
[Federal Register Volume 79, Number 237 (Wednesday, December 10, 2014)]
[Notices]
[Pages 73367-73369]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28905]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73743; File No. SR-BATS-2014-057]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 14.11(j)(5) of BATS Exchange, Inc., To Remove the Restriction 
Prohibiting Market Makers in UTP Derivative Securities From Acting or 
Registering as a Market Maker in Any Reference Asset of That UTP 
Derivative Security or Any Derivative Instrument Based on Such 
Reference Asset

December 4, 2014.
    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 November 21, 2014, BATS Exchange, Inc. (``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with 
the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend Rule 14.11(j)(5) to 
harmonize its restrictions on Market Makers \5\ in UTP Derivative 
Securities \6\ with NYSE Arca, Inc. (``NYSE Arca'') Rule 5.1(a)(2)(v) 
\7\ and the Nasdaq Stock Market LLC (``Nasdaq'') Rule 4630(e).\8\
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    \5\ The term ``Market Maker'' is defined as ``a Member that acts 
as a Market Maker pursuant to Chapter XI.'' See Exchange Rule 
1.5(l).
    \6\ The term ``UTP Derivative Security'' is defined as ``[a]ny 
UTP Security that is a `new derivative securities product' as 
defined in Rule 19b-4(e) under the Exchange Act . . . and traded 
pursuant to Rule 19b-4(e) under the Exchange Act.'' See Exchange 
Rule 14.11(j).
    \7\ See Securities Exchange Act Release No. 67066 (May 29, 
2012), 77 FR 33010 (June 4, 2012) (SR-NYSEArca-2012-46) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Regarding 
the Extension of Unlisted Trading Privileges to New Derivative 
Securities Products That Are Listed on Another Exchange and to Make 
Other Conforming and Technical Amendments). The Commission also 
waived the 30-day operative delay for SR-NYSEArca-2012-46 under Rule 
19b-4(f)(6) of the Act. Id.
    \8\ See Securities Exchange Act Release No. 69858 (June 25, 
2013), 78 FR 39432 (July 1, 2013) (SR-Nasdaq-2013-085) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change [sic] 
Rule 4630 to Remove a Restriction on a Member Acting as a Registered 
Market Maker in a Commodity-Related Security).
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    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.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 Exchange 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 parts of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Rule 14.11(j)(5) to harmonize its 
restrictions on Market Makers in UTP Derivative Securities with NYSE 
Arca Rule 5.1(a)(2)(v) \9\ and Nasdaq Rule 4630(e).\10\ The purpose of 
the proposed rule change is to remove the restriction that a Member 
acting as a registered Market Maker in a UTP Derivative Security on the 
Exchange will not act or

[[Page 73368]]

