[Federal Register Volume 81, Number 23 (Thursday, February 4, 2016)]
[Notices]
[Pages 6066-6084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02061]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76998; File No. 10-221]


In the Matter of the Application of ISE Mercury, LLC for 
Registration as a National Securities Exchange; Findings, Opinion, and 
Order of the Commission

January 29, 2016.

I. Introduction

    On September 29, 2014, ISE Mercury, LLC (``ISE Mercury'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') an Application for Registration as a National 
Securities Exchange (``Form 1 Application'') \1\ under Section 6 of the 
Securities Exchange Act of 1934 (``Act'').\2\ On June 26, 2015, ISE 
Mercury submitted Amendment No. 1 to its Form 1 Application.\3\ Notice 
of the Form 1 Application, as modified by Amendment No. 1, was 
published for comment in the Federal Register on September 16, 2015.\4\ 
The Commission received one comment letter regarding the Form 1 
Application.\5\ ISE Mercury submitted a response to comments on 
December 7, 2015.\6\ On January 8, 2016, ISE Mercury submitted 
Amendment No. 2 to the Form 1 Application.\7\
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    \1\ ISE Mercury, in conjunction with its submission of the Form 
1 Application, requested an exemption under Section 36(a)(1) of the 
Act from certain requirements of Rules 6a-1(a) and 6a-2 of the Act. 
On September 9, 2015, the Commission issued an order granting ISE 
Mercury exemptive relief, subject to certain conditions, in 
connection with the filing of its Form 1 Application. See Securities 
Exchange Act Release No. 75867 (September 9, 2015), 80 FR 55395 
(September 15, 2015). Because the Form 1 Application was not 
considered filed without the exemptive relief, the date of filing of 
such application is September 9, 2015. Id.
    \2\ 15 U.S.C. 78f.
    \3\ Amendment No. 1, among other things, includes changes to the 
Limited Liability Company Agreement of ISE Mercury (``ISE Mercury 
LLC Agreement'') and the Constitution of ISE Mercury (``ISE Mercury 
Constitution'') concerning board composition and fair representation 
of the Exchange's members, use of confidential information for non-
regulatory purposes, and the use of regulatory funds. Amendment No. 
1 also includes revisions to the proposed rules of ISE Mercury. 
Amendment No. 1 further provides additional descriptions in Exhibit 
E to the Form 1 Application regarding ISE Mercury's compliance with 
Regulation Systems Compliance and Integrity (``Regulation SCI'').
    \4\ See Securities Exchange Act Release No. 75884 (September 10, 
2015), 80 FR 55691 (``Notice'').
    \5\ See Letter from Kurt Eckert, Principal, Wolverine Trading, 
LLC (``Wolverine''), to Elizabeth M. Murphy, Secretary, Commission, 
dated October 23, 2014 (``Wolverine Letter'').
    \6\ See Letter from Michael Simon, General Counsel and 
Secretary, ISE Mercury, to Brent J. Fields, Secretary, Commission, 
dated December 7, 2015 (``ISE Mercury Response Letter'').
    \7\ Amendment No. 2, among other things, also includes revisions 
to the proposed rules of ISE Mercury to reflect changes to 
comparable ISE rules since the filing of Amendment No. 1. The 
changes proposed in Amendment No. 2 are not substantive, are 
consistent with the existing rules of other registered national 
securities exchanges, and do not raise any new or novel regulatory 
issues.
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II. Discussion

    Under Sections 6(b) and 19(a) of the Act,\8\ the Commission shall 
by order grant an application for registration as a national securities 
exchange if the Commission finds, among other things, that the proposed 
exchange is so organized and has the capacity to carry out the purposes 
of the Act and to comply, and to enforce compliance by its members and 
persons associated with its members, with the provisions of the Act, 
the rules and regulations thereunder, and the rules of the exchange.
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    \8\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds, after 
consideration of the comment letter and the Exchange's response 
thereto, that ISE Mercury's application for exchange registration meets 
the requirements of the Act and the rules and regulations thereunder. 
Further, the Commission finds that the proposed rules of ISE Mercury 
are consistent with Section 6 of the Act in that, among other things, 
they assure a fair representation of the Exchange's members in the 
selection of its directors and administration of its affairs and 
provide that one or more directors will be representative of issuers 
and investors and not be associated with a member of the exchange, or 
with a broker or dealer; \9\ and that they are designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and remove impediments to and perfect the mechanisms of a 
free and open market and a national market system and, in general, 
protect investors and the public interest and are not designed to 
permit unfair discrimination between customers, issuers, or broker-
dealers.\10\ Finally, the

[[Page 6067]]

Commission finds that ISE Mercury's proposed rules do not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\11\
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    \9\ See 15 U.S.C. 78f(b)(3).
    \10\ See 15 U.S.C. 78f(b)(5).
    \11\ See 15 U.S.C. 78f(b)(8).
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A. Overview of Ownership of ISE Mercury

    ISE Mercury is structured as a Delaware limited liability company 
(``LLC'') and is a wholly-owned subsidiary of International Securities 
Exchange Holdings, Inc. (``ISE Holdings'').\12\ ISE Holdings, in turn, 
is a wholly-owned subsidiary of U.S. Exchange Holdings, Inc. (``U.S. 
Exchange Holdings''), which is wholly-owned by Eurex Frankfurt AG, a 
German stock corporation (``Eurex Frankfurt''), and Deutsche B[ouml]rse 
AG (``Deutsche B[ouml]rse,'' and together with U.S. Exchange Holdings 
and Eurex Frankfurt, the ``Upstream Owners'').\13\
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    \12\ Following any Commission grant of registration to ISE 
Mercury, ISE Holdings will be the sole holding company of three 
registered national securities exchanges: International Securities 
Exchange LLC (``ISE''), ISE Gemini Exchange, LLC (``ISE Gemini''), 
and ISE Mercury. See Exhibit C to the Form 1 Application, Section M.
    \13\ Eurex Frankfurt holds an 85% interest in U.S. Exchange 
Holdings, and Deutsche B[ouml]rse holds the remaining 15%. In turn, 
Deutsche B[ouml]rse holds a 100% interest in Eurex Frankfurt. The 
current upstream ownership structure of ISE Mercury is the result of 
the acquisition of ISE Holdings by Eurex Frankfurt in 2007 (the 
``Eurex Acquisition'')1 and a corporate reorganizations in 2014.1 
See Securities Exchange Act Release No. 56955 (December 13, 2007), 
72 FR 71979 (December 19, 2007) (File No. SR-ISE-2007-101) (order 
approving a transaction in which ISE Holdings became a wholly-owned 
indirect subsidiary of Eurex Frankfurt) (``Eurex Acquisition 
Order''); and Securities Exchange Act Release Nos. 73530 (November 
5, 2014), 79 FR 67224 (November 12, 2014) (SR-ISE-2014-44); 73860 
(December 17, 2014), 79 FR 77066 (December 23, 2014); 73531 
(November 5, 2014), 79 FR 67215 (November 12, 2014) (SR-ISEGemini-
2014-24); and 73861 (December 17, 2014), 79 FR 77064 (December 23, 
2014).
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B. Governance of ISE Mercury

1. ISE Mercury Board of Directors
    The board of directors of ISE Mercury (``ISE Mercury Board'' or 
``Board'') will be its governing body and will possess all of the 
powers necessary for the management of its business and affairs, 
including governance of ISE Mercury as a self-regulatory organization 
(``SRO'').\14\ The ISE Mercury Board will be comprised of no fewer than 
eight, but no more than 16, directors.\15\ Specifically, at least 50% 
of the ISE Mercury Board must be comprised of Non-Industry 
Directors,\16\ of which at least one of the Non-Industry Directors must 
be a Public Director.\17\ Further, the ISE Mercury Board will include 
the President/Chief Executive Officer as a director.\18\ Moreover, at 
least 30% of the ISE Mercury Board must be officers, directors or 
partners of ISE Mercury members, and must be elected by a plurality of 
holders of Exchange Rights \19\ (``Industry Directors''), of which at 
least: (i) one must be elected by a plurality of holders of Primary 
Market Maker (``PMM'') Exchange Rights, (ii) one must be elected by a 
plurality of holders of Competitive Market Maker (``CMM'') Exchange 
Rights, and (iii) one must be elected by a plurality of holders of 
Electronic Access Member (``EAM'') Exchange Rights, provided that the 
number of each type of Industry Director shall always be equal.\20\
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    \14\ See ISE Mercury Constitution, Article III, Section 3.1.
    \15\ See ISE Mercury Constitution, Article III, Section 3.2(a).
    \16\ See ISE Mercury Constitution, Article III, Section 
3.2(b)(ii). Under the ISE Mercury Constitution, ``Non-Industry 
Director'' means a member of ISE Mercury Board that meets the 
requirements of a non-industry representative and is elected by ISE 
Holdings. See id. ``The term `non-industry representative' means any 
person that is not considered an `industry representative,' as well 
as (i) a person affiliated with a broker or dealer that operates 
solely to assist the securities-related activities of the business 
of non-member affiliates, (ii) an employee of an entity that is 
affiliated with a broker or dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who 
is primarily engaged in the business of the non-member entity.'' ISE 
Mercury Constitution, Article VIII, Section 13.1(v). The term 
``industry representative'' means a person who is an officer, 
director or employee of a broker or dealer or who has been employed 
in any such capacity at any time within the prior three (3) years, 
as well as a person who has a consulting or employment relationship 
with or has provided professional services to the Exchange and a 
person who had any such relationship or provided any such services 
to the Exchange at any time within the prior three (3) years. See 
ISE Mercury Constitution, Article VIII, Section 13.1(s).
    \17\ See ISE Mercury Constitution, Article III, Section 
3.2(b)(ii). Under the ISE Mercury Constitution, ``Public Director'' 
means a Non-Industry Director that is a non-industry representative 
who has no material relationship with a broker or dealer or any 
affiliate of a broker or dealer or the Exchange or any affiliate of 
the Exchange. See ISE Mercury Constitution, Article VIII, Sections 
13.1(aa) and (bb), and Article III, Section 3.2(b)(ii).
    \18\ See ISE Mercury Constitution, Article III, Section 
3.2(b)(iii).
    \19\ See ISE Mercury Rule 300 Series. ``Exchange Rights'' means 
the PMM Rights, CMM Rights and EAM Rights collectively. See ISE 
Mercury Rule 100(a)(17). PMM Rights, CMM Rights and EAM Rights have 
the meaning set forth in Article VI of ISE Mercury LLC Agreement. 
See ISE Mercury Rules 100(a)(12), 100(a)(15) and 100(a)(36).
    \20\ See ISE Mercury Constitution, Article III, Section 
3.2(b)(i).
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    As part of the process to elect members of the Board, the 
Nominating Committee will nominate the proposed Industry Directors and 
the Corporate Governance Committee \21\ and ISE Holdings will nominate 
the proposed Non-Industry Directors.\22\ A petition process will allow 
ISE Mercury members to nominate alternate candidates for consideration 
as Industry Directors.\23\ At the first annual meeting and at each 
annual meeting thereafter, ISE Holdings will elect all of the members 
of the ISE Mercury Board (except the Industry Directors, which are 
elected by ISE Mercury members \24\) but will be required to do so in 
compliance with the compositional requirements for the Board outlined 
in the ISE Mercury Constitution.
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    \21\ See infra Section II.B.3. for a description of ISE 
Mercury's Nominating Committee and Corporate Governance Committee.
    \22\ See, e.g., ISE Mercury Constitution, Article III, Section 
3.10(a)-(b). ISE Holdings, as the Sole LLC Member of ISE Mercury, is 
permitted to petition the Corporate Governance Committee to propose 
alternate Non-Industry Directors and Public Directors. See ISE 
Mercury Constitution, Article III, Section 3.10(b)(ii). See also 
infra note 63 for a definition of ``Sole LLC Member.''
    \23\ See, e.g., ISE Mercury Constitution, Article III, Section 
3.10(a)(ii). Specifically, in addition to the Industry Director 
nominees named by the Nominating Committee, persons eligible to 
serve as such may be nominated for election to the ISE Mercury Board 
by a petition, signed by the holders of not less than five percent 
(5%) of the outstanding Exchange Rights of the series entitled to 
elect such person if there are more than eighty (80) Exchange Rights 
in the series entitled to vote, ten percent (10%) of the outstanding 
rights of such series entitled to elect such person if there are 
between eighty (80) and forty (40) Exchange Rights in the series 
entitled to vote, and twenty-five percent (25%) of the outstanding 
Exchange Rights of such series entitled to elect such person if 
there are less than forty (40) Exchange Rights in the series 
entitled to vote. For purposes of determining whether a person has 
been nominated for election by petition by the requisite percentage, 
no ISE Mercury member, alone or together with its affiliates, may 
account for more than 50% of the signatures of the holders of 
outstanding Exchange Rights of the series entitled to elect such 
person, and any such signatures by such Exchange Members, alone or 
together with its affiliates, in excess of such 50% limitation shall 
be disregarded. Id. This process is identical to the process in 
place at ISE. See ISE Second and Amended Constitution, Article III, 
Section 3.10(a)(ii).
    \24\ See ISE Mercury Constitution, Article III, Sections 
3.2(b)(i) and (c). The Commission notes that pursuant to Section 
6.3(b) of the ISE Mercury LLC Agreement, a holder of Exchange 
Rights, together with any affiliate, as such term is defined in the 
ISE Mercury Constitution, may not exercise the voting rights 
associated with more than twenty percent (20%) of the outstanding 
Exchange Rights. Any exercise of voting rights in excess of twenty 
percent (20%) of the outstanding Exchange Rights by a holder of 
Exchange Rights, together with any affiliate, shall be deemed null 
and void. See Exhibit J.2 to the Form 1 Application.
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    The Commission believes that the requirements in the ISE Mercury 
Constitution--that at least 30% of the directors be Industry Directors 
and the means by which they will be chosen by ISE Mercury members 
\25\--are consistent with Section 6(b)(3) of the Act because they 
provide for the fair representation of members in the selection of 
directors and the administration of ISE

[[Page 6068]]

Mercury.\26\ Section 6(b)(3) of the Act requires that ``the rules of 
the exchange assure a fair representation of its members in the 
selection of its directors and administration of its affairs and 
provide that one or more directors shall be representative of issuers 
and investors and not be associated with a member of the exchange, 
broker, or dealer.'' As the Commission previously has noted, this 
statutory requirement helps to ensure that members have a voice in the 
Exchange's use of self-regulatory authority and that the Exchange is 
administered in a way that is equitable to all those persons who trade 
on its market or through its facilities.\27\ In addition, the 
Commission believes that the requirements that at least 50% of the 
Board be composed of Non-Industry Directors and that at least one 
director be a Public Director satisfy the requirements of Section 
6(b)(3) of the Act.\28\
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    \25\ Id. See also ISE Mercury Constitution, Article III, Section 
3.10(a)(ii).
    \26\ 15 U.S.C. 78f(b)(3).
    \27\ See, e.g., Securities Exchange Act Release Nos. 70050 (July 
26, 2013), 78 FR 46622 (August 1, 2013) (File No. 10-209) (order 
granting the exchange registration of ISE Gemini) (``ISE Gemini 
Order''); 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) 
(File No. 10-131) (order granting the exchange registration of 
Nasdaq Stock Market, Inc.) (``Nasdaq Order''); and 58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order 
granting the exchange registration of BATS Exchange, Inc.) (``BATS 
Order'').
    \28\ 15 U.S.C. 78f(b)(3). See also ISE Gemini Order, supra note 
27; Securities Exchange Act Release No. 68341, p.8, (December 3, 
2012), 77 FR 73065, 73067 (December 7, 2012) (File No. 10-207) 
(order granting the registration of Miami International Securities 
Exchange, LLC) (``MIAX Order''); and Regulation of Exchanges and 
Alternative Trading Systems, Securities Exchange Act Release No. 
40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) 
(``Regulation ATS Release'').
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2. Interim Board
    After ISE Mercury is granted registration by the Commission, but 
prior to commencing operations, ISE Holdings, as the sole shareholder 
of ISE Mercury,\29\ will appoint an interim board of directors for ISE 
Mercury that will serve only until the first annual meeting (``Interim 
ISE Mercury Board''). The Interim ISE Mercury Board will be comprised 
of the same individuals as those then-serving ISE board and ISE Gemini 
board and will consist of 15 directors: the President/Chief Executive 
Officer Director; \30\ six Industry Directors; and eight Non-Industry 
Directors.\31\ ISE Mercury anticipates that there will be a significant 
overlap between its membership and the membership of ISE and ISE 
Gemini.\32\ ISE Mercury also ``does not expect to receive a meaningful 
number of applications for membership from non-ISE and ISE Gemini 
members during the tenure of the Interim ISE Mercury Board.'' \33\ 
Thus, the six interim Industry Directors to be appointed to the ISE 
Mercury Board likely will have been elected by ISE Mercury members in 
their capacity as ISE and ISE Gemini members.\34\
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    \29\ See infra Section II.C.1. for a discussion of the ownership 
of ISE Mercury.
    \30\ See Exhibit J to the Form 1 Application.
    \31\ See Exhibit J to the Form 1 Application.
    \32\ See Exhibit L to the Form 1 Application. Based on 
discussions with ISE members, ISE Mercury represented that it 
currently expects that ISE Mercury's membership will consist 
substantially of current ISE and ISE Gemini members, including, but 
not limited to, those ISE and ISE Gemini members that have 
representatives serving as industry directors on the ISE Board. See 
Exhibit J to ISE Mercury Form 1 Application.
    \33\ Exhibit J to the Form 1 Application.
    \34\ See id.
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    These interim Industry Directors will serve until the first initial 
ISE Mercury Board is elected pursuant to the full nomination, petition, 
and voting process set forth in the ISE Mercury Constitution as 
described above.\35\ ISE Mercury will complete such process as promptly 
as possible and within 90 days after its application for registration 
as a national securities exchange is granted by the Commission.\36\
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    \35\ See ISE Mercury Constitution, Article III, Sections 3.2(c) 
and 3.10; see also Exhibit J to the Form 1 Application.
    \36\ See Exhibit J to the Form 1 Application.
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    The Commission believes that the process for electing the Interim 
ISE Mercury Board, as proposed, is consistent with the requirements of 
the Act, including that the rules of the exchange assure fair 
representation of the exchange's members in the selection of its 
directors and administration of its affairs.\37\ The Commission 
believes that the Interim ISE Mercury Board process is designed to 
provide member representation sufficient to allow ISE Mercury to 
commence operations for an interim period prior to going through the 
process to elect a new Board pursuant to the full nomination, petition, 
and voting process set forth in the ISE Mercury Constitution.
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    \37\ See 15 U.S.C. 78f(b)(3). ISE Mercury's proposed timeline 
for the Interim ISE Mercury Board process comports with the interim 
board process approved by the Commission for ISE Gemini, the Boston 
Options Exchange (``BOX'') and Miami International Securities 
Exchange, LLC (``MIAX''). See ISE Gemini Order, supra note at 27; 
Securities Exchange Act Release No. 66871 (April 27, 2012), 77 FR 
26323 (May 3, 2012) (File No. 10-206) (``BOX Order''); and the MIAX 
Order, supra note 28.
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    The Interim ISE Mercury Board will be filled by current ISE and ISE 
Gemini Board members (which currently include Industry Directors who 
were elected by current ISE and ISE Gemini members) until the first 
annual meeting of ISE Mercury.\38\ As noted above, ISE Mercury 
anticipates that there will be significant overlap between the initial 
members of ISE Mercury and the current members of ISE and ISE 
Gemini.\39\ Moreover, ISE Mercury will complete the full nomination, 
petition, and voting process, as set forth in the ISE Mercury 
Constitution,\40\ as promptly as possible and within 90 days of when 
ISE Mercury's application for registration as a national securities 
exchange is granted.\41\ As a part of the full nomination, petition, 
and voting process, members of ISE Mercury will be able to petition for 
alternate candidates to be considered for Industry Director 
positions.\42\ This process will provide persons who are approved as 
members of ISE Mercury after the effective date of this order with the 
opportunity to participate in the selection of the Industry Directors.
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    \38\ See Exhibit J to the Form 1 Application.
    \39\ ISE Mercury will have a streamlined waive-in process for 
existing ISE and ISE Gemini members to apply for membership on ISE 
Mercury. See ISE Mercury Rule 302(a).
    \40\ See, e.g., ISE Mercury Constitution, Article III, Section 
3.10(a)-(b).
    \41\ See ISE Mercury Constitution, Article III, Sections 3.2(c) 
and 3.10.
    \42\ See ISE Mercury Constitution, Article III, Section 
3.10(a)(ii).
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3. Exchange Committees
    ISE Mercury will have a number of Board committees,\43\ including 
an Executive Committee (consisting of six directors, and with the 
number of Non-Industry Directors equaling or exceeding the number of 
Industry Directors),\44\ a Finance and Audit Committee (consisting of 
between three and five directors, all of whom must be Non-Industry 
Directors),\45\ a Compensation Committee (consisting of between three 
and five directors, all of whom must be Non-Industry Directors),\46\ a 
Corporate Governance Committee (consisting of at least three directors, 
all of whom must be Non-Industry Directors),\47\ and such other 
additional committees as may be approved by the ISE Mercury Board.\48\
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    \43\ See ISE Mercury Constitution, Article V, Section 5.1(a).
    \44\ See ISE Mercury Constitution, Article V, Section 5.2. The 
Executive Committee will have and may exercise all the powers and 
authority of the Board, except that the Executive Committee will not 
have the powers of the Board with respect to approving: (i) Any 
merger, consolidation, sale of substantially all of the assets or 
dissolution of the Exchange; or (ii) any matters pertaining to the 
self-regulatory function of the Exchange or relating to the 
structure of the market which the Exchange regulates. See id.
    \45\ See ISE Mercury Constitution, Article V, Section 5.5.
    \46\ See ISE Mercury Constitution, Article V, Section 5.6.
    \47\ See ISE Mercury Constitution, Article V, Section 5.4.
    \48\ See ISE Mercury Constitution, Article V, Section 5.1(a).

