
[Federal Register Volume 82, Number 153 (Thursday, August 10, 2017)]
[Notices]
[Pages 37479-37484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16829]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81315; File No. SR-CHX-2017-12]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Regarding Qualified Contingent 
Trades and Related Information Recording Obligations by Certain 
Participants

August 4, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 26, 2017, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') 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 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

    CHX proposes to amend the Rules of the Exchange (``CHX Rules'') 
regarding Qualified Contingent Trades (``QCTs'') \3\ and related 
information recording obligations by certain Participants.\4\ The text 
of this proposed rule change is available on the Exchange's Web site at 
http://www.chx.com/regulatory-operations/rule-filings/, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \3\ See infra Section A.1(1).
    \4\ A Participant is a ``member'' of the Exchange for purposes 
of the Act. See CHX Article 1, Rule 1(s).
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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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend CHX Rules to effect the following 
changes:
     Clarify the operation of cross orders \5\ and Cross With 
Size handling.\6\
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    \5\ See CHX Article 1, Rule 2(a)(2).
    \6\ See CHX Article 1, Rule 2(g)(1).
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     Only permit Participants that are registered with the 
Exchange as Institutional Brokers (``IBs'') \7\ to submit an NMS stock 
component order of a

[[Page 37480]]

QCT (``QCT Cross'') to the Matching System.\8\
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    \7\ See CHX Article 1, Rule 1(n); see also generally CHX Article 
17.
    \8\ The Matching System is an automated order execution system, 
which is a part of the Exchange's ``Trading Facilities,'' as defined 
under CHX Article 1, Rule 1(z).
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     Clarify the scope of information recording obligations 
under current Article 11, Rule 3.
     Adopt rules describing the CHX Broker Back Office System 
(``BBOS''), a trade management system developed and maintained by the 
Exchange.
     Require IBs to record certain information in the BBOS 
regarding component orders and trades related to QCT Crosses executed 
within the Matching System.
     Clarify the agency, principal and error accounts 
requirements for IBs.
(1) Background
    In 2006,\9\ the Commission granted an exemption from Rule 611(a) of 
Regulation NMS \10\ (``QCT Exemption'') for any trade-throughs caused 
by the execution of an order involving one or more NMS stocks (each an 
``Exempted NMS Stock Transaction'') that are components of a QCT, which 
was modified in 2008 to eliminate the Size Condition.\11\ Consistent 
with the QCT Exemption, the Exchange permits Participants to submit 
cross orders marked with the QCT modifier (i.e., QCT Crosses) to the 
Matching System to effect transactions that comprise the NMS stock 
components of QCTs.\12\
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    \9\ See Securities Exchange Act Release No. 54389 (August 31, 
2006), 71 FR 52829 (September 7, 2006) (``QCT Exemptive Order'').
    \10\ 17 CFR 242.611(a).
    \11\ ``Qualified contingent trade'' is defined as ``a 
transaction consisting of two or more component orders, executed as 
agent or principal where: (1) At least one component order is in an 
NMS stock; (2) All components are effected with a product or price 
contingency that either has been agreed to by the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (3) The execution of one component is contingent upon the 
execution of all other components at or near the same time; (4) The 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined at the 
time the contingent order is placed; (5) The component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or since cancelled; and (6) The Exempted NMS Stock 
Transaction is fully hedged (without regard to any prior existing 
position) as a result of the other components of the contingent 
trade. See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (``Modified QCT Exemptive 
Order''). In 2008, the Commission modified the QCT Exemptive Order 
to eliminate a seventh requirement (``Size Condition'') that the 
Exempted NMS Stock Transaction that is part of a contingent trade 
involves at least 10,000 shares or has a market value of at least 
$200,000. See id. at 19274.
    \12\ While CHX Rules currently permit any Participant to submit 
a QCT Cross, in practice, only IBs have submitted QCT Crosses, in 
large part due to the complexities of coordinating the execution of 
the various components of a QCT and allocating positions to the 
various parties to the QCT.
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    Mechanically, upon receipt of a QCT Cross, the Exchange will 
immediately execute the QCT Cross without regard to the protected 
quotations of away markets if the state of the CHX limit order book 
(``CHX book'') in the relevant security would permit the QCT Cross to 
execute within the Matching System.\13\ If the QCT Cross is blocked by 
an order resting on the CHX book, the QCT Cross will be immediately 
cancelled. The Exchange does not conduct a pre-execution verification 
of each QCT Cross for compliance with the terms of the QCT Exemption 
