
[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21931-21932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08426]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77553; File No. SR-CBOE-2016-009]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Relating to LMMs 
and DPMs

April 7, 2016.

I. Introduction

    On February 8, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to amend its rules 
relating to Lead Market-Makers (``LMMs''), Designated Primary Market-
Makers (``DPMs'') and Supplemental Market-Makers (``SMMs''). The 
proposed rule change was published for comment in the Federal Register 
on February 26, 2016.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77200 (February 22, 
2016), 81 FR 9910 (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ A more detailed description of the proposed rule change 
appears in the Notice. See Notice, supra note 3.
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    The Exchange proposes to (i) reorganize, simplify and make 
consistent certain text relating to LMM and DPM obligations generally, 
(ii) amend its Rules related to LMMs, (iii) delete outdated references 
in its Rules to SMMs and other obsolete language and (iv) make other 
clarifying changes.
    Specifically, the Exchange proposes to make modifications to Rules 
8.15 (pertaining to LMMs in Hybrid 3.0 classes), 8.15A (pertaining to 
LMMs in Hybrid classes) and 8.85 (pertaining to DPMs) to modify the 
descriptions of certain obligations of LMMs and DPMs (e.g., obligations 
related to quote accuracy, bid/ask differentials, minimum size and 
trading rotations, competitive markets and promotion of the Exchange, 
and material operational or financial change notifications) to be more 
consistent with each other.\5\ The Exchange notes that LMMs and DPMs 
have substantially similar functions and obligations (including the 
same continuous quoting obligations, along with the same participation 
entitlement percentages), and therefore, having consistent language 
with respect to these obligations will simplify its rules and reflect 
the similar roles served by LMMs and DPMs.\6\
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    \5\ See Notice, supra note 3, at 9913.
    \6\ See id. Currently, the primary difference between LMMs and 
DPMs relates to their appointment terms. An LMM receives an 
appointment for a limited term (e.g., one month), while a DPM serves 
in that role until it resigns or the Exchange removes it from that 
role pursuant to Rule 8.90.
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    Of significance, CBOE proposes to change the opening quoting 
obligations of LMMs and DPMs. CBOE Rules 8.15A(b)(iv) and 8.85(a)(xi) 
require LMMs and DPMs, respectively, to ensure that a trading rotation 
is initiated promptly following the opening of the underlying security 
in 100% of the series of each allocated class by entering opening 
quotes as necessary. The Exchange proposes to modify the opening quote 
requirement to require that opening quotes must be entered within one 
minute in any series that is not open due to the lack of a quote. The 
proposed rule change also modifies the Rules' language to provide that 
the timing of the opening quoting obligation begins after the 
initiation of an opening rotation on the Exchange rather than after the 
opening of the underlying security.\7\
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    \7\ See Notice, supra note 3, at 9913.
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    CBOE also proposes to impose a continuous quoting obligation on 
LMMs in Hybrid 3.0 classes.\8\ LLMs in Hybrid classes currently must 
provide continuous electronic quotes in the lesser of 99% of the non-
adjusted option series or 100% of the non-adjusted option series minus 
one call-put pair, with the term ``call-put pair'' referring to one 
call and one put that cover the same underlying instrument and have the 
same expiration date and exercise price.\9\ According to CBOE, its 
rules currently do not prescribe for LMMs a continuous electronic 
quoting requirement for Hybrid 3.0 classes, though CBOE has 
historically assumed a requirement of at least 90% of the series of 
each appointed class for 99% of the time.\10\ CBOE now proposes to 
codify for LMMs a continuous quoting requirement for Hybrid 3.0 classes 
to be identical to the existing requirement for LMMs assigned to Hybrid 
classes.\11\
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    \8\ See Notice, supra note 3, at 9915.
    \9\ See CBOE Rule 8.15A(b)(i).
    \10\ See Notice, supra note 3, at 9915.
    \11\ See id. As proposed, this obligation would not apply to 
intra-day add-on series on the day during which such series are 
added for trading, and would apply to an LMM's appointed classes 
collectively. CBOE would determine compliance with an LMM's 
continuous electronic quoting obligation on a monthly basis 
(however, determining compliance with this obligation on a monthly 
basis would not relieve an LMM from meeting this obligation on a 
daily basis, nor would it prohibit the Exchange from taking 
disciplinary action against an LMM for failing to meet these 
obligations each trading day). Further, the proposed Rule would 
provide that when the underlying security for a class is in a limit 
up-limit down state, LMMs in Hybrid 3.0 classes would have no 
quoting obligations in the class. The Exchange represents that these 
obligations are identical to the obligations currently imposed on 
LMMs in Hybrid classes, as well as DPMs in Hybrid 3.0 classes. See 
Notice, supra note 3, at 9915.
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    The Exchange also proposes modifications to Rules 8.15, 8.15A, 8.83 
and 8.85 as they relate to the Off-Floor DPM and Off-/On-Floor LMM 
programs. For instance, CBOE proposes to amend Rule 8.83(g) to conform 
Hybrid 3.0 classes to Hybrid classes by providing that in a Hybrid 3.0 
class in which an Off-Floor DPM has been appointed, the Exchange also 
would be permitted to appoint an On-Floor LMM, which would be eligible 
to receive a participation entitlement under current

