
[Federal Register Volume 82, Number 56 (Friday, March 24, 2017)]
[Notices]
[Pages 15074-15081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05854]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80281; File No. SR-C2-2017-010]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Related to Complex Orders

March 20, 2017.
    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 6, 2017, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Exchange filed the proposal pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend its rules related to complex orders. 
The text of the proposed rule change is provided below (additions are 
italicized; deletions are [bracketed]).
* * * * *

C2 Options Exchange, Incorporated

Rules

* * * * *

Rule 1.1. Definitions

* * * * *

Exchange Spread Market

    The term ``Exchange spread market'' means the derived net market 
based on the BBOs in the individual series legs comprising

[[Page 15075]]

a complex order and, if a stock-option order, the NBBO of the stock 
leg.
* * * * *

National Spread Market

    The term ``national spread market'' means the derived net market 
based on the NBBOs in the individual series legs comprising a 
complex order and, if a stock-option order, the NBBO of the stock 
leg.
* * * * *

Rule 6.13. Complex Order Execution

    (a)-(c) No change.
    . . . Interpretations and Policies:
    .01 No change.
    .02 For each class where COA is activated, the Exchange may also 
determine to activate COA for complex orders resting in COB. For 
such classes, any non-marketable order resting at the top of COB may 
be automatically subject to COA if the order is within a number of 
ticks away from the opposite side of the current [derived 
net]Exchange spread market. [The ``derived net market'' will be 
calculated based on the derived net price of the individual series 
legs. For stock-option orders, the derived net market for a strategy 
will be calculated using the Exchange's best bid or offer in the 
individual option series leg(s) and the NBBO in the stock leg.] The 
Exchange may also determine on a class-by-class and strategy basis 
to limit the frequency of COAs initiated for complex orders resting 
in COB.
    .03 No change.
    .04 Price Check Parameters: On a class-by-class basis, the 
Exchange may determine (and announce via Regulatory Circular) which 
of the following price check parameters will apply to eligible 
complex orders. Paragraphs (b)[, (e)] and (g)(1) will not be 
applicable to stock-option orders.
    For purposes of this Interpretation and Policy .04:
    Vertical Spread. A ``vertical'' spread is a two-legged complex 
order with one leg to buy a number of calls (puts) and one leg to 
sell the same number of calls (puts) with the same expiration date 
but different exercise prices.
    Butterfly Spread. A ``butterfly'' spread is a three-legged 
complex order with two legs to buy (sell) the same number of calls 
(puts) and one leg to sell (buy) twice as many calls (puts), all 
with the same expiration date but different exercise prices, and the 
exercise price of the middle leg is between the exercise prices of 
the other legs. If the exercise price of the middle leg is halfway 
between the exercise prices of the other legs, it is a ``true'' 
butterfly; otherwise, it is a ``skewed'' butterfly.
    Box Spread. A ``box'' spread is a four-legged complex order with 
one leg to buy calls and one leg to sell puts with one strike price, 
and one leg to sell calls and one leg to buy puts with another 
strike price, all of which have the same expiration date and are for 
the same number of contracts.
    To the extent a price check parameter is applicable, the 
Exchange will not automatically execute an eligible complex order 
that is:
    (a)-(d) No change.
    (e) Acceptable Percentage [Distance]Range Parameter:
    (i) An incoming complex order (including a stock-option order) 
after all leg series are open for trading that is marketable and 
would execute immediately upon submission to the COB or following a 
COA if[, following COA,] the execution would be at a price [that is 
not within]outside an acceptable percentage [distance from the 
derived net price of the individual series legs]range. The 
``acceptable percentage range'' is the national spread market (or 
Exchange spread market if the NBBO in any leg is locked, crossed or 
unavailable and for pairs of orders submitted to AIM or SAM) that 
existed when the System received the order or at the start of COA[. 
The ``acceptable percentage distance'' will be a percentage 
determined by the Exchange on a class-by-class basis and shall be no 
less than 3 percent. Such a complex order will be cancelled.], as 
applicable, plus/minus:
    (A) the amount equal to a percentage (which may not be less than 
3%) of the national spread market (the ``percentage amount'') if 
that amount is not less than a minimum amount or greater than a 
maximum amount (the Exchange will determine the percentage and 