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[[Page 6069]]

    ISE Mercury also will have a Nominating Committee, which will be a 
committee of ISE Mercury and not a committee of the Board.\49\ The 
Nominating Committee will be composed of three Exchange Member 
Representatives \50\ and will be responsible for nominating candidates 
for Industry Director positions.\51\ As noted above, there will be a 
petition process by which members of ISE Mercury can nominate their own 
nominees for the Industry Director positions.\52\ These nomination 
processes are consistent with processes that the Commission has 
approved for other national securities exchanges.\53\
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    \49\ See ISE Mercury Constitution, Article V, Section 5.3.
    \50\ See id. Article XIII, Section 13.1(n) of the ISE Mercury 
Constitution defines ``Exchange Member Representative'' as an 
associated person of an Exchange Member, and Section 13.1(m) defines 
``Exchange Member'' as an organization that has been approved to 
exercise trading rights associated with Exchange Rights.
    \51\ See ISE Mercury Constitution, Article V, Section 5.3. The 
Interim ISE Mercury Board shall appoint the initial members of the 
Nominating Committee in accordance with the qualifications 
prescribed in Section 5.3 of the ISE Mercury Constitution.
    \52\ See ISE Mercury Constitution, Article III, Section 
3.10(a)(ii). See also supra note 23 and accompanying text.
    \53\ See, e.g., ISE Second Amended and Restated Constitution, 
Articles III and V, Sections 3.10 and 5.3; ISE Gemini Constitution, 
Articles III and V, Sections 3.10 and 5.3; and MIAX Amended and 
Restated By-laws, Articles II and V, Sections 2.4 and 5.3.
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    The Commission believes that ISE Mercury's proposed committees, 
which are similar to committees maintained by other national securities 
exchanges,\54\ are designed to help enable ISE Mercury to carry out its 
responsibilities under the Act and are consistent with the Act, 
including Section 6(b)(1), which requires, in part, an exchange to be 
so organized and have the capacity to carry out the purposes of the 
Act.\55\
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    \54\ See, e.g., ISE Gemini Order, supra note 27, MIAX Order, 
supra note 28, and BOX Order, supra note 37.
    \55\ 15 U.S.C. 78f(b)(1).
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C. Regulation of ISE Mercury

    When ISE Mercury commences operations as a national securities 
exchange, it will have all the attendant regulatory obligations under 
the Act. In particular, ISE Mercury will be responsible for the 
operation and regulation of its trading system and the regulation of 
its members. Certain provisions in the ISE Mercury's and ISE Holdings' 
governance documents are designed to facilitate the ability of ISE 
Mercury and the Commission to fulfill their regulatory and oversight 
obligations under the Act. The discussion below summarizes some of 
these key provisions.
1. Ownership Structure: Ownership and Voting Limitations
    As noted above in Section II.A, ISE Mercury is a Delaware LLC and a 
wholly-owned subsidiary of ISE Holdings.\56\ ISE Holdings is owned by 
Eurex Frankfurt and Deutsche B[ouml]rse through an intermediary holding 
company, U.S. Exchange Holdings. ISE Holdings' governing documents 
impose limits on any direct or indirect change in control of ISE 
Holdings, which are to be enforced through the creation of a statutory 
trust.\57\
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    \56\ The ISE Mercury LLC Agreement provides that ISE Holdings 
may not assign its interest in ISE Mercury unless such assignment is 
subject to prior approval by the Commission pursuant to the rule 
filing procedure under Section 19 of the Act. See ISE Mercury LLC 
Agreement, Section 7.1 (Assignments; Additional LLC Members).
    \57\ See Article FOURTH, Section III.(c) of the Second Amended 
and Restated Certificate of Incorporation of International 
Securities Exchange Holdings, Inc. (``ISE Holdings Certificate''). 
See infra notes 67-69 and 101-105 and accompanying text for a 
discussion of the statutory trust.
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    Specifically, ISE Holdings' governing documents prohibit any ISE 
Mercury member (alone or together with its Related Persons \58\) from 
owning more than 20% of any class of Voting Shares of ISE Holdings.\59\ 
Moreover, pursuant to ISE Holdings' governing documents, no person 
(alone or together with its Related Persons) may own more than 40% of 
any class of Voting Shares of ISE Holdings.\60\ Finally, no person 
(alone or together with its Related Persons) may vote or cause the 
voting of shares representing more than 20% of the voting power of the 
then outstanding Voting Shares of ISE Holdings.\61\ As described more 
fully below, if a person exceeds an ISE Holdings' ownership or voting 
limit, a majority of the capital stock of ISE Holdings that has the 
right by its terms to vote in the election of the ISE Holdings Board or 
on other matters (other than matters affecting the rights, preferences 
or privileges of the capital stock) automatically will be transferred 
to a Delaware statutory trust (``ISE Trust'').\62\
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    \58\ See ISE Holdings Certificate, Article FOURTH, Section III 
for the definition of ``Related Persons.''
    \59\ See ISE Holdings Certificate, Article FOURTH, Section 
III.(a)(i) for the definition of ``Voting Shares.'' The ISE Holdings 
Certificate defines ``Voting Shares'' as shares of the capital stock 
(whether Common Stock or Preferred Stock) of the ISE Holdings that 
have the right by their terms to vote in the election of members of 
the ISE Holdings board of directors (``ISE Holdings Board'') or on 
other matters which may require the approval of the holders of 
voting shares of the ISE Holdings (other than matters affecting the 
rights, preferences or privileges of a particular class of capital 
stock).
    \60\ See ISE Holdings Certificate, Article FOURTH, Section 
III.(a)(i).
    \61\ See ISE Holdings Certificate, Article FOURTH, Section 
III.(b). See also Second Amended and Restated Bylaws of ISE Holdings 
(``ISE Holdings Bylaws''), Article XI, Section 11.1(b).
    \62\ See ISE Holdings Certificate, Article FOURTH, Section 
III.(c). See also infra notes 67-70 and accompanying text for a 
discussion of the ISE Trust.
    Consistent with the governance structure of other exchanges, 
however, ISE Holdings Board may waive the 40% ownership limitation 
and the 20% voting restriction for persons other than ISE Mercury 
members, subject to certain specified conditions, but such waiver 
will not be effective unless approved by the Commission. 
Specifically, The ISE Holdings Certificate allows the ISE Holdings 
Board to waive the ISE Holdings ownership and voting limits pursuant 
to an amendment to the ISE Holdings Bylaws, provided that the ISE 
Holdings Board makes certain determinations. See ISE Holdings 
Certificate, Article FOURTH, Sections III.(a)(i)(A), III.(a)(i)(B) 
and III.(b)(i).
    Article XI of the ISE Holdings Bylaws waives the ISE Holdings 
ownership and voting limits to allow the Upstream Owners to own and 
vote all of the common stock of ISE Holdings. Article XI, Section 
11.1(b) states that, in waiving the ISE Holdings ownership and 
voting limits to permit the Upstream Owners to own and vote the 
capital stock of ISE Holdings, the ISE Holdings Board has 
determined, with respect to each Upstream Owner, that: (i) Such 
waiver will not impair the ability of ISE Holdings and each 
``Controlled National Securities Exchange'' (i.e., any national 
securities exchange or facility thereof controlled, directly or 
indirectly, by ISE Holdings, including ISE, ISE Gemini, and as a 
result of this order, ISE Mercury) to carry out their respective 
functions and responsibilities under the Act; (ii) such waiver is in 
the best interests of ISE Holdings, its stockholders, and each 
Controlled National Securities Exchange; (iii) such waiver will not 
impair the ability of the Commission to enforce the Act; (iv) 
neither the Upstream Owner nor any of its related persons is subject 
to a statutory disqualification (within the meaning of Section 
3(a)(39) of the Act, 15 U.S.C. 78c(a)(39)); and (v) neither the 
Upstream Owner nor any of its related persons is a member of such 
Controlled National Securities Exchange. Article XI of the ISE 
Holdings Bylaws was adopted in connection with the Eurex 
Acquisition, when ISE was the sole national securities exchange 
controlled by ISE Holdings. See Eurex Acquisition Order, supra note 
13. Article XI, Section 11.1(b) was subsequently amended to apply to 
any Controlled National Securities Exchange, which by its terms will 
include ISE Mercury. See Securities Exchange Act Release No. 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (order 
approving proposed rule change relating to the purchase by ISE 
Holdings of an ownership interest in Direct Edge Holdings, Inc.) and 
61498 (February 4, 2010), 75 FR 7299 (February 18, 2010) (order 
approving proposed rule change relating to changes to the U.S. 
Exchange Holdings corporate documents and ISE Trust).
---------------------------------------------------------------------------

    The ISE Mercury LLC Agreement and ISE Mercury Constitution do not 
include change of control provisions that are similar to those in the 
ISE Holdings Certificate and ISE Holdings Bylaws. However, the ISE 
Mercury LLC Agreement and the ISE Mercury Constitution explicitly 
provide that ISE Holdings is the Sole LLC Member of ISE Mercury.\63\ 
Under the ISE Mercury LLC Agreement, ISE Holdings is permitted to 
``assign all (but not less than all)'' of its

[[Page 6070]]

interest in ISE Mercury, but the assignment of all of ISE Holdings' 
interest in ISE Mercury will be subject to prior approval by the 
Commission pursuant to the rule filing procedures under Section 19 of 
the Act.\64\
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    \63\ See ISE Mercury LLC Agreement, Article II, Section 2.1 and 
ISE Mercury Constitution Article I, Section 1.1 (both of which 
define ``Sole LLC Member'' to mean ISE Holdings, as the sole member 
of ISE Mercury).
    \64\ See 15 U.S.C. 78s; see also ISE Mercury LLC Agreement, 
Article VII, Section 7.1 and ISE Mercury Constitution, Article I, 
Section 1.1.
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    To facilitate compliance with the ISE Holdings ownership and voting 
limits, the Upstream Owners have committed to take reasonable steps 
necessary to cause ISE Holdings to be in compliance with the ISE 
Holdings ownership and voting limits. These commitments are contained 
in the governing documents for U.S. Exchange Holdings \65\ and in 
corporate resolutions for Eurex Frankfurt and Deutsche B[ouml]rse.\66\
---------------------------------------------------------------------------

    \65\ The Third Amended and Restated Certificate of Incorporation 
of U.S. Exchange Holdings (``U.S. Exchange Holdings Certificate'') 
provides that, for so long as U.S. Exchange Holdings directly or 
indirectly controls a Controlled National Securities Exchange, U.S. 
Exchange Holdings will take reasonable steps necessary to cause ISE 
Holdings to be in compliance with the ISE Holdings' ownership and 
voting limits. See U.S. Exchange Holdings Certificate, Article 
THIRTEENTH.
    \66\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Section (4)), Exhibit B to the Form 1 Application. 
In the Form 1 Application, ISE Mercury included these supplemental 
resolutions that Eurex Frankfurt and Deutsche B[ouml]rse have each 
adopted that, in part, incorporate provisions regarding the 
ownership and voting limits (``ISE Mercury Resolutions'') in the 
same manner and to the same extent as prior corporate resolutions 
signed by Eurex Frankfurt and Deutsche B[ouml]rse apply to ISE and 
ISE Gemini (``2007 Resolutions''). The ISE Mercury Resolutions were 
signed by Eurex Frankfurt and Deutsche B[ouml]rse, and extend to ISE 
Mercury the commitments made in the 2007 Resolutions with respect to 
ISE and ISE Gemini. For example, ISE Mercury represented in Exhibit 
B of Amendment No. 2 to the Form 1 Application that the Deutsche 
B[ouml]rse AG Executive Board adopted its corporate resolution on 
February 17, 2015 and the Eurex Frankfurt Executive Board adopted 
its corporate resolutions on February 13, 2015.
---------------------------------------------------------------------------

    In connection with the Eurex Acquisition, ISE implemented the ISE 
Trust pursuant to a Trust Agreement (``2007 Trust Agreement'') among 
ISE Holdings, U.S. Exchange Holdings, trustees (``Trustees''), and a 
Delaware trustee, which agreement has been subsequently amended to take 
into account subsequent acquisitions, including the current 
transaction.\67\ The ISE Trust Agreement serves, in part, to effectuate 
the ownership and voting limits for ISE Holdings in the event that a 
person obtains an ownership or voting interest in excess of the limits 
established in the ISE Holdings Certificate without prior Commission 
approval. To accomplish that purpose, for as long as ISE Holdings 
controls, directly or indirectly, a national securities exchange, 
including ISE Mercury, the ISE Trust would accept, hold and dispose of 
Trust Shares \68\ on the terms and subject to the conditions set forth 
therein.\69\ Specifically, if any person's ownership percentage exceeds 
the ownership limits or any person's voting control percentage exceeds 
the voting limits without Commission approval, the Excess Shares will 
be transferred automatically to the ISE Trust pursuant to the terms 
prescribed in the ISE Holdings Certificate.\70\ The ISE Trust then 
would accept the Excess Shares and hold them for the benefit of the 
trust beneficiary, U.S. Exchange Holdings, who has the right to 
reacquire the Excess Shares either when a person no longer exceeds the 
ownership or voting limits or when such excess ownership percentage or 
voting control percentage is approved by the Commission in accordance 
with ISE Holdings Certificate.\71\
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    \67\ See Third Amended and Restated Trust Agreement, dated as of 
December 22, 2014, by and among ISE Holdings, U.S. Exchange 
Holdings, and the Trustees (``ISE Trust Agreement''). The term of 
the ISE Trust is perpetual, provided that ISE Holdings directly or 
indirectly controls a national securities exchange or a facility 
thereof, which would include ISE Mercury. See ISE Trust Agreement, 
Article III, Section 2.6(a). See also Eurex Acquisition Order, supra 
note 13, at Section II.C., for a more detailed description of the 
ISE Trust. By its terms, the 2007 Trust Agreement related solely to 
ISE Holdings' ownership of ISE, and not to any other national 
securities exchange that ISE Holdings might control, directly or 
indirectly. In 2010, the Commission approved proposed rule changes 
that revised the 2007 Trust Agreement to replace references to ISE 
with references to any Controlled National Securities Exchange. See 
Securities Exchange Act Release Nos. 59135 (December 22, 2008), 73 
FR 79954 (December 30, 2008) (``ISE Holdings Order'') and 61498 
(February 4, 2010), 75 FR 7299 (February 18, 2010) (``U.S. Exchange 
Holdings Order''); see also ISE Trust Agreement, Articles I and II, 
Sections 1.1 and 2.6. Thus, the ISE Trust Agreement also applies to 
ISE Gemini and will apply to ISE Mercury, upon the Commission 
granting ISE Mercury registration as a national securities exchange.
    \68\ Under the ISE Trust Agreement, the term ``Trust Shares'' 
means either Excess Shares or Deposited Shares, or both, as the case 
may be. The term ``Excess Shares'' means that a person obtained an 
ownership or voting interest in ISE Holdings in excess of the 
ownership and voting limits pursuant to Article FOURTH of the ISE 
Holdings Certificate, for example, through ownership of one of the 
Upstream Owners, without obtaining the approval of the Commission. 
The term ``Deposited Shares'' means shares that are transferred to 
the ISE Trust pursuant to the ISE Trust's exercise of the Call 
Option. Under the ISE Trust Agreement, the term ``Call Option'' 
means the option granted by the ISE Trust beneficiary to the ISE 
Trust to call the Voting Shares as set forth in Section 4.2 therein. 
See infra Section II.C.2.b for further discussion of the Call 
Option.
    \69\ See ISE Trust Agreement, Article IV, Section 4.1; see also 
ISE Holdings Certificate, Article FOURTH, Section III.(c); Eurex 
Acquisition Order, supra note 13, at 72 FR 71982 n.37 and 
accompanying text.
    \70\ See id.
    \71\ See ISE Trust Agreement, Article IV, Section 4.1(f). In 
addition, as discussed in Section II.C.2.b below, the Trust also may 
accept, hold and dispose of Trust Shares in connection with the Call 
Option. Section 4.2(h) of the ISE Trust Agreement governs when the 
Trustees can transfer Deposited Shares in connection with the Call 
Option. Section 4.3(a) of the ISE Trust Agreement further permits 
the Trustees, upon receipt of written instructions from the Trust 
Beneficiary, to sell Trust Shares to a person or persons whose 
ownership percentage or voting control percentage will not violate 
the ownership or voting limits.
---------------------------------------------------------------------------

