
[Federal Register Volume 76, Number 210 (Monday, October 31, 2011)]
[Notices]
[Pages 67239-67243]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28046]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65615; File No. SR-CHX-2011-17]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice and Order Granting Accelerated Approval to Proposed Rule Change, 
as Modified by Amendment No. 1, Regarding the Submission of Clearing-
Related Information for Trades Executed Otherwise Than on the Exchange

October 24, 2011.

I. Introduction

    On July 7, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change regarding the submission of clearing-related 
information for trades executed otherwise than on the CHX. The proposed 
rule change was published for comment in the Federal Register on July 
26, 2011.\3\ The Commission received one comment in support of the 
proposal.\4\ CHX filed Amendment No. 1 to the proposed rule change on 
October 24, 2011.\5\ This order approves the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64937 (July 20, 
2011), 76 FR 44638 (``Notice'').
    \4\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Christopher Meyer, Chief Compliance Officer, E*Trade Capital 
Markets, LLC dated August 16, 2011.
    \5\ See Amendment No. 1, dated October 24, 2011.
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II. Description of the Proposal

    The text of the proposed rule change, as modified, is reproduced 
below. Additions are italicized, deletions are [lsqbb]bracketed[rsqbb].

Rules of Chicago Stock Exchange, Inc.

* * * * *

Article 1.

Definitions and General Information

Rule 1. Definitions

    Whenever and wherever used in these Rules, unless the context 
requires otherwise, the following terms shall have the respective 
meanings ascribed to them below:
    (a)--(dd) Unchanged
    (ee) ``Clearing Participant'' means a Participant which has been 
admitted to membership in a Qualified Clearing Agency pursuant to 
the provisions of the Rules of the Qualified Clearing Agency.

[[Page 67240]]

    (ff) ``Qualified Clearing Agency'' means a clearing agency as 
defined in Section 3(a)(23) of the Exchange Act which is registered 
with the Commission pursuant to the provisions of Section 17A(b)(2) 
of the Exchange Act or has obtained from the Commission an exemption 
from registration granted specifically to allow the clearing agency 
to provide confirmation and affirmation services.
* * * * *

Article 21.