minimum and maximum amounts and announce them to Trading Permit 
Holders by Regulatory Circular);
    (B) the minimum amount, if the percentage amount is less than 
the minimum amount; or
    (C) the maximum amount, if the percentage amount is greater than 
the maximum amount.
    (ii) The System cancels an order (or any remaining size after 
partial execution of the order) that would execute or rest in the 
COB at a price outside the acceptable price range.
    (iii) If the System rejects either order in a pair of orders 
submitted to AIM or SAM pursuant to this parameter, then the System 
also cancels the paired order. Notwithstanding the foregoing, with 
respect to an AIM Retained (``A:AIR'') order as defined in 
Interpretation and Policy .10 to Rule 6.51, if the System rejects 
the Agency Order pursuant to this check, then the System also 
rejects the contra-side order; however, if the System rejects the 
contra-side order pursuant to this check, the System still accepts 
the Agency Order if it satisfies the check. To the extent a contra-
side order or response is marketable against the Agency Order, the 
execution price will be capped at the opposite side of the 
acceptable price range.
    (f) [Stock-Option Derived Net Market Parameters: A stock-option 
order that is marketable if, following COA, the execution would not 
be within the acceptable derived net market for the strategy that 
existed at the start of COA.
    (1) An ``acceptable derived net market'' for a strategy will be 
calculated using the Exchange's best bid or offer in the individual 
option series leg(s) and the NBBO in the stock leg plus/minus an 
acceptable tick distance. An ``acceptable tick distance'' (``ATD'') 
will be determined by the Exchange on a class-by-class and premium 
basis.
    (2) Such a stock-option order will be cancelled.
    (3) To the extent that any non-marketable order resting at the 
top of the COB is priced within the ATD of the derived net market, 
the full order will be subject to COA (and the processing described 
in this paragraph (f)). The Exchange may also determine on a class-
by-class and strategy basis to limit the frequency of COAs initiated 
for non-marketable stock-option orders resting in COB.
    In classes where this price check parameter is available, it 
will also be available for COA responses under Rule 6.13(c), AIM and 
Solicitation Auction Mechanism stock-option orders and responses 
under Rule 6.51 and 6.52, and customer-to-customer immediate cross 
stock-option orders under Rule 6.51.08. Such paired stock-option 
orders and responses under these provisions will not be accepted 
except that, to the extent that only a paired contra-side order 
subject to an auction under Rule 6.51 or 6.52 exceeds this price 
check parameter, the contra-side order will not be accepted and the 
paired original Agency Order will not be accepted or, at the order 
entry firm's discretion (i.e., an AIM Retained (``A:AIR'') order as 
defined in Interpretation and Policy .10 to Rule 6.51), continue 
processing as an unpaired stock-option order. To the extent that a 
contra-side order or response is marketable, its price will be 
capped at the price inside the acceptable derived net 
market.]Reserved.
    (g) Limit Order Price Parameters: [The Exchange will not accept 
for execution eligible limit orders if]The System rejects back to a 
Trading Permit Holder a complex limit order with a net debit 
(credit) price more than a specified amount above (below):
    (1) prior to the opening of a series (including during any pre-
opening period and opening rotation)[before a series is opened 
following a halt), the order is priced at a net debit that is more 
than an ATD above] the derived net market using the Exchange's 
previous day's closing[e] prices in the individual option series 
legs comprising the complex order. However, this does not apply[ or 
the order is priced at a net credit that is more than an ATD below 
the derived net market using the Exchange's previous day's close in 
the individual series legs comprising the complex order (as 
determined by the Exchange on a class by class and net premium 
basis)]to stock-option orders, to orders for the account of Market-
Makers or away Market-Makers, or if there is no Exchange previous 
day's closing price in any leg; or
    (2) [once a series has opened, the order is priced at a net 
debit that is more than an ATD above]intraday, the opposite side of 
the national spread[derived net] market. This applies to stock-
option orders, but does not apply [using the Exchange's best bid or 
offer in the individual option series legs comprising the complex 
order or the order is priced at a net credit that is more than an 
ATD below the opposite side derived net market using the Exchange's 
best bid or offer in the individual option series legs comprising 
the complex order (as determined by the Exchange on a class by class 
and net premium basis)]if the NBBO in any leg is locked, crossed or 
unavailable or if there is no Exchange spread market.

