Notice2022-15306
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Certain of Its Rules Related to Market-Makers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 19, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 137 (Tuesday, July 19, 2022)</title>
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[Federal Register Volume 87, Number 137 (Tuesday, July 19, 2022)]
[Notices]
[Pages 43079-43081]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15306]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95271; File No. SR-CBOE-2022-037]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Certain of Its Rules Related to Market-Makers
July 13, 2022.
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 July 5, 2022, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') 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 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
Cboe Exchange, Inc. (``Cboe Options'' or the ``Exchange'') is
filing with the Securities and Exchange Commission (the ``Commission'')
a proposed rule change to amend certain of its Rules related to Market-
Makers. The text of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), 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 proposes to amend certain of its Rules related to
Market-Makers. Specifically, the Exchange proposes to amend its Rules
to permit a Trading Permit Holder (``TPH'') organization to register
separate market-maker aggregation units as separate Market-Makers, each
of which would be subject to Market-Maker obligations on an individual
basis. Currently, Cboe interprets the term ``Market-Maker'' to apply at
a firm level, including with respect to obligations.\3\ However, the
Exchange understands TPH organizations have Market-Maker units that are
completely separate from each other for operational and profit/loss
purposes, with appropriate information barriers between units.\4\
Because of this operational separation, such organizations may prefer
to have those units be treated as individual Market-Makers under the
Exchange's Rules consistent with those organizations' internal
operations.
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\3\ The Exchange notes it used to permit a TPH organization to
determine whether to have Market-Maker continuous quoting
obligations apply on an individual or collective basis. See
Securities Exchange Act Release No. 82974 (March 30, 2018), 83 FR
14685 (April 5, 2018) (SR-CBOE-2018-021). The Exchange eliminated
this flexibility and began applying the current interpretation as of
October 2019. See Securities Exchange Act Release No. 87024
(September 19, 2019), 84 FR 50545 (September 25, 2019) (SR-CBOE-
2019-059). However, the language permitting this flexibility
inadvertently remained in Rules 5.54(a)(1)(C), 5.55(a)(1)(B), and
5.56(a)(2) with respect to the continuous quoting obligations of
Designated Primary Market-Makers (``DPMs''), Lead Market-Makers
(``LMMs''), and Preferred Market-Makers (``PMMs''), respectively.
The proposed rule change deletes these outdated provisions and re-
numbers or re-letters, as applicable, the subparagraphs as
applicable. While the proposed rule change will permit a TPH
organization to have continuous quoting obligations apply below the
firm level, it will not permit application of continuous quoting
obligations at the individual level, as was the case pursuant to the
prior rule. Instead, the proposed rule change will permit a TPH
organization to have continuous quoting obligations apply at the
firm level or business unit level (if sufficient information
barriers are in place).
\4\ Cboe Options Rules currently contemplate that TPHs may have
separate Market-Maker aggregation units. See, e.g., Rule 5.89(b)(1).
Various other rules (for example contemplate TPH organizations
having separate business units and require information barriers in
the form of appropriate policies and procedures that reflect the
TPH's business to establish those separate business units. See,
e.g., Rules 5.89 (risk-weighted assets transactions); 8.10
(prevention of the misuse of material, nonpublic information); and
8.30, Interpretations and Policies .03 (position limits).
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The proposed rule change amends certain Rules to provide TPH
organizations with this flexibility:
[[Page 43080]]
<bullet> Rule 3.52 currently provides that TPHs registered as
Market-Makers have certain rights and bear certain responsibilities
beyond those of other TPHs. The proposed rule change adds
Interpretation and Policy .01 to provide that if a TPH organization is
comprised of multiple market-making aggregation units and has in place
appropriate information barriers or segregation requirements,\5\ the
TPH may register each individual aggregation unit as a separate Market-
Maker. The proposed rule change also adds a similar interpretation and
policy to Rules 3.53, 3.55, and 3.56 regarding DPMs, LMMs, and PMMs,
respectively.
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\5\ The TPH organization will need to provide the Exchange with
sufficient evidence of separation of these units.
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<bullet> The proposed rule change adds Rule 5.50, Interpretation
and Policy .01 to provide that Market-Maker appointments would apply to
each individual Market-Maker aggregation unit and adds Rule 5.53,
Interpretation and Policy .01 to provide that each Market-Maker
aggregation unit will be evaluated for good standing on an individual
basis.
<bullet> The proposed rule change amends Rules 5.33, Interpretation
and Policy .02 and adds Rule 5.51, Interpretation and Policy .01; Rule
5.52, Interpretation and Policy .01; Rule 5.54, Interpretation and
Policy .01; Rule 5.55, Interpretation and Policy .01; and Rule 5.56,
Interpretation and Policy .01 to provide that Market-Maker obligations
(including those with respect to DPMs, LMMs, and PMMs, when
applicable), will apply to individual Market-Maker aggregation units if
a TPH organization registers separate aggregation units as Market-
Makers.
<bullet> The proposed rule change adds Rule 5.24, Interpretation
and Policy .02 to require any individual Market-Maker aggregation unit
within a single firm to connect to the Exchange's backup systems and
participate in functional and performance testing announced by the
Exchange if that unit satisfies the connection criteria set forth in
Rule 5.24(b).
