of certain obligations of LMMs and DPMs (e.g., obligations
related to quote accuracy, bid/ask differentials, minimum size and
trading rotations, competitive markets and promotion of the Exchange,
and material operational or financial change notifications) to be more
consistent with each other.\5\ The Exchange notes that LMMs and DPMs
have substantially similar functions and obligations (including the
same continuous quoting obligations, along with the same participation
entitlement percentages), and therefore, having consistent language
with respect to these obligations will simplify its rules and reflect
the similar roles served by LMMs and DPMs.\6\
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    \5\ See Notice, supra note 3, at 9913.
    \6\ See id. Currently, the primary difference between LMMs and
DPMs relates to their appointment terms. An LMM receives an
appointment for a limited term (e.g., one month), while a DPM serves
in that role until it resigns or the Exchange removes it from that
role pursuant to Rule 8.90.
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    Of significance, CBOE proposes to change the opening quoting
obligations of LMMs and DPMs. CBOE Rules 8.15A(b)(iv) and 8.85(a)(xi)
require LMMs and DPMs, respectively, to ensure that a trading rotation
is initiated promptly following the opening of the underlying security
in 100% of the series of each allocated class by entering opening
quotes as necessary. The Exchange proposes to modify the opening quote
requirement to require that opening quotes must be entered within one
minute in any series that is not open due to the lack of a quote. The
proposed rule change also modifies the Rules' language to provide that
the timing of the opening quoting obligation begins after the
initiation of an opening rotation on the Exchange rather than after the
opening of the underlying security.\7\
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    \7\ See Notice, supra note 3, at 9913.
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    CBOE also proposes to impose a continuous quoting obligation on
LMMs in Hybrid 3.0 classes.\8\ LLMs in Hybrid classes currently must
provide continuous electronic quotes in the lesser of 99% of the non-
adjusted option series or 100% of the non-adjusted option series minus
one call-put pair, with the term ``call-put pair'' referring to one
call and one put that cover the same underlying instrument and have the
same expiration date and exercise price.\9\ According to CBOE, its
rules currently do not prescribe for LMMs a continuous electronic
quoting requirement for Hybrid 3.0 classes, though CBOE has
historically assumed a requirement of at least 90% of the series of
each appointed class for 99% of the time.\10\ CBOE now proposes to
codify for LMMs a continuous quoting requirement for Hybrid 3.0 classes
to be identical to the existing requirement for LMMs assigned to Hybrid
classes.\11\
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    \8\ See Notice, supra note 3, at 9915.
    \9\ See CBOE Rule 8.15A(b)(i).
    \10\ See Notice, supra note 3, at 9915.
    \11\ See id. As proposed, this obligation would not apply to
intra-day add-on series on the day during which such series are
added for trading, and would apply to an LMM's appointed classes
collectively. CBOE would determine compliance with an LMM's
continuous electronic quoting obligation on a monthly basis
(however, determining compliance with this obligation on a monthly
basis would not relieve an LMM from meeting this obligation on a
daily basis, nor would it prohibit the Exchange from taking
disciplinary action against an LMM for failing to meet these
obligations each trading day). Further, the proposed Rule would
provide that when the underlying security for a class is in a limit
up-limit down state, LMMs in Hybrid 3.0 classes would have no
quoting obligations in the class. The Exchange represents that these
obligations are identical to the obligations currently imposed on
LMMs in Hybrid classes, as well as DPMs in Hybrid 3.0 classes. See
Notice, supra note 3, at 9915.
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    The Exchange also proposes modifications to Rules 8.15, 8.15A, 8.83
and 8.85 as they relate to the Off-Floor DPM and Off-/On-Floor LMM
programs. For instance, CBOE proposes to amend Rule 8.83(g) to conform
Hybrid 3.0 classes to Hybrid classes by providing that in a Hybrid 3.0
class in which an Off-Floor DPM has been appointed, the Exchange also
would be permitted to appoint an On-Floor LMM, which would be eligible
to receive a participation entitlement under current

