
[Federal Register Volume 81, Number 102 (Thursday, May 26, 2016)]
[Notices]
[Pages 33561-33563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12384]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77875; File No. SR-ISE-2016-08]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change Related to Market Wide Risk 
Protection

May 20, 2016.

I. Introduction

    On March 17, 2016, the International Securities Exchange, LLC (the 
``Exchange'' or ``ISE'') 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 to introduce new activity-based 
risk protection functionality. The proposed rule change was published 
for comment in the Federal Register on April 6, 2016.\3\ No comment 
letters were received in response to this 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. 77489 (Mar. 31, 
2016), 81 FR 20004 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposed to introduce two activity-based risk 
protection measures that will be mandatory for all members: (1) The 
``Order Entry Rate Protection,'' which prevents members from entering 
orders at a rate that exceeds predefined thresholds,\4\ and (2) the 
``Order Execution Rate Protection,'' which prevents members from 
executing orders at a rate that exceeds their predefined risk settings 
(together, ``Market Wide Risk Protection''). The Exchange will announce 
the implementation date of the proposed rule in a circular to be 
distributed to members prior to implementation.\5\
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    \4\ The Exchange stated that it will initiate the Order Entry 
Rate Protection pre-open, but in a manner that allows members time 
to load their orders without inadvertently triggering the 
protection. The Exchange further noted that it will establish and 
communicate the precise initiation time via circular and prior to 
implementation. See Notice, supra note 3, at 20004 n.4.
    \5\ See Notice, supra note 3, at 20004.
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    Pursuant to proposed Rule 714(d), ``Market Wide Risk Protection,'' 
the Exchange's trading system (the ``System'') will maintain one or 
more counting programs on behalf of each member that will track the 
number of orders entered and the number of contracts traded on ISE or, 
if chosen by the member, across both ISE and its affiliate, ISE Gemini, 
LLC (``ISE Gemini'').\6\ Members may also use multiple counting 
programs to separate risk protections for different groups established 
within the member.\7\ The counting programs will maintain separate 
counts, over rolling time periods specified by the member, for each 
count of: (1) The total number of orders entered in the regular order 
book; (2) the total number of orders entered in the complex order book 
with only options legs; (3) the total number of orders entered in the 
complex order book with both stock and options legs; (4) the total 
number of contracts traded in regular orders; and (5) the total number 
of contracts traded in complex orders with only options legs.\8\
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    \6\ Members may set different risk parameters for their trading 
activity on each exchange, or they may set risk parameters that 
apply to their trading across both ISE and ISE Gemini. See proposed 
Rule 714(d).
    \7\ The Exchange stated that it will explain how members can go 
about setting up risk protections for different groups (e.g., 
business units) in a circular issued to members. See Notice, supra 
note 3, at 20004-05 n.7.
    \8\ See proposed Rule 714(d). The Exchange clarified that a 
member's allowable order rate for the Order Entry Rate Protection 
will be comprised of parameters (1) to (3), while the allowable 
contract execution rate for the Order Execution Rate Protection will 
be comprised of parameters (4) and (5). The Exchange further 
explained that contracts executed on the agency and contra-side of a 
two-sided crossing order will be counted separately for the Order 
Execution Rate Protection. See Notice, supra note 3, at 20005.
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    According to the Exchange, members will have the discretion to 
establish the applicable time period for each of the counts maintained 
under the Market Wide Risk Protection, provided that the selected 
period is within minimum and maximum time parameters that will be 
established by the Exchange and announced via circular.\9\ By contrast, 
the Exchange's proposal does not establish minimum or maximum values 
for any of the order entry or execution parameters described in (1) 
through (5) above. Nevertheless, the Exchange will establish default 
values \10\ for the time period, order entry, and contracts traded 
parameters in a circular to be distributed to members. The Exchange 
represented that such default values will apply only to members that do 
not submit their own parameters for the Market Wide Risk Protection 
measures.\11\
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    \9\ Id. The Exchange stated that it anticipated setting these 
minimum and maximum time parameters at one second and a full trading 
day, respectively. See Notice, supra note 3, at 20005 n.9.
    \10\ See proposed Rule 714(d); see also Notice, supra note 3, at 
20005.
    \11\ Id.
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    The Exchange further proposed to use separate counts for regular 
orders, complex options orders,\12\ and complex orders with a stock 
component,\13\ as it believed that members may want to have different 
risk settings for these instruments. If the Market Wide Risk Protection 
is triggered based on any count, however, proposed Rule 714(d) states 
that the triggered action (discussed below) will be taken across the 
entire market--with respect to all products traded in both simple and 
complex instruments and across ISE (or,