Clearance and Settlement

Rule 1. Trade Recording with a Qualified Clearing Agency

    (a)--(d) Unchanged
    [lsqbb]   Interpretations and Policies:
    .01 Definition of Registered Clearing Agency
    The term ``Registered Clearing Agency'' shall mean a clearing 
agency as defined in Section 3(a)(23) of the Exchange Act which is 
registered with the Commission pursuant to the provisions of the 
Section 17A(b)(2) of the Exchange Act or has obtained from the 
Commission an exemption from registration granted specifically to 
allow the clearing agency to provide confirmation and affirmation 
services..
    .02 Definition of Fully-Interfaced Clearing Agency
    The term ``Fully-Interfaced Clearing Agency'' shall mean a 
Registered Clearing Agency which, in conjunction with the Registered 
Clearing Agency selected by the contra-party to the contract, has 
established systems for the clearance and settlement of securities 
contracts in a manner which does not require each party to a 
contract to be a participant in the same Registered Clearing Agency.
    .03 Definition of a Qualified Clearing Agency
    For purposes of this Rule, the term ``Qualified Clearing 
Agency'' shall mean a Fully Interfaced Clearing Agency which has 
entered into an agreement with the Exchange pursuant to which it 
will (i) Provide such services to the Exchange and its Participants 
as the Exchange, and such Qualified Clearing Agency shall from time 
to time agree, (ii) maintain facilities through which Exchange 
Contracts may be recorded, cleared and settled, and (iii) supply the 
Exchange with data reasonably necessary and requested in order to 
permit the Exchange to enforce compliance by its Participants with 
the provisions of the Exchange Act, the rules and regulations 
thereunder and the Rules of the Exchange.[rsqbb]
* * * * *
Rule 6. Submission of Clearing Information for Transactions Executed 
Off-Exchange
    The Exchange shall make clearing submissions for non-Exchange 
trades only in the following manner:
    (a) Substitution of Participants in Off-Exchange Transactions.
    (1) An Institutional Broker registered with the Exchange and 
acting as an authorized agent of a Clearing Participant may enter a 
non-tape, clearing-only submission into the Exchange's systems for 
trades executed otherwise than on the Exchange for the purpose of 
transferring securities from one Clearing Participant to another, 
provided that the transfer does not constitute a transaction in 
securities that is otherwise subject to trade reporting that has 
not, in fact, been previously and separately reported as a 
transaction. The Exchange shall make such submissions to a Qualified 
Clearing Agency. Each such Institutional Broker must be party to an 
agreement with the Clearing Participant in which name the 
submissions are made under which the Institutional Broker has 
received authorization from the Clearing Participant to act on its 
behalf. Copies of these agreements shall be filed by the 
Institutional Broker with the Exchange.
    (2) A Participant can only use a non-tape, clearing-only 
submission for a trade that has been reported in the market in which 
it was effected.
    (3) An Institutional Broker must enter all non-tape, clearing-
only submissions into the Exchange's systems pursuant to this 
subparagraph (a) for a given non-Exchange transaction within three 
(3) hours of the execution of such transaction.
    (b) Non-Tape, Clearing-Only Riskless Principal Submissions
    (1) An Institutional Broker registered with the Exchange may 
make non-tape, clearing-only submissions into the Exchange's systems 
for submission to clearing to facilitate riskless principal 
transactions as defined in Article 9, Rule 14 (``riskless principal 
transactions'') taking place on another national securities 
exchange, or over-the-counter, only as follows. For riskless 
principal transactions in which an Institutional Broker, after 
having received an order to buy a security, purchases the security 
at the same price to satisfy the order to buy or, after having 
received an order to sell, sells the security at the same price to 
satisfy the order to sell, the Institutional Broker shall make, for 
the offsetting ``riskless principal'' portion of the transaction, a 
clearing-only submission. If the order is executed in multiple 
transactions, the Institutional Broker may enter a non-tape, 
clearing-only submission at the volume-weighted average price 
(``average price'') of those transactions. The Institutional Broker 
shall provide to the Exchange records sufficient to identify such 
transactions as ``riskless principal.''
    (2) A Participant can only use a non-tape, clearing-only 
submission for a trade that has been reported in the market in which 
it was effected.
    (3) An Institutional Broker must enter all non-tape, clearing-
only submissions into the Exchange's systems pursuant to this 
subparagraph (b) for a given non-Exchange transaction within twenty 
(20) minutes of the execution of such transaction. For clearing 
submissions reported at the average price of multiple trade 
executions, the Institutional Broker shall enter the non-tape, 
clearing-only submission into the Exchange's systems within twenty 
(20) minutes of the last component trade execution.
    (c) Each Clearing Participant which is a party to a non-tape, 
clearing-only submission under this rule will pay a Trade Processing 
Fee in the amount specified in the Exchange's Fee Schedule.
       