    Although ISE Holdings is not independently responsible for 
regulation of ISE Mercury, its activities with respect to the operation 
of ISE Mercury must be consistent with, and must not interfere with, 
the self-regulatory obligations of ISE Mercury.\72\ As described above, 
the provisions applicable to direct and indirect changes in control of 
ISE Holdings and ISE Mercury, as well as the voting limitation, are 
designed to help prevent any owner of ISE Holdings from exercising 
undue influence or control over the operation of ISE Mercury and to 
help ensure that ISE Mercury is able to effectively carry out its 
regulatory obligations under the Act. In addition, these limitations 
are designed to address the conflicts of interests that might result 
from a member of a national securities exchange owning interests in the 
Exchange. As the Commission has noted in the past, however, a member's 
interest in an exchange, including an entity that controls an exchange, 
could become so large as to cast doubts on whether the exchange may 
fairly and objectively exercise its self-regulatory responsibilities 
with respect to such member.\73\ A member that is a controlling 
shareholder of an exchange could seek to exercise that controlling 
influence by directing the exchange to refrain from, or the exchange 
may hesitate to, diligently monitor and conduct surveillance of the 
member's conduct or diligently enforce the exchange's rules and the 
federal securities laws with respect to conduct by the member that 
violates such provisions. As such, these requirements are designed to 
minimize the potential that a person or entity can improperly interfere 
with or restrict the ability of ISE Mercury to effectively carry out 
its regulatory oversight responsibilities under the Act.
---------------------------------------------------------------------------

    \72\ See also infra Section II.C.2. (Regulatory Independence and 
Oversight).
    \73\ See, e.g., ISE Gemini Order, supra note 27; and BATS Order, 
supra note 27; see also MIAX Order, supra note 28.
---------------------------------------------------------------------------

    The Commission believes that ISE Mercury's and ISE Holdings' 
proposed ownership and voting limitation provisions, together with the 
provisions in U.S. Exchange Holdings' governing documents, the ISE 
Mercury Resolutions, and the ISE Trust

[[Page 6071]]

Agreement described above,\74\ are consistent with the Act, including 
Section 6(b)(1), which requires, in part, an exchange to be so 
organized and have the capacity to carry out the purposes of the 
Act.\75\ In particular, these requirements are designed to minimize the 
potential that a person could improperly interfere with or restrict the 
ability of the Commission or ISE Mercury to effectively carry out their 
regulatory oversight responsibilities under the Act.\76\
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    \74\ See supra notes 65-66, and accompanying text.
    \75\ 15 U.S.C. 78f(b)(1).
    \76\ In addition, the ISE Trust Agreement is consistent with the 
provisions that other entities that directly or indirectly own or 
control an SRO have instituted and that have been approved by the 
Commission. See, e.g., Securities Exchange Act Release No. 55293 
(February 14, 2007), 72 FR 8033 (February 22, 2007) (File No. SR-
NYSE-2006-120) (order relating to the combination between NYSE 
Group, Inc. and Euronext N.V.). See also Eurex Acquisition Order, 
supra note 13, at 72 FR 71986 n.111.
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
a. ISE Holdings
    Although ISE Holdings itself will not itself carry out regulatory 
functions, its activities with respect to the operation of ISE Mercury 
must be consistent with, and not interfere with, the self-regulatory 
obligations of ISE Mercury.\77\ In this regard, ISE Mercury and ISE 
Holdings' respective corporate documents include certain provisions 
that are designed to maintain the independence of ISE Mercury's self-
regulatory function. These provisions are substantially similar to 
those included in the governing documents of the exchanges that have 
most recently been granted registration.\78\ Specifically:
---------------------------------------------------------------------------

    \77\ See, e.g., ISE Gemini Order, supra note 27; and BOX Order, 
supra note 37.
    \78\ See, e.g., ISE Gemini Order, supra note 27; BOX Order, 
supra note 37; MIAX Order, supra note 28.
---------------------------------------------------------------------------

     The directors, officers, and employees of ISE Holdings 
must give due regard to the preservation of the independence of the 
self-regulatory function of ISE Mercury and must not take actions that 
would interfere with the effectuation of decisions by the ISE Mercury 
Board relating to ISE Mercury's regulatory functions (including 
disciplinary matters) or that would adversely affect the ability of ISE 
Mercury to carry out its responsibilities under the Act.\79\
---------------------------------------------------------------------------

    \79\ See ISE Holdings Bylaws, Article I, Section 1.5. Similarly, 
Article V, Section 5.1(b) of the ISE Mercury LLC Agreement requires 
each ISE Mercury Board director to take into consideration the 
effect that his or her actions would have on the ability of ISE 
Mercury to carry out its responsibilities under the Act and on the 
ability of ISE Mercury to engage in conduct that fosters and does 
not interfere with ISE Mercury's ability 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 or assist in the removal of impediments to or perfection 
of the mechanisms for a free and open market and a national market 
system; and in general to protect investors and the public interest.
---------------------------------------------------------------------------

     ISE Holdings must comply with federal securities laws and 
the rules and regulations promulgated thereunder, and must cooperate 
with ISE Mercury and the Commission pursuant to, and to the extent of, 
their respective regulatory authority. In addition, ISE Holdings' 
officers, directors, and employees must comply with federal securities 
laws and the rules and regulations thereunder and agree to cooperate 
with ISE Mercury and the Commission pursuant to their respective 
regulatory authority.\80\
---------------------------------------------------------------------------

    \80\ See ISE Holdings Certificate, Article TENTH. ISE Holdings 
also shall take reasonable steps necessary to cause its agents to 
cooperate with ISE Mercury and the Commission pursuant to their 
respective regulatory authority. ISE Holdings Certificate, Article 
THIRTEENTH.
---------------------------------------------------------------------------

     ISE Holdings, and its officers, directors, employees, and 
agents are deemed to irrevocably submit to the jurisdiction of the U.S. 
federal courts, the Commission, and ISE Mercury, for purposes of any 
suit, action, or proceeding pursuant to U.S. federal securities laws, 
and the rules and regulations thereunder, arising out of, or relating 
to, ISE Mercury's activities.\81\
---------------------------------------------------------------------------

    \81\ See ISE Holdings Bylaws, Article I, Section 1.4.
---------------------------------------------------------------------------

     All books and records of ISE Mercury containing 
confidential information pertaining to the self-regulatory function of 
ISE Mercury (including but not limited to confidential information 
regarding disciplinary matters, trading data, trading practices and 
audit information) will be subject to confidentiality restrictions.\82\
---------------------------------------------------------------------------

    \82\ See ISE Holdings Certificate, Article ELEVENTH. 
Additionally, pursuant to the ISE Mercury LLC Agreement, books and 
records of ISE Mercury containing confidential information 
pertaining to the self-regulatory function of ISE Mercury (including 
but not limited to confidential information regarding disciplinary 
matters, trading data, trading practices and audit information) 
shall be retained in confidence by ISE Mercury and its officers, 
directors, employees and agents and will not be used by ISE Mercury 
for any non-regulatory purpose and shall not be made available to 
persons other than those officers, directors, employees and agents 
that have a reasonable need to know the contents thereof. See ISE 
Mercury LLC Agreement, Article VI, Section 4.1(b). The requirement 
to keep such information confidential shall not limit or impede the 
Commission's ability to access and examine such information or limit 
or impede the ability of officers, directors, employees, or agents 
of ISE Holdings to disclose such information to the Commission. See 
ISE Holdings Certificate, Article ELEVENTH and ISE Mercury LLC 
Agreement, Article VI, Section 4.1(b).
---------------------------------------------------------------------------

     The books and records of ISE Mercury and ISE Holdings must 
be maintained in the United States \83\ and, to the extent they are 
related to the operation or administration of ISE Mercury, ISE Holdings 
books and records will be subject at all times to inspection and 
copying by the Commission.\84\
---------------------------------------------------------------------------

    \83\ See ISE Mercury LLC Agreement, Article IV, Section 4.1 and 
ISE Holdings Bylaws, Article I, Section 1.3.
    \84\ See ISE Holdings Certificate, Article TWELFTH.
---------------------------------------------------------------------------

     Furthermore, to the extent that they are related to the 
activities of ISE Mercury, the books, records, premises, officers, 
directors, and employees of ISE Holdings will be deemed to be the 
books, records, premises, officers, directors, and employees of ISE 
Mercury, for purposes of, and subject to oversight pursuant to, the 
Act.\85\
---------------------------------------------------------------------------

    \85\ See id.
---------------------------------------------------------------------------

     ISE Holdings will take necessary steps to cause its 
officers, directors, and employees, prior to accepting a position as an 
officer, director, or employee (as applicable) to consent in writing to 
the applicability of provisions regarding books and records, 
confidentiality, jurisdiction, and regulatory obligations, with respect 
to their activities related to ISE Mercury.\86\
---------------------------------------------------------------------------

    \86\ See ISE Holdings Bylaws, Article I, Section 1.6.
---------------------------------------------------------------------------

     ISE Holdings Certificate and ISE Holdings Bylaws require 
that, so long as ISE Holdings controls ISE Mercury, any changes to 
those documents be submitted to the ISE Mercury Board, and, if 
required, to be filed with, and as applicable approved by, the 
Commission pursuant to Section 19 of the Act and the rules thereunder 
before they may be effective.\87\
---------------------------------------------------------------------------

    \87\ See ISE Holdings Certificate, Article FOURTEENTH; and ISE 
Holdings Bylaws, Article X; see also supra notes 63-64 and 
accompanying text discussing a similar provision for ISE Mercury.
---------------------------------------------------------------------------

b. Upstream Owners
    Although the Upstream Owners will not carry out any regulatory 
functions, the activities of each of the Upstream Owners with respect 
to the operation of ISE Mercury must be consistent with, and not 
interfere with, the self-regulatory obligations of ISE Mercury. The 
2007 Resolutions, as supplemented by the supplemental Resolutions for 
ISE Mercury, the U.S. Exchange Holdings Certificate, and the U.S. 
Exchange Holdings Bylaws include certain provisions that are designed 
to maintain the independence of the self-regulatory function of ISE 
Mercury, enable ISE Mercury to operate in a manner that complies with 
the U.S. federal securities laws, including the objectives and 
requirements of Sections 6(b) and 19(g)

[[Page 6072]]

of the Act,\88\ and facilitate the ability of ISE Mercury and the 
Commission to fulfill their regulatory and oversight obligations under 
the Act. Specifically:
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

     Each Upstream Owner and each board member, officer, and 
employee of the Upstream Owners will comply with the U.S. federal 
securities laws and the rules and regulations thereunder and cooperate 
with the Commission and ISE Mercury.\89\
---------------------------------------------------------------------------

    \89\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Sections (1), (7)(a) and (8)(a) and ISE Mercury 
Resolution Sections (2)(a), (2)(b) and (2)(c)); and U.S. Exchange 
Holdings Certificate, Articles TENTH and ELEVENTH. The Resolutions 
also provide that Eurex Frankfurt and Deutsche B[ouml]rse will each 
take reasonable steps necessary to cause each person who 
subsequently becomes a board member of Eurex Frankfurt or Deutsche 
B[ouml]rse to agree in writing to certain matters included in the 
Resolutions. See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Section (7) and ISE Mercury Resolution Section 
(2)(b)).
---------------------------------------------------------------------------

     In discharging his or her responsibilities as a board 
member of an Upstream Owner, each such member must take into 
consideration the effect that the actions of the Upstream Owner will 
have on the ability of ISE Mercury to carry out its responsibilities 
under the Act.\90\
---------------------------------------------------------------------------

    \90\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Section (7)(f) and ISE Mercury Resolution Section 
(2)(b)); and U.S. Exchange Holdings Certificate, Article TENTH.
---------------------------------------------------------------------------

     The Upstream Owners, and their board members, officers, 
and employees, must give due regard to the preservation of the 
independence of the self-regulatory function of ISE Mercury.\91\
---------------------------------------------------------------------------

    \91\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Sections (5), (7)(d), and (8)(d) and ISE Mercury 
Resolution Section (2)); and U.S. Exchange Holdings Certificate, 
Article TWELFTH.
---------------------------------------------------------------------------

     The Upstream Owners, and their respective board members, 
officers, and employees agree to keep confidential information 
pertaining to the self-regulatory function of ISE Mercury, including, 
but not limited to, confidential information regarding disciplinary 
matters, trading data, trading practices, and audit information, 
contained in the books and records of ISE Mercury and not use such 
information for any non-regulatory purposes.\92\
---------------------------------------------------------------------------

    \92\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Sections (6), (7)(e) and (8)(e) and ISE Mercury 
Resolution Sections (1) and (2)); and U.S. Exchange Holdings 
Certificate, Article FOURTEENTH.
---------------------------------------------------------------------------

     The books and records of the Upstream Owners related to 
the activities of ISE Mercury must at all times be made available for, 
and the books and records of U.S. Exchange Holdings must be subject at 
all times to, inspection and copying by the Commission and ISE 
Mercury.\93\
---------------------------------------------------------------------------

    \93\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Section (3) and ISE Mercury Resolution Section 
(2)(a)); and U.S. Exchange Holdings Certificate, Article FIFTEENTH. 
Additionally, the books and records of U.S. Exchange Holdings 
related to the activities of ISE Mercury will be maintained within 
the United States. See U.S. Exchange Holdings Certificate, Article 
FIFTEENTH.
---------------------------------------------------------------------------

     The books, records, officers, directors, and employees of 
each of the Upstream Owners will be deemed to be the books, records, 
officers, directors, and employees of ISE Mercury, to the extent that 
such books and records are related to, or such officers, directors (or 
equivalent in the case of Eurex Frankfurt and Deutsche B[ouml]rse) and 
employees are involved in, the activities of ISE Mercury,\94\ and the 
premises of U.S. Exchange Holdings will be deemed to be the premises of 
ISE Mercury.\95\
---------------------------------------------------------------------------

    \94\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Sections (3) and (8)(c) and ISE Mercury Resolution 
Sections (2)(a) and (2)(c)); and U.S. Exchange Holdings Certificate, 
Article FIFTEENTH.
    \95\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH.
---------------------------------------------------------------------------

     To the extent involved in the activities of ISE Mercury, 
the Upstream Owners, and their board members, officers, and employees, 
irrevocably submit to the jurisdiction of the U.S. federal courts and 
the Commission.\96\
---------------------------------------------------------------------------

    \96\ See, e.g., Form of German Parent Corporate Resolutions 
(2007 Resolution Sections (2), (7)(b), and (8)(b) and ISE Mercury 
Resolution Section (2)). See also U.S. Exchange Holdings Bylaws, 
Article VI, Section 16.
---------------------------------------------------------------------------

     Any change to the governing documents that would have the 
effect of amending or repealing the ISE Mercury Resolutions or the 2007 
Resolutions must be submitted to the ISE Mercury Board,\97\ and, if 
required, filed with the Commission pursuant to Section 19 of the Act 
\98\ and the rules thereunder before it may be effective.\99\
---------------------------------------------------------------------------

    \97\ See, e.g., Form of German Parent Corporate Resolutions (ISE 
Mercury Resolution Section (3)); U.S. Exchange Holdings Certificate, 
Article SIXTEENTH; and U.S. Exchange Holdings Bylaws, Article VI, 
Section 9.
    \98\ 15 U.S.C. 78s.
    \99\ See, e.g., Form of German Parent Corporate Resolutions (ISE 
Mercury Resolution Section (3)); U.S. Exchange Holdings Certificate, 
Article SIXTEENTH; and U.S. Exchange Holdings Bylaws, Article VI, 
Section 9. The requirement to submit changes to the ISE Mercury 
Board endures for as long as U.S. Exchange Holdings directly or 
indirectly controls ISE Mercury. See U.S. Exchange Holdings Bylaws, 
Article VI, Section 9.
---------------------------------------------------------------------------