[[Page 15076]]

    [Paragraph (g)(1) is not applicable to limit orders of Exchange 
Market-Makers or away Market-Makers or Intermarket Sweep Orders 
(``ISOs'') as ISOs cannot be entered prior to the opening on the 
System. Paragraph (g)(2) is applicable to ISOs for all classes where 
the limit order price parameter is activated. The Exchange may 
determine on a class by class basis and announce via Regulatory 
Circular whether to apply paragraphs (g)(1) and/or (g)(2) to 
immediate-or-cancel complex orders if doing so would be necessary or 
appropriate in furtherance of the interests of investors and the 
promotion of fair and orderly markets. The Exchange may determine to 
widen or narrow the ATDs with respect to particular order types, in 
the interests of fair and orderly markets or, in furtherance of the 
objectives of the Options Order Protection and Locked/Crossed Market 
Plan, as announced via Regulatory Circular.]
    (3) For purposes of this paragraph (g):
    (i) [An ATD shall be no less than 5 minimum net price increment 
ticks (where the ``minimum net price increment'' is the minimum 
increment for net priced bids and offers for the given complex order 
strategy).]The Exchange determines the amount, which may be no less 
than $0.02, on a class-by-class and net premium basis and announces 
the amount to Trading Permit Holders via Regulatory Circular. The 
Exchange may determine to apply a different amount to orders entered 
during the pre-opening or a trading rotation.
    (ii) No limit order price parameter applies to complex orders 
submitted during a halt (including during any pre-opening period and 
opening rotation prior to re-opening following the halt) or to pairs 
of orders submitted to AIM or SAM. The limit order price parameter 
will take precedence over another price check parameter to the 
extent that both are applicable to an incoming limit order.
    (iii) The senior official in the Help Desk may grant [intra-day 
]relief on any trading day (including prior to opening) by widening 
or inactivating one or more of the applicable [ATD]amount parameter 
settings [for complex orders ]in the interest of a fair and orderly 
market.
    (A) Notification of [intra-day ]this relief will be announced 
via electronic message to Trading Permit Holders that request to 
receive such messages. Such [intra-day ]relief will not extend 
beyond the trade day on which it is granted, unless a determination 
to extend such relief is announced to Trading Permit Holders via 
Regulatory Circular. The Exchange will make and keep records to 
document all determinations to grant [intra-day]this relief under 
this Rule, and shall maintain those records in accordance with Rule 
17a-1 under the Exchange Act.
    (B) The Exchange will periodically review determinations to 
grant [intra-day ]relief on any trading day for consistency with the 
interest of a fair and orderly market. [If a limit order is not 
accepted for execution because the limit order price ATD has not 
been met, the order will be returned to the order entry firm. The 
limit order price parameter will take precedence over another price 
check parameter to the extent that both are applicable to an 
incoming limit order.]
    (h) No change.
    .06 Special Provisions Applicable to Stock-Option Orders: Stock-
option orders may be executed against other stock-option orders 
through the COB and COA. Stock-option orders will not be legged 
against the individual component legs, except as provided in 
paragraph (d) below.
    (a) No change.
    (b) Option Component. Notwithstanding the special priority 
provisions contained in paragraphs (c) and (d) below, the option 
leg(s) of a stock-option order shall not be executed on the system 
(i) at a price that is inferior to the Exchange's best bid (offer) 
in the series or (ii) at the Exchange's best bid (offer) in that 
series if one or more public customer orders are resting at the best 
bid (offer) price on the Book in each of the component option series 
and the stock-option order could otherwise be executed in full (or 
in a permissible ratio). The option leg(s) of a stock-option order 
may be executed in a one-cent increment, regardless of the minimum 
quoting increment applicable to that series.
    (1) No change.
    (2) To the extent that a stock-option order resting in COB 
becomes marketable against the [derived net]Exchange spread market, 
the full order will be subject to COA (and the processing described 
in paragraph (b)(1) of this Interpretation and Policy). [The 
``derived net market'' for a strategy will be calculated using the 
Exchange's best bid or offer in the individual option series leg(s) 
and the NBBO in the stock leg.]
    (c)-(f) No change.
    .07 Execution of Complex Orders on the COB Open:
    (a) Complex orders, including stock-option orders, do not 
participate in opening rotations for individual component option 
series legs conducted pursuant to Rule 6.11. When the last of the 
individual component option series legs that make up a complex order 
strategy has opened (and, in the case of a stock-option order, the 
underlying stock has opened), the COB for that strategy will open. 
The COB will open with no trade, except as follows:
    (i) The COB will open with a trade against the individual 
component option series legs if there are complex orders on only one 
side of the COB that are marketable against the opposite side of the 
[derived net]Exchange spread market. The resulting execution will 
occur at the [derived net]Exchange spread market price to the extent 
marketable pursuant to the rules of trading priority otherwise 
applicable to incoming electronic orders in the individual component 
legs. To the extent there is any remaining balance, the complex 
orders will trade pursuant to subparagraph (ii) below or, if unable 
to trade, be processed as they would on an intra-day basis under 
Rule 6.13. This paragraph (i) is not applicable to stock-option 
orders because stock-option orders do not trade against the 
individual component option series legs when the COB opens.
    (ii) The COB will open (or continue to open with another trade 
if a trade occurred pursuant to subparagraph (i) above) with a trade 
against complex orders if there are complex orders in the COB 
(including any remaining balance of an order that enters the COB 
after a partial trade with the legs pursuant to subparagraph (i)) 
that are marketable against each other and priced within the 
[derived net]Exchange spread market. The resulting execution will 
occur at a market clearing price that is inside the [derived 
net]Exchange spread market and that matches complex orders to the 
extent marketable pursuant to the allocation algorithm from Rule 
6.12, as determined by the Exchange on a class-by-class basis with 
the addition that the COB gives priority to complex orders whose net 
price is better than the market clearing price first, and then to 
complex orders at the market clearing price. To the extent there is 
any remaining balance, the complex orders will be processed as they 
would on an intra-day basis under Rule 6.13. This subparagraph (ii ) 
is applicable to stock-option orders.
    (b) [The ``derived net market'' for a stock-option order 
strategy will be calculated using the Exchange's best bid or offer 
in the individual option series leg(s) and the NBBO in the stock 
leg. The ``derived net market'' for any other complex order strategy 
will be calculated using the Exchange's best bid or offer in the 
individual option series legs.
    (c)] The Exchange may also use the process described in 
paragraph (a) of this Interpretation and Policy .07 when the COB 
reopens a strategy after a time period during which trading of that 
strategy was unavailable.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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 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 Exchange has in place various price protection mechanisms that 
are designed to prevent complex orders from executing at potentially 
erroneous

