
[Federal Register Volume 79, Number 235 (Monday, December 8, 2014)]
[Proposed Rules]
[Pages 72745-72747]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28642]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73715; File No. SR-OC-2014-06]


Self-Regulatory Organizations; OneChicago, LLC; Notice of Filing 
of Proposed Rule Change Relating to Bilateral Block and Bilateral EFP 
Reporting Guidance

December 2, 2014.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ notice is hereby given that on November 20, 2014, 
OneChicago, LLC (``OneChicago,'' ``OCX,'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change described in Items I, II, and III 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. OneChicago has also filed 
this rule change with the Commodity Futures Trading Commission 
(``CFTC''). OneChicago filed a written certification with the CFTC 
under Section 5c(c) of the Commodity Exchange Act (``CEA'') on November 
20, 2014.
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    \1\ 15 U.S.C. 78s(b)(7).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    OCX is proposing to issue Notice to Members (``NTM'') 2014-33, 
which provides guidance to market participants regarding bilateral 
block and bilateral Exchange of Future for Physical (``EFP'') 
reporting. NTM 2014-33 provides guidance relating to four aspects of 
bilateral block and bilateral EFP reporting.
    First, NTM 2014-33 defines the completion time of certain types of 
block trades. Specifically, the NTM relates to block trades in which a 
liquidity provider pre-hedges the customer's futures block order by 
executing in a related product, such as the underlying equity. OCX is 
clarifying that those types of block trades must be reported upon 
completion of the customer's full futures order quantity, and are not 
required to be reported in partial portions throughout the day.
    The second topic on which NTM 2014-33 provides guidance is the 
order in which market participants may report a block trade. 
Specifically, for block trades that involve an order originator or 
customer on one side and a liquidity provider on the other, OCX is 
clarifying that it is acceptable for the liquidity provider to inform 
the order originator that the trade is complete, and for the order 
originator to then post the trade to the Exchange (after which time the 
liquidity provider would then accept the trade details in the 
OneChicago System). Previous OCX guidance was silent on this issue.
    Furthermore, OneChicago is proposing to update its reporting time 
requirements to account for the dual-party posting guidance described 
above. Generally, OCX requires the posting party of a block trade to 
post the trade within five minutes of execution, and the accepting 
party to accept the reported trade details within five minutes from the 
time it was posted. OCX is proposing to modify this requirement for 
pre-hedged blocks for two reasons. First, OCX has become aware that 
market participants may be unable to comply with a strict five minute 
deadline when executing a block that involves a hedge in a related 
market. Second, OCX is tailoring the reporting requirements imposed on 
each side of a block trade to allow the side with greater reporting 
requirements more time to meet those obligations.
    Finally, NTM 2014-33 states that block and EFP trades may be 
reported outside the time parameters described in the NTM only in 
extenuating circumstances. The NTM then provides a non-exhaustive list 
of scenarios that OCX may consider to constitute an extenuating 
circumstance.

Block Trade Completion

    Generally, block trades in OCX's products occur with one party (the 
order originator or customer) seeking directional exposure to a single 
stock future. The counterparty (the liquidity provider) hedges in a 
related product, such as the underlying equity, and then buys/sells the 
equivalent number of single stock futures from/to the order originator/
customer. OCX considers this type of ``pre-hedged'' block trade to be 
complete when the liquidity provider hedges in the related market and 
then calculates the futures price by adding or subtracting the agreed 
upon basis from the hedge price.
    Under this interpretation, a block trade may be considered complete 
before the customer's entire order quantity is filled. This 
interpretation has led to concerns among market participants regarding 
how to appropriately report amounts that meet the block trade minimum 
quantity threshold, but that do not satisfy the customer's full order 
quantity. These situations generally arise when a liquidity provider 
has completed a blockable amount, but can no longer execute the 
remaining customer order due to the customer's limit price being 
crossed, or because of a lack of liquidity in the hedge product.
    OCX is now clarifying in NTM 2014-33 that market participants are 
not required to report these ``partial fill'' amounts throughout the 
day. Rather, a block trade of this type is considered complete when the 
liquidity provider has completed the hedge for the customer's full 
futures block order quantity. The NTM then lists certain requirements 
relating to the reporting of block trades pursuant to the NTM. First, 
if the liquidity provider is unable to complete the customer's entire 
futures order quantity equivalent by the end of the day, the reporting 
firm should report the amount that the liquidity provider was able to 
complete, so long as that amount meets the minimum block trade quantity 
threshold. Second, if the liquidity provider was not able to hedge an 
amount at least equal to the minimum block trade quantity threshold, a 
futures block was not created, and thus no block trade may be reported. 
In such a situation, the liquidity provider may offset or maintain its 
long or short position in the hedge product. For example, a liquidity 
provider that bought stock to hedge its sale of futures may sell the 
stock if it was unable to hedge enough shares of stock to reach the 
minimum block trade quantity threshold.
    The NTM then describes a customer's obligation to accept a pre-
hedged amount greater than or equal to the minimum block trade quantity 
threshold. A customer is required to accept a futures block that the 
liquidity provider has completed by pre-hedging. In other words, once a 
liquidity