    The ISE Trust Agreement, in addition to enforcing the ownership and 
voting limits,\100\ also serves to effectuate compliance with the other 
commitments made under the ISE Mercury Resolutions, which incorporate 
the 2007 Resolutions. To accomplish that purpose, the ISE Trust would 
determine whether a Material Compliance Event \101\ has occurred or is 
continuing. The ISE Trust would determine whether the occurrence and 
continuation of a Material Compliance Event requires the exercise of 
the Call Option.\102\ The ISE Trust holds a Call Option over the 
capital stock of ISE Holdings that may be exercised if a Material 
Compliance Event has occurred and continues to be in effect. Upon 
exercise of the Call Option, the Trust Beneficiary \103\ and ISE 
Holdings, as applicable, will take such actions as are necessary to 
transfer, or cause the transfer to the ISE Trust of a majority of the 
Voting Shares then outstanding.\104\ The ISE Trust will transfer 
Deposited Shares from the ISE Trust back to the Trust Beneficiary, as 
provided in Section 4.2(h) of the ISE Trust Agreement, only if no 
Material Compliance Event is continuing or, notwithstanding its 
continuation, the Trustees determine that the retention of the 
Deposited Shares could not reasonably be expected to address the 
continuing Material Compliance Event, provided that the determination 
is filed with, or filed with and approved by, the Commission.\105\
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    \100\ See supra notes 59-61 and 68-71 and accompanying text for 
a discussion of the ownership and voting limits.
    \101\ Under the ISE Trust Agreement, a ``Material Compliance 
Event'' is any state of facts, development, event, circumstance, 
condition, occurrence, or effect that results in the failure of any 
of the Affected Affiliates (as defined therein) to adhere to its 
respective commitments under the Resolutions in any material 
respect. See ISE Trust Agreement, Article I, Section 1.1.
    \102\ See supra note 68.
    \103\ Under the ISE Trust, the term ``Trust Beneficiary'' means 
U.S. Exchange Holdings.
    \104\ See ISE Trust Agreement, Article IV, Section 4.2. 
Specifically, if a Material Compliance Event occurs and continues to 
be in effect, the Trustees must take certain actions, including, 
after a specified cure period, the exercise of a Call Option for a 
transfer of the majority of capital stock of ISE Holdings that has 
the right by its terms to vote in the election of the ISE Holdings 
Board or on other matters.
    \105\ See ISE Trust Agreement, Article IV, Section 4.2.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed above, which 
are designed to help maintain the independence of ISE Mercury's 
regulatory function and help facilitate the ability of ISE Mercury to 
carry out its regulatory responsibilities and operate in a manner 
consistent with the Act, are appropriate and consistent with the 
requirements of the Act, particularly with Section 6(b)(1), which 
requires, in part, an exchange to be so organized and have the capacity 
to carry out the purposes of the Act.\106\ Whether ISE Mercury operates 
in compliance with the Act, however, depends on how it and ISE Holdings 
in practice implement

[[Page 6073]]

the governance and other provisions that are the subject of this order. 
Accordingly, Section 19(h)(1) of the Act \107\ provides the Commission 
with the authority ``to suspend for a period not exceeding twelve 
months or revoke the registration of [an SRO], or to censure or impose 
limitations upon the activities, functions, and operations of [an SRO], 
if [the Commission] finds, on the record after notice and opportunity 
for hearing, that [the SRO] has violated or is unable to comply with 
any provision of [the Act], the rules or regulations thereunder, or its 
own rules or without reasonable justification or excuse has failed to 
enforce compliance'' with any such provision by its members (including 
associated persons thereof).\108\ If Commission were to find, or become 
aware of, through staff review and inspection or otherwise, facts 
indicating any violations of the Act, including without limitation 
Sections 6(b)(1) \109\ and 19(g)(1),\110\ these matters could provide 
the basis for a disciplinary proceeding under Section 19(h)(1) of the 
Act.\111\
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78f(b)(1).
    \107\ See 15 U.S.C. 78s(h)(1).
    \108\ See id.
    \109\ See 15 U.S.C. 78f(b)(1).
    \110\ See 15 U.S.C. 78s(g)(1).
    \111\ See 15 U.S.C. 78s(h)(1).
---------------------------------------------------------------------------

    Moreover, under Section 20(a) of the Act,\112\ any person who, 
directly or indirectly, controls ISE Mercury would be jointly and 
severally liable with and to the same extent that ISE Mercury is liable 
under any provision of the Act, unless the controlling person acted in 
good faith and did not directly or indirectly induce the act or acts 
constituting the violation or cause of action. In addition, Section 
20(e) of the Act \113\ creates aiding and abetting liability for any 
person who knowingly or recklessly provides substantial assistance to 
another person in violation of any provision of the Act or rule 
thereunder. Further, Section 21C of the Act authorizes the Commission 
to enter a cease-and-desist order against any person who has been ``a 
cause of'' a violation of any provision of the Act through an act or 
omission that the person knew or should have known would contribute to 
the violation.\114\ These provisions are applicable to all entities 
controlling ISE Mercury, including the ISE Trust, ISE Holdings, and the 
Upstream Owners.
---------------------------------------------------------------------------

    \112\ See 15 U.S.C. 78t(a).
    \113\ See 15 U.S.C. 78t(e).
    \114\ See 15 U.S.C. 78u-3(a).
---------------------------------------------------------------------------

3. Regulation of ISE Mercury
    As a prerequisite to the Commission's granting of an exchange's 
application for registration, an exchange must be so organized and have 
the capacity to carry out the purposes of the Act.\115\ Specifically, 
an exchange must be able to enforce compliance by its members, and 
persons associated with its members, with the Act and the rules and 
regulations thereunder and the rules of the exchange.\116\ The 
discussion below summarizes how ISE Mercury proposes to structure and 
conduct its regulatory operations.
---------------------------------------------------------------------------

    \115\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \116\ See id. See also Section 19(g) of the Act, 15 U.S.C. 
78s(g).
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a. Corporate Governance Committee and Finance and Audit Committee
    ISE Mercury will have a Chief Regulatory Officer (``CRO'') with 
general responsibility for supervision of the regulatory operations of 
ISE Mercury.\117\ The CRO will report to the Corporate Governance 
Committee \118\ and to the President/Chief Executive Officer, although 
the ISE Mercury Board would retain the power to call the CRO to report 
directly to the Board as needed. The CRO also may call special meetings 
of the Board, as necessary.\119\ The Corporate Governance Committee 
will meet regularly with the CRO to review regulatory matters.\120\
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    \117\ See Exhibit L to the Form 1 Application.
    \118\ The Corporate Governance Committee will consist of at 
least three directors, all of whom must be Non-Industry Directors. 
See ISE Mercury Constitution, Article V, Section 5.4.
    \119\ See Exhibit L to the Form 1 Application.
    \120\ See id.
---------------------------------------------------------------------------

    The Corporate Governance Committee will monitor the regulatory 
program for sufficiency, effectiveness, and independence, and will 
oversee trade practices and market surveillance, audits, examinations, 
and other regulatory responsibilities with respect to members and the 
conduct of investigations.\121\ The Corporate Governance Committee also 
will supervise the CRO; will receive an annual report from the CRO 
assessing ISE Mercury's self-regulatory program for the Board; will 
recommend changes that would ensure fair and effective regulation; and 
will review regulatory proposals and advise the Board as to whether and 
how such changes may impact regulation.\122\ The Corporate Governance 
Committee will review annually the regulatory budget and specifically 
inquire into the adequacy of the resources available in the budget for 
regulatory activities.\123\ The Corporate Governance Committee will 
authorize unbudgeted expenditures for necessary regulatory 
expenses.\124\ In addition, the Finance and Audit Committee will 
provide oversight over the systems of internal controls established by 
management and the Board and the Exchange's regulatory and compliance 
process.\125\
---------------------------------------------------------------------------

    \121\ See id.
    \122\ See id.
    \123\ See id.
    \124\ See id.
    \125\ See id.
---------------------------------------------------------------------------

    The Compensation Committee will set compensation for the CRO.\126\ 
The Corporate Governance Committee, in its sole discretion, will make 
hiring and termination decisions with respect to the CRO, in each case 
taking into consideration any recommendations made by the 
President.\127\ The Corporate Governance Committee will be informed 
about the compensation of the CRO, including factors affecting changes 
thereto.\128\
---------------------------------------------------------------------------

    \126\ See id.
    \127\ See id.
    \128\ See id.
---------------------------------------------------------------------------

b. Regulatory Funding
    To help ensure the Commission that it has and will continue to have 
adequate funding to be able to meet its responsibilities under the Act, 
ISE Mercury represents in its Form 1 Application that, prior to 
commencing operations as a national securities exchange, ISE Holdings 
will provide sufficient funding to ISE Mercury for the exchange to 
carry out its responsibilities under the Act.\129\ Specifically, ISE 
Mercury represents that ISE Holdings has made a cash contribution to 
ISE Mercury of $5 million, in addition to previously provided ``in-
kind'' contributions of legal, regulatory and infrastructure-related 
services to ISE Mercury.\130\ ISE Mercury represents that the cash and 
in-kind contributions to ISE Mercury will be adequate to operate ISE 
Mercury, including its regulatory program.\131\
---------------------------------------------------------------------------

    \129\ See Exhibit I to the Form 1 Application.
    \130\ Other applicants for registration as a national securities 
exchange have noted in their Form 1 applications similar funding 
commitments and representations. In ISE Gemini, ISE Holdings 
represented that it would make a capital contribution of $5 million 
to ISE Gemini. See ISE Gemini Order, supra note 27. BOX represented 
that, prior to launch, BOX Group LLC would allocate sufficient 
operational assets, including regulatory infrastructure and industry 
and regulatory memberships, along with a $1,000,000 loan to BOX. See 
BOX Order, supra note 37. In MIAX, the exchange represented that 
Miami International Holdings, Inc. would allocate sufficient 
operational assets and make a capital contribution of not less than 
$2,000,000 into MIAX capital account prior to launching operations. 
See MIAX Order, supra note 28.
    \131\ See Exhibit I to the Form 1 Application.
---------------------------------------------------------------------------

    ISE Mercury also represents in its Form 1 Application that there is 
a written agreement between ISE Mercury and ISE Holdings that requires 
ISE

[[Page 6074]]

Holdings to provide adequate funding for ISE Mercury's operation, 
including the regulation of ISE Mercury.\132\ This agreement further 
provides that ISE Holdings will reimburse ISE Mercury for its costs and 
expenses to the extent ISE Mercury's assets are insufficient to meet 
its costs and expenses.\133\ Excess funds, as solely determined by ISE 
Mercury, will be remitted to ISE Holdings.\134\ Further, ISE Mercury 
will receive all fees, including regulatory fees and trading fees, 
payable by ISE Mercury's members, as well as any funds received from 
any applicable market data fees and OPRA tape revenue.\135\ Regulatory 
Funds will not be used for non-regulatory purposes and will be used to 
fund the legal, regulatory and surveillance operations of ISE 
Mercury.\136\
---------------------------------------------------------------------------

    \132\ See Exhibit I to the Form 1 Application. ISE Gemini, BOX 
and MIAX also represented in their Form 1 applications that there 
would be explicit agreements with their respective holding companies 
to provide adequate funding for the exchanges' operations, including 
regulation.
    \133\ See id.
    \134\ See id.
    \135\ See id.
    \136\ See ISE Mercury LLC Agreement, Article III, Section 3.3. 
The ISE Mercury LLC Agreement defines ``Regulatory Funds'' as fees, 
fines or penalties derived from the regulatory operations of ISE 
Mercury, provided that Regulatory Funds shall not include revenues 
derived from listing fees, market data revenues, transaction 
revenues or any other aspect of the commercial operations of ISE 
Mercury or a facility of ISE Mercury, even if a portion of such 
revenues are used to pay costs associated with the regulatory 
operations of ISE Mercury. Id. This definition is consistent with 
the rules of other SROs. See, e.g., MIAX Second Amended and Restated 
LLC Agreement, Section 16; and MIAX Amended and Restated By-Laws, 
Article IX, Section 9.4.
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c. Rule 17d-2 Agreements; Regulatory Contracts With FINRA and ISE
    Unless the SRO is relieved of this responsibility pursuant to 
Section 17(d) or Section 19(g)(2) of the Act, Section 19(g)(1) of the 
Act,\137\ among other things, requires every SRO registered as a 
national securities exchange, absent reasonable justification or 
excuse, to enforce compliance by its members and persons associated 
with its members with the Act, the rules and regulations thereunder, 
and the SRO's own rules.\138\ Rule 17d-2 of the Act \139\ permits SROs 
to propose joint plans to allocate regulatory responsibilities among 
themselves for their common rules with respect to their common 
members.\140\ These agreements, which must be filed with and declared 
effective by the Commission, generally cover areas where each SRO's 
rules substantively overlap, including such regulatory functions as 
personnel registration and sales practices. Without this relief, the 
statutory obligation of each individual SRO could result in a pattern 
of multiple examinations of broker-dealers that maintain memberships in 
more than one SRO. Such regulatory duplication would add unnecessary 
expenses for common members and their SROs. A 17d-2 plan that is 
declared effective by the Commission relieves the specified SRO of 
those regulatory responsibilities allocated by the plan to another 
SRO.\141\ Many SROs have entered into Rule 17d-2 agreements.\142\
---------------------------------------------------------------------------

    \137\ 15 U.S.C. 78s(g)(1).
    \138\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \139\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the 
Act allows the Commission to relieve an SRO of certain 
responsibilities with respect to members of the SRO who are also 
members of another SRO. Specifically, Section 17(d)(1) allows the 
Commission to relieve an SRO of its responsibilities to: (i) Receive 
regulatory reports from such members; (ii) examine such members for 
compliance with the Act and the rules and regulations thereunder, 
and the rules of the SRO; or (iii) carry out other specified 
regulatory responsibilities with respect to such members.
    \140\ 17 CFR 240.17d-2. Section 19(g)(1) of the Act requires 
every SRO to examine its members and persons associated with its 
members and to enforce compliance with the federal securities laws 
and the SRO's own rules, unless the SRO is relieved of this 
responsibility pursuant to Section 17(d) of the Act. Section 17(d) 
was intended, in part, to eliminate unnecessary multiple 
examinations and regulatory duplication with respect to Common 
Members. See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976).
    \141\ See id.
    \142\ See, e.g., Securities Exchange Act Release Nos. 73641 
(November 19, 2014), 79 FR 70230 (November 25, 2014) (File No. 4-
678) (Financial Industry Regulatory Authority, Inc. (``FINRA'')/
MIAX); 70053 (July 26, 2013), 78 FR 46656 (August 1, 2013) (File No. 
4-663) (FINRA/ISE Gemini) (``ISE Gemini Bilateral 17d-2 Plan''); 
59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-
575) (FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 
73 FR 63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS 
Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) 
(File No. 4-536) (National Association of Securities Dealers, Inc. 
(``NASD'') (n/k/a FINRA) and Chicago Board of Options Exchange, Inc. 
(``CBOE'') concerning the CBOE Stock Exchange, LLC); 55367 (February 
27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) (NASD/ISE); 
and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4-
517) (NASD/The Nasdaq Stock Market LLC).
---------------------------------------------------------------------------

    ISE Mercury represents to the Commission that it will enter into 
the following allocation of regulatory responsibilities pursuant to 
Rule 17d-2 of the Act (``17d-2 Plans''),\143\ including the two 
existing multiparty plans applicable to options trading:
---------------------------------------------------------------------------

    \143\ Rule 17d-2 under the Act permits SROs to propose joint 
plans for the allocation of regulatory responsibilities with respect 
to their common members (i.e., 17d-2 plans).
---------------------------------------------------------------------------

     Multiparty 17d-2 Plan for the Allocation of Regulatory 
Responsibility for Options Sales Practice Matters; \144\
---------------------------------------------------------------------------

    \144\ See Exhibit L to the Form 1 Application. See also 
Securities Exchange Act Release No. 68363 (December 5, 2012), 77 FR 
73711 (December 11, 2012) (File No. S7-966) (notice of filing and 
order approving and declaring effective an amendment to the 
multiparty 17d-2 plan concerning options-related sales practice 
matters).
---------------------------------------------------------------------------

     Multiparty 17d-2 Plan for the Allocation of Regulatory 
Responsibility for Options Related Market Surveillance Matters; \145\ 
and
---------------------------------------------------------------------------

    \145\ See Exhibit L to the Form 1 Application. See also 
Securities Exchange Act Release No. 68362 (December 5, 2012), 77 FR 
73719 (December 11, 2012) (File No. 4-551) (notice of filing and 
order approving and declaring effective an amendment to the 
multiparty 17d-2 plan concerning options-related market 
surveillance).
---------------------------------------------------------------------------

     Bilateral 17d-2 Plan with FINRA that would cover, among 
other things, general inspection, examination, and enforcement 
activity.\146\
---------------------------------------------------------------------------

    \146\ See Exhibit L of Amendment No. 2 to the Form 1 
Application. See also ISE Gemini Bilateral 17d-2 Plan, supra note 
142.
---------------------------------------------------------------------------

    If the Commission declares effective the amendments to the 
multilateral 17d-2 Plans and the new bilateral 17d-2 Plan, another SRO 
(often FINRA) would assume certain regulatory responsibility for 
members of ISE Mercury that are also members of the SRO that assumes 
the regulatory responsibilities. This regulatory structure would be 
consistent with that of other exchanges, including ISE.\147\
---------------------------------------------------------------------------

    \147\ Amendments to the multilateral 17d-2 Plans and the new 
bilateral 17d-2 Plan are not before the Commission as part of this 
order and, therefore, the Commission is not acting on them at this 
time.
---------------------------------------------------------------------------

    In addition, ISE Mercury represents that it will enter into a 
third-party Regulatory Service Agreement (``RSA'') with FINRA.\148\ 
Under the RSA, FINRA \149\ will carry out certain specified regulatory 
activities on behalf of ISE Mercury. For example, FINRA, in its 
capacity as service provider to ISE Mercury, will provide member 
operation services, including membership application review, conducting 
market surveillance investigation services, conducting routine and 
cause examination services, assisting ISE Mercury with disciplinary 
proceedings pursuant to ISE Mercury's rules including conducting 
hearings, and providing dispute resolution services to ISE Mercury 
members on behalf of ISE Mercury.\150\ ISE Mercury, as an SRO, however, 
has the ultimate legal responsibility for the regulation of its members 
and market. This regulatory

[[Page 6075]]

structure would be consistent with that of other exchanges.\151\
---------------------------------------------------------------------------

    \148\ See, e.g., Exhibit L to the Form 1 Application.
    \149\ FINRA executed a single RSA with both ISE and ISE Mercury 
as signatories. The single RSA, however, has two separate statements 
of work. The first statement of work describes the specified 
regulatory activities that FINRA will carry out on behalf of ISE. 
The second statement of work describes the specified regulatory 
activities that FINRA will carry out on behalf of ISE Mercury.
    \150\ See Exhibit L to the Form 1 Application.
    \151\ For example, ISE Gemini, ISE, EDGA Exchange, Inc., EDGX 
Exchange Inc., and BATS have entered into 17d-2 Plans and RSAs with 
FINRA.
---------------------------------------------------------------------------

    ISE Mercury also represents that it will enter into a facilities 
management agreement (``FMA'') with ISE.\152\ Pursuant to the proposed 
FMA, ISE intends to provide to ISE Mercury certain services, including, 
for example, business management services, facilities management 
services, IT services, fiscal services, as well as other regulatory 
compliance services and other legal services, such as surveillance 
programs, legal programs, systems and other operational services.\153\ 
ISE Mercury, however, will retain ultimate legal responsibility for the 
regulation of its members and market.
---------------------------------------------------------------------------

