
[Federal Register Volume 81, Number 58 (Friday, March 25, 2016)]
[Notices]
[Pages 16248-16250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[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,

[[Page 16249]]

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

[[Page 16250]]

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 rule-comments@sec.gov. 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