[[Page 15077]]

prices.\5\ These mechanisms are designed to help maintain a fair and 
orderly market by mitigating potential risks associated with complex 
orders trading at prices that are extreme or potentially erroneous. 
Currently, certain of these price protection mechanisms applicable to 
complex orders compare a complex order's net price, or the net price at 
which a complex order would execute, against the derived net market 
price based on the Exchange's best bid or offer (``BBO'') in the 
individual series legs.\6\ The Exchange proposes to amend these 
mechanisms to provide they will use the derived net market based on the 
national best bid or offer (``NBBO'') in the individual series legs 
rather than the BBO. The Exchange also proposes to update the parameter 
that requires a complex order to execute at a range within an 
acceptable percentage distance from the current market.
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    \5\ See, e.g., Rules 6.13, Interpretation and Policy .04.
    \6\ See id.
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Limit Order Price Parameter for Complex Orders
    The proposed rule change amends the limit order price parameters 
for complex and stock-option orders, which are intended to block 
executions at prices that exceed the derived net market by more than a 
reasonable amount. Rule 6.13, Interpretation and Policy .04(g) 
currently provides the Exchange will not accept for execution eligible 
limit orders if:
     Prior to the opening (including before a series is opened 
following a halt), the order is priced at a net debit that is more than 
an acceptable tick distance (``ATD'') above the derived net market 
using the Exchange's previous day's close in the individual series legs 
comprising the complex order or the order is priced at a net credit 
that is more than an ATD below the derived net market using the 
Exchange's previous day's close in the individual series legs 
comprising the complex order (as determined by the Exchange on a class-
by-class and net premium basis); \7\ or
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    \7\ This provision currently does not apply to orders of 
Exchange Market-Makers or away Market-Makers or Intermarket Sweep 
Orders (``ISOs'') (which cannot be entered prior to the opening of 
the System). The proposed rule change eliminates the reference to 
ISOs--because Trading Permit Holders may not enter ISOs prior to the 
opening, the rule does not need to specify this check will not apply 
to those orders prior to the opening, as none will enter the System 
during that time.
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     once a series has opened, the order is priced at a net 
debit that is more than an ATD above the opposite side derived net 
market using the Exchange's best bid or offer in the individual series 
legs comprising the complex order or the order is priced at a net 
credit that is more than an ATD below the opposite side derived net 
market based on the individual series legs comprising the complex order 
(as determined by the Exchange on a class-by-class and net premium 
basis).
    The Exchange proposes to amend these provisions to provide a 
complex order's price generally will be compared to the derived net 
price based on the national spread market.\8\ Specifically, proposed 
subparagraph (g)(1) states the System rejects back to a Trading Permit 
Holder \9\ a complex limit order with a net debit (credit) price more 
than distance specified amount above (below):
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    \8\ The proposed rule change adds the definition of national 
spread market to Rule 1.1, defined as the derived net market based 
on the NBBOs in the individual series legs comprising a complex 
order and, if a stock-option order, the NBBO of the stock leg.
    \9\ Current subparagraph (3)(ii)(B) states if a limit order is 
not accepted for execution because the limit order price ATD has not 
been met, the order will be returned to the order entry firm. The 
proposed rule change deletes this language, as it is no longer 
needed due to the revised introductory language in proposed 
paragraph (g). Additionally, the proposed rule change moves the rule 
provision stating the limit order price parameter will take 
precedence over another price check parameter to the extent both are 
applicable to an incoming limit order from current subparagraph 
(3)(ii)(B) to proposed subparagraph (3)(ii).
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     Prior to the opening of a series (including during any 
pre-opening period and opening rotation), the derived net market using 
the Exchange's previous day's closing prices in the individual series 
legs comprising the complex order. However, this does not apply to 
stock-option orders, to orders for the account of C2 or away market-
makers, or if there is no Exchange previous day's closing price in any 
leg; or
     intraday, the opposite side of the national spread market. 
This applies to stock-option orders, but does not apply if the NBBO in 
any leg is locked, crossed or unavailable \10\ or if there is no 
Exchange spread market.\11\