    \152\ See, e.g., Exhibit L to the Form 1 Application. The FMA 
with ISE provides, in part, for the provision of legal and other 
regulatory compliance services.
    \153\ See id.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for ISE 
Mercury to contract with other SROs to perform certain examination, 
enforcement, and disciplinary functions.\154\ These functions are 
fundamental elements of a regulatory program, and constitute core self-
regulatory functions. The Commission believes that both FINRA, as an 
SRO that provides contractual services to other SROs, and ISE, as an 
SRO that currently operates an options exchange, should have the 
capacity to perform these functions for ISE Mercury.\155\ However, ISE 
Mercury, unless relieved by the Commission of its responsibility,\156\ 
bears the ultimate responsibility for self-regulatory responsibilities 
and primary liability for self-regulatory failures, not the SRO 
retained to perform regulatory functions on ISE Mercury's behalf. In 
performing these regulatory functions, however, the SRO retained to 
perform specified regulatory functions may nonetheless bear liability 
for causing or aiding and abetting the failure of ISE Mercury to 
perform its regulatory functions.\157\ Accordingly, although FINRA and 
ISE will not act on their own behalves under their respective SRO 
responsibilities in carrying out the above mentioned regulatory 
services for ISE Mercury, as the SROs retained to perform regulatory 
functions, FINRA and ISE may have secondary liability if, for example, 
the Commission finds that the contracted functions are being performed 
so inadequately as to cause a violation of the federal securities laws 
by ISE Mercury.
---------------------------------------------------------------------------

    \154\ See, e.g., Regulation ATS Release, supra note 28. See also 
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that 
allowed Amex to contract with another SRO for regulatory services) 
(``American Stock Exchange (``Amex'') Regulatory Services Approval 
Order''); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-
NASDAQ-2007-004 and SR-NASDAQ-2007-080) (``NOM Approval Order''); 
Nasdaq Order, supra note 27; and BATS Order, supra note 27.
    \155\ See, e.g., Amex Regulatory Services Approval Order, supra 
note 154; NOM Approval Order, supra note 154; and Nasdaq Order, 
supra note 27. The Commission notes that the RSA and FMA are not 
before the Commission and, therefore, the Commission is not acting 
on them.
    \156\ See supra note 139.
    \157\ For example, if failings by the SRO retained to perform 
regulatory functions have the effect of leaving an exchange in 
violation of any aspect of the exchange's self-regulatory 
obligations, the exchange will bear direct liability for the 
violation, while the SRO retained to perform regulatory functions 
may bear liability for causing or aiding and abetting the violation. 
See, e.g., ISE Gemini Order, supra note 27; MIAX Order, supra note 
28; BOX Order, supra note 37; and Securities Exchange Act Release 
No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 
10-127) (order granting the exchange registration of ISE) (``ISE 
Order'').
---------------------------------------------------------------------------

    As part of its FMA with ISE, ISE Mercury proposes to use dual 
employees to staff its regulatory services program. In other words, 
current ISE employees will also serve in a similar capacity for ISE 
Mercury under the FMA. ISE Mercury represents that the FMA will contain 
an obligation on the part of ISE Mercury and ISE to preserve the other 
party's information and materials which are confidential, proprietary, 
and/or trade secrets and prevent unauthorized use or disclosure to 
third parties.\158\
---------------------------------------------------------------------------

    \158\ See Exhibit L to the Form 1 Application.
---------------------------------------------------------------------------

    The Commission believes that the use of ISE employees by ISE 
Mercury is appropriate, as the operations, rules, and management of ISE 
and ISE Mercury will overlap to a considerable degree such that ISE 
Mercury should benefit by leveraging the experience of current ISE 
staff. The Commission has approved such arrangements in a similar 
context.\159\ However, the Commission expects ISE and ISE Mercury to 
monitor the workload of their shared employees and supplement their 
staffs, if necessary, so that ISE Mercury maintains sufficient 
personnel to allow it to carry out the purposes of the Act and enforce 
compliance with the rules of ISE Mercury and the federal securities 
laws.
---------------------------------------------------------------------------

    \159\ See, e.g., ISE Gemini Order, supra note 27; Securities 
Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 
(December 16, 2009) (File No. 10-191) (order granting registration 
to C2 Options Exchange) (``C2 Order'').
---------------------------------------------------------------------------

D. Trading System

1. Access to ISE Mercury
    Access to ISE Mercury will be through the use of Exchange 
Rights.\160\ Through an application process, organizations will be 
approved to become members of ISE Mercury and to exercise trading 
rights.\161\ Exchange Rights will not convey any ownership rights, but 
will provide for voting rights for representation on the ISE Mercury 
Board and will confer the ability to transact on ISE Mercury.\162\ 
Exchange Rights may not be leased and are not transferable except in 
the event of a change in control of a member or corporate 
reorganization involving a member.\163\ There is no limit on the number 
of Exchange Rights issued by ISE Mercury.\164\
---------------------------------------------------------------------------

    \160\ See supra note 19.
    \161\ The term ``Member'' means an organization that has been 
approved to exercise trading rights associated with Exchange Rights, 
and the term ``Membership'' refers to the trading privileges 
associated with Exchange Rights. See ISE Mercury Rules 100(a)(23) 
and 100(a)(24). Under ISE Mercury Rules 300 and 302(c), ISE Mercury 
shall issue memberships that confer the ability to transact on ISE 
Mercury, although no rights shall be conferred upon a member except 
those set forth in the ISE Mercury LLC Agreement or ISE Mercury 
Rules as amended from time to time. A membership shall not convey 
any ownership interest in the Exchange. See ISE Mercury Rules 300 
and 302(c).
    \162\ See ISE Mercury Rules 300 and 302(c); see also ISE Mercury 
LLC Agreement, Article VI, Sections 6.1 and 6.3.
    \163\ See ISE Mercury Rule 302(c). In such case, member status 
may be transferred to a qualified affiliate or successor upon 
written notice to ISE Mercury. Id.
    \164\ See ISE Mercury Rule 300; see also ISE Mercury LLC 
Agreement, Article VI, Section 6.1.
---------------------------------------------------------------------------

    Membership in ISE Mercury will be open to any broker-dealer 
registered under Section 15(b) of the Act that meets the standards for 
membership set forth in the rules of ISE Mercury.\165\ The Exchange's 
denials from, and impositions of conditions upon, becoming or 
continuing to be a member may be appealed pursuant to rules governing 
hearing and review, described in Section II.E below.\166\ In addition 
to its regular membership application process, ISE Mercury also will 
provide a process whereby a current member of ISE or ISE Gemini in good 
standing that is a registered broker-dealer can submit an abbreviated 
``waive-in'' application to ISE Mercury.\167\ This waive-in process is 
similar to arrangements in place at other exchanges.\168\
---------------------------------------------------------------------------

    \165\ See ISE Mercury Rule 301.
    \166\ See ISE Mercury Rule 1700 Series, which incorporates by 
reference ISE Rule 1700 Series.
    \167\ See ISE Mercury Rule 302(a).
    \168\ See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1) 
(containing a similar expedited waive-in membership process for 
members of CBOE).

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[[Page 6076]]

    ISE Mercury will have three classes of membership: (1) PMMs; (2) 
CMMs; and (3) EAMs.\169\ PMM and CMMs may seek appointment to become 
market makers in one or more options classes traded on the 
Exchange.\170\ ISE Mercury proposes to allow firms that register as 
market makers to receive special privileges or rights over non-market 
maker members, such as participation entitlements for PMMs, if they 
satisfy certain affirmative and negative market making obligations on 
the Exchange.\171\ This is similar to arrangements in place at other 
exchanges, such as ISE and ISE Gemini.\172\
---------------------------------------------------------------------------

    \169\ See ISE Mercury Rule 301(c).
    \170\ See ISE Mercury Rule 800 Series.
    \171\ See ISE Mercury Rules 713, 802 and 803. See infra Section 
II.D.3.b. for further discussion of market maker privileges and 
obligations.
    \172\ See, e.g., ISE Rules 713, 802 and 803, and ISE Gemini 
Rules 713, 802 and 803 (containing similar rights and obligations 
for market makers on ISE and ISE Gemini, respectively). ISE 
Mercury's approach is consistent with the rules of other exchanges 
that have no limit on the number of exchange rights, or their 
functional equivalent, that may be issued by the exchange. See, 
e.g., C2 Order, supra note 159.
---------------------------------------------------------------------------

    The Commission finds that ISE Mercury's proposed membership rules 
are consistent with the Act, including Section 6(b)(2) of the Act,\173\ 
which requires the rules of an exchange to provide that any registered 
broker or dealer or natural person associated with a registered broker 
or dealer may become a member of such exchange and any person may 
become associated with a member thereof. ISE Mercury's proposed rules 
with respect to exchange membership are substantively similar to the 
rules of other exchanges.\174\
---------------------------------------------------------------------------

    \173\ 15 U.S.C. 78f(b)(2).
    \174\ See, e.g., ISE Gemini Rule 300 Series (``Membership''); 
MIAX Rule 200 Series (``Access'').
---------------------------------------------------------------------------

    The Commission notes that pursuant to Section 6(c) of the Act,\175\ 
an exchange must deny membership to any person, other than a natural 
person, that is not a registered broker or dealer, any natural person 
that is not, or is not associated with, a registered broker or dealer, 
and registered broker-dealers that do not satisfy certain standards, 
such as financial responsibility or operational capacity. As a 
registered exchange, ISE Mercury must independently determine if an 
applicant satisfies the standards set forth in the Act, regardless of 
whether an applicant is a member of another SRO.\176\
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    \175\ 15 U.S.C. 78f(c).
    \176\ See, e.g., ISE Gemini Order, supra note 27, at 78 FR 
46633; MIAX Order, supra note 28, at 77 FR 73074; BOX Order, supra 
note 37, at 77 FR 26337; BATS Order, supra note 27, at 73 FR 49502; 
and Nasdaq Order, supra note 27, at 71 FR 3555.
---------------------------------------------------------------------------

    In addition, ISE Mercury also will allow non-members to access ISE 
Mercury as ``sponsored customers'' of an ISE Mercury member, subject to 
certain rules.\177\ The sponsoring member will be responsible for 
implementing policies and procedures to supervise and monitor the 
trading of its sponsored users to ensure compliance with all applicable 
federal securities laws and rules and ISE Mercury rules.\178\ ISE 
Mercury's proposed sponsored access rules are similar to the rules of 
other exchanges that provide for sponsored access \179\ and are 
consistent with Rule 15c3-5 under the Act.\180\
---------------------------------------------------------------------------

    \177\ See ISE Mercury Rule 706, Supplementary Material .01.
    \178\ See ISE Mercury Rule 706. See also 17 CFR 240.15c3-5.
    \179\ See, e.g., ISE Rule 706; see also ISE Gemini Rule 706; 
MIAX Rule 210.
    \180\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

2. Linkage
    ISE Mercury intends to become a participant in the Plan Relating to 
Options Order Protection and Locked/Crossed Markets or any successor 
plan (``Linkage Plan'').\181\ If admitted as a participant to the 
Linkage Plan, other plan participants will be able to send orders to 
ISE Mercury in accordance with the terms of the plan as applied to ISE 
Mercury.
---------------------------------------------------------------------------

    \181\ See Exhibit E to the Form 1 Application, Section B for a 
discussion of the Linkage Plan; and Exhibit L to the Form 1 
Application. See also Securities Exchange Act Release No. 60405 
(July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) 
(order approving the National Market System Plan Relating to Options 
Order Protection and Locked/Crossed Markets Submitted by the Chicago 
Board Options Exchange, Incorporated, International Securities 
Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., 
NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.).
---------------------------------------------------------------------------

    ISE Mercury rules include relevant definitions; establish the 
conditions pursuant to which members may enter orders in accordance 
with the Linkage Plan; impose obligations on ISE Mercury regarding how 
it must process incoming orders; establish a general standard that 
members and ISE Mercury should avoid trade-throughs; establish 
potential regulatory liability for members that engage in a pattern or 
practice of trading through other exchanges; and establish obligations 
with respect to locked and crossed markets.
    The Commission believes that ISE Mercury has proposed rules that 
are designed to comply with the requirements of the Linkage Plan.\182\ 
Further, as provided below, before ISE Mercury can commence operations 
as an exchange, it must become a participant in the Linkage Plan.
---------------------------------------------------------------------------

    \182\ See, e.g., ISE Mercury Rules relating to Intermarket 
Linkage in Rule 1900 Series, which incorporates by reference ISE 
Rule 1900 Series.
---------------------------------------------------------------------------

3. Market Makers
a. Registration of Market Makers
    Members of ISE Mercury may apply to become one of two types of 
market maker: PMMs or CMMs (collectively, ``Market Makers''). Market 
Makers are entitled to receive certain benefits and privileges in 
exchange for fulfilling certain affirmative and negative market-making 
obligations.\183\ Each class of Market Maker will receive a specific 
level of benefits and privileges in exchange for a specific level of 
obligation from such Market Maker.
---------------------------------------------------------------------------

    \183\ Market Makers' benefits and obligations are discussed in 
greater detail in the following section.
---------------------------------------------------------------------------

    To begin the process of registering as a PMM or CMM, a member will 
be required to file a written application with ISE Mercury.\184\ In 
reviewing a member's application for membership, ISE Mercury will 
consider, among other things, the applicant's market making 
ability.\185\ To qualify for registration as a Market Maker, a member 
of ISE Mercury must meet the requirements established in Rule 15c3-1 
under the Act \186\ and the general requirements set forth in ISE 
Mercury Rule 800 series, including the minimum financial requirements 
of ISE Mercury Rule 809.\187\ All members who are approved to become 
Market Makers will be designated as specialists on ISE Mercury for all 
purposes under the Act and rules thereunder.\188\ ISE Mercury will not 
limit the number of qualifying entities that may become Market 
Makers.\189\
---------------------------------------------------------------------------

    \184\ See ISE Mercury Rule 800(b).
    \185\ See id. The provision permitting ISE Mercury to consider 
``such other factors as [it] deems appropriate'' must be applied in 
a manner that is consistent with the Act, including provisions that 
prohibit an exchange from acting in an unfairly discriminatory 
manner. See 15 U.S.C. 78f(b)(5); see also ISE Gemini Order, supra 
note 27, at 78 FR 46634 n. 195; MIAX Order, supra note 28, at 77 FR 
73074 n.149.
    \186\ 17 CFR 240.15c3-1.
    \187\ See ISE Mercury Rule 800 Series. See also ISE Mercury Rule 
1300 Series relating to Net Capital Requirements, which incorporates 
by reference ISE Rule 1300 Series.
    \188\ See ISE Mercury Rule 800(a).
    \189\ See ISE Mercury Rule 300. See also Exhibit E to the Form 1 
Application, Section 1.
---------------------------------------------------------------------------

    In addition, all ISE and ISE Gemini market makers in good standing 
will be eligible for an Exchange Right in the same membership category 
in which they operate on ISE and ISE Gemini, respectively, to trade on 
ISE Mercury.\190\ For example, a CMM in good standing on ISE will be 
eligible to become a CMM on ISE Mercury, through the submission and 
approval of an ISE Mercury Waive-In Membership Application.\191\
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    \190\ See ISE Mercury Rule 302(a).
    \191\ See id. See also Exhibit F to the Form 1 Application.

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[[Page 6077]]

    Once approved, a Market Maker may seek appointment to make markets 
in one or more options classes traded on the ISE Mercury.\192\ Further, 
ISE Mercury will provide non-ISE and ISE Gemini members with at least 
sixty days advance written notice of the date upon which the Exchange 
will allocate options classes and appoint market makers in order to 
ensure that non-ISE and ISE Gemini members have a reasonable 
opportunity to participate in those processes.\193\ A market 
participant must have completed a membership application to be eligible 
to participate in the appointment and allocation processes.\194\
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    \192\ See ISE Mercury Rule 802(a).
    \193\ A non-ISE and ISE-Gemini member must have a completed a 
membership application to be eligible to participate in the 
processes. See ISE Mercury Rule 302(b).
    \194\ See Exhibit E to the Form 1 Application, Section A 
(``Introduction'').
---------------------------------------------------------------------------

    Either the ISE Mercury Board or a committee thereof \195\ will 
appoint classes of options contracts traded on ISE Mercury to Market 
Makers, taking into consideration: (1) The financial resources 
available to the Market Maker; (2) the Market Maker's experience and 
expertise in market making or options trading; and (3) the maintenance 
and enhancement of competition among Market Makers in each option class 
to which they are appointed.\196\ No appointment of a Market Maker will 
be without the Market Maker's consent to such appointment, provided 
that refusal to accept an appointment may be deemed sufficient cause 
for termination or suspension of a market maker's registration.\197\ 
ISE Mercury will appoint a PMM to each options class traded on ISE 
Mercury.\198\ Once appointed, ISE Mercury will surveil a Market Maker's 
activity for continued compliance with all applicable rules and 
requirements, which are discussed in more detail below.\199\
---------------------------------------------------------------------------

    \195\ See ISE Mercury Rule 802(a). ISE Mercury Rule 1700 Series 
provides the process for hearings, review, and arbitration of claims 
by persons economically aggrieved by ISE Mercury action, which would 
include denial of registration as a Market Maker.
    \196\ See id.
    \197\ See id.
    \198\ See ISE Mercury Rule 802(b).
    \199\ See ISE Mercury Rule 802(e).
---------------------------------------------------------------------------

    The Commission finds that ISE Mercury's proposed rules for the 
registration and appointment of Market Makers are consistent with the 
Act. In particular, ISE Mercury's rules provide an objective process by 
which a member could become a Market Maker on ISE Mercury and provide 
for oversight by ISE Mercury to monitor for continued compliance by 
Market Makers with the terms of their application for such status. The 
Commission notes that ISE Mercury's proposed Market Maker registration 
and appointment requirements are similar to those of other options 
exchanges.\200\
---------------------------------------------------------------------------