[[Page 72746]]

provider has pre-hedged an amount in a related market, the customer may 
not refuse to accept the futures equivalent of that pre-hedge. 
Nonetheless, a customer may permissibly cancel the unexecuted balance 
of its order that has not been pre-hedged. In such a case, the firms 
simply report the futures equivalent of the completed pre-hedge amount, 
so long as that amount meets the minimum block trade quantity 
threshold.

Dual Party Posting

    The OneChicago System requires dual-party posting. Specifically, 
one party to the block trade must report the details of the trade, 
while the counterparty must then accept the reported details of the 
trade. In the case of a block trade described above in which one party 
seeks directional exposure and the counterparty provides liquidity by 
pre-hedging in a related market, NTM 2014-33 proposes to allow either 
side to the trade (the customer/order originator or the liquidity 
provider) to initially post the trade. Previous Exchange block trading 
guidance was silent on this issue.
    OCX recognizes that for business or operational purposes, market 
participants may prefer in certain instances for the order originator/
customer to initially report the trade and for the liquidity provider 
to then accept the trade details. Therefore, NTM 2014-33 expressly 
permits market participants to report bilateral blocks in this manner.

Updated Reporting Time Requirements

    OCX Rule 417 (Block Trading) requires that block trades be reported 
to the Exchange ``without delay.'' The term ``without delay'' is 
interpreted by NTM 2012-25 to mean within five minutes of completion of 
the hedge or, if there is no hedge involved, within five minutes of 
agreement to the terms of the trade. NTM 2012-25 clarifies that each 
party to the trade has five minutes to report the trade; that is, the 
party inserting the trade is required to enter the trade into the 
OneChicago System within five minutes of execution and the other party 
is required to accept the trade within five minutes of it being entered 
into the OneChicago System.
    OCX has determined that five minutes per side is not sufficient to 
allow parties enough time to accurately report their block trades when 
the block trade is of the type that involves a liquidity provider pre-
hedging in a related market, because a trade of this type does not 
involve a single point of execution during which parties agree to the 
terms of a trade then immediately report the trade details to the 
Exchange. Rather, these block trades involve multiple steps. Also, 
because the point of execution depends on executions in a related 
market, parties to a block trade need time to respond to their block 
execution and report the trade to the Exchange.
    Accordingly, NTM 2014-33 proposes two alternative reporting time 
requirements depending on whether the liquidity provider or the 
customer/order originator is posting the block trade. The proposed 
reporting times have been made more flexible to account for: (1) The 
amount of time required for the liquidity provider to calculate the 
futures price based on its hedge price; (2) the amount of time required 
for the posting party to enter the trade details into the OneChicago 
System; and (3) the time it may take for a party not on notice to react 
to an inbound message or alert from a counterparty or the OneChicago 
System.\2\
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    \2\ For example, when an order originator sends an order to a 
liquidity provider, the order originator is not on notice as to when 
it will receive a message from the liquidity provider that the hedge 
is complete (or, alternatively, receive a message from the 
OneChicago System that the liquidity provider has inserted the trade 
details into the OneChicago System and that such details must now be 
accepted or rejected). Accordingly, requiring a ``non-notice party'' 
(such as the order originator in this example) to accept or post a 
trade within five minutes may be unreasonably burdensome, as the 
non-notice party may receive this message at any time in the trading 
day.
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    Under NTM 2014-33, in cases where the liquidity provider is 
initially posting the block trade to the Exchange, the liquidity 
provider has fifteen minutes from the final execution of its hedge in 
the related market to calculate the futures price and then insert the 
trade details into the OneChicago System. The liquidity provider in 
this case has fifteen minutes rather than the standard five because the 
liquidity provider must calculate the futures price from its hedge 
price and manually enter the details of the trade into the OneChicago 
System. The order originator then has ten minutes to accept the trade 
in the OneChicago System. The order originator in this case has ten 
minutes rather than the standard five because it is considered a non-
notice party in that it will not become aware that its obligation to 
post its side of the trade is running until it receives a trade report 
from the OneChicago System.
    Conversely, when the order originator will be posting the block 
trade, the liquidity provider has ten minutes to calculate the futures 
price based on the hedge price and then inform the order originator of 
the futures price. The order originator then has fifteen minutes to 
insert the details of the trade into the OneChicago System. The 
liquidity provider then has five additional minutes to accept the trade 
in the OneChicago System. In this case, the liquidity provider 
initially has ten minutes rather than the standard five in order to 
calculate the futures price. The liquidity provider here does not 
receive the full fifteen minutes, however, because it is not also 
entering the trade details into the OneChicago System, as was the case 
in the previous example. The order originator has fifteen minutes 
rather than the standard five because it is considered a non-notice 
party that also needs to insert the details of the trade into the 
OneChicago System. Finally, the liquidity provider then has the 
standard five minutes to accept the inserted trade because it is on 
notice that the trade will soon be posted and simply has to review the 
trade details and accept the trade, and therefore, does not require any 
additional time.
    NTM 2014-33 clarifies that for block trades where there is no hedge 
in a related market (both parties simply agree to a block trade then 
post to the Exchange), NTM 2012-25 controls, and the parties must 
report the block without delay. As such, the reporting party has five 
minutes to insert the trade details into the OneChicago System and the 
accepting party then has five minutes to accept the trade. OCX is also 
clarifying that the standard five minute reporting and five minute 
accepting requirements are also applicable to bilateral EFP trades, 
because those trades do not involve a pre-hedge like the block trades 
described in NTM 2014-33.