    \10\ If the NBBO (or BBO) is not currently being disseminated, 
the NBBO (or BBO) will be considered ``unavailable.''
    \11\ The proposed rule change adds the definition of Exchange 
spread market to Rule 1.1, defined as the derived net market based 
on the BBOs in the individual series legs comprising a complex order 
and, if a stock-option order, the NBBO of the stock leg. The 
proposed rule change makes corresponding changes to Rule 6.13, 
Interpretations and Policies .02, 06, and .07 to incorporate the 
proposed defined term (as well as delete the definition currently in 
those provision [sic] to avoid duplication). The proposed rule 
change also clarifies in Interpretation and Policy .02 the number of 
ticks is applied to the opposite side of the Exchange spread market, 
which is consistent with System functionality and language in other 
rules that incorporate the Exchange spread market or national spread 
market.
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While the Exchange believes Trading Permit Holders are generally 
willing to accept executions at prices that exceed the maximum possible 
value of the applicable spread to a certain extent, executions too far 
away from the market may be erroneous. The current limit order price 
parameter when trading is open compares the order prices to the 
Exchange spread market, which is the derived net market based on the 
BBOs of the individual series legs comprising a complex order and, if a 
stock-option order, the NBBO of the stock leg. The proposed rule change 
amends this parameter so it compares an order's price to the national 
spread market intraday (i.e., when open for trading). As discussed 
above, the NBBO of the legs (upon which the national spread market is 
based) more accurately reflects the entire market for the legs 
comprising a complex order at the time of execution than the Exchange 
spread market (based on the BBO of the legs). Therefore, the Exchange 
believes it is appropriate for complex order net execution prices 
during the trading day to be based on the best prices throughout the 
entire market rather than those only on C2's market.\12\
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    \12\ The proposed rule change also makes nonsubstantive changes 
to paragraph (g).
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    Prior to individual series legs opening on C2 (which the rule 
clarifies includes any pre-opening period and opening rotation),\13\ 
the System will continue to use the derived net market using the 
Exchange's previous day's closing prices as the comparison figure. The 
check will continue to not apply to stock-option orders or orders of C2 
or away market-makers. The check will also not apply if there is no 
Exchange previous day's closing price in any leg (and thus no reliable 
measure against which to compare the price of the order to determine 
its reasonability).
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    \13\ Pursuant to Rule 6.11, the procedure used to open classes 
for trading on the Exchange includes use of a pre-opening period 
(which currently begins at 6:30 a.m.) and trading rotation. The pre-
opening period and rotation occur prior to a class being open, and 
the proposed rule change merely makes this clear.
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    With respect to complex orders entered during a trading halt (which 
includes any pre-opening period or opening rotation prior to re-opening 
following a halt),\14\ current subparagraph (g)(1) applies, using the 
derived net market using the Exchange's previous day's closing prices. 
The

[[Page 15078]]