due to the practical difficulties of conducting such verification 
within the constraints of the ``at or near the same time'' requirement 
for the execution of the component orders that comprise the QCT.\14\ 
Instead, the Exchange maintains and operates a comprehensive 
Surveillance and Examination program that, among other things, reviews 
executed QCT Crosses for compliance with CHX Rules and the QCT 
Exemption.
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    \13\ See CHX Article 1, Rule 2(a)(2).
    \14\ See CHX Article 1, Rule 2(b)(2)(E)(iii); see also supra 
note 11.
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    The Exchange believes that the operation of the Matching System and 
the Surveillance and Examination program, in general, and as applied to 
the execution and review of QCT Crosses, in particular, are 
``reasonably designed'' in compliance with the requirements of Rule 
611(a)(1) of the Regulation NMS.\15\ The Exchange also regularly 
surveils to ascertain the effectiveness of its policies and procedures 
required by Rule 611(a)(1) and has taken prompt action to remedy 
deficiencies in such policies and procedures, consistent with the 
requirements of Rule 611(a)(2) of Regulation NMS.\16\ As part of its 
ongoing effort to update and optimize the Surveillance and Examination 
program, the Exchange has developed and deployed BBOS, a trade 
management system that, among other things, permits the Exchange to 
review additional information to identify the specific component 
transactions \17\ that are being used to hedge executed QCT Crosses. 
Currently, the Exchange encourages its IBs to include certain 
information for away executions related to QCT Crosses submitted to the 
Matching System into the BBOS,\18\ which the Exchange uses to verify 
that the components to the QCT satisfy the derivative relationship and 
fully-hedged requirements of the QCT Exemption.\19\ In addition, CHX 
Rules require IBs to input all orders and related information \20\ it 
receives for execution into an automated system (e.g., Brokerplex 
\21\), which includes QCT Crosses.
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    \15\ 17 CFR 242.611(a)(1).
    \16\ 17 CFR 242.611(a)(2).
    \17\ Currently, the vast majority of component transactions used 
to hedge QCT Crosses involve exchange traded options. As such, BBOS 
permits users to automatically link QCT Crosses with specific 
exchange-traded options transactions via the use of unique sequence 
numbers. While the BBOS permits the entry of other types of 
component transactions, such as futures transactions, the full 
details of such component transactions must be entered manually. See 
infra note 18.
    \18\ Current data fields include: QCT Type; Related Exchange; 
Print Time; Expiration Year; Expiration Month; Price; Contracts; 
Strike Price; Call/Put; Volume; and Short Sale Indicator. The 
alternatives under ``QCT Type'' include exchange traded options, 
over-the-counter traded options, FLEX Options, equities, futures and 
``other.'' See id.
    \19\ See supra note 11.
    \20\ See CHX Article 11, Rule 3(a) and (b).
    \21\ See CHX Article 17, Rule 5.
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    The Exchange now proposes various amendments to the CHX Rules in 
order to clarify the operation of cross orders, to clarify the scope of 
certain Participant obligations and to codify current practices related 
to the enhancement of the Exchange's oversight of QCTs.
(2) Amendments Related to Cross Orders
    The Exchange proposes to adopt various non-substantive amendments 
to CHX Rules to clarify the operation of cross orders and Cross With 
Size handling.\22\ Current Article 1, Rule 2(a)(2) defines cross order 
as an order to buy and sell the same security at a specific price 
better than the Working Price, as defined under Article 1, Rule 1(pp), 
of all resting orders on the CHX Book and which would not constitute a 
trade-through under Regulation NMS (including all applicable exceptions 
and exemptions). The rule also provides that a cross order may 
represent interest of one or more Participants of the Exchange, but may 
only be executed in an increment permitted by Article 20, Rule 
4(a)(7)(b). The rule then provides that a cross order may be subject to 
special handling, pursuant to Article 20, Rule 2(g).
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    \22\ See CHX Article 1, Rule 2(g)(1).
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    While the current definition is technically accurate, the Exchange 
believes that it can be amended to clarify that the pricing requirement 
for cross orders is prerequisite for execution within the Matching 
System, but not a prerequisite for submission into the Matching System. 
That is, a cross order that does not meet the pricing requirement, and 
is thus cancelled by

[[Page 37481]]

the Matching System, is still a cross order by definition, albeit not 
an executable one. As such, the Exchange proposes to amend the first 
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paragraph of current Article 1, Rule 2(a)(2) to provide as follows:

    ``Cross order'': An order to buy and sell the same security at a 
specific price. A cross order may only execute within the Matching 
System if it is priced better than the Working Price, as defined 
under Article 1, Rule 1(pp), of all resting orders on the CHX Book. 
A cross order may represent interest of one or more Participants of 
the Exchange, but may only be executed in an increment permitted by 
Article 20, Rule 4(a)(7)(b). A cross order may be subject to special 
handling, pursuant to paragraph (g) below.