register as a market maker in any Reference Asset \11\ that a UTP 
Derivative Security derives its value from. The Exchange also proposes 
to amend a related cross-reference contained in Exchange Rule 3.21.
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    \9\ See supra note 7.
    \10\ See supra note 8.
    \11\ A ``Reference Asset'' is defined as one or more currencies, 
or commodities, or derivatives based on one or more currencies, or 
commodities, or is based on a basket or index comprised of 
currencies or commodities that a UTP Derivative Security derives its 
value from. See Exchange Rule 14.11(j)(5).
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    Exchange Rule 14.11(j)(5) prohibits a Market Maker in a UTP 
Derivative Security from acting or registering as a market maker on 
another exchange in any Reference Asset of that UTP Derivative 
Security, or any derivative instrument based on a Reference Asset of 
that UTP Derivative Security (collectively, with Reference Assets, 
``Related Instruments''). NYSE Arca Rule 5.1(a)(2)(v) and Nasdaq Rule 
4630(e) recently amended their respective rules to permit market makers 
to trade in securities underlying the derivative security so long as 
that market maker discloses to NYSE Arca or Nasdaq all accounts within 
which it trades the underlying securities.\12\ As amended, Exchange 
Rule 14.11(j)(5), would similarly remove this prohibition, which states 
that a Market Maker in a UTP Derivative Security is prohibited from 
acting or registering as a market maker on another exchange in any 
Related Instruments.
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    \12\ See supra notes 7 and 8.
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    Similar to NYSE Arca Rule 5.1(a)(2)(v) and Nasdaq Rule 4630(e), 
amended Rule 14.11(j)(5) would require a Member acting as a registered 
Market Maker in a UTP Derivative Security to file with the Exchange, in 
a manner prescribed by the Exchange, and to keep a current list 
identifying all accounts for trading the underlying physical asset or 
commodity, related futures or options on futures, or any other related 
derivatives, which the Member acting as registered Market Maker may 
have or over which it may exercise investment discretion. Rule 
14.11(j)(5) would also prohibit a Member from acting as registered 
Market Maker in the UTP Derivative Security from trading in the 
underlying physical asset or commodity, related futures or options on 
futures, or any other related derivatives in an account in which a 
Member acting as a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, that has not been reported to the Exchange.
    Exchange Rules \13\ ensure that Market Makers in UTP Derivative 
Securities would continue to have in place reasonably designed policies 
and procedures to prevent the misuse of material non-public information 
with regard to also acting as a Market Maker in any Related 
Instruments.\14\ In the context of approving a more flexible, 
principled-based approach to information barriers by NYSE Arca, the 
Commission stated that, ``while information barriers are not 
specifically required under the proposal, a [firm's] business model or 
business activities may dictate that an information barrier or a 
functional separation be part of the appropriate set of policies and 
procedures that would be reasonably designed to achieve compliance with 
applicable securities law and regulations, and with applicable Exchange 
rules.'' \15\ Rule 14.11(j)(5)(B) will continue to prohibit Market 
Makers from using material non-public information in connection with 
trading a Related Instrument. Rule 14.11(j)(5)(B) will also continue to 
require that, in addition to the existing obligations under Exchange 
rules regarding the production of books and records, a Market Maker 
shall, upon request by the Exchange, make available to the Exchange any 
books, records or other information pertaining to any Related 
Instrument trading account or to the account of any registered or non-
registered employee affiliated with the Market Maker for which Related 
Instruments are traded. Lastly, under Exchange Rule 14.11(j)(6) the 
Exchange will enter into comprehensive surveillance sharing agreement 
with other markets that offer trading in Related Instruments to the 
same extent as the listing exchange's rules require the listing 
exchange to enter into a comprehensive surveillance sharing agreement 
with such markets. This amendment does not lessen the protection of 
Members from the risks associated with integrated market making and any 
possible misuse of non-public information.
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    \13\ See Exchange Rules 5.5 and 14.1(j)(5)(B).
    \14\ 15 U.S.C. 78o(g).
    \15\ See Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR 46272 (September 8, 2009) (SR-NYSEArca-2009-78).
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    In addition to the proposal set forth above, the Exchange also 
proposes to amend a related cross-reference contained in Exchange Rule 
3.21. Specifically, Rule 3.21 currently refers to Rule 14.1(c) as the 
source of the definition for UTP Derivative Securities but that 
definition is, in fact, contained in Rule 14.11(j).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \16\ and furthers the objectives of 
Section 6(b)(5) of the Act,\17\ in that it is designed promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest. In addition, the 
Exchange believes that the proposed rule change is not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers. The proposed rule change is substantially similar to the 
existing NYSE Arca Rule 5.1(a)(2)(v) and Nasdaq Rule 4630(e).\18\ In 
addition, the Exchange believes that amending Exchange Rule 14.11(j)(5) 
to permit a Member acting as a registered Market Maker in a UTP 
Derivative Security on the Exchange the flexibility to act or register 
as a market maker in any Reference Asset that a UTP Derivative Security 
derives its value from consistent with Commission and Exchange Rules 
will remove impediments to and perfect the mechanism of a free and open 
market by providing the same flexibility to the Exchange that is 
already available to NYSE Arca and Nasdaq regarding the market maker 
activities for derivative-related Securities. Additionally, Exchange 
Rule 14.11(j)(5), as amended, would continue to serve to prevent 
fraudulent and manipulative acts and practices, as well as to protect 
investors and the public interest from concerns that may be associated 
with integrated market making and any possible misuse of non-public 
information. Finally, the Exchange believes that the correction to the 
cross-reference contained in Rule 3.21 is consistent with the Act in 
that it will protect investors and the public interest by avoiding 
potential confusion with respect to Exchange Rules.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ See supra notes 7 and 8.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change would not impose any burden on 
competition. On the contrary, the Exchange believes that the proposal 
will promote competition because it is a competitive response to 
recently amended NYSE Arca and Nasdaq rules which permit market makers 
to trade in the reference assets or components underlying the 
derivative security on the same terms as that proposed by the 
Exchange.\19\ Thus, the Exchange believes this proposed rule change is 
necessary to permit fair

[[Page 73369]]

competition among national securities exchanges.
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    \19\ See supra notes 7 and 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 
the proposed rule change.

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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6)(iii) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6)(iii). 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.
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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 waiver of the 30-day operative 
delay period is consistent with the protection of investors and the 
public interest. The Commission notes that the proposal would allow 
Market Makers in a UTP Derivative Security on the Exchange to act or 
register as a Market Maker in any Related Instruments. The Commission 
believes that proposal could allow the Exchange to attract more Market 
Makers to the Exchange, thereby potentially increasing liquidity in UTP 
Derivative Securities, provide more price competition, and enhance the 
markets for those securities. The Commission further notes that the 
proposal is similar to the rules of other national securities 
exchanges.\22\ Therefore, the Commission designates the proposed rule 
change to be operative upon filing.\23\
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    \22\ See NYSE Arca Equities Rule 5.1(a)(2)(v) and Nasdaq Rule 
4630(e).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has 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 such 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 under 
Section 19(b)(2)(B) \24\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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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-BATS-2014-057 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BATS-2014-057. 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 will also 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-BATS-2014-057 and should be 
submitted on or before December 31, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28905 Filed 12-9-14; 8:45 am]
BILLING CODE 8011-01-P