Interpretation and Policies:
    .01 An Institutional Broker making a submission pursuant to this 
rule must obtain documentary evidence of a non-Exchange trade 
execution no later than the close of business on the day of the 
trade and submit such evidence to the Exchange in a format 
acceptable to it and within such timeframe that the Exchange shall 
designate, but in no event later than T+1.
    .02 An Institutional Broker entering a non-tape, clearing-only 
submission shall be responsible for ensuring that all clearing 
information is accurate and complete prior to its submission.
    .03 Post-trade cancellations and corrections: price, volume and 
security changes. No later than T+1, Exchange operations personnel 
may cancel a clearing submission and enter a new corrective 
submission if the Institutional Broker which entered the original 
submission provides documentary evidence that the original trade 
execution was cancelled and re-entered at the same price, quantity 
and/or security of the corrective clearing submission. Exchange 
operations personnel may also correct a clearing submission if it 
was erroneously entered on terms which differed from the reported 
trade execution, if provided with documentary evidence of the 
original trade execution. Exchange operations personnel may also 
enter a clearing submission which the Institutional Broker failed to 
enter or which was not processed due to systems error, if provided 
with documentary evidence of the original trade execution. In all 
cases, the documentary evidence must be provided to the Exchange 
Operations personnel prior to entry of the corrective submission. In 
extraordinary circumstances, corrective submissions can be made 
after T+1 subject to the approval of an officer of the Exchange.
    .04 Post-trade cancellations and corrections: Clearing 
Participant changes. Either Exchange Operations personnel or 
Institutional Brokers may cancel a clearing submission and enter a 
new corrective submission to correct a misidentification of the 
Clearing Participant, by no later than T+1. Before the corrective 
submission is made, the Institutional Broker must obtain documentary 
evidence of the misidentification of the Clearing Participant, and 
provide it to the Exchange Operations personnel if the latter are 
making the corrective submission. In extraordinary circumstances, 
corrective submissions can be made after T+1 subject to the approval 
of an officer of the Exchange.
* * * * *
    The Exchange is proposing to adopt Rule 6 to Article 21 to set 
forth the terms upon which the Exchange will submit information for 
clearance and settlement to the National Securities Clearing 
Corporation, (``NSCC'') and to amend Article 1, Rule 1 to add updated 
definitions and Article 21, Rule 1 to delete definitions. Rule 6 
provides for the submission of clearing related information to a 
Qualified Clearing Agency i.e., NSCC. The CHX submits clearing 
information to NSCC through

[[Page 67241]]