    Similarly, the Exchange proposes to amend Article 1, Rule 
2(g)(1)(A) to clarify the requirements for Cross With Size handling and 
to remove redundant references to compliance various CHX Rules and 
federal securities laws and regulations:

    ``Cross With Size'': A cross order (except any cross order 
subject to Non-Regular Way Settlement) to buy and sell at least 
5,000 shares of the same security with a total value of at least 
$100,000 will execute, notwithstanding resting orders in the CHX 
Book at the same price, where: (A) There are no resting orders on 
the CHX Book with a Working Price, as defined under Article 1, Rule 
1(pp), better than the cross order; and

    In addition, the Exchange proposes to amend Article 20, Rule 8(e) 
to replace a redundant summary of the operation of cross orders and 
Cross With Size handling with specific references to the relevant 
rules. Also, since Cross With Size is a special handling for cross 
orders and not a separate order type or order modifier, the Exchange 
proposes to eliminate reference to ``Cross With Size,'' but to maintain 
the citation to the relevant CHX Rules. Thus, amended Article 20, Rule 
8(e) provides that ``Cross orders shall be handled pursuant to Article 
1, Rule 2(a)(2) and Rule 2(g)(1) above.''
(3) Amendments Related to QCT Modifier
    As noted above,\23\ while CHX Rules permit any Participant to 
submit QCT Crosses, in practice, non-IB Participants do not currently 
submit QCT Crosses. Moreover, CHX Rules require only IBs to input 
additional information into Brokerplex,\24\ which facilitates the 
ability of the Exchange to gather crucial information related to its 
review of QCT Crosses executed on the Exchange. Given that non-IBs do 
not currently submit QCTs and the Surveillance and Examination program 
is optimized to review QCT Crosses submitted by IBs, the Exchange 
proposes to amend Article 1, Rule 2(b)(2)(E) to provide that QCT 
Crosses may only be submitted by IBs.\25\ The Exchange believes that 
the proposed restriction will ensure consistent recordkeeping 
requirements related to QCTs for those Participants that submit QCT 
Crosses. Also, given that any Participant may apply to register as an 
IB,\26\ the Exchange submits that the proposal is not unfairly 
discriminatory to non-IB Participants.\27\
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    \23\ See supra Section A.1(1).
    \24\ See CHX Article 17, Rule 3.
    \25\ The Exchange also proposes to add the acronym ``QCT'' to 
CHX Article 1, Rule 2(b)(2)(E) to clarify that the term ``QCT'' 
refers to ``Qualified Contingent Trade.''
    \26\ See CHX Article 17, Rule 1.
    \27\ See infra Section A.2.
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(4) Clarifying Amendments to Recordkeeping Requirement for Certain 
Participants
    The Exchange also proposes various non-substantive clarifying 
amendments to Article 11, Rule 3 (Records of Orders and 
Executions).\28\ Specifically, the Exchange proposes to amend Article 
11, Rule 3(a) to clarify that the provisions of Article 11, Rule 3 only 
apply to certain Participants described under Rule 3(e), which limits 
the applicability of Article 11, Rule 3 to IBs, CHX-registered Market 
Makers,\29\ Participants for whom the Exchange is the Designated 
Examining Authority (``DEA'') and any other Participant to the extent 
that the information under Article 11, Rule 3 is required by the rules 
of the other self-regulatory organizations of which they are 
members.\30\ Similarly, the Exchange proposes to amend the title of 
Article 11, Rule 3 to provide ``Records of Orders and Executions by 
Certain Participants,'' which better describes the scope of the rule 
and distinguishes it from Article 11, Rule 2 (Maintenance of Books and 
Records), which requires all Participants to comply with the 
requirements of Rules 17a-3 \31\ and 17a-4 under the Exchange Act.\32\
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    \28\ The provisions under current CHX Article 11, Rule 3 that 
the Exchange is proposing to clarify were originally adopted in 2006 
as part of the Exchange's transition to its current electronic 
trading model. See Exchange Act Release No. 54550 (September 29, 
2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-05).
    \29\ See CHX Article 16, Rule 1.
    \30\ The Exchange proposes to amend Article 11, Rule 3(e) to 
clarify that the provisions of Article 11, Rule 3 would apply to 
IBs, Market Makers, Participants for which the Exchange is its DEA 
and any other Participant to the extent that the information under 
Article 11, Rule 3 is required by the Exchange Act and the rules 
thereunder, as well as the rules of the other self-regulatory 
organizations of which they are members. The Exchange believes that 
this amendment is appropriate given that Participants are 
``members'' of the Exchange, as defined under the Exchange Act, and 
any provisions under the Exchange Act and the rules thereunder that 
apply to a ``member'' of an exchange would apply to Participants. 
See CHX Article 1, Rule 1(s).
    \31\ 17 CFR 240.17a-3.
    \32\ 17 CFR 240.17a-4.
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    The Exchange further proposes to amend paragraph .01 under the 
Interpretations and Policies of Article 11, Rule 3 to clarify that 
proprietary orders, such as those submitted by Market Makers, fall 
under the purview of Article 11, Rule 3. Specifically, while the second 
sentence under paragraph .01 excludes from the scope of orders 
described under Article 11, Rule 3(a) the actual decision to purchase 
or sell a security by a Participant on a proprietary basis and not the 
proprietary order itself, the Exchange believes that the sentence could 
be misconstrued to exclude all proprietary orders from the scope of 
Article 11, Rule 3. The Exchange also believes that current Article 11, 
Rule 3(a)(1)-(3) adequately describes the types of orders subject to 
current Article 11, Rule 3. Accordingly, the Exchange proposes to 
delete the second sentence of paragraph .01 in its entirety.
    Current paragraph .03 under the Interpretations and Policies of 
Article 11, Rule 3 provides, in pertinent part, that Article 11, Rule 3 
shall not apply to orders sent or received through the Matching System 
or through any other electronic system that the Exchange expressly 
recognizes as providing the required information in a format acceptable 
to the Exchange. The purpose of current paragraph .03 is to clarify 
that Participants that submit or receive orders through Exchange-
approved electronic systems are not required to maintain a separate 
record of the information required under Article 11, Rule 3. However, 
the Exchange believes that paragraph .03 could be misconstrued as to 
exclude orders sent or received through an Exchange-approved electronic 
system from the scope of Article 11, Rule 3 entirely, which is 
incorrect. Accordingly, the Exchange proposes to amend paragraph .03 to 
provide that a Participant that sends or receives orders, cancellations 
and executions, as applicable, through the Matching System or through 
any other electronic systems that the Exchange expressly recognizes as 
providing the required information in a format acceptable to the 
Exchange is not required to maintain a separate record of such orders, 
cancellations and executions.\33\ Moreover, the Exchange