proposed rule change states in subparagraph (g)(3)(ii) the System will 
no longer apply the limit order price parameter to complex orders 
entered during a trading halt. If a halt occurs during the trading day, 
it is difficult for the System at this time to determine reliable 
pricing for each leg during a likely volatile time when quotes may be 
available for some legs but not others. The Exchange believes this is 
preferable to applying the check using the previous day's closing 
price, which would be stale by that time.
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    \14\ Pursuant to Rule 6.11(i), the Exchange may reopen a class 
following a trading halt using the procedure described in the rule, 
including use of a pre-opening period and rotation. Any such pre-
opening period and rotation would occur while trading is still 
halted, as trading would not yet be reopened, and the proposed rule 
change merely makes this clear.
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    The proposed rule change states this price parameter will not apply 
to pairs of orders submitted to AIM or SAM. The AIM and SAM 
functionality separately limits the prices at which those pairs may be 
submitted and executed, and thus it would be duplicative for the System 
to apply this price parameter to those pairs of orders.\15\
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    \15\ See Rules 6.51(a) and Interpretation and Policy .06, and 
6.52(a) and Interpretation and Policy .01, respectively.
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    Once a series has opened on C2, this check will compare the price 
of a complex order with a net debit (credit) price to the opposite side 
of the national spread market. The national spread market would more 
accurately reflect the then-current market, rather than the Exchange 
spread market, and thus the Exchange believes it would be a better 
measure to use for purposes of determining the reasonability of the 
prices of orders. This applies to stock-option orders, but does not 
apply if the NBBO in any leg is locked, crossed or unavailable \16\ or 
if there is no Exchange spread market \17\ (and thus no reliable 
measure against which to compare the price of the order to determine 
its reasonability).
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    \16\ If the NBBO (or BBO) is not currently being disseminated, 
the NBBO (or BBO) will be considered ``unavailable.''
    \17\ The Exchange notes this is consistent with functionality 
today--the System does not apply the limit order price parameter to 
an order if there is no Exchange spread market (which includes if 
there is no C2-disseminated quote in any leg comprising the complex 
order).
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    Currently, C2 does not accept stock-option orders. However, current 
paragraph (g) does not specify whether the limit order price parameter 
would apply to stock-option orders if C2 accepted them. The proposed 
rule change states proposed subparagraph (g)(1) does not apply to 
stock-option orders but subparagraph (g)(2) does apply to stock-option 
orders.
    Current subparagraph (3)(i) states an ATD may be no less than five 
minimum net price increment ticks (where the ``minimum net price 
increment'' is the minimum increment for net priced bids and offers for 
the given complex order strategy). The proposed rule change states the 
Exchange will determine a specified amount, rather than an ATD, which 
may be no less than $0.02. With respect to complex orders, the Exchange 
has determined pursuant to Rule 6.4(4) the minimum increment for 
complex orders in all but three classes (SPX, OEX and XEO) is $0.01, 
which would be the minimum increment tick under current Rule 6.13, 
Interpretation and Policy .04(g) (thus the current minimum is 
essentially $0.01 for almost all classes). The Exchange generally 
announces the setting for this parameter in a monetary amount rather 
than number of ticks, so the Exchange believes amending the rule to use 
the term amount rather than ticks is consistent with this practice.\18\
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    \18\ See Regulatory Circular RG16-008.
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    Additionally, because market conditions during pre-opening periods 
and trading rotations are different than those present during regular 
trading hours, the proposed rule change provides the Exchange with 
flexibility to apply a different amount during those times. The 
Exchange believes it is appropriate to have the ability to apply a 
different amount during the pre-open period or opening rotation so the 
check does not impact the Exchange's ability to open an option or 
determination of the opening price.\19\
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    \19\ Note current Rule 6.13, Interpretation and Policy 
.04(g)(3)(ii) permits a senior official on the Exchange Help Desk to 
grant intra-day relief by widening or inactivating one or more of 
the applicable ATD parameters settings in the interest of a fair and 
orderly market. The proposed rule change amends subparagraph (3)(ii) 
to become subparagraph (3)(iii) and to provide this relief (with 
respect to an amount rather than ATD) can be on any trading day 
(including prior to opening). The term intraday used elsewhere in 
Rule 6.13 generally refers to when trading is open, while this 
temporary relief may be granted at any time on a trading day, 
including prior to the open of trading. Granting this relief at any 
of those times may be necessary to address market events or 
volatility, which may occur prior to an opening, in addition to when 
the Exchange is open for trading, and maintain a fair and orderly 
market during those times. The proposed rule change clarifies when 
this relief may be granted. The Exchange will continue to make and 
keep records of any determination to grant relief, and periodically 
review these determinations. The proposed rule change also deletes 
language in paragraph (g) stating the Exchange may determine to 
widen or narrow the ATDs with respect to particular order types, in 
the interests of fair and orderly markets or, in furtherance of the 
objectives of the Options Order Protection and Locked/Crossed Market 
Plan, as announced via Regulatory Circular. Current subparagraph 
(3)(ii) and proposed subparagraph (3)(iii) includes language 
permitting the Exchange to widen or inactivate the settings in the 
interest of a fair and orderly market, so the Exchange believes this 
additional language is redundant.
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    The proposed rule change deletes the Exchange's flexibility to not 
apply this price parameter to immediate-or-cancel complex orders, as 
the Exchange believes these orders are also at risk of execution at 
extreme and potentially erroneous prices and thus will benefit from 
applicability of these checks.
Example
    The System receives a complex order to buy Series A and sell Series 
B for a net debit price of $1.50. Suppose the NBBO for Series A is 
$2.00 to $2.20 and the NBBO for Series B is $1.00 to $1.20, making the 
national spread market for a strategy with a buy Series A leg and sell 
Series B leg $0.80 to $1.20. The Exchange has set the limit order price 
parameter at $0.20 (thus a limit order will be rejected if more than 
$0.20 above (below) the opposite side of the national spread market). 
Because the net debit price of the complex order is $0.30 above the 
offer of the national spread market, the System rejects this order.
Acceptable Percentage Range Parameter
    The proposed rule change amends Rule 6.13, Interpretation and 
Policy .04(e), which currently provides the Exchange will not 
automatically execute an eligible complex order that is marketable if, 
following a complex order auction (``COA''), the execution would be at 
a price that is not within an acceptable percentage distance from the 
derived net price of the individual series legs that existed at the 
start of COA. The acceptable percentage distance is a percentage 
determined by the Exchange on a class-by-class basis and is no less 
than 3%.
    The proposed rule change amends this price protection mechanism to 
provide the Exchange will not automatically execute an incoming complex 
order (including a stock-option order) after all leg series are open 
for trading \20\ that is marketable and would execute immediately upon 
submission to the complex order book (``COB'') or following a COA if 
the execution would be at a price outside an acceptable percentage 
range, which is the national spread market that existed when the System 
received the order or at the start of COA, as applicable, plus/minus:
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    \20\ Rule 6.11 has separate price protections applicable to 
execution prices during pre-open and the opening rotation. The 
Exchange believes it is appropriate to apply the acceptable price 
range protection to orders when the leg series comprising the 
complex order are open to avoid interfering with the orderly opening 
process during which the System matches as many orders as possible.
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     The amount equal to a percentage (which may not be less 
than 3%) of the national spread market (the ``percentage amount'') if 
that amount is not less than a minimum amount or greater than a maximum 
amount (the Exchange will determine the percentage and minimum and 
maximum amounts and announce

[[Page 15079]]

them to Trading Permit Holders by Regulatory Circular);
     the minimum amount, if the percentage amount is less than 
the minimum amount; or
     the maximum amount, if the percentage amount is greater 
than the maximum amount.\21\
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    \21\ The proposed rule change also amends the name of this price 
parameter to be consistent with the proposed changes.

