[Federal Register Volume 81, Number 58 (Friday, March 25, 2016)]
[Notices]
[Pages 16248-16250]
[FR Doc No: 2016-06745]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77410; File No. SR-ISE-2016-07]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Eliminate the Strict Concentration Limits on Primary Market
Makers

March 21, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 15, 2016, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    ISE proposes to eliminate the 30% strict cap on the number of
Primary Market Maker (``PMM'') memberships that the ISE's Board of
Directors (the ``Board'') can approve for an ISE member to operate. The
text of the proposed rule change is available on the Exchange's Web
site at www.ise.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposal is to eliminate the 30% strict cap on
the number of PMM memberships that the Board can approve for an ISE
member to operate.\3\ ISE Rule 303(b) currently requires the Board show
``good cause'' to approve any PMM membership that would result in the
PMM operating trading privileges associated with more than one PMM
membership. The Board may waive the limitations contained in this rule
if it determines that good cause has been shown and such action is, in
its judgment, in the best interests of the Exchange.\4\ The Board is
not permitted,

however, to grant this approval if the member and its affiliates would,
as a result, be approved to exercise trading privileges associated with
more than 30% of all outstanding PMM memberships.\5\ Section 6.5(b) of
ISE's Third Amended and Restated Limited Liability Company Agreement
(the ``LLC Agreement'') contains the same 30% strict cap as Rule
303(b). This limitation on exercising PMM trading privileges is in
addition to ownership and voting limitations in the LLC Agreement and
in the Exchange's rules that prohibit any member from owning (or voting
the shares representing) more than 20% of any class of membership.\6\
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    \3\ A PMM serves a function similar to that of a specialist on
other exchanges. Among other things, a PMM must provide continuous
quotations in all assigned options classes. See Rule 804(e)(1);
Supplementary Material .01 to Rule 804. There are currently 10
outstanding PMM memberships authorized and issued by the Exchange
under its Third Amended and Restated LLC Agreement (the ``LLC
Agreement''). See LLC Agreement, Section 6.1(a).
    \4\ When making its determination whether good cause has been
shown to waive the limitations contained in this rule, the Board
must consider whether an operational, business or regulatory need to
exceed the limits has been demonstrated, and in those cases where
such a need is demonstrated, the Board must also consider any
operational, business or regulatory concerns may be raised if such a
waiver were granted. See Supplementary Material .01 to Rule 303.
    \5\ In 2006, the Commission approved an ISE proposal to increase
the maximum number of PMM memberships that an ISE member may operate
from two to three PMM memberships. See Securities Exchange Act
Release No. 53271 (February 10, 2006), 71 FR 8625 (February 17,
2006) (SR-ISE-2005-46) (Approval Order).
    \6\ See LLC Agreement, Section 6.5(a); Supplementary Material
.02 to Rule 303. The Exchange is not proposing any changes to the
ownership and voting limitations.
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    Due to the continued concentration and specialization in the
options market making community, and the decreasing number of market
makers available to operate these memberships, the Exchange is
proposing to eliminate the 30% cap on the number of PMM memberships
that the Board can approve for a member to operate.
    As the number of market makers decreases, the Exchange is concerned
that there may not be a sufficient number of members qualified to be
PMMs if the Exchange retains the current 30% cap (thus limiting a
member to operating three PMM memberships). The options markets are
highly competitive, and each exchange actively seeks to attract order
flow by disseminating tight and liquid markets and by providing a high
level of customer satisfaction. Ensuring that the Exchange has high
quality PMMs is critical in this competitive battle.
    The Exchange believes that the proposed approach is consistent with
treatment on other markets that do not have strict market maker
concentration limits, and will enable the Board to approve members to
operate multiple PMM memberships after the Board determines that good
cause has been shown and if doing so would be in the best interest of
the Exchange.
    The Commission has previously approved rule changes that eliminated
mandatory caps on the number of issues that may be allocated to market
makers on other markets, such as on Pacific Exchange, Inc. (``PCX'')
(n/k/a ``NYSE Arca''), where the Commission approved a rule change by
PCX to eliminate its Lead Market Maker (``LMM'') concentration limit of
15% of the issues traded on the PCX options floor.\7\ There, the
Commission noted that PCX's concentration limits served the purpose of
minimizing the disturbance to a fair and orderly market that may
otherwise result from the failure of an LMM. However, the Commission
also noted that other exchanges did not impose specified mandatory
limits on the number of options that may be allocated to specialists,