[[Page 37482]]

proposes to add the term ``expressly'' before the term ``recognize'' 
under the second sentence of current paragraph .03 to be stylistically 
consistent with the amended first sentence and to make other 
grammatical amendments.
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    \33\ The Exchange notes that the proposed amendment to paragraph 
.03 would have no impact on a Participant's recordkeeping 
obligations under Article 11, Rule 2, which requires, among other 
things, that Participants comply with the recordkeeping requirements 
of Rule 17a-3 under the Act. For example, the proposed amendment to 
paragraph .03 would not impinge on a Participant's obligation 
pursuant to Article 11, Rule 2 and Rule 17a-3(a)(6)(i) under the Act 
to maintain a memorandum of each brokerage order, and of any other 
instruction, given or received for the purchase or sale of 
securities, whether executed or unexecuted.
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(5) Proposed Recordkeeping Requirements for Away Component Trades for 
QCT Crosses Executed Within the Matching System
    The Exchange proposes to require IBs to record certain 
information\34\ for away QCT component orders and trades related to QCT 
Crosses executed within the Matching System into the BBOS. While the 
Exchange currently encourages IBs to enter such information into the 
BBOS,\35\ the CHX Rules do not currently require IBs to do so. Given 
that current Article 11, Rule 3(a)(1)-(3) does not contemplate such 
component orders and trades, as some component orders may not originate 
or otherwise be handled by the Participant, the Exchange proposes to 
adopt Article 11, Rule 3(a)(4), which would bring within the scope of 
Article 11, Rule 3 every component order and trade, whether handled by 
the Participant or not, related to a QCT Cross that is submitted by the 
Participant and executed within the Matching System. Correspondingly, 
the Exchange proposes to amend the citation under Article 11, Rule 3(b) 
to include proposed Article 11, Rule 3(a)(4).
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    \34\ See supra Section A.1(1).
    \35\ See id.
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    Moreover, the Exchange proposes to amend Article 11, Rule 3(b)(27) 
\36\ to provide that subject to certain enumerated exceptions, each 
Participant must accurately record, with respect to any cross orders 
marked Qualified Contingent Trade executed within the Matching System, 
(A) the date and time of receipt by the Participant of the 
corresponding order from its customer and (B) all information specified 
by the Exchange regarding any related component orders and trades 
executed within the Matching System or away, which shall be entered 
into the BBOS (as applicable), in a manner prescribed by the 
Exchange.\37\
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    \36\ The Exchange proposes to move the current language under 
current CHX Article 11, Rule 3(b)(27) to proposed CHX Article 11, 
Rule 3(b)(28). Correspondingly, the Exchange proposes to amend 
paragraph .06 of the Interpretations and Policies of CHX Article 11, 
Rule 3 to contemplate the addition of Rule 3(b)(28).
    \37\ The required information would be identical to the current 
data fields available in the BBOS. See supra note 18. As described 
below, the Exchange proposes to codify the required information 
under proposed Article 17, Rule 7(c).
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    The Exchange also proposes to adopt Article 17, Rule 7 (Broker Back 
Office System) to describe the BBOS. Proposed Rule 7(a) provides that 
BBOS is a trade management system developed and maintained by the 
Exchange that permits IBs to input certain information and to generate 
reports therefrom. The rule also states that BBOS is an automated 
system approved by the Exchange for the purposes of amended Rule 3(a) 
above.
    Proposed Rule 7(b) provides that users of the BBOS are responsible 
for entering all transaction, order and other information into the 
system as required by CHX Rules. The rule further states that as 