[[Page 21932]]

Rule 8.15B with respect to orders represented in open outcry.\12\
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    \12\ The provisions in current Rule 8.15A related to the on-
floor LMM program would apply to Hybrid 3.0 classes pursuant to 
proposed Rule 8.15.
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    CBOE also proposes that the Exchange have the discretion to appoint 
an On-Floor LMM in any class in which an Off-Floor LMM has been 
appointed, and that any such On-Floor LMM would be eligible to receive 
a participation entitlement under current Rule 8.15B with respect to 
orders represented in open outcry.\13\ The Exchange also proposes to 
treat Off-Floor LMMs in a manner similar to the current treatment of 
Off-Floor DPMs with respect to their quoting requirement and 
appointments.
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    \13\ See proposed Rule 8.15, Interpretation and Policy .01(c). 
This proposed change is consistent with the program for Off-Floor 
DPMs/On-Floor LMMs and would extend the applicability of the 
provision to Hybrid and Hybrid 3.0 classes that have Off-Floor LMMs 
(rather than Off-Floor DPMs).
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    CBOE also proposes to make changes to eliminate obsolete 
references, including those related to individual LMMs, SMMs, an 
expired pilot program, the former Linkage Plan, and strike price 
interval, bid/ask differential and quote continuity requirements. 
Further, CBOE proposes to make non-substantive or technical 
modifications to Rules 1.1(fff) and (ggg), 3.2, 6.1A, 6.2A, 6.45A, 
6.45B, 6.74, 8.7, 8.13, 8.14, 8.15, 8.15A, 8.83, 8.85, 17.50, 22.14, 
24.9, and 29.17, including amendments to correct typographical errors, 
update headings, update cross-references to Rules 8.15, 8.15A and 
8.15B, make the rule text more plain English, and make the rule text 
more consistently organized, numbered and worded.

III. Discussion

    The Commission believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\14\ Specifically, the Commission believes the proposed rule change 
is consistent with the Section 6(b)(5) \15\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, 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. 
In addition, the Commission believes the proposed rule change is 
consistent with the Section 6(b)(5) \16\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Commission believes that the proposed rule 
changes to amend Rules 8.15, 8.15A and 8.85 to revise descriptions of 
obligations of LMMs in Hybrid 3.0 classes, LMMs in Hybrid classes, and 
DPMs, respectively, as well as to combine the LMM obligations into a 
single rule for all classes, should benefit investors by providing more 
uniformity to the Rules related to market participants with 
substantially similar functions that are subject to analogous 
obligations. In addition, the Commission believes that CBOE's proposal 
to impose a continuous quoting obligation on LMMs in Hybrid 3.0 classes 
that mirrors the existing continuous quoting obligation in Hybrid 
classes should help facilitate transactions in securities in a manner 
that protects investors and the public interest.
    The CBOE's proposal also slightly modifies the opening quoting 
obligations of LMMs and DPMs to include a specific time by which 
opening quotes must be entered. The Commission believes that the 
Exchange's proposal to require an opening quotation within one minute 
rather than promptly should provide DPMs and LMMs with clearer guidance 
regarding the opening quote obligation, which should facilitate 
compliance by LMMs and DPMs with this obligation. The Commission notes 
the Exchange's representation that nearly all series open for trading 
within this timeframe on a daily basis.\17\ Therefore, the Commission 
believes this time frame should not be unduly burdensome to LMMs and 
DPMs while still helping to ensure a timely opening.
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    \17\ See Notice, supra note 3, at 9913.
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    Further, the Commission believes the proposed revisions to the 
descriptions of the Off-Floor DPM and Off-/On-Floor LMM programs should 
clarify these programs, including with respect to appointments. Among 
other things, CBOE's proposal extends to Hybrid 3.0 classes certain 
provisions currently applicable to Hybrid classes, including on-floor 
appointments, and clarifies the effect on an on-floor appointment when 
an off-floor appointment is reallocated. These changes further 
harmonize Hybrid 3.0 with Hybrid and codify into the CBOE rules 
important detail regarding on and off-floor appointments.
    Finally, the Commission believes that the CBOE's proposal to 
eliminate obsolete provisions, including those related to individual 
LMMs, SMMs, an expired pilot program, the former Linkage Plan, as well 
as references to the non-applicability of strike price intervals, bid/
ask differentials, and quote continuity requirements for LEAPs, should 
protect investors by eliminating potential confusion that may result 
from incorrect references in CBOE's rules. With respect to strike price 
intervals, bid/ask differentials, and quote continuity requirements for 
LEAPs, the CBOE represents that other existing rules address those 
requirements \18\ and, therefore, the proposed rule change should have 
no effect on the regulatory requirements applicable to CBOE market 
makers. The Commission notes that the non-substantive, technical 
changes proposed should help to reduce duplication, simplify and 
provide clarity in the Exchange's rules, which should benefit all CBOE 
market participants.
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    \18\ See Notice, supra note 3, at 9917.
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IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\19\ that the proposed rule change (SR-CBOE-2016-009), be and hereby is 
approved.
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    \19\ 15.U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08426 Filed 4-12-16; 8:45 am]
 BILLING CODE 8011-01-P