the Regional Interface Operation (``RIO'') system.\6\
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    \6\ RIO is a service offered by NSCC to regional exchanges to 
make clearing submissions.
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    Proposed Rule 6(a) addresses clearing submissions made via CHX 
systems, i.e., Brokerplex,\7\ for transactions executed on another 
exchange or in the over-the-counter (``OTC'') market. These submissions 
will be made by the Exchange only on behalf of an Institutional Broker 
acting as an authorized agent of a Clearing Participant.\8\ The 
Institutional Broker may submit a clearing-only entry to Brokerplex for 
the purpose of transferring securities from one Clearing Participant to 
another, as long as the trade has been properly reported for 
transaction reporting purposes.
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    \7\ The Brokerplex[supreg] system is an order entry, management 
and recordation system provided by the Exchange for use by 
Institutional Brokers. See Article 17, Interpretations and Policies 
.03.
    \8\ Institutional Brokers are an elective sub-category of 
Exchange Participants who register with the Exchange and are subject 
to the obligations of Article 17 of the CHX rules, in addition to 
the other provisions of Exchange rules.
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    Proposed Section (a)(3) of Rule 6 would require an Institutional 
Broker to enter all non-tape, clearing-only entries into the Exchange's 
systems for a given non-Exchange transaction within three hours of the 
execution of the transaction. According to the CHX, the complex nature 
of these transactions, which frequently involve multiple contraparties, 
and are often of large size such that the Clearing Participant 
separately confirms the terms of the transaction with the Institutional 
Broker to ensure the creditworthiness of the counter-party, 
necessitates an extended period of time for submission of clearing 
information to NSCC. Once all of the final clearing allocations have 
been entered in Brokerplex for submission to NSCC, the CHX deems them 
to be ``locked in'' for purposes of comparison and settlement.\9\
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    \9\ The Exchange will identify non-CHX trades as distinct from 
transactions executed in the CHX's Matching System in submissions to 
NSCC.
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    CHX provided three scenarios wherein Institutional Brokers would 
make clearing entries under paragraph (a) of Rule 6. First, an 
Institutional Broker may buy or sell securities on another trading 
center as a correspondent of a clearing member of that trading center. 
Any resulting execution report would be ``flipped'' from the executing 
clearing member via entries in Brokerplex to the trading account of the 
Institutional Broker or the CHX Clearing Participant on whose behalf 
the Institutional Broker is acting.\10\
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    \10\ See Notice, supra note 3.
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    Second, an Institutional Broker may execute or instruct a third 
party broker-dealer to execute a cross-transaction in the OTC market 
and report the transaction to a Trade Reporting Facility (``TRF'') 
using the Institutional Broker's trading symbol or the symbol of the 
Institutional Broker's clearing firm when reporting the trade to the 
Consolidated Tape.\11\ The Institutional Broker may then enter the 
transaction information in Brokerplex and transfer the positions from 
its own trading account (or the account of its clearing firm) to the 
accounts of the ultimate beneficiaries of the trade. Once all 
components of the transaction are properly allocated, the information 
in Brokerplex is forwarded to the NSCC via RIO for clearance and 
settlement.
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    \11\ The ability of an Institutional Broker to directly execute 
a transaction in the OTC market is predicated on the Commission's 
approval of a separate proposal which would establish that 
Institutional Brokers are not operating directly on the Exchange. 