operator of BBOS, the Exchange retains information entered into BBOS on 
behalf of the user in conformity with applicable rules and regulations. 
The rule then provides that the Exchange provides such information to 
IBs in a format designated by the Exchange to assist IBs: In conducting 
research regarding their own trading activities; in responding to 
requests for information from customers, regulatory authorities or by 
process of law; and for other legitimate business purposes. The rule 
also states that the Exchange charges IBs the fees specified in its 
published Schedule of Fees and Assessments for the collection and 
retrieval of such information.\38\
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    \38\ The Exchange does not propose to assess a fee for use of 
the BBOS in addition to the current fees related to costs incurred 
by the Exchange in creating any requested reports, which shall be 
rebilled to Participants at cost. See Section K of the Fee Schedule 
of CHX.
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    Proposed Rule 7(c) lists the specific information regarding 
component orders and trades related to QCT Crosses that IBs are 
required to enter into the BBOS. Specifically, proposed Rule 7(c) 
provides that for all orders and trades described under amended Article 
11, Rule 3(b)(27), IBs must record the following information into the 
BBOS, as applicable: (1) QCT Type; (2) Related Exchange; (3) Print 
Time; (4) Expiration Year; (5) Expiration Month; (6) Price; (7) 
Contracts; (8) Strike Price; (9) Call/Put; (10) Volume; and (11) Short 
Sale Indicator.
    In addition, in order to contemplate the proposed IB 
responsibilities related to the QCT Crosses, the Exchange proposes to 
amend Article 17, Rule 3(a) to broaden its scope so as to provide that 
each IB must enter all orders it receives for execution and any other 
information as required under Article 11 into an automated system 
approved by the Exchange. Correspondingly, the Exchange proposes to 
amend the header to Article 17, Rule 3(a) to state ``Entry of orders 
and related information into an automated system.'' Given that amended 
Article 11, Rule 3(b)(27) may require the recording of information 
related to orders that the IB did not actually receive or otherwise 
handle, the Exchange believes that broadening the scope of Article 17, 
Rule 3(a) is necessary, as it currently only applies to orders received 
by the IB.
(6) Clarifying Amendments Related to IB Trading Accounts
    Current Article 17, Rule 3(c) provides that each IB must maintain 
separate accounts for handling (1) agency transactions; (2) principal 
transactions; and (3) transactions involving errors, and must enter 
transactions into the appropriate accounts. The Exchange proposes to 
amend the rule to clarify that the required accounts relate to special 
recordkeeping accounts that must be maintained at CHX, which is 
necessary for the Exchange to adequately surveil and examine the 
relevant IB trading activity, as well as to provide additional detail 
as to the types of transactions that must be recorded in the respective 
accounts. Accordingly, amended Article 17, Rule 3(c) provides that each 
IB must establish and maintain separate CHX recordkeeping accounts at 
the Exchange for the sole purpose of recording the following activity: 
(1) An agency recordkeeping account for agency transactions; (2) a 
principal recordkeeping account for principal and riskless principal 
\39\ transactions; and (3) an error recordkeeping account for 
transactions involving only Bona Fide Errors.\40\ The rule also 
provides that an IB must record each above-mentioned transaction into 
the appropriate CHX recordkeeping account.
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    \39\ See CHX Article 9, Rule 14.
    \40\ See CHX Article 1, Rule 1(ii).
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(7) Operative Date
    In the event the proposed rule change is approved by the 
Commission, the proposed rule change shall be operative pursuant to 
notice by the Exchange to Participants.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\41\ and furthers the 
objectives of Section 6(b)(5)