    \200\ See, e.g., ISE Rules 800 and 801, ISE Gemini Rules 800 and 
801, and MIAX Rule 600 (registration); ISE Rule 802, ISE Gemini Rule 
802, and MIAX Rule 602 (appointment).
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to ISE Mercury rules, Market Makers will be subject to a 
number of general obligations. In particular, the transactions of a 
Market Maker should constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market and a Marker Maker should not make bids or offers or enter into 
transactions that are inconsistent with such a course of dealings.\201\ 
A Market Maker has a continuous obligation to engage, to a reasonable 
degree under the existing circumstances, in dealings for his own 
account when there exists, or it is reasonably anticipated that there 
will exist, a lack of price continuity, a temporary disparity between 
the supply of and demand for a particular options contract, or a 
temporary distortion of the price relationships between options 
contracts of the same class.\202\ For all series of option classes 
which the Market Maker is appointed, the Market Maker is expected to: 
(1) Compete with other Market Makers to improve the market; (2) make 
markets that, absent changed market conditions, will be honored for the 
number of contracts entered into the ISE Mercury's system; (3) update 
market quotations in response to changed market conditions; (4) price 
options contracts fairly by, among other things, bidding and offering 
so as to create the prescribed bid/ask differentials.\203\ These 
provisions are similar to arrangements in place at other options 
exchanges.\204\
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    \201\ See ISE Mercury Rule 803(a).
    \202\ See ISE Mercury Rule 803(b).
    \203\ See ISE Mercury Rule 803(b)(1)-(4). Specifically, under 
ISE Mercury Rule 803(b)(4), following the opening rotation, Market 
Makers must create differences of no more than $5 between the bid 
and offer. Prior to the opening rotation, spread differentials shall 
be no more than $.25 between the bid and offer for each options 
contract for which the bid is less than $2, no more than $.40 where 
the bid is at least $2 but does not exceed $5, no more than $.50 
where the bid is more than $5 but does not exceed $10, no more than 
$.80 where the bid is more than $10 but does not exceed $20, and no 
more than $1 where the bid is $20 or greater, provided that the ISE 
Mercury may establish differences other than the above for one or 
more options series. These differentials do not apply to in-the-
money options series where the underlying securities market is wider 
than the differentials.
    \204\ See, e.g., ISE Gemini Rules 802 and 803 (containing 
similar rights and obligations for market makers on ISE Gemini).
---------------------------------------------------------------------------

    Further, Market Makers must maintain minimum net capital in 
accordance with ISE Mercury rules, including the minimum financial 
requirement pursuant to ISE Mercury Rule 809, in addition to the Act 
and rules and regulations thereunder.\205\
---------------------------------------------------------------------------

    \205\ See ISE Mercury Rule 1300 Series, which incorporates by 
reference ISE Rule 1300 Series; see also ISE Mercury Rule 809.
---------------------------------------------------------------------------

    ISE Mercury's rules governing Market Maker quoting obligations also 
are tailored to the specific class of Market Maker (i.e., PMM or 
CMM).\206\ Specifically, a PMM will be subject to the highest standard 
applicable on ISE Mercury. On a daily basis, PMMs must enter continuous 
two-sided quotations and enter into any resulting transactions in all 
of the series listed on the ISE Mercury of the options classes to which 
they are appointed.\207\ PMMs are also required to participate in the 
opening rotation.\208\ Although a CMM is not required to enter 
quotations in the options classes to which it is appointed, whenever a 
CMM does enter a quote in an options class to which it is appointed, 
the CMM must then provide continuous quotations in that class for 60% 
of the time the options class is open for trading on ISE Mercury.\209\ 
Further, whenever in the judgment of an ISE Mercury official it is 
necessary in the interest of fair and orderly markets to do so, CMMs 
may be called upon to submit a single quote or maintain continuous 
quotes in one or more series of options class to which the CMM is 
appointed.\210\ For purposes of meeting the continuous quoting 
obligations discussed herein, a Market Maker's quote must meet the bid/
ask differential requirements of ISE Mercury Rule 803(b)(4).\211\
---------------------------------------------------------------------------

    \206\ See ISE Mercury Rule 804.
    \207\ See ISE Mercury Rule 804(e)(1); see also ISE Mercury Rule 
804(c). A PMM shall be deemed to have provided continuous quotes 
pursuant to paragraph (e)(1) of Rule 804 if it provides two-sided 
quotes for 90% of the time that an options class is open for trading 
on the ISE Mercury. See ISE Mercury Rule 804, Supplementary Material 
.01.
    \208\ See ISE Mercury Rule 701(b)(1).
    \209\ See ISE Mercury Rule 804(e)(2). A CMM must maintain 
continuous quotations for at least 90% of the time the options class 
for which it receives Preferenced Orders is open for trading on the 
ISE Mercury. See ISE Mercury Rule 804(e)(2)(iii); see also ISE 
Mercury Rule 713, Supplementary Material .03 regarding Preferenced 
Orders.
    \210\ See ISE Mercury Rule 804(e)(2)(iv).
    \211\ See ISE Mercury Rule 804(e)(1)-(2). See also supra note 
203.
---------------------------------------------------------------------------

    In options classes other than to which it is appointed, ISE 
Mercury's rules provide that a Market Maker should not engage in 
transactions in an account in which it has an interest that are 
disproportionate in relation to, or in derogation of, the performance 
of its

[[Page 6078]]

market making obligations.\212\ Further, the total number of contracts 
executed during a quarter by a CMM in options classes to which it is 
not appointed may not exceed 25% of the total number of contracts 
traded by such CMMs in classes to which it is appointed and with 
respect to which it was quoting pursuant to ISE Mercury Rule 
804(e)(2).\213\ Similarly, the total number of contracts executed 
during a quarter by a PMM in options classes to which it is not 
appointed may not exceed 10% of the total number of contracts traded 
per each PMM membership.\214\
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    \212\ See ISE Mercury Rule 803(d). Among other things, a Market 
Maker should not effect purchases or sales on the ISE Mercury except 
in a reasonable and orderly manner. See id.
    \213\ See ISE Mercury Rule 805(b)(2).
    \214\ See ISE Mercury Rule 805(b)(3).
---------------------------------------------------------------------------

    If ISE Mercury finds any failure by a Market Maker to properly 
perform as a market maker, such Market Maker may be subject to 
suspension or termination.\215\ ISE Mercury may suspend or terminate 
any appointment of a Market Maker under ISE Mercury Rule 802 and may 
make additional appointments whenever, in ISE Mercury's judgment, the 
interests of a fair and orderly market are best served by such 
action.\216\
---------------------------------------------------------------------------

    \215\ See ISE Mercury Rule 800(c).
    \216\ See ISE Mercury Rule 802(d).
---------------------------------------------------------------------------

    Although Market Makers have a number of obligations, Market Makers 
also receive certain benefits for carrying out their 
responsibilities.\217\ For example, a broker-dealer or other lender may 
extend ``good faith'' credit to a member of a national securities 
exchange or registered broker-dealer to finance its activities as a 
market maker or specialist.\218\ PMMs are also entitled to certain 
participation entitlements.\219\ In addition, market makers are 
excepted from the prohibition in Section 11(a) of the Act.\220\
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    \217\ See, e.g., ISE Gemini Order, supra note 27; MIAX Order, 
supra note 28 (discussing the benefits and obligations of market 
makers).
    \218\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \219\ See ISE Mercury Rule 713, Supplementary Material .01(b)-
(c). See also infra notes 248-255 and accompanying text (describing 
the PMM participation entitlements).
    \220\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

    The Commission believes that a market maker must be subject to 
sufficient and commensurate affirmative obligations, including the 
obligation to hold itself out as willing to buy and sell options for 
its own account on a regular or continuous basis, to justify favorable 
treatment.\221\ The Commission further believes that the rules of all 
U.S. options markets need not provide the same standards for market 
maker participation, so long as they impose affirmative obligations 
that are consistent with the Act.\222\ The Commission believes that ISE 
Mercury's Market Maker participation requirements impose appropriate 
affirmative obligations on ISE Mercury's Market Makers that are 
commensurate with the benefits afforded to such participants, as 
discussed above, and, accordingly, are consistent with the Act. The 
Commission believes that the specific levels of benefits conferred on 
the different classes of Market Makers are appropriately balanced by 
the obligations imposed by ISE Mercury's rules. The Commission further 
believes that ISE Mercury's market maker requirements,\223\ which are 
identical to those of ISE and ISE Gemini \224\ and similar to other 
options exchanges' rules,\225\ impose sufficient appropriate 
obligations that are consistent with the Act. Finally, the Commission 
believes that the Act does not mandate a particular market model for 
exchanges, and while Market Makers may become an important source of 
liquidity on ISE Mercury, they will likely not be the only source as 
ISE Mercury is designed to match buying and selling interest of all ISE 
Mercury participants.
---------------------------------------------------------------------------

    \221\ See ISE Gemini Order, supra note 27, at 78 FR 46635; MIAX 
Order, supra note 28, at 77 FR 73076; BOX Order supra note 37.
    \222\ See id.
    \223\ See ISE Mercury Rule 803.
    \224\ See, e.g., ISE Rule 800 Series; ISE Gemini Rule 800 
Series.
    \225\ See, e.g., ISE Gemini Order, supra note 27; MIAX Order, 
supra note 28; BOX Order, supra note 37.
---------------------------------------------------------------------------

4. Order Display, Execution, and Priority
    ISE Mercury proposes to operate a fully automated electronic 
options trading platform to buy or sell securities with a continuous, 
automated matching function.\226\ Liquidity will be derived from ISE 
Mercury members acting as principal or as agent electronically 
submitting quotes as well as market and various types of limit orders 
to buy or to sell.\227\ Non-members also may access ISE Mercury 
pursuant to ISE Mercury rules governing ``sponsored access.'' \228\ All 
electronic submissions of quotes and orders to ISE Mercury will be from 
remote locations, as there will be no trading floor.\229\ ISE Mercury's 
system generally will automatically execute incoming orders.\230\ Non-
opening trades will occur when a buy order/quote and a sell order/quote 
match on the ISE Mercury's order book.\231\ All options will be traded 
in decimals on ISE Mercury and will be consistent with the Penny 
Pilot.\232\
---------------------------------------------------------------------------

    \226\ See Exhibit E to the Form 1 Application.
    \227\ See id.
    \228\ See id.
    \229\ See id.
    \230\ See ISE Mercury Rule 714.
    \231\ See Exhibit E to the Form 1 Application.
    \232\ See ISE Mercury Rule 710 and Supplementary Material .01. 
The Commission has approved exchange rules on a pilot basis that 
permit an exchange to quote series with premiums under $3 in pennies 
and series with premiums of $3 and over in nickels in approximately 
360 options classes (``Penny Pilot''). In addition, these rules 
allow all series in QQQQs, IWM, and SPY to be quoted in pennies. 
See, e.g., Securities Exchange Act Release Nos. 60711 (September 23, 
2009), 74 FR 49419 (September 28, 2009); 61061 (November 24, 2009), 
74 FR 62857 (December 1, 2009) (File No. SR-NYSEArca-2009-44) 
(approving Penny Pilot program expansions for NYSE Arca). Proposed 
Supplementary Material .01 to Rule 710 would permit ISE Mercury to 
operate a pilot to permit certain options classes to be quoted and 
traded in increments as low as $0.01, consistent with these 
previously approved rules. Specifically, this pilot is consistent 
with the penny pilot on ISE Gemini, which was last extended on June 
26, 2015 and is scheduled to expire on June 30, 2016. See Securities 
Exchange Act Release No. 75315 (June 26, 2015), 80 FR 38243 (July 2, 
2015) (File No. SR-ISE Gemini-2015-12). Similar to ISE Gemini, ISE 
Mercury has further agreed to submit to the Commission such reports 
regarding the Penny Pilot as the Commission may request. See Exhibit 
B to the Form 1 Application.
---------------------------------------------------------------------------

    All orders submitted to ISE Mercury's trading platform must have a 
designated price and size (limit orders) \233\ or must be orders to buy 
or sell a stated amount of a security at the national best bid or offer 
when the order reaches ISE Mercury (market orders).\234\ Members may 
submit the following orders to ISE Mercury: Market Orders; Limit Orders 
(including Marketable Limit, Fill-or-Kill, Immediate or Cancel, Non-
Displayed Penny Order, Sweep, Intermarket Sweep, and Stopped Orders); 
\235\ or Contingency Orders

[[Page 6079]]

(including All-Or-None, Stop, Stop Limit, Customer Participation, 
Reserve, Attributable, Customer Cross, Qualified Contingent Cross, 
Minimum Quantity, Do-Not-Route, Add Liquidity, Opening Only, and Good-
Till-Date Orders).\236\ Like ISE, ISE Mercury also will permit flash 
mechanisms. Accordingly, certain orders will first be exposed at the 
National Best Bid or Offer (``NBBO'') to all ISE Mercury members for 
execution at the NBBO before an unaffiliated broker, under contract 
with ISE Mercury, routes the order to another market for 
execution.\237\
---------------------------------------------------------------------------

    \233\ A limit order is an order to buy or sell a stated number 
of options contracts at a specified price or better. ISE Mercury 
Rule 715(b).
    \234\ A market order is an order to buy or sell a stated number 
of options contracts that is to be executed at the best price 
obtainable when the order reaches ISE Mercury. ISE Mercury Rule 
715(a).
    \235\ See ISE Mercury Rule 715. A Marketable Limit Order is a 
limit order to buy (sell) at or above (below) the best offer (bid) 
on the ISE Mercury. A Fill-or-Kill Order is a limit order that is to 
be executed in its entirety as soon as it is received and, if not so 
executed, treated as cancelled. An Immediate-or-Cancel Order is a 
limit order that is to be executed in whole or in part upon receipt 
and any portion not so executed is to be treated as cancelled. A 
Non-Displayed Penny Order is a limit order that specifies a one-cent 
price increment in a security that has a minimum trading increment 
pursuant to ISE Mercury Rule 710 that is larger than one-cent. A 
Sweep Order is a limit order that is executed in whole or in part on 
the exchange with the portion not executed routed pursuant to 
Supplementary Material .05 to ISE Mercury Rule 1901, which 
incorporates by reference ISE Rule 1901. An Intermarket Sweep Order 
is a limit order that meets the requirements of ISE Mercury Rule 
1900(h), which incorporates by reference ISE Rule 1900(h). A Stopped 
Order is a limit order that meets the requirements of ISE Mercury 
Rule 1901(b)(8), which incorporates by reference ISE Rule 
1901(b)(8). To execute Stopped Orders, members must enter them into 
the Facilitation Mechanism or Solicited Order Mechanism pursuant to 
ISE Mercury Rule 716.
    \236\ See ISE Mercury Rule 715. An All-or-None Order is a limit 
or market order that is to be executed in its entirety or not at 
all. A Stop Order is an order that becomes a market order when the 
stop price is elected. A Stop Limit Order is an order that becomes a 
limit order when the stop price is elected. A Customer Participation 
Order is a limit order on behalf of a Public Customer (as defined in 
ISE Mercury Rule 100(a)(38)) that, in addition to the limit order 
price in standard increments according to ISE Mercury Rule 710, 
includes a price stated in one-cent increments at which the Public 
Customer wishes to participate in trades executed in the same 
options series in penny increments through the Price Improvement 
Mechanism pursuant to ISE Mercury Rule 723. A Reserve Order is a 
limit order that contains both a displayed portion and a non-
displayed portion. An Attributable Order is a market or limit order 
which displays the user firm ID for purposes of electronic trading 
on ISE Mercury. A Customer Cross Order is comprised of a Priority 
Customer Order (as defined in ISE Mercury Rule 100(a)(37B) to buy 
and a Priority Customer Order to sell at the same price and for the 
same quantity. A Qualified Contingent Cross order is comprised of an 
order to buy or sell at least 1000 contracts that is identified as 
being part of a qualified contingent trade (as defined in ISE 
Mercury Rule 715, Supplementary Material .02) coupled with a contra-
side order to buy or sell an equal number of contracts. A Minimum 
Quantity Order is an order that is initially available for partial 
execution only for a specified number of contracts or greater. A Do-
Not-Route Order is a market or limit order that is to be executed in 
whole or in part on ISE Mercury only. An Add Liquidity Order is a 
limit order that is to be executed in whole or in part on ISE 
Mercury (i) only after being displayed on ISE Mercury's limit order 
book; and (ii) without routing any portion of the order to another 
market center. An Opening Only Order is a limit order that can be 
entered for the opening rotation only. A Good-Till-Date Order is a 
limit order to buy or sell which, if not executed, will be cancelled 
at the sooner of the end of the expiration date assigned to the 
order, or the expiration of the series. These order types are the 
same order types that are available on ISE, except that ISE also 
includes several complex order types that are not proposed for ISE 
Mercury. See ISE Mercury Rule 715; ISE Rules 715 and 722; see also 
Exhibit B to the Form 1 Application.
    \237\ See ISE Mercury Rule 1901, Supplementary Material .02 
(which incorporates by reference ISE Rule 1901, Supplementary 
Material .02).
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    Quotes entered by PMMs and CMMs must, like Limit Orders, be priced 
and have a designated size.\238\ Orders will be accepted for any 
security traded on ISE Mercury, whether submitted by a member on a 
proprietary or agency basis in any size,\239\ whereas quotes for any 
security traded on ISE Mercury may only be submitted by PMMs and CMMs 
and only in the options classes to which the market makers are 
appointed.\240\ ISE Mercury will be required to maintain a full audit 
trail of every incoming and outgoing message (including all orders and 
quotes) submitted to the ISE Mercury's system.\241\ Members may receive 
status reports regarding orders submitted to ISE Mercury or change or 
cancel an order at any time before that order is executed on ISE 
Mercury, except as otherwise specified in ISE Mercury Rule 723 (Price 
Improvement Mechanism for Crossing Transactions).\242\
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    \238\ See ISE Mercury Rule 804(b).
    \239\ See ISE Mercury Rule 713(a).
    \240\ See ISE Mercury Rule 804(a).
    \241\ See 17 CFR 240.17a-5. See also Exhibit E to the Form 1 
Application, Section C.
    \242\ See Exhibit E to the Form 1 Application, Section C.
---------------------------------------------------------------------------

    All orders and quotes submitted to ISE Mercury will be displayed 
unless designated otherwise by the member submitting the order.\243\ 
Displayed orders and quotes will be displayed on an anonymous basis 
(except for Attributable Orders,\244\ which will allow voluntary 
disclosure of firm identification information) at a member's specified 
price. Non-Displayed Orders (the non-displayed portion of a Reserve 
Order or a Non-Displayed Penny Order) will not be displayed to anyone 
and will not have time priority over displayed orders at the same 
price.\245\
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    \243\ See ISE Mercury Rule 704.
    \244\ An Attributable Order is a market or limit order which 
displays the user firm's ID for purposes of trading on the ISE 
Mercury. See ISE Mercury Rule 715(h). Use of Attributable Orders 
would be voluntary. This order type is consistent with similar order 
types on other exchanges. See, e.g., ISE Gemini Rule 715(h); CBOE 
Rule 6.53(o) (attributable order type).
    \245\ See ISE Mercury Rules 715(b)(4) and 715(g).
---------------------------------------------------------------------------