[[Page 33562]]

if set by the member, across ISE and ISE Gemini).\14\
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    \12\ The Exchange explained that the contract execution count 
for complex orders with only options legs will be the sum of the 
number of contracts executed with respect to each leg. Id.
    \13\ Complex orders that contain a stock component will not be 
included as part of the complex order execution count. The Exchange 
stated its belief that the separate components of stock-option 
orders (i.e., options components executed in contracts and stock 
components executed in shares) could not be combined in a way that 
would provide a meaningful measure of risk exposure. See Notice, 
supra note 3, at 20005 n.10.
    \14\ Proposed Rule 714(d)(1); see also Notice, supra note 3, at 
20005.
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    Under proposed Rule 714(d), the System will trigger the Market Wide 
Risk Protection when it determines that the member has either (1) 
entered a number of orders exceeding its designated allowable order 
rate for the specified time period, or (2) executed a number of 
contracts exceeding its designated allowable contract execution rate 
for the specified time period.\15\ If the member's thresholds have been 
exceeded in either simple or complex instruments, the Market Wide Risk 
Protection will be triggered and the System will automatically reject 
all subsequent incoming orders entered by the member on ISE or, if set 
by the member, across both ISE and ISE Gemini.\16\ In addition, if the 
member has opted in to this functionality, the System will 
automatically cancel all of the member's existing orders.\17\ The 
Market Wide Risk Protection will remain engaged until the member 
manually (e.g., via email) notifies the Exchange to enable the 
acceptance of new orders.\18\
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    \15\ Id.; see also proposed Rule 714(d)(1). Specifically, after 
a member enters or executes an order, the System will look back over 
the specified time period to determine whether the member has 
exceeded the relevant thresholds. See Notice, supra note 3, at 
20005. In the Notice, the Exchange provided examples illustrating 
how the Market Wide Risk Protection functionality would work both 
for order entry and order execution protections. See Notice, supra 
note 3, at 20005-06.
    \16\ According to the Exchange, members that set different risk 
parameters for ISE and ISE Gemini will only have their orders 
rejected on the exchange whose threshold was exceeded. See Notice, 
supra note 3, at 20005 n.11.
    \17\ Proposed Rule 714(d)(2).
    \18\ Proposed Rule 714(d)(3). Members who have not opted to 
cancel all existing orders under proposed Rule 714(d)(2), however, 
will still be able to interact with their existing orders entered 
before the Market Wide Risk Protection was triggered. For instance, 
such members may send cancel order messages and/or receive trade 
executions for those orders. Id.; see also Notice, supra note 3, at 
20005.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \19\ 
and rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act, which requires, among other things, that the rules 
of a national securities exchange be 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.\21\
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    \19\ 15 U.S.C. 78f(b).
    \20\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposed activity-based 
order protections will provide an additional tool to members to assist 
them in managing their risk exposure.\22\ Specifically, the Commission 
believes that the Market Wide Risk Protection functionality may help 
members to mitigate the potential risks associated with entering and/or 
executing a level of orders that exceeds their risk management 
thresholds that may result from, for example, technology issues with 
electronic trading systems. Further, the Commission notes that other 
exchanges have established risk protection mechanisms for members and 
market makers that are similar in many respects to ISE's proposal.\23\
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    \22\ The Exchange currently provides members with limit order 
price protections that reject orders priced too far outside of the 
Exchange's best bid or offer. See ISE Rule 714(b)(2).
    \23\ See, e.g., Miami International Securities Exchange, LLC 
Rule 519A (``Risk Protection Monitor''); BATS BZX Exchange, Inc. 
Rule 21.16 (``Risk Monitor Mechanism'').