(SR-CHX-2011-29). See Securities Exchange Act Release No. 65354 
(September 19, 2011), 76 FR 59476 (September 26, 2011). 
Institutional Brokers who execute transactions in the OTC market 
must be members of FINRA. See Section 15(b)(8) of the Act.
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    Third, transactions may be executed on another trading center by a 
third party broker-dealer, which then utilizes an Institutional Broker 
as its agent for handling the allocation of the clearing information. 
These third party transactions may include both cross-transactions 
executed OTC and reported to a TRF by the third party broker-dealer, as 
well as purchases or sales of securities by the third party broker-
dealer on another exchange or OTC.\12\ The third party broker-dealer 
instructs the Institutional Broker how to handle any substitution of 
Clearing Participants and allocate the trade. In either the second or 
third scenario, the trade may have been executed with broker-dealer A 
as the selling firm and broker-dealer B as the buyer. After the trade 
has been executed, broker-dealer B may step out of the transaction in 
favor of broker-dealer C.\13\ The Institutional Broker making the 
clearing submission would be responsible for substituting the various 
parties based upon instructions of those parties or their agents. 
Clearing information for third-party cross-trades and single-sided 
purchases or sales is then recorded in Brokerplex and submitted to NSCC 
in the same manner as if the trades had been executed by the 
Institutional Broker.
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    \12\ The Institutional Broker may be instructed to allocate the 
trades at an average price of the transactions executed by the third 
party broker-dealer.
    \13\ There may be multiple broker-dealers (e.g., broker-dealers 
D, E, and F) who ``step in'' to one or both sides of the transaction 
because many of the transactions handled by Institutional Brokers 
arise out of transactions on a derivatives exchange, either as a 
hedge or part of a combination stock-options order (such as a buy-
write trade).
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    Rule 6(a) requires Institutional Brokers that make these 
submissions to have an agreement with the Clearing Participant in whose 
name the entries are submitted. The agreement must authorize the 
Institutional Broker to act on behalf of the Clearing Participant.\14\ 
The Institutional Broker must file copies of these agreements with the 
Exchange. The Exchange has developed functionality within the 
Brokerplex application to validate that such agreements are in place 
before an Institutional Broker is able to submit clearing entries to 
Brokerplex.\15\ The Exchange will monitor clearing submissions to 
ensure that the Institutional Brokers involved in these transactions 
have the appropriate agreements in place and will take disciplinary 
action to enforce this requirement.
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    \14\ In addition, the Exchange requires Clearing Participants to 
sign a clearing agreement by which the latter accept responsibility 
for non-Exchange transactions submitted to NSCC through the auspices 
of an authorized Institutional Broker. See Amendment 1 at note 11.
    \15\ See Amendment No. 1, supra note 5.
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    CHX's system for making clearing submissions does not provide a 
fully-automated comparison feature.\16\ CHX states that its rules 
provide procedural safeguards to ensure that the manual comparison is 
valid. Furthermore, a Participant is prohibited from using a non-tape, 
clearing-only submission for the purpose of effecting a transaction 
required to be trade reported which has not been trade reported or for 
reporting a trade for regulatory purposes.\17\ Proposed Interpretation 
and Policy .01 to Rule 6 will require that an Institutional Broker 
submitting an entry for a transaction executed otherwise than on the 
Exchange obtain documentary evidence of the non-Exchange trade 
execution no later than the close of trading and submit such evidence 
to the Exchange in a format acceptable to it and within such