    ISE Mercury will utilize a pro-rata priority scheme with a Priority 
Customer preference.\246\ This scheme is the same as what the 
Commission has approved for ISE and ISE Gemini.\247\
---------------------------------------------------------------------------

    \246\ See ISE Mercury Rule 713, Supplementary Material .01. 
Under this priority methodology, the highest bid and lowest offer 
will have priority except that Priority Customer Orders will have 
priority over professional interest and all market maker interest at 
the same price. Subject to certain limits, Professional Orders and 
market maker quotes at the best price receive allocations based upon 
the percentage of the total number of contracts available at the 
best price that is represented by the size of the Professional Order 
or quote. If there were two or more Priority Customer Orders for the 
same options series at the same price, priority will be afforded 
based on the sequence in which such orders were received. ISE 
Mercury rules will define ``Priority Customer'' as a person or 
entity that is not a broker or dealer in securities, and does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial accounts. 
``Professional Orders,'' i.e., orders for the account of a person or 
entity that is not a Priority Customer, will be subordinate to 
Priority Customer Orders for priority and fee purposes. Professional 
Orders will include orders of broker-dealers and orders of those 
Public Customers that are not Priority Customers. See ISE Mercury 
Rules 100(a)(37A)-(37C) for definitions of Priority Customer, 
Priority Customer Order and Professional Order, respectively.
    \247\ See, e.g., ISE Rule 713; ISE Gemini Rule 713 (Priority of 
Quotes and Orders).
---------------------------------------------------------------------------

    In addition, under ISE Mercury rules, PMMs are granted certain 
participation entitlements. For example, PMMs will be entitled to a 
participation entitlement with respect to each incoming order if they 
have a quote at the NBBO.\248\ The PMM participation entitlement will 
apply only to any remaining balance after any Priority Customer \249\ 
orders have first been satisfied.\250\ The PMM will not be allocated a 
total quantity greater than the quantity it is quoting at the execution 
price, and it will not receive any further allocation of an order if it 
receives a participation entitlement.\251\ Moreover, if the PMM has a 
quote at the NBBO, small size orders (i.e., five or fewer contracts) 
will be allocated in full to the PMM.\252\
---------------------------------------------------------------------------

    \248\ See ISE Mercury Rule 713, Supplementary Material .01. 
Specifically, the PMM's participation entitlement will be equal to 
the greater of: (i) The proportion of the total size at the best 
price represented by the size of its quote, or (ii) 60% of the 
contracts to be allocated if there is only one other Market Maker 
quotation at the NBBO or 40% if there are two or more other Market 
Maker quotes at the NBBO. See ISE Mercury Rule 713, Supplementary 
Material .01(b).
    \249\ See supra note 246 for the definition of Priority 
Customer.
    \250\ See ISE Mercury Rule 713, Supplementary Material .01.
    \251\ See id.
    \252\ See ISE Mercury Rule 713, Supplementary Material .01(c). 
The rule provides that ISE Mercury will review the functioning of 
this provision quarterly to make sure that small size orders do not 
account for more than 40% of the volume executed on ISE Mercury. Id.
---------------------------------------------------------------------------

    These participation entitlements for PMMs are consistent with 
provisions that the Commission has approved for other exchanges.\253\ 
The Commission believes that these entitlements are appropriately 
balanced by the obligations imposed on these classes of market makers, 
as discussed in detail above.\254\ In particular, PMMs are subject to 
higher quoting obligations than other Market Makers who are not 
eligible to receive the aforementioned participation entitlements.\255\ 
Therefore,

[[Page 6080]]

the Commission believes that the proposed rules regarding participation 
entitlements are consistent with the Act, including Section 
6(b)(5),\256\ in that they are designed to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \253\ See, e.g., ISE Gemini Order, supra note 27; MIAX Order, 
supra note 28.
    \254\ See supra Section II.D.3.b (discussing market maker 
obligations).
    \255\ For example, as discussed above, supra Section II.D.3.b., 
PMMs must provide continuous two-sided quotes in each appointed 
option class.
    \256\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    ISE Mercury proposes to make available certain additional order 
processing and matching features, largely based on features available 
on ISE.\257\ Mechanisms that will be utilized by ISE Mercury include: A 
Price Improvement Mechanism (which affords the opportunity for price 
improvement after an auction for eligible orders above the NBBO); \258\ 
a Facilitation Mechanism (which affords members an opportunity to cross 
orders after an auction and provides the facilitating member the 
opportunity to receive 40% of the agency order); \259\ and a Solicited 
Order Mechanism (which allows members representing agency orders the 
opportunity to cross large size solicited orders after an 
auction).\260\ These mechanisms are consistent with substantially 
similar mechanisms currently existing on other options exchanges, 
including identical mechanisms on ISE and ISE Gemini.\261\
---------------------------------------------------------------------------

    \257\ The primary difference between ISE Mercury's order 
processing and matching features and those of ISE previously 
approved by the Commission will be that ISE Mercury will not accept 
complex orders.
    \258\ See ISE Mercury Rule 723. ISE Mercury will operate a pilot 
program whereby there will be no minimum size requirements for 
orders to be eligible for the PIM. See Exhibit B to the Form 1 
Application; see also ISE Mercury Rule 723, Supplementary Material 
.03.
    \259\ See ISE Mercury Rule 716(d).
    \260\ See ISE Mercury Rule 716(e).
    \261\ See ISE Rules 716 and 723; ISE Gemini Rules 716 and 723.
---------------------------------------------------------------------------

    Members will be able to access ISE Mercury through a variety of 
electronic systems, and non-members will be able to access ISE Mercury 
pursuant to sponsored access arrangements with ISE Mercury members, 
pursuant to ISE Mercury rules.\262\ As noted above and provided further 
below, prior to commencing operations, ISE Mercury also must become a 
participant in the Linkage Plan.\263\ The manner in which ISE Mercury 
proposes to comply with the Linkage Plan is identical to the manner in 
which ISE and ISE Gemini comply with the Linkage Plan. Specifically, to 
comply with the Linkage Plan, ISE Mercury, among other things, will 
prohibit its members from effecting a transaction at a price that is 
inferior to the NBBO, unless an exception applies.\264\ ISE Mercury 
will provide a centralized process for sending intermarket sweep orders 
to other exchanges on behalf of Public Customer Orders.\265\ ISE 
Mercury will contract with one or more unaffiliated brokers to route 
orders to other exchanges when necessary to comply with the Linkage 
Plan. In circumstances where marketable orders are received when ISE 
Mercury is not at the NBBO or orders are received that would lock or 
cross another market, they will be exposed to ISE Mercury members for 
up to one second.\266\ If, after an order is exposed, such order cannot 
be executed in full on ISE Mercury at the then-current NBBO or better 
and is marketable, the lesser of the full displayed size of the 
protected bid(s) or protected offer(s) that are priced better than the 
ISE Mercury's quote or the balance of the order will be sent to a 
contracted unaffiliated broker, and any additional balance of the order 
that is not marketable against the then-current NBBO will be placed on 
the ISE Mercury book.\267\
---------------------------------------------------------------------------

    \262\ See, e.g., ISE Mercury Rule 706, Supplementary Material 
.01.
    \263\ See ISE Mercury Rule 1900 Series, which incorporates by 
reference ISE Rule 1900 Series.
    \264\ See ISE Mercury Rule 714(a); see also ISE Rule 714(a); ISE 
Gemini Rule 714(a).
    \265\ See ISE Mercury Rule 1901, which incorporates by reference 
ISE Rule 1901.
    \266\ See ISE Mercury Rule 1901, Supplementary Material .02, 
which incorporates by reference ISE Rule 1901, Supplementary 
Material .02.
    \267\ See id. Any additional balance of the order will be 
executed on ISE Mercury if it is marketable.
---------------------------------------------------------------------------

    The Commission believes that ISE Mercury's proposed display, 
execution, and priority rules are consistent with the Act. In 
particular, the Commission finds that the proposed rules are consistent 
with Section 6(b)(5) of the Act,\268\ which, among other things, 
requires that the rules of a national securities exchange be designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating 
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, and to not 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. The Commission also finds that the proposed rules are 
consistent with Section 6(b)(8) of the Act,\269\ which requires that 
the rules of an exchange not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the Act. 
The trading rules of ISE Mercury are substantially similar to the 
current ISE and ISE Gemini trading rules, which were approved at the 
time each of ISE and ISE Gemini's registration as a national securities 
exchange was granted \270\ or filed with and approved by the Commission 
(or otherwise became effective) pursuant to Section 19(b) of the 
Act.\271\
---------------------------------------------------------------------------

    \268\ 15 U.S.C. 78f(b)(5).
    \269\ 15 U.S.C. 78f(b)(8).
    \270\ See ISE Order, supra note 157; ISE Gemini Order, supra 
note 27.
    \271\ The Commission notes, however, that some of ISE Mercury's 
rules differ in some respects from the rules of ISE and ISE Gemini. 
For example, ISE Mercury is not proposing to incorporate ISE's rules 
relating to the trading of equity securities or to incorporate any 
rules concerning the trading of complex or multi-legged orders at 
this time.
---------------------------------------------------------------------------

5. Section 11(a) of the Act
    Section 11(a)(1) of the Act \272\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
Exchange has represented that it has analyzed its rules proposed 
hereunder, and believes that they are consistent with Section 11(a) of 
the Act and rules thereunder.\273\ For the reasons set forth below, 
based on ISE Mercury's representations, the Commission believes that 
ISE Mercury's order execution algorithm, including the Facilitation, 
Solicitation, Price Improvement Mechanism, and Customer Cross 
processes, will allow members to meet the requirements of Rule 11a2-
2(T) for executions on ISE Mercury.
---------------------------------------------------------------------------

    \272\ 15 U.S.C. 78k(a)(1).
    \273\ See Letter from Michael Simon, General Counsel, Secretary 
and Chief Regulatory Officer, ISE Mercury, to Brent J. Fields, 
Secretary, Commission, dated January 7, 2016 (``Exchange 11(a) 
Request Letter'').
---------------------------------------------------------------------------

    Rule 11a2-2(T) under the Act,\274\ known as the ``effect versus 
execute'' rule, provides exchange members with an exemption from the 
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange 
member, subject to certain conditions, to effect transactions for 
covered accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) May not be associated with the executing 
member; (ii) must transmit the order from off the exchange floor; (iii) 
may not participate in the execution of the transaction once it has 
been transmitted to the member

[[Page 6081]]

performing the execution; \275\ and (iv) with respect to an account 
over which the member or an associated person has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule.
---------------------------------------------------------------------------

    \274\ 17 CFR 240.11a2-2(T).
    \275\ This prohibition also applies to associated persons. See 
15 U.S.C. 78f(b)(8). The member may, however, participate in 
clearing and settling the transaction. See Securities Exchange Act 
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(regarding the NYSE's Designated Order Turnaround System) (``1978 
Release'').
---------------------------------------------------------------------------

    In a letter to the Commission,\276\ ISE Mercury requested that the 
Commission concur with its conclusion that ISE Mercury members that 
enter orders through the ISE Mercury system, including the 
Facilitation, Solicitation, Price Improvement Mechanism, and Customer 
Cross processes, satisfy the requirements of Rule 11a2-2(T). For the 
reasons set forth below, the Commission believes that ISE Mercury 
members that enter orders through the ISE Mercury system, including 
through these processes, will satisfy the conditions of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \276\ See Exchange 11(a) Request Letter, supra note 273.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s first condition is that the order be executed by 
an exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities are used, such as the ISE Mercury system, 
as long as the design of these systems ensures that members do not 
possess any special or unique trading advantages over non-members in 
handling their orders after transmitting them to the Exchange.\277\ ISE 
Mercury has represented that the design of the ISE Mercury system 
ensures that no member has any special or unique trading advantage in 
the handling of its orders after transmitting its orders to ISE 
Mercury.\278\ Based on the Exchange's representation, the Commission 
believes that the ISE Mercury system is designed to enable its members 
to satisfy this requirement.
---------------------------------------------------------------------------

    \277\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into each system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See Securities 
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084, 6086 
n.25 (January 31, 1979) (File No. S7-613) (regarding the Amex Post 
Execution Reporting System, the Amex Switching System, the 
Intermarket Trading System, the Multiple Dealer Trading Facility of 
the Cincinnati Stock Exchange, the PCX Communications and Execution 
System, and the Philadelphia Stock Exchange Automated Communications 
and Execution System (``1979 Release'')).
    \278\ See Exchange 11(a) Request Letter, supra note 273.
---------------------------------------------------------------------------

    Second, Rule 11a2-2(T) requires orders for covered accounts to be 
transmitted from off the exchange floor. ISE Mercury will not have a 
physical trading floor, and like other automated systems, will receive 
orders electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\279\ Orders sent 
to ISE Mercury, regardless of where it executes within the ISE Mercury 
system, will be transmitted from remote terminals directly to ISE 
Mercury by electronic means. Since the ISE Mercury trading system 
receives all orders electronically, the Commission believes that the 
ISE Mercury system will satisfy the off-floor transmission requirement.
---------------------------------------------------------------------------

    \279\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) 
(order approving proposed rules of BX); 49068, (January 13, 2004), 
69 FR 2775 (January 20, 2004) (SR-BSE-2002-15) (establishing, among 
other things, BOX as an options trading facility of BSE); 44983, 
(October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25) 
(approving the PCX's use of the Archipelago Exchange as its equity 
trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) 
(SR-NYSE-90-52 and SR-NYSE-90-53) (regarding NYSE's Off-Hours 
Trading Facility). See 1978 Release, supra note 275. See also 1979 
Release, supra note 277.
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the member and any associated 
person not participate in the execution of its order once it has been 
transmitted to the member performing the execution.\280\ ISE Mercury 
represents that at no time following the submission of an order is a 
member able to acquire control or influence over the result or timing 
of an order's execution. According to ISE Mercury, orders submitted 
through ISE Mercury systems meet the non-participation requirement. 
Trades on ISE Mercury will execute when orders or quotations on ISE 
Mercury match one another based on their priority. Execution will not 
depend on the participant, but rather upon what other orders are 
entered into the system at or around the same time as the subject 
order, what orders are on ISE Mercury, or submitted as responses, and 
where the order is ranked based on priority ranking algorithm.\281\ 
Accordingly, the Commission believes that the non-participation 
requirement will be met when orders are executed automatically through 
use of the ISE Mercury system.
---------------------------------------------------------------------------

    \280\ The member may cancel or modify the order, or modify the 
instructions for executing the order, but only from off the Exchange 
floor. See 1978 Release, supra note 275, at 43 FR 11547. The 
Commission has stated that the non-participation requirement is 
satisfied under such circumstances so long as such modifications or 
cancellations are also transmitted from off the floor. See id. 
(stating that the ``non-participation requirement does not prevent 
initiating members from canceling or modifying orders (or the 
instructions pursuant to which the initiating member wishes orders 
to be executed) after the orders have been transmitted to the 
executing member, provided that any such instructions are also 
transmitted from off the floor'').
    \281\ See Exchange 11(a) Request Letter, supra note 273.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\282\ ISE Mercury members trading for covered accounts over which 
they exercise investment discretion must comply with this condition in 
order to rely on the rule's exemption.\283\
---------------------------------------------------------------------------

    \282\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 275, at 43 FR 11548 
(stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \283\ See Exchange 11(a) Request Letter, supra note 273.
---------------------------------------------------------------------------

E. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to be able to carry out the 
purposes of the Act.\284\ Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with the Act and the rules and regulations thereunder and the 
rules of the exchange.\285\
---------------------------------------------------------------------------

    \284\ See 15 U.S.C. 78f(b)(1).
    \285\ See id.

---------------------------------------------------------------------------

[[Page 6082]]

    ISE Mercury rules codify ISE Mercury's disciplinary jurisdiction 
over its members, thereby facilitating its ability to enforce its 
members' compliance with its rules and the federal securities 
laws.\286\ ISE Mercury's rules permit it to sanction members for 
violations of the Act and the rules and regulation thereunder and ISE 
Mercury's rules by, among other things, expelling or suspending 
members; limiting members' activities, functions, or operations; fining 
or censuring members; suspending or barring a person from being 
associated with a member; or any other fitting sanction in accordance 
with ISE Mercury rules.\287\
---------------------------------------------------------------------------

    \286\ See ISE Mercury Rule 1600(a) (which incorporates by 
reference ISE Rule 1600(a)).
    \287\ See id. See also ISE Gemini Rule 1600(a); MIAX Rule 1000; 
BOX Exchange Rule 12000 Series (containing identical provisions).
---------------------------------------------------------------------------

    ISE Mercury's disciplinary and oversight functions will be 
administered in accordance with Chapter 16 of the ISE Mercury rules, 
which incorporates by reference Chapter 16 of ISE rules, governing 
disciplinary jurisdiction. Unless delegated to another SRO pursuant to 
the terms of an effective 17d-2 Plan,\288\ ISE Mercury regulatory staff 
(including regulatory staff of another SRO that may be acting on ISE 
Mercury's behalf pursuant to a regulatory services agreement) will, 
among other things, investigate potential securities laws violations 
and initiate charges pursuant to ISE Mercury rules.\289\
---------------------------------------------------------------------------

    \288\ See supra notes 144-146 and accompanying text (concerning 
the multiparty 17d-2 Plans to which ISE Mercury has committed to 
join).
    \289\ See ISE Mercury Rule 1602 (which incorporates by reference 
ISE Rule 1602). As noted above, ISE Mercury has entered into an RSA 
with FINRA and a FMA with ISE under which FINRA and ISE, 
respectively, will perform certain regulatory functions on behalf of 
ISE Mercury. See ISE Mercury Rule 1615 (which incorporates by 
reference ISE Rule 1615).
---------------------------------------------------------------------------

    Upon a finding of probable cause of a violation within the 
disciplinary jurisdiction of ISE Mercury and where further proceedings 
are warranted,\290\ ISE Mercury will conduct a hearing on disciplinary 
matters before a professional hearing officer \291\ and two members of 
the Business Conduct Committee \292\ (``Panel'').\293\ The ISE Mercury 
member (or its associated person) or the ISE Mercury regulatory staff 
may petition for review of the Panel's decision by the ISE Mercury 
Board.\294\ Any review will be conducted by the ISE Mercury Board or a 
committee thereof composed of at least three of its directors (whose 
decision must be ratified by the ISE Mercury Board).\295\ In addition, 
the ISE Mercury Board on its own motion may order review of a 
disciplinary decision.\296\ The ISE Mercury Board may affirm, reverse, 
or modify, in whole or in part, the Panel's decision.\297\ The decision 
of the ISE Mercury Board will be in writing and will be final.\298\
---------------------------------------------------------------------------