Rule 8.15B with respect to orders represented in open outcry.\12\
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    \12\ The provisions in current Rule 8.15A related to the on-
floor LMM program would apply to Hybrid 3.0 classes pursuant to
proposed Rule 8.15.
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    CBOE also proposes that the Exchange have the discretion to appoint
an On-Floor LMM in any class in which an Off-Floor LMM has been
appointed, and that any such On-Floor LMM would be eligible to receive
a participation entitlement under current Rule 8.15B with respect to
orders represented in open outcry.\13\ The Exchange also proposes to
treat Off-Floor LMMs in a manner similar to the current treatment of
Off-Floor DPMs with respect to their quoting requirement and
appointments.
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    \13\ See proposed Rule 8.15, Interpretation and Policy .01(c).
This proposed change is consistent with the program for Off-Floor
DPMs/On-Floor LMMs and would extend the applicability of the
provision to Hybrid and Hybrid 3.0 classes that have Off-Floor LMMs
(rather than Off-Floor DPMs).
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    CBOE also proposes to make changes to eliminate obsolete
references, including those related to individual LMMs, SMMs, an
expired pilot program, the former Linkage Plan, and strike price
interval, bid/ask differential and quote continuity requirements.
Further, CBOE proposes to make non-substantive or technical
modifications to Rules 1.1(fff) and (ggg), 3.2, 6.1A, 6.2A, 6.45A,
6.45B, 6.74, 8.7, 8.13, 8.14, 8.15, 8.15A, 8.83, 8.85, 17.50, 22.14,
24.9, and 29.17, including amendments to correct typographical errors,
update headings, update cross-references to Rules 8.15, 8.15A and
8.15B, make the rule text more plain English, and make the rule text
more consistently organized, numbered and worded.

III. Discussion

    The Commission believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\14\ Specifically, the Commission believes the proposed rule change
is consistent with the Section 6(b)(5) \15\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
In addition, the Commission believes the proposed rule change is
consistent with the Section 6(b)(5) \16\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Commission believes that the proposed rule
changes to amend Rules 8.15, 8.15A and 8.85 to revise descriptions of
obligations of LMMs in Hybrid 3.0 classes, LMMs in Hybrid classes, and
DPMs, respectively, as well as to combine the LMM obligations into a
single rule for all classes, should benefit investors by providing more
uniformity to the Rules related to market participants with
substantially similar functions that are subject to analogous
obligations. In addition, the Commission believes that CBOE's proposal
to impose a continuous quoting obligation on LMMs in Hybrid 3.0 classes
that mirrors the existing continuous quoting obligation in Hybrid
classes should help facilitate transactions in securities in a manner
that protects investors and the public interest.
    The CBOE's proposal also slightly modifies the opening quoting
obligations of LMMs and DPMs to include a specific time by which
opening quotes must be entered. The Commission believes that the
Exchange's proposal to require an opening quotation within one minute
rather than promptly should provide DPMs and LMMs with clearer guidance
regarding the opening quote obligation, which should facilitate
compliance by LMMs and DPMs with this obligation. The Commission notes
the Exchange's representation that nearly all series open for trading
within this timeframe on a daily basis.\17\ Therefore, the Commission
believes this time frame should not be unduly burdensome to LMMs and
DPMs while still helping to ensure a timely opening.
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    \17\ See Notice, supra note 3, at 9913.
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    Further, the Commission believes the proposed revisions to the
descriptions of the Off-Floor DPM and Off-/On-Floor LMM programs should
clarify these programs, including with respect to appointments. Among
other things, CBOE's proposal extends to Hybrid 3.0 classes certain
provisions currently applicable to Hybrid classes, including on-floor
appointments, and clarifies the effect on an on-floor appointment when
an off-floor appointment is reallocated. These changes further
harmonize Hybrid 3.0 with Hybrid and codify into the CBOE rules
important detail regarding on and off-floor appointments.
    Finally, the Commission believes that the CBOE's proposal to
eliminate obsolete provisions, including those related to individual
LMMs, SMMs, an expired pilot program, the former Linkage Plan, as well
as references to the non-applicability of strike price intervals, bid/
ask differentials, and quote continuity requirements for LEAPs, should
protect investors by eliminating potential confusion that may result
from incorrect references in CBOE's rules. With respect to strike price
intervals, bid/ask differentials, and quote continuity requirements for
LEAPs, the CBOE represents that other existing rules address those
requirements \18\ and, therefore, the proposed rule change should have
no effect on the regulatory requirements applicable to CBOE market
makers. The Commission notes that the non-substantive, technical
changes proposed should help to reduce duplication, simplify and
provide clarity in the Exchange's rules, which should benefit all CBOE
market participants.
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    \18\ See Notice, supra note 3, at 9917.
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the proposed rule change (SR-CBOE-2016-009), be and hereby is
approved.
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    \19\ 15.U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08426 Filed 4-12-16; 8:45 am]
 BILLING CODE 8011-01-P