The System cancels an order (or any remaining size after partial 
execution of the order) that would execute or rest in the COB at a 
price outside the acceptable price range.
    This proposed rule change expands this parameter to incoming 
complex orders that do not COA and may immediately execute, as well as 
orders that do COA (to which the current parameter applies), which will 
potentially prevent erroneous executions of more complex orders. The 
proposed rule change provides, while the acceptable price range will 
continue to be based on a percentage away from the market, the System 
will use the national spread market rather than the Exchange spread 
market for the reasons set forth above.\22\ The proposed rule change 
also puts in place a ``maximum'' price range (with the minimum and 
maximum amounts), which will keep the acceptable price range from being 
too wide and thus enhance the effectiveness of this price parameter to 
prevent erroneous executions.\23\
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    \22\ Proposed subparagraph (e)(i) states the acceptable price 
range uses the Exchange spread market rather than the national 
spread market if the NBBO in any leg is locked, crossed or 
unavailable (and thus there is no reliable measure against which to 
compare the price of the order to determine its reasonability). 
Pursuant to proposed subparagraph (e)(i), the acceptable price range 
will also continue to use the Exchange spread market for pairs of 
orders submitted to AIM and SAM (as it does today), as the AIM and 
SAM functionality separately limits the prices at which those pairs 
may be submitted and executed. See Rules 6.51(a) and Interpretation 
and Policy .06, and 6.52(a) and Interpretation and Policy .01, 
respectively. If the System rejects either order in the pair 
pursuant to this parameter, then the System also cancels the paired 
order. Notwithstanding the foregoing, with respect to an AIM 
Retained (``A:AIR'') order as defined in Interpretation and Policy 
.10 to Rule 6.51, if the System rejects the Agency Order pursuant to 
this check, then the System also rejects the contra-side order; 
however, if the System rejects the contra-side order pursuant to 
this check, the System still accepts the Agency Order if it 
satisfies the check. This currently is codified in paragraph (f) for 
stock-option orders and is being codified for all complex orders in 
proposed subparagraph (e)(iii), as it is consistent with current 
System functionality and the contingencies attached to those types 
of orders, as well as rules related to other price protections. See, 
e.g., Rule 6.13, Interpretation and Policy .04(c) and (h). 
Additionally, the proposed rule change applies the provision in 
current paragraph (f), which states to the extent a contra-side 
order or response is marketable against the Agency Order, the 
execution price will be capped at the opposite side of the 
acceptable price range, to all complex orders in proposed paragraph 
(e)(iii).
    \23\ The maximum value acceptable price range in Rule 6.13, 
Interpretation and Policy .04(h) similarly uses an acceptable price 
range determined by a percentage away from the maximum possible 
value of a spread, with a minimum and maximum amount.
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    Rule 6.13, Interpretation and Policy .04(f) sets forth a parameter 
currently applicable to stock-option orders, which is the same as the 
parameter in current paragraph (e), except the parameter in current 
paragraph (f) blocks executions of stock-option orders at prices more 
than a specified number of ticks away from the Exchange spread market, 
while current paragraph (e) blocks executions of complex orders at 
prices more than a specified percentage away from the Exchange spread 
market. Current paragraph (f) states the Exchange will not 
automatically execute a stock-option order that is marketable if, 
following a COA, the execution would not be within the acceptable 
derived net market for the strategy that existed at the start of COA. 
An ``acceptable derived net market'' for a strategy is calculated using 
the BBO in the individual option series leg(s) and the NBBO in the 
stock leg plus/minus an acceptable tick distance, which is determined 
by the Exchange on a class-by-class and premium basis. Such a stock-
option order will be cancelled. The proposed rule change deletes 
paragraph (f) and applies the parameter in paragraph (e) (as proposed 
to be amended) to stock-option orders.\24\ Proposed paragraph (e) will 
apply to stock-option orders in the same manner as it does to other 
complex orders.\25\ Therefore, the Exchange believes it simplifies its 
rules to include the enhanced parameter once in the rules using the 
proposed defined terms.
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    \24\ Proposed paragraph (e) will apply to incoming orders and 
not auction responses. While this price protection will not cancel 
auction responses that would execute outside the acceptable price 
range, this price protection will prevent an order from executing 
outside the acceptable price range (including against an auction 
response), and thus responses will not execute against an order 
outside the acceptable price range.
    \25\ The proposed rule change makes a conforming change to the 
introductory paragraph of Interpretation and Policy .04.
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Example
    Suppose the NBBO for Series A is $2.00 to $2.20 (50 x 50) and the 
NBBO for Series B is $1.00 to $1.20 (50 x 50), making the national 
spread market for a strategy with a buy Series A leg and sell Series B 
leg $0.80 to $1.20. Also suppose the BBO for Series A is $1.98 to $2.22 
(10 x 10) and the BBO for Series B is $0.98 to $1.22 (10 x 10), making 
the Exchange spread market for a strategy with a buy Series A leg and 
sell Series B leg $0.76 to $1.24. Pursuant to proposed Rule 6.13, 
Interpretation and Policy .04(g), the Exchange has set the limit order 
price parameter at $0.20 (thus a limit order will be rejected if more 
than $0.20 above (below) the opposite side of the national spread 
market). The Exchange determined the following settings for the 
acceptable percentage range parameter: 10%, with a minimum amount of 
$0.05 and a maximum amount of $0.10. Therefore, the acceptable 
percentage range is $0.72 to $1.30.\26\ The System receives a COA-
eligible \27\ complex order to buy 35 Series A and sell 35 Series B for 
a net debit price of $1.40. A COA begins, and at the end of the COA, 
there are no auction responses or opposite side complex orders resting 
in the COB. The complex order executes against the 10 contracts in the 
leg market at a net price of $1.24 (buy 10 contracts in Series A at the 
$2.22 offer, and sell 10 contracts in Series B at the $0.98 bid), which 
price is within the acceptable price range. The resulting BBO for 
Series A is $1.98 to $2.26 (10 x 10), and the resulting BBO for Series 
B is $0.94 to $1.22 (10 x 10), making the resulting Exchange spread 
market for a strategy with a buy Series A leg and sell Series B leg 
$0.76 to $1.32. The System cancels the remaining 25 contracts of the 
order, because the next execution price with the leg markets of $1.32 
and the $1.40 net debit price of the order are each outside the 
acceptable price range, and therefore, the order cannot trade or rest 
in the book at a price not outside the acceptable price range.
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    \26\ The bid side of this range equals $0.72, which is $0.80 
minus 10% of $0.80 (or $0.08), an amount greater than the minimum 
and less than the maximum. The offer side of this range equals 
$1.30, which is $1.20 plus the maximum amount of $0.10, because 10% 
of $1.20 (or $0.12) is greater than that maximum amount.
    \27\ See Rule 6.13(c) for a description of the COA process and 
order eligibility requirements. Note, in this example, the same 
result occurs for a non-COA eligible order--such order would execute 
against the 10 contracts resting in the leg markets at a net price 
of $1.24 upon submission to the COB rather than following a COA, and 
the System would cancel the remainder.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\28\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section