[[Page 37483]]

in particular,\42\ in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments and perfect the mechanisms of a free and open market, and, 
in general, to protect investors and the public interest; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that permitting only IBs to 
submit QCT Crosses to the Matching System would protect investors and 
the public interest, as IBs have historically been the only 
Participants that have submitted QCT Crosses and, thus, have the 
necessary experience in ensuring that QCT Crosses are submitted to the 
Matching System in a manner consistent with CHX Rules and the QCT 
Exemption. Moreover, given that the Surveillance and Examination 
program as applied to QCTs is optimized with respect to the submission 
of QCT Crosses by IBs, the Exchange believes that the proposal would 
permit the Exchange to more effectively monitor the use of QCT Crosses 
by ensuring that all QCT activity on the Exchange is monitored via the 
same surveillance and examination protocols, which further the 
protection of investors and the public interest.
    The Exchange also believes that permitting only IBs to submit QCT 
Crosses to the Matching System would not result in unfair 
discrimination among Participants. Initially, the Exchange notes that 
any Participant that has satisfied all Exchange requirements to operate 
as an IB may register as an IB,\43\ which would, in effect, permit any 
Participant that meets Exchange requirements to submit QCT Crosses. 
Moreover, even if the proposal discriminates between IB and non-IB 
Participants, given the complexity of facilitating QCTs, the Exchange 
believes that the heightened recordkeeping requirements for QCTs are 
necessary and appropriate to ensure that QCTs are executed in a manner 
consistent with CHX Rules and the QCT Exemption. Since the Surveillance 
and Examination program as applied to QCTs is optimized with respect to 
the submission of QCT Crosses by IBs, the Exchange believes that the 
most effective way to surveil for compliance with CHX Rules and the QCT 
Exemption is to limit the submission of QCTs to IBs. The Exchange also 
believes that the proposal would eliminate the possibility of 
regulatory disparities that may result from the transmission of QCT-
related information to the Exchange through different means and ensure 
consistent recordkeeping obligations among Participants that submit QCT 
Crosses. Thus, the Exchange submits that any discrimination between IB 
and non-IB Participants is justified.
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    \43\ See CHX Article 17, Rule 1.
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    In addition, the Exchange believes that the proposed IB 
recordkeeping requirements for component orders related to QCT Crosses 
executed within the Matching System and the requirement that such 
information be entered into the BBOS would protect investors and the 
public interest by requiring the entry of more detailed information, 
which will enhance the ability of the Exchange to monitor compliance by 
the IBs with CHX Rules and the QCT Exemption.
    Also, the Exchange believes that the non-substantive amendments to 
the operation of the cross order type and Cross With Size handling 
under Article 1, Rule 2(a)(2), Article 1, Rule 2(g)(1) and Article 20, 
Rule 8(e); the recordkeeping requirements under Article 11, Rule 3; and 
the IB recordkeeping account requirements under Article 17, Rule 3(c), 
clarifies the scope and meaning of those rules, which furthers the 
objectives of Section 6(b)(1) \44\ in that it further enables the 
Exchange to be so organized as to have the capacity to be able to carry 
out the purposes of the Act and to comply, and to enforce compliance by 
its Participants and persons associated with its Participants, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the Exchange.
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    \44\ 15 U.S.C. 78f(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 
enhances the Exchange's Surveillance and Examination program as applied 
to QCTs and otherwise clarifies existing CHX Rules. Thus, the Exchange 
does not believe that the proposed rule change raises any competitive 
issues.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-CHX-2017-12 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CHX-2017-12. 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

[[Page 37484]]

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-CHX-2017-12, and should be submitted on or before August 31, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16829 Filed 8-9-17; 8:45 am]
 BILLING CODE 8011-01-P