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    Proposed Rule 714(d) imposes a mandatory obligation on ISE members 
to utilize the Market Wide Risk Protection functionality. The 
Commission notes that, although the Exchange will establish minimum and 
maximum permissible parameters for the time period values, members will 
have discretion to set the threshold values for the order entry and 
order execution parameters.\24\ If members do not independently set 
such parameters, they will be subject to the default parameters 
established by ISE.\25\ While the Commission believes that the 
Exchange's proposed rule provides members flexibility to tailor the 
Market Wide Risk Protection to their respective risk management needs, 
the Commission reminds members to be mindful of their obligations to, 
among other things, seek best execution of orders they handle on an 
agency basis and consider their best execution obligations when 
establishing parameters for the Market Wide Risk Protection or 
utilizing the default parameters set by ISE.\26\ For example, an 
abnormally low order entry parameter, set over an abnormally long 
specified time period should be carefully scrutinized, particularly if 
a member's order flow to ISE contains agency orders. To the extent that 
a member chooses sensitive parameters, a member should consider the 
effect of its chosen settings on its ability to receive a timely 
execution on marketable agency orders that it sends to ISE in various 
market conditions. The Commission cautions brokers considering their 
best execution obligations to be aware that the agency orders they 
represent may be rejected as a result of the Market Wide Risk 
Protection functionality.
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    \24\ The Exchange has represented that it anticipates that the 
minimum and maximum values for the applicable time period will be 
initially set at one second and a full trading day, respectively, 
which the Commission believes gives members wide latitude in 
establishing the applicable time periods. See Notice, supra note 3, 
at 20005 n.9.
    \25\ Proposed Rule 714(d).
    \26\ See Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290, at 48323 (Sept. 12, 1996) (Order Execution 
Obligations adopting release); see also Securities Exchange Act 
Release No. 51808 (June 9, 2005), 70 FR 37496, 37537-8 (June 29, 
2005) (Regulation NMS adopting release).
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    As discussed above, ISE determined not to establish minimum and 
maximum permissible settings for the order entry and order execution 
parameters in its rule and indicated its intent to set a minimum and 
maximum for the time period parameters that provide broad discretion to 
members (i.e., one second and a full trading day, respectively).\27\ In 
light of these broad limits, the Commission expects ISE to periodically 
assess whether the Market Wide Risk Protection measures are operating 
in a manner that is consistent with the promotion of fair and orderly 
markets, including whether the default values and minimum and maximum 
permissible parameters for the applicable time period established by 
ISE continue to be appropriate and operate in a manner consistent with 
the Act and the rules thereunder.
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    \27\ See Notice, supra note 3, at 20005 n.9; see also supra note 
24.
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    Finally, the Commission believes that it is consistent with the Act 
for ISE to offer its Market Wide Risk Protection across both ISE and 
its affiliate, ISE Gemini, as such functionality could assist members 
in managing and reducing inadvertent exposure to excessive risk across 
both of these markets if the member desires to avail itself of that 
feature. Further, the Commission notes that it previously approved 
ISE's proposal to offer cross-market risk protections for market maker 
quotes, and approval of the cross-market application of the Market Wide 
Risk Protection functionality is consistent with that prior 
approval.\28\
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    \28\ See ISE Rule 804(g); see also Securities Exchange Act 
Release No. 73147 (Sept. 19, 2014), 79 FR 57639 (Sept. 25, 2014) 
(SR-ISE-2014-09) (approval order).

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[[Page 33563]]

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-ISE-2016-08) be, and hereby 
is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12384 Filed 5-25-16; 8:45 am]
 BILLING CODE 8011-01-P