<bullet> The proposed rule change adds Rule 5.37, Interpretation
and Policy .04 (related to the Automated Improvement Mechanism
(``AIM'')) and Rule 5.39, Interpretation and Policy .04 (related to the
Solicitation Auction Mechanism (``SAM'')) to provide that the
restriction in the introductory paragraph of each Rule that prohibits a
solicited order for the account of any Market-Maker with an appointment
in the applicable class on the Exchange in all classes except SPX
applies to an individual Market-Maker aggregation unit if a TPH has
multiple aggregation units registered as separate Market-Makers.\6\
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\6\ For example, if Firm ABC has aggregation units DEF and GHI
each registered as separate Market-Makers, if Market-Maker DEF has
an appointment in class XYZ but Market-Maker GHI does not, Market-
Maker GHI could be solicited to be the contra-side order in an AIM
or SAM auction in class XYZ, but Market-Maker DEF could not.
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These proposed changes are consistent with the concept of treating
individual Market-Maker aggregation units within a single firm as
separate Market-Makers.
The proposed rule change states that a TPH organization may
register separate aggregation units as individual Market-Makers if the
organization has in place appropriate information barriers or
segregation units. The proposed language provides TPHs with flexibility
to adapt their policies and procedures to reflect their business model
and activities, including changes thereto. This flexibility is similar
to other rules that require information barriers, such as Rule 8.10,
which requires every TPH to establish, maintain, and enforce written
policies and procedures reasonably designed, taking into consideration
the nature of the TPH's business, to prevent the misuse, in violation
of the Exchange Act and Exchange Rules, of material nonpublic
information by the TPH or persons associated with the TPH. In
accordance with this proposed rule change, pursuant to Rule 8.10, a TPH
organization that registers separate business units as individual
Market-Makers would be obligated to ensure that its policies and
procedures reflect the current state of its business and continue to be
reasonably designed to prevent the misuse of material, nonpublic
information. Separate market-making units registered as individual
Market-Makers may dictate that an information barrier or functional
separation be part of the appropriate set of policies and procedures
that would be reasonably designed to achieve compliance with the
proposed rule change. The proposed rule change has no pre-approval
requirement; however, appropriate information barriers would be subject
to review as part of the process to register the separate aggregation
units as individual Market-Makers with the Exchange.\7\ Additionally,
these policies and procedures would be subject to regular review by the
Exchange's Regulation Division, such as part of the routine examination
or testing process or as part of internal surveillances and
investigations.
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\7\ The Exchange's Regulatory Division intends to announce by
Regulatory Circular a method by which a TPH organization may seek
pre-approval of the policies and procedures comprising the
information barriers.
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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.\8\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \9\ 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) \10\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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In particular, the Exchange believes the proposed rule change will
promote just and equitable principles of trade and remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest, because it will provide TPH organizations with flexibility to
register its business units as Market-Makers with the Exchange, and
have the Exchange regulate those Market-Maker business units, in a
manner consistent with these organizations' internal business
operations. The Exchange believes this will permit these organizations
to manage the entirety of their Market-Maker operations--including
Market-Maker registrations, appointments, and quoting--as they deem
appropriate based on the nature of their businesses, which may
ultimately benefit the efficiency of their Market-Maker businesses. The
Exchange does not propose to modify any Market-Maker responsibilities
or obligations. The Exchange does not believe the proposed rule change
will reduce liquidity, as any individual Market-Maker aggregation unit
(as opposed to the TPH
[[Page 43081]]
organization collectively) will need to satisfy all Market-Maker
obligations, including continuous quoting obligations, on its own.
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
will not impose any burden on intramarket competition, because it will
apply in the same manner to all TPH organizations that register with
the Exchange as Market-Makers. Whether a TPH organization registers
separate business units as Market-Makers is within the sole discretion
of that organization. With respect to TPH organizations that elect to
register separate business units as Market-Makers, the proposed rule
change will apply all applicable Market-Maker rules, including those
regarding Market-Maker obligations and responsibilities, in the same
manner to those units. The Exchange does not propose to modify any
Market-Maker obligations or responsibilities, and thus does not believe
the proposed rule change will diminish liquidity on the Exchange. The
proposed rule change will not impose any burden on intermarket
competition, because the proposed rule change applies only to how TPH
organizations may register with the Exchange as a Market-Maker and how
the Exchange will determine Market-Maker compliance with Exchange-
imposed Market-Maker obligations and responsibilities.
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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act normally does not become operative for 30 days after the date of
its filing. However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission
to designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange requested
that the Commission waive the 30-day operative delay so that the
proposal may become operative immediately upon filing. The proposal
provides flexibility to a TPH organization to register separate market-
maker aggregation units as separate Market-Makers, each of which would
be subject to Market-Maker obligations on an individual basis, if
appropriate information barriers or segregation requirements are in
place. The Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest because the proposed rule change does not raise any new or
novel issues. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change operative upon
filing.\14\
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\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab"><span class="__cf_email__" data-cfemail="4331362f266e202c2e2e262d3730033026206d242c35">[email protected]</span></a>. Please include
File Number SR-CBOE-2022-037 on the subject line.
Paper Comments
<bullet> 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-CBOE-2022-037. 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 website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 website 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.
Persons submitting comments are cautioned that we do not redact or
edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-CBOE-2022-037
and should be submitted on or before August 9, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15306 Filed 7-18-22; 8:45 am]
BILLING CODE 8011-01-P
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