[[Page 15080]]

6(b)(5) \29\ 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. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \30\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ Id.
---------------------------------------------------------------------------

    In particular, the proposed rule change removes impediments to and 
perfects the mechanism of a free and open market and national market 
system because the limit order price parameter (intraday) and the 
acceptable percentage range parameter for complex orders will be based 
on the national spread market when available, which is based on the 
NBBO, and thus will more accurately reflect the entire market for a 
complex order at the time of execution than the Exchange spread market 
(which is based on the BBO). The Exchange believes the enhanced price 
protection mechanisms will further protect investors and the public 
interest and maintain fair and orderly markets by mitigating potential 
risks associated with market participants entering orders at extreme 
and potentially erroneous prices.
    With respect to the limit order price parameter for complex orders, 
the Exchange believes the national spread market when trading is open 
would be a better measure to use for purposes of determining the 
reasonability of the prices of orders and more accurately prevent 
executions of limit orders at erroneous prices, which ultimately 
protects investors. The Exchange also believes applying this check to 
immediate-or-cancel complex orders may prevent executions at extreme 
and potentially erroneous prices of these orders. The Exchange believes 
it is appropriate to have flexibility to determine to apply a different 
amount to complex orders entered during the pre-opening, a trading 
rotation, or a trading halt to reflect different market conditions 
during those times. This flexibility will further assist the Exchange 
with its efforts to maintain a fair and orderly market, which will 
ultimately protect investors.
    With respect to the acceptable percentage range parameter, the 
national spread market would be a better measure to use for purposes of 
preventing executions of complex orders at erroneous prices, which 
ultimately protects investors. The proposed parameter will apply to 
complex orders that do not COA (and would execute against orders in the 
COB) in addition to those that do, which may prevent additional 
erroneous trades at prices that are extreme or ``too far away'' from 
the market.\31\ The Exchange believes the methodology to determine the 
acceptable price range is reasonable because using a percentage amount 
provides Trading Permit Holders with precise protection, while the pre-
set minimum and maximum ensures that the acceptable price range cannot 
be too wide or narrow to the point that the parameter would become 
ineffective.
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    \31\ As further discussed below, the proposed rule change is 
substantially similar to NASDAQ OMX [sic] PHLX LLC (``PHLX'') Rule 
1098(i).
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    The Exchange also believes the proposed rule change regarding how 
the acceptable percentage range parameter will apply to AIM and SAM 
orders is reasonable, as the proposed rule change is consistent with 
the contingencies attached to those types of orders.
    The proposed rule change to apply a single limit order price 
parameter and acceptable price range to all complex orders, including 
stock-option orders (subject to certain exceptions consistent with the 
current rules), will protect investors, as it simplifies the rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change will 
apply to all complex orders submitted to C2 in the same manner. The 
enhancements to the price protection mechanisms applicable to all 
incoming orders will help further prevent potentially erroneous 
executions, which benefits all market participants. The proposed rule 
change will not impose any burden on intermarket competition, as it 
merely incorporates best prices available on other markets into current 
price protection mechanisms applicable to complex orders. Additionally, 
the proposed rule change is substantially similar to a rule of another 
options exchange.\32\
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    \32\ See PHLX Rule 1098(i).
---------------------------------------------------------------------------

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \33\ and Rule 19b-
4(f)(6) thereunder.\34\
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    \33\ 15 U.S.C. 78s(b)(3)(A).
    \34\ 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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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 change 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-C2-2017-010 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.


[[Page 15081]]


All submissions should refer to File Number SR-C2-2017-010. 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-C2-2017-010 and should be 
submitted on or before April 14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05854 Filed 3-23-17; 8:45 am]
 BILLING CODE 8011-01-P