[[Page 67242]]

timeframe that the Exchange shall designate, but in no event later than 
T+1. CHX believes this requirement will strengthen the safeguards 
associated with submitting trades for comparison and provide CHX with 
the necessary data to perform surveillance of the transactions.\18\
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    \16\ The Commission understands that Nasdaq's ACT system 
provides a fully automated comparison process. CHX has committed to 
develop such a system by December 2011. See Amendment No. 1 at notes 
5 and 13.
    \17\ As detailed in a letter to Kathy England, Assistant 
Director, Division of Trading and Markets, Commission, and Mark 
Donohue, Assistant Director, Office of Compliance, Inspections and 
Examinations, Commission dated October 24, 2011, the Exchange plans 
to monitor the activity of Participants that make clearing-only 
submissions for compliance with applicable trade reporting rules. In 
addition, the Exchange has made arrangements to share data regarding 
its clearing submissions for non-Exchange trades with FINRA in order 
to assist in its efforts to oversee trading activity in the over-
the-counter marketplace.
    \18\ For transactions which originated with the Institutional 
Broker and were handled in the Brokerplex system, the execution 
report provided either directly from the away trading center or a 
drop copy thereof will constitute the written evidence of the non-
Exchange trade execution. If the trade was executed by a third-party 
broker-dealer, the Institutional Broker must provide a record which 
evidences the away market trade execution (such as a confirmation or 
other record from the executing trading center) to the Exchange in a 
specified format to be communicated by the Exchange. See Amendment 
No. 1 at notes 14 and 18.
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    Proposed Interpretation and Policy .02 states that an Institutional 
Broker that enters a non-tape, clearing-only record is responsible for 
ensuring that all clearing information is accurate and complete before 
the clearing information is submitted to NSCC. Section (b) of Rule 6 
governs non-tape riskless principal submissions.\19\ It permits an 
Institutional Broker to enter non-tape submissions in Brokerplex which 
are submitted to clearing to facilitate riskless principal transactions 
that occurred otherwise than on the Exchange. For riskless principal 
transactions in which an Institutional Broker, after having received an 
order to buy a security, purchases the security at the same price to 
satisfy the order to buy, or, after having received an order to sell, 
sells the security at the same price to satisfy the order to sell, the 
Institutional Broker will submit a clearing-only report for the 
offsetting riskless portion of the transaction. If the order is 
executed in multiple transactions, the Institutional Broker may submit 
a non-tape, clearing-only report at the volume-weighted average price 
(``average price'') of those transactions. Entries in Brokerplex must 
be made within twenty minutes of the execution, or for multiple trade 
executions reported at an average price, within twenty minutes of the 
last component trade execution. The Institutional Broker must provide 
CHX records sufficient to identify the transactions as riskless 
principal transactions.\20\
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    \19\ Article 9, Rule 14 (Reporting Riskless Principal 
Transactions) describes the manner in which Exchange Participants 
are required to report riskless principal transactions for trade 
reporting purposes.
    \20\ The information necessary to identify riskless principal 
transactions is normally provided to the Exchange either directly 
via Brokerplex in the form of the execution report from the other 
trading center or a ``drop copy'' of the execution report (which can 
be systematically linked to the original order and the clearing 
submission), which must be provided by the Institutional Broker 
pursuant to Article 11, Rule 4. The Exchange plans to add a riskless 
principal identifier to these records.
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    Proposed Interpretation and Policy .03 governs post-trade 
cancellations and corrections of clearing-related information entered 
pursuant to proposed Rule 6.\21\ It would permit Exchange personnel, 
generally no later than T+1, to cancel a clearing submission and enter 
a corrected submission if the Institutional Broker that entered the 
original submission provides documentary evidence that the trade was 
cancelled in the marketplace in which it was originally executed and 
re-entered at the price, quantity, and/or security of the corrected 
clearing submission. Exchange operations personnel may also enter a 
clearing submission which an Institutional Broker failed to enter \22\ 
or which was not processed due to a systems error, if operations 
personnel have been provided documentary evidence of the original trade 
execution. Proposed Interpretation and Policy .04 would permit either 
Exchange Operations personnel or Institutional Brokers to cancel a 
clearing submission and enter a new corrective submission to correct a 
misidentification of the Clearing Participant, generally, by no later 
than T+1. Before the corrective submission is made, the Institutional 
Broker must obtain documentary evidence of the misidentification of the 
Clearing Participant, and provide it to the Exchange Operations 
personnel if the latter are making the corrective submission. 
Authorizing Exchange personnel to make these cancellations and 
corrections should prevent unnecessary and unwanted failures to clear 
and should help ensure transactions settle in an accurate manner.
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    \21\ CHX states that the need to correct a clearing record is 
typically identified by an order-sending firm or Institutional 
Broker where there is a clearing break and the parties are looking 
for a position which does not show up or they have a position they 
did not expect to have. See Amendment No. 1 at 17.
    \22\ If an Institutional Broker fails to enter the clearing 
submission within the timeframes specified in the Rule 6, it will be 
in violation of the rule.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 rule-comments@sec.gov. Please include 
File No. SR-CHX-2011-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CHX-2011-17. 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 changes 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 inspection and 
copying in the Commission's Public Reference Room on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the CHX. 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 No. SR-CHX-
2011-17 and should be submitted on or before November 21, 2011.

IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\23\ and, in particular, Section 6(b)(5) of the Act,\24\ 
which, among other things, requires that

[[Page 67243]]

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, 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. The Commission believes that 
the Exchange's proposal will facilitate the clearance and settlement of 
complex transactions that occur otherwise than on the CHX.
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78f(b)(5).
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    Rule 6 sets forth the requirements for Institutional Brokers who 
utilize CHX's systems to provide a clearance service for transactions 
executed otherwise than on the Exchange.\25\ The filing permits 
Institutional Brokers to provide a clearing service by entering 
information with respect to trades that have occurred in multiple 
venues in Brokerplex for submission to NSCC. Proposed Rule 6(a) 
requires Institutional Brokers to have an agreement with the Clearing 
Participant in whose name the entries are made and to file a copy of 
the agreement with the Exchange, which should ensure Institutional 
Brokers have the appropriate authorization to act on behalf of a 
particular Clearing Participant. The Exchange will provide a 
functionality within Brokerplex to validate that an agreement is in 
place before an Institutional Broker may submit clearing entries in 
Brokerplex. CHX requires Clearing Participants to sign a clearing 
agreement accepting responsibility for non-Exchange transactions 
submitted to NSCC through an Institutional Broker.\26\ CHX will 
distinguish non-CHX trades from CHX-trades in its submissions to 
NSCC.\27\ These requirements should increase transparency regarding the 
clearing service that Institutional Brokers provide for non-exchange 
trades and should enable the Exchange and other regulators to surveil 
the clearing activity to ensure that Institutional Brokers and Clearing 
Participants are acting consistent with the provisions of the rule.
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    \25\ NASDAQ Rule 7038 permits the use of step-outs by member 
firms for trades effected otherwise than on NASDAQ. Rule 7042 
governs clearing entries for riskless principal transactions. FINRA 
also permits the use of non-tape, clearing only entries for riskless 
principal transactions. See e.g., Rule 6282.
    \26\ See Article 21, Rule 4. The Commission expects that CHX 
will maintain copies of these agreements.
    \27\ See Amendment No. 1, supra note 5.
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    In addition, CHX has represented that it will develop an automated 
system for the submission of clearing information such that trades for 
which clearing information has been submitted are locked-in before the 
clearing information is submitted to NSCC. Locked-in trades eliminate 
the risk to NSCC that after a clearing entry has been submitted to it, 
one of the parties to the transaction will disavow the transaction. 
Further, for submissions pursuant to proposed Rule 6(a), the 
Institutional Broker must make clearing entries involving substitution 
of parties within three hours of the execution of the transaction, and 
provide documentation to the Exchange of a non-Exchange execution no 
later than the close of business on the day of the trade. These aspects 
of the rule should assist the Exchange as well as other regulators to 
more effectively monitor this clearing activity. The Commission urges 
CHX to continue to review the amount of time Institutional Brokers have 
to provide clearing information to CHX.
    Rule 6(b) will permit Institutional Brokers to submit non-tape, 
clearing only entries for riskless principal transactions. 
Institutional Brokers must provide the Exchange records to demonstrate 
that the transactions were riskless principal transactions. The 
Institutional Broker must make all clearing entries within twenty 
minutes of the execution of the transaction, or, in the case of 
multiple transactions, of the last component trade execution, and 
provide to the Exchange documentation of a non-Exchange trade execution 
no later than the close of business on the day of the trade. These 
aspects of the rule should assist the Exchange as well as other 
regulators in more effectively monitoring clearing activity.
    Furthermore, the Commission notes that, with respect to either 
category of submissions of clearing information for trades executed 
other than on the Exchange, CHX's proposed rule forbids Participants 
from using CHX's clearing submission services to avoid any regulatory 
trade reporting obligations.\28\ The Commission understands that CHX 
will share data regarding its clearing submissions for non-Exchange 
trades with FINRA in order to assist FINRA in supervising the over-the-
counter component of this activity.\29\ The rule should provide CHX 
with additional information and documentation regarding the clearing 
activities of Institutional Brokers and thus enhance CHX's ability to 
surveil non-tape, clearing-only entries related to transactions 
executed otherwise than on the Exchange.
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    \28\ See proposed Rule 6(a)(2) and 6(b)(2).
    \29\ See Amendment No. 1, supra note 5.
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    Finally, the rule permits Exchange personnel, under prescribed 
circumstances, to cancel and/or correct clearing submissions and 
codifies that Institutional Brokers are responsible for ensuring that 
all clearing information is complete and accurate for non-tape, 
clearing-only submissions. The Commission believes that the limitations 
regarding changes to clearing entries are appropriate, however, the 
Commission expects CHX to monitor the changes made by Exchange 
personnel to ensure that they are only making changes that are 
permitted by the rule and only when they have the appropriate 
documentation indicating the need for the change to the clearing 
records. The limitations in the rule should help avoid abuse of the 
process by Institutional Brokers.
    The Commission finds good cause to approve the filing, as modified 
by Amendment No. 1, before the 30th day after the date of publication 
in the Federal Register, because the changes made in Amendment No. 1 
clarify the activity that will be permitted under the rule and add 
limitations to make the rule more effective. As discussed, NASDAQ 
provides a similar service for its members.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-CHX-2011-17), as amended, 
be, and hereby is, approved, on an accelerated basis.
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    \30\ 15 U.S.C. 78s(b)(2).
    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-28046 Filed 10-28-11; 8:45 am]
BILLING CODE 8011-01-P