Delayed EFP and Block Trade Reporting

    OCX recognizes that in some instances parties to a block trade may 
be unable to report their blocks and EFPs within the timelines required 
by the Exchange. Accordingly, OCX is permitting market participants to 
report block or EFP trades outside the reporting requirements in 
certain situations that the Exchange considers extenuating 
circumstances. NTM 2014-33 provides a non-exhaustive list of scenarios 
that the Exchange may consider to be extenuating circumstances, 
including (1) a technical malfunction or systems outage; (2) 
disagreement between reporting parties on price or some other material 
term of the trade; (3) a firm is reporting or accepting multiple block 
trades within short time period; and (4) unusual or abnormal market 
conditions.
    The text of the proposed rule change is attached as Exhibit 4 to 
the filing submitted by the Exchange but is not

[[Page 72747]]

attached to the published notice of the filing.

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

    In its filing with the Commission, OneChicago 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 self-regulatory organization 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 OneChicago's filing is to provide its market 
participants with guidance regarding the method by which bilateral 
blocks and bilateral EFPs may be reported to the Exchange. 
Specifically, market participants have raised questions regarding 
various aspects of bilateral block and bilateral EFP reporting, 
including how to deal with partial fills and remainders when reporting 
a bilateral block, which party to a bilateral block must report the 
trade first, how much time parties have to report a block trade to the 
Exchange, and under what circumstances, if any, OCX would allow parties 
to a bilateral block or bilateral EFP trade to exceed the reporting 
time requirements. OCX is updating its guidance in NTM 2014-33 to 
account for these questions that have been raised by market 
participants.
2. Statutory Basis
    OneChicago believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\3\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\4\ in particular, in that it 
is designed to foster cooperation and coordination with persons engaged 
in facilitating transactions in securities, and remove impediments to 
and perfect the mechanism of a free and open market and national market 
system. OneChicago believes that providing guidance to its market 
participants regarding the reporting of bilateral trades allows market 
participants to engage in these types of trades with regulatory 
certainty.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OneChicago does not believe that the proposed rule changes will 
impose any impact, or impose any burden, on competition not necessary 
or appropriate in furtherance of the purposes of the Act, in that the 
NTM simply provides guidance regarding how to comply with OCX's 
bilateral block and bilateral EFP reporting rules. The rule change 
furthers competition by updating its bilateral block and bilateral EFP 
guidance to account for the various ways market participants engage in 
such trades. The Exchange believes that the proposed rule change is 
equitable and not unfairly discriminatory because all of the amended 
rules apply equally to all market participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The rule change will become operative on December 10, 2014.
    At any time within 60 days of the date of effectiveness of the 
proposed rule change, the Commission, after consultation with the CFTC, 
may summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.\5\
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    \5\ 15 U.S.C. 78s(b)(1).
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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 rule-comments@sec.gov. Please include 
File Number SR-OC-2014-06 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-OC-2014-06. 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 such filing also will be available 
for inspection and copying at the principal offices 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-OC-2014-06, 
and should be submitted on or before December 29, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28642 Filed 12-5-14; 8:45 am]
BILLING CODE 8011-01-P


