[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Notices]
[Pages 51951-51954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18570]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78452; File No. SR-BatsEDGX-2016-33]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Adopt an Options Regulatory Fee

August 1, 2016.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 20, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule

[[Page 51952]]

change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Exchange has designated the proposed 
rule change as one establishing or changing a member due, fee, or other 
charge imposed by the Exchange under section 19(b)(3)(A)(ii) of the Act 
\3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposed rule 
change effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend the fee schedule applicable 
to Members \5\ and non-members of the Exchange pursuant to EDGX Rules 
15.1(a) and (c).
---------------------------------------------------------------------------

    \5\ The term ``Member'' is defined as ``any registered broker or 
dealer that has been admitted to membership in the Exchange.'' See 
Exchange Rule 1.5(n).
---------------------------------------------------------------------------

    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The Exchange proposes to modify the fee schedule applicable to the 
Exchange's options platform (``EDGX Options'') to adopt an ORF in the 
amount of $0.0002 per contract side. The per-contract ORF will be 
assessed by the Exchange to each Member and non-Member for all options 
transactions cleared by OCC in the ``customer'' range, regardless of 
the exchange on which the transaction occurs. The ORF will be collected 
indirectly from Members and non-Members through their clearing firms by 
OCC on behalf of the Exchange. The ORF will be collected indirectly 
from Members and non-Members through their clearing firms by OCC on 
behalf of EDGX Options.
    The Exchange believes it is appropriate to charge the ORF to 
transactions by Members and non-Members that clear as customer at the 
OCC, irrespective of where the transactions takes place. Many of the 
Exchange's surveillance programs for customer trading activity require 
the Exchange to look at activity across all options markets, such as 
surveillances for position limit violations, manipulation, insider 
trading, front-running and contrary exercise advice violations/expiring 
exercise declarations. Accordingly, there is a strong nexus between the 
ORF and the Exchange's regulatory activities with respect to its 
Members', as well as non-Members', customer trading activity. These 
activities span across multiple exchanges.
    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\6\ the Exchange shares information and coordinates inquiries 
and investigations with other exchanges designed to address potential 
intermarket manipulation and trading abuses. Also, the Exchange and the 
other options exchanges are required to populate a consolidated options 
audit trail (``COATS'') \7\ system in order to surveil trading 
activities across markets.
---------------------------------------------------------------------------

    \6\ ISG is an industry organization formed in 1983 to coordinate 
intermarket surveillance among the SROs by co-operatively sharing 
regulatory information pursuant to a written agreement between the 
parties. The goal of the ISG's information sharing is to coordinate 
regulatory efforts to address potential intermarket trading abuses 
and manipulations.
    \7\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
---------------------------------------------------------------------------

    The Exchange proposes to assess ORF monthly based on information 
received from the OCC regarding transactions that cleared in the 
customer range. Notably, the Exchange believes that this will help to 
alleviate confusion or even potential double-billing of customer 
transactions. In particular, by billing all customer transactions on a 
monthly basis the Exchange will be able to capture transactions that 
may have been executed on the Exchange that were submitted for clearing 
by a Member but then ``flipped'' to the account of a non-Member. Thus, 
the Exchange believes that charging the ORF to Members and non-Members 
across all markets will avoid having non-Members clear their trades 
through non-Members in order to avoid the fee and to thereby avoid 
paying for their fair share for regulation. If the ORF did not apply to 
activity across markets then a Member or non-Member would send their 
orders to the least cost, least regulated exchange. In addition, 
applying the fee to all Members' and non-Members' activity across all 
market will avoid options participants from terminating their 
membership status on or not becoming a Members of certain exchanges 
simply to avoid being assessed ORF.
    As discussed above, the ORF is designed to recover a material 
portion of the costs to the Exchange of the supervision and regulation 
of Members' and non-Member's customer options business, including 
performing routine surveillances and investigations, as well as policy, 
rulemaking, interpretive and enforcement activities. The Exchange 
believes that revenue generated from the ORF, when combined with all of 
the Exchange's other regulatory fees and fines, will cover a material 
portion, but not all, of the Exchange's regulatory costs.\8\
---------------------------------------------------------------------------