    \290\ See ISE Mercury Rule 1604 (which incorporates by reference 
ISE Rule 1604). If there is probable cause for finding a violation, 
ISE Mercury's regulatory staff will prepare a statement of charges 
including the allegations and specifying the provisions of the Act 
and the rules and regulations promulgated thereunder, provisions of 
the ISE Mercury Constitution or rules, or interpretations or 
resolutions of which such acts are in violation. The CRO must 
approve the statement of charges.
    \291\ See ISE Mercury Rule 1606 (which incorporates by reference 
ISE Rule 1606); see also ISE Mercury Rule 1615, Supplemental 
Material .01 (which incorporates by reference ISE Rule 1615, 
Supplemental Material .01).
    \292\ Pursuant to a Resolution of the ISE Mercury Board, the 
President and CEO shall establish ISE Mercury's Business Conduct 
Committee, pursuant to a charter. The Committee shall consist of no 
more than 21 persons, all of whom are employees of members of ISE 
Mercury, representing members as follows: At least three persons 
shall represent PMMs; at least three persons shall represent CMMs 
that are not also PMMs; and at least four persons shall represent 
EAMs that neither are, nor are affiliated with, a PMM or CMM. See 
Exhibit L to the Form 1 Application.
    \293\ See ISE Mercury Rule 1606 (which incorporates by reference 
ISE Rule 1606). A Panel may make a determination without a hearing 
and may impose a penalty as to violations that the member or 
associated person has admitted or has failed to answer or that 
otherwise do not appear to be in dispute. See ISE Mercury Rule 1608 
(which incorporates by reference ISE Rule 1608). A member or 
associated person alleged to have committed a disciplinary violation 
may submit a written offer of settlement to the Panel, or CRO if a 
Panel is not yet been appointed, which the Panel or CRO may accept 
or reject. See ISE Mercury Rule 1609 (which incorporates by 
reference ISE Rule 1609). If the second offer of settlement is 
rejected (such decision is not subject to review), a hearing will 
proceed in accordance with ISE Mercury Rule 1606 (which incorporates 
by reference ISE Rule 1606). See also ISE Mercury Rule 1609 (which 
incorporates by reference ISE Rule 1609).
    \294\ See ISE Mercury Rule 1610 (which incorporates by reference 
ISE Rule 1610).
    \295\ See id.
    \296\ See id.
    \297\ See id.
    \298\ See id.
---------------------------------------------------------------------------

    Appeals from any determination that impacts access to ISE Mercury, 
such as termination or suspension of membership, will be instituted 
under, and governed by, the provisions in Chapter 17 of the ISE Mercury 
rules, which incorporate by reference the provisions in Chapter 17 of 
ISE rules. ISE Mercury's Chapter 17 applies to persons economically 
aggrieved by any of the following actions of ISE Mercury including, but 
not limited to: (a) Denial of an application to become a member; (b) 
barring a person from becoming associated with a member; and (c) 
limiting or prohibiting services provided by the ISE Mercury or 
services of any exchange member.\299\
---------------------------------------------------------------------------

    \299\ See ISE Mercury Rule 1700 (which incorporates by reference 
ISE Rule 1700). As noted above, ISE Mercury has entered into an RSA 
with FINRA and a FMA with ISE under which FINRA and ISE, 
respectively, will perform certain regulatory functions on behalf of 
ISE Mercury. For example, FINRA may perform some or all of the 
functions specified in Chapter 17 of ISE Mercury rules. See supra 
notes 148-149 and accompanying text. See also ISE Mercury Rule 1706 
(which incorporates by reference ISE Rule 1706).
---------------------------------------------------------------------------

    Any person aggrieved by an action of ISE Mercury within the scope 
of the Chapter 17 may file a written application to be heard within 
thirty days \300\ after such action has been taken.\301\ Applications 
for hearing and review will be referred to the Business Conduct 
Committee, which will appoint a hearing panel of no less than three 
members of such Committee.\302\ The decision of the hearing panel made 
pursuant to Chapter17 of the ISE Mercury rules is subject to review by 
the ISE Mercury Board, either on its own motion, or upon written 
request submitted by the applicant or the President of ISE 
Mercury.\303\ The review will be conducted by the ISE Mercury Board or 
a committee of the ISE Mercury Board composed of at least three 
directors.\304\
---------------------------------------------------------------------------

    \300\ An applicant may file for an extension of time within 
thirty days of ISE Mercury's action. An application for such an 
extension will be ruled upon by the Chairman of the Business Conduct 
Committee and is not subject to appeal. See ISE Mercury Rule 1701 
(which incorporates by reference ISE Rule 1701).
    \301\ See ISE Mercury Rule 1701 (which incorporates by reference 
ISE Rule 1701).
    \302\ See ISE Mercury Rule 1702 (which incorporates by reference 
ISE Rule 1702).
    \303\ See ISE Mercury Rule 1704 (which incorporates by reference 
ISE Rule 1704). The ISE Mercury Board, or a committee of the ISE 
Mercury Board, will have sole discretion to grant or deny either 
request. See id.
    \304\ See ISE Mercury Rule 1704 (which incorporates by reference 
ISE Rule 1704). The ISE Mercury Board or its designated committee 
may affirm, reverse, or modify in whole or in part, the decision of 
the hearing panel. The decision of the ISE Mercury Board or its 
designated committee will be in writing and will be final. See ISE 
Mercury Rule 1704 (which incorporates by reference ISE Rule 1704).
---------------------------------------------------------------------------

    The Commission finds that ISE Mercury's proposed disciplinary and 
oversight rules and structure, as well as its proposed process for 
persons economically aggrieved by certain ISE Mercury actions, are 
consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the 
Act \305\ in that they provide fair procedures for the disciplining of 
members and persons associated with members. The Commission further 
finds that the proposed ISE Mercury rules, which incorporate by 
reference ISE rules, are designed to provide ISE

[[Page 6083]]

Mercury with the ability to comply, and with the authority to enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Act, the rules and regulations thereunder, and 
the rules of ISE Mercury.\306\ The Commission notes that ISE Mercury's 
proposed disciplinary and oversight rules and structures are similar to 
the rules of other exchanges.\307\
---------------------------------------------------------------------------

    \305\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \306\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \307\ See, e.g., ISE Gemini Order, supra note 27; MIAX Order, 
supra note 28; and BOX Order, supra note 37.
---------------------------------------------------------------------------

F. Listing Requirements

    ISE Mercury does not intend to offer original listings when it 
commences operations. Instead, ISE Mercury will list and trade only 
standardized option contracts that are listed on other national 
securities exchanges and cleared by the Options Clearing 
Corporation.\308\ ISE Mercury's listing rules, including the criteria 
for the underlying securities of the options to be traded, incorporate 
by reference all of the listing rules of ISE.\309\
---------------------------------------------------------------------------

    \308\ See Exhibit H to the Form 1 Application.
    \309\ See ISE Mercury Rule 500 Series (which incorporates by 
reference ISE Rule 500 Series) (Securities Traded on the Exchange). 
See also ISE Gemini Rule 500 Series; MIAX Rule 400 Series; and BOX 
Rule 5000 Series.
---------------------------------------------------------------------------

    The Commission finds that ISE Mercury's proposed initial and 
continued listing rules are consistent with the Act, including Section 
6(b)(5),\310\ in that they are designed to protect investors and the 
public interest, prevent fraudulent and manipulative acts and 
practices, and promote just and equitable principles of trade. Before 
beginning operation, ISE Mercury will need to become a participant in 
the Plan for the Purpose of Developing and Implementing Procedures 
Designed to Facilitate the Listing and Trading of Standardized Options 
Submitted Pursuant to Section 11A(a)(3)(B) of the Act (``OLPP'').\311\ 
In addition, before beginning operation, ISE Mercury will need to 
become a participant in the Options Clearing Corporation.
---------------------------------------------------------------------------

    \310\ 15 U.S.C. 78f(b)(5).
    \311\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------

G. Limitation on Liability

    ISE Mercury proposes to adopt a rule providing that, in general, 
ISE Mercury will not be liable for any losses arising from the use of 
exchange facilities, systems, or equipment.\312\ The rule also states 
that ISE Mercury may compensate its members for certain identified 
losses resulting directly from the malfunction of ISE Mercury's 
physical equipment, devices and/or programming.\313\ Under the rule, 
ISE Mercury's aggregated payments for all claims on a single trading 
day would not exceed $250,000, and this amount will be allocated 
proportionally among all claims if the claims arising on a single 
trading day exceeded $250,000.
---------------------------------------------------------------------------

    \312\ See proposed Rules of ISE Mercury, Chapter 7, Rule 705, 
Exhibit B.
    \313\ NASDAQ and NYSE Arca also provide that the exchanges may 
compensate their members for certain identified losses resulting 
from the malfunction of their respective systems. See NASDAQ Rule 
4626; NYSE Arca (Options) Rule 14.2.
---------------------------------------------------------------------------

    The Commission finds that ISE Mercury's proposed rule regarding 
limitation of liability is consistent with the requirements of Section 
6(b)(5) \314\ of the Act in that it is designed to promote just and 
equitable principles of trade and to not permit unfair discrimination 
between customers, issuers, brokers, or dealers. The Commission notes 
that ISE Mercury's proposed limitation of liability is similar to the 
limitations of other exchanges, including ISE and ISE Gemini.\315\
---------------------------------------------------------------------------

    \314\ 15 U.S.C. 78f(b)(5).
    \315\ The proposed rule is identical to ISE Rule 705 and ISE 
Gemini Rule 705. See also Securities Exchange Act Release No. 57675 
(April 17, 2008), 73 FR 21996 (April 23, 2008) (noting that the 
approved ISE rule, as approved, was generally similar to NASDAQ Rule 
4626(b) and NYSE Arca Rules 14.2(b) and (c)).
---------------------------------------------------------------------------

H. Comment

    As noted above, the Commission received one comment letter 
regarding the Form 1 Application. In its letter, Wolverine recommends 
that the Commission disapprove the Form 1 Application.\316\ In 
particular, Wolverine asserts that an approval of a new options 
exchange would further fragment existing options liquidity and hinder 
best execution for market participants.\317\ Additionally, Wolverine 
argues that the creation of another options exchange would impose 
additional costs on the industry without providing a sufficient 
benefit.\318\ For example, Wolverine states that approval of a new 
options exchange would impose additional cost on the industry through 
the assessment of Options Regulatory Fees (``ORFs'').\319\
---------------------------------------------------------------------------

    \316\ See Wolverine Letter, supra note 5.
    \317\ See id.
    \318\ See id.
    \319\ See id.
---------------------------------------------------------------------------

    In response, ISE Mercury provides that the ``comment letter does 
not raise any new issues unique to the creation of ISE Mercury.'' \320\ 
The Exchange asserts that new options exchanges are necessary ``to 
provide customers with additional choices related to fees and market 
structure.'' \321\ The Exchange also highlighted that ``there are much 
fewer options exchanges in comparison to the many registered equity 
exchanges, ECNs, and ATSs, and this is partly why there continues to be 
an influx of new options exchanges.'' \322\ Finally, ISE Mercury notes 
that ORFs are applied consistently across the options industry (not 
specific to ISE Mercury) and are designed to make options regulatory 
structure stronger.\323\ The Exchange also emphasizes that if ISE 
Mercury determines to propose an ORF for its market, Wolverine and all 
other market participants will have an opportunity to comment on such 
proposal at that time.\324\
---------------------------------------------------------------------------

    \320\ See ISE Mercury Response Letter, supra note 6.
    \321\ See id.
    \322\ See id.
    \323\ See id.
    \324\ See id.
---------------------------------------------------------------------------

    The Commission believes that ISE Mercury has sufficiently addressed 
the principal concerns raised by the commenter. The Commission 
acknowledges the concerns that were raised by the commenter regarding 
possible impacts resulting from potential market fragmentation that may 
result from the approval of the Form 1 Application. However, the 
Commission also notes that the commenter did not identify any specific 
Exchange Act provision or rule or regulation thereunder that would be 
inconsistent with the approval of the Form 1 Application. Although the 
Commission continuously considers issues related to market structure--
including the issues raised by the commenter--pursuant to Sections 6 
and 19 of the Exchange Act, the Commission must grant an application 
for registration as a national securities exchange if it finds that the 
requirements of the Exchange Act and the rules and regulations 
thereunder with respect to the applicant are satisfied.\325\ For the 
reasons discussed throughout the order, the Commission believes that 
these requirements have been met. Finally, the Commission also notes 
that the commenter's concern regarding an increased ORF is not ripe for 
consideration until ISE Mercury proposes such a separate fee.
---------------------------------------------------------------------------

    \325\ See 15 U.S.C. 78f(b); 15 U.S.C. 78s(a)(1).
---------------------------------------------------------------------------

III. Exemption From Section 19(b) of the Act With Regard to ISE, CBOE, 
New York Stock Exchange LLC (``NYSE''), and FINRA Rules Incorporated by 
Reference

    ISE Mercury proposes to incorporate by reference certain ISE, CBOE, 
NYSE and FINRA rules.\326\ Thus, for certain

[[Page 6084]]

ISE Mercury rules, ISE Mercury members will comply with an ISE Mercury 
rule by complying with the referenced ISE, CBOE, NYSE or FINRA rule.
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    \326\ Specifically, ISE Mercury proposes to incorporate by 
reference the following ISE Rules: Chapter 4 (Business Conduct), 
Chapter 5 (Securities Traded on the Exchange), Chapter 6 (Doing 
Business with the Public), Chapter 10 (Closing Transactions), 
Chapter 11 (Exercises and Deliveries), Chapter 12 (Margins), Chapter 
13 (Net Capital Requirements), Chapter 14 (Records, Reports and 
Audits), Chapter 15 (Summary Suspension), Chapter 16 (Discipline), 
Chapter 17 (Hearings and Review), Chapter 18 (Arbitration), Chapter 
19 (Order Protection; Locked and Crossed Markets), Chapter 20 (Index 
Rules), Chapter 22 (Rate-Modified Foreign Currency Options Rules). 
The following rules are cross-referenced in the ISE rules: ISE Rule 
1202 (Margin Requirements) cross-references the same CBOE and NYSE 
rules that may be in effect from time to time; ISE Rule 1615 
(Disciplinary Functions) cross-references the FINRA Code of 
Procedure and ISE Rule 1800 cross-references the 12000 and 13000 
Series of the FINRA Manual and FINRA Rule 2268.
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    In connection with the proposal to incorporate ISE, CBOE, NYSE and 
FINRA rules by reference, ISE Mercury requests, pursuant to Rule 240.0-
12 under the Act,\327\ an exemption under Section 36 of the Act from 
the rule filing requirements of Section 19(b) of the Act for changes to 
the ISE Mercury rules that are effected solely by virtue of a change to 
a cross-referenced ISE, CBOE, NYSE or FINRA rule.\328\ ISE Mercury 
proposes to incorporate by reference categories of rules, rather than 
individual rules within a category, that are not trading rules. In 
addition, ISE Mercury agrees to provide written notice to its members 
whenever FINRA, ISE, CBOE or NYSE proposes a change to a cross-
referenced rule \329\ and whenever any such proposed changes are 
approved by the Commission or otherwise become effective.\330\
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    \327\ 17 CFR 240.0-12.
    \328\ See Letter from Michael Simon, General Counsel, Secretary 
and Chief Regulatory Officer, ISE Mercury, to Brent J. Fields, 
Secretary, Commission, dated June 26, 2015.
    \329\ See id.
    \330\ ISE Mercury will provide such notice through a posting on 
the same Web site location where ISE Mercury posts its own rule 
filings pursuant to Rule 19b-4 under the Act, within the required 
time frame. The Web site posting will include a link to the location 
on the FINRA, ISE, CBOE or NYSE Web site where FINRA, ISE, CBOE or 
NYSE's proposed rule change is posted. See id.
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    Using the authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\331\ The Commission is 
hereby granting ISE Mercury's request for exemption, pursuant to 
Section 36 of the Act, from the rule filing requirements of Section 
19(b) of the Act with respect to the rules that ISE Mercury proposes to 
incorporate by reference. The exemption is conditioned upon ISE Mercury 
providing written notice to ISE Mercury members whenever FINRA, ISE, 
CBOE or NYSE proposes to change an incorporated by reference rule and 
when the Commission approves any such changes. The Commission believes 
that the exemption is appropriate in the public interest and consistent 
with the protection of investors because it will promote more efficient 
use of Commission's and SROs' resources by avoiding duplicative rule 
filings based on simultaneous changes to identical rule text sought to 
be implemented by more than one SRO.
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    \331\ See, e.g., BATS Order, supra note 27, C2 Order, supra note 
159, Nasdaq Order, supra note 27, and NOM Approval Order, supra note 
154.
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IV. Conclusion

    IT IS ORDERED that the application of ISE Mercury for registration 
as a national securities exchange be, and it hereby is, granted.
    IT IS FURTHERED ORDERED that operation of ISE Mercury is 
conditioned on the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Options Trading. ISE Mercury must join: (1) The Plan for the Reporting 
of Consolidated Options Last Sale Reports and Quotation Information 
(Options Price Reporting Authority); (2) the OLPP; (3) the Linkage 
Plan; and (4) the Plan of the Options Regulatory Surveillance 
Authority.
    B. Participation in Multiparty Rule 17d-2 Plans. ISE Mercury must 
become a party to the multiparty Rule 17d-2 agreements concerning 
options sales practice regulation and market surveillance.
    C. Participation in the Options Clearing Corporation. ISE Mercury 
must become an Options Clearing Corporation participant exchange.
    D. Participation in the Intermarket Surveillance Group. ISE Mercury 
must join the Intermarket Surveillance Group.
    It is further ordered, pursuant to Section 36 of the Act,\332\ that 
ISE Mercury shall be exempted from the rule filing requirements of 
Section 19(b) of the Act with respect to the FINRA, ISE, CBOE and NYSE 
rules that ISE Mercury proposes to incorporate by reference, subject to 
the conditions specified in this order that ISE Mercury provide written 
notice to ISE Mercury members whenever FINRA, ISE, CBOE or NYSE propose 
to change an incorporated by reference rule and when the Commission 
approves any such changes.
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    \332\ 15 U.S.C. 78mm.

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02061 Filed 2-3-16; 8:45 am]
 BILLING CODE 8011-01-P