citing to the rules of the Chicago Board Options Exchange
(``CBOE'').\8\ In addition, the Commission has previously granted
registration to new exchanges that do not have similar concentration
limits.\9\
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    \7\ See Securities Exchange Act Release Nos. 47795 (May 5,
2003), 68 FR 25074 (May 9, 2003) (Notice); 48029 (June 13, 2003), 68
FR 37187 (June 23, 2003) (SR-PCX-2002-25) (Approval Order).
    \8\ See CBOE Rule 8.84 (Rule 8.84 does not impose a mandatory
cap on the number of issues that may be allocated to a Designated
Primary Market-Maker (``DPM'').
    \9\ See MIAX Options Exchange (``MIAX'') Rules.
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    The Exchange recognizes that increasing the number of PMM
memberships a member can operate could raise issues regarding
concentration of market making expertise. In this regard, the proposed
rule change is only an enabling rule. With the proposed change, the
Board will still be required to show good cause to approve any member
to operate more than one PMM membership, and could consider the number
of memberships already by the member in determining whether or not
there is good cause shown. Thus, the Board will need to weigh each
potential application on its own merits, balancing the potential
benefits of allowing a member to exercise more than one PMM membership
against any potential concentration concerns. The Board would not be
prohibited under the rules and under the LLC Agreement, however, from
approving PMMs to operate more than a specified percentage of
outstanding memberships.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange, and,
in particular, with the requirements of Section 6(b) of the Act.\10\ In
particular, the proposal is consistent with Section 6(b)(5) of the
Act,\11\ because it is designed to promote just and equitable
principles of trade, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The options industry continues to experience a consolidation and
decrease in the number of market makers and therefore, the Exchange is
proposing a rule change that would eliminate the 30% PMM cap and would
allow the Board the flexibility to approve or deny each potential PMM
application based upon its determination of whether good cause had been
shown and if doing so would be in the best interest of the Exchange.
Also as noted above, the Commission has previously approved rule
changes eliminating mandatory caps on the number of issues that may be
allocated to market makers on other markets, and has granted
registration to new exchanges that do not have similar concentration
limits. The Exchange therefore believes that the proposed rule change
is designed to remove impediments to and perfect the mechanisms of a
free and open market and a national market system. Furthermore, this
proposed rule change would not amend the current prohibitions in the
LLC Agreement and in the Exchange's rules against a member owning or
voting more than 20% of any class of membership. Thus, the only way a
member could operate more than 30% of all outstanding PMM memberships
would be to lease such membership, with the lease providing that the
lessor retains all voting rights.\12\
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    \12\ See ISE Second A&R Constitution, Section 12.4;
Supplementary Material .02 to Rule 303.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\13\ the Exchange
does not believe that the proposed rule change will impose any burden
on intermarket or intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
the Exchange believes that the proposed rule change will increase
competition among market makers to be approved as a PMM on the
Exchange, thus allowing the Exchange to choose the most qualified PMM
that will provide the Exchange with strong market making capabilities.
Also as noted above, other markets do not have

comparable mandatory caps or concentration limits, so eliminating the
30% PMM cap will bring the Exchange's rules in line with its
competitors.
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    \13\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on
this proposed rule change. The Exchange has not received any written
comments from members or other interested parties.

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

    Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6)
thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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    The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposed rule change operative upon filing.\16\ As noted
above, the Exchange states that waiver of this requirement will allow
the Exchange to immediately remove the 30% cap and align its rules with
other competing options markets that do not have comparable
restrictions. The Exchange also notes that the proposed rule change
preserves existing ownership and voting limitations in the LLC
Agreement.
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    \16\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-ISE-2016-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2016-07. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2016-07 and should be
submitted on or before April 15, 2016.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Brent J. Fields,
Secretary.
[FR Doc. 2016-06745 Filed 3-24-16; 8:45 am]
 BILLING CODE 8011-01-P