    \8\ The Exchange notes that its regulatory responsibilities with 
respect to compliance with options sales practice rules has been 
allocated to the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') under a 17d-2 Agreement. The ORF is not designed to 
cover the cost of options sales practice regulation.
---------------------------------------------------------------------------

    The Exchange will monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other regulatory fees 
and fines, does not exceed the Exchange's total regulatory costs. The 
Exchange expects to monitor its regulatory costs and revenues at a 
minimum on a semi-annual basis. If the Exchange determines regulatory 
revenues exceed or are insufficient to cover a material portion of its 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Commission. The Exchange will notify Members and 
non-Members of adjustments to the ORF at least 30 calendar days prior 
to the effective date of the change.\9\
---------------------------------------------------------------------------

    \9\ The Exchange announced its intent to charge an ORF on June 
30, 2016. See Bats Options Exchange Regulatory Fee Schedule Update 
Effective August 1, 2016 available at: http://cdn.batstrading.com/resources/fee_schedule/2016/Bats-Options-Exchange-Regulatory-Fee-Schedule-Update-Effective-August-1-2016.pdf. The semi-annual review 
and notice provisions are similar to those adopted by NYSE Arca, 
Inc. (``NYSE Arca''). See Securities Exchange Act Release No. 70500 
(September 25, 2013), 78 FR 60361 (October 1, 2013) (SR-NYSEArca-
2013-91).

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

[[Page 51953]]

    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRAs Trading Activity Fee \10\ 
and the BZX, MIAX, NYSE Amex, NYSE Arca, CBOE, PHLX, ISE and BOX ORFs. 
While the Exchange does not have all of the same regulatory 
responsibilities as FINRA, the Exchange believes that, like other 
exchanges that have adopted an ORF, its broad regulatory 
responsibilities with respect to a Member's and non-Members' 
activities, irrespective of where their transactions take place, 
support a regulatory fee applicable to transactions on other markets. 
Unlike FINRA's Trading Activity Fee, the ORF would apply only to a 
Member's and non-Member's customer options transactions.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 3402 (June 6, 2003).
---------------------------------------------------------------------------

Implementation Date
    The Exchange proposes to implement the ORF on August 1, 2016.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of section 6 of the Act.\11\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with section 6(b)(4) of the Act,\12\ in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange notes that it operates in a 
highly competitive market in which market participants can readily 
direct order flow to competing venues or providers of routing services 
if they deem fee levels to be excessive.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes the ORF is equitable and not unfairly 
discriminatory because it would be objectively allocated to Members and 
non-Members in that it would be charged to all Members and non-Members 
on all their transactions that clear as customer transactions at the 
OCC. Moreover, the Exchange believes the ORF ensures fairness by 
assessing fees to those Members and non-Members that are directly based 
on the amount of customer options business they conduct. Regulating 
customer trading activity is much more labor intensive and requires 
greater expenditure of human and technical resources than regulating 
non-customer trading activity, which tends to be more automated and 
less labor-intensive. As a result, the costs associated with 
administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Member proprietary 
transactions) of its regulatory program. In addition, the Exchange 
believes the amount of the ORF is reasonable as it is significantly 
lower than ORFs charged by other exchanges. By way of comparison, MIAX 
charges an ORF of $0.0045 per contract side,\13\ and both NYSE Arca and 
NYSE Amex charge an ORF of $0.0055 per contract side.\14\ The CBOE 
charges an ORF of $0.0081 per contract.\15\
---------------------------------------------------------------------------

    \13\ See MIAX fee schedule available at http://www.miaxoptions.com/sites/default/files/MIAX_Options_Fee_Schedule_06012016.pdf (date May 1, 2016).
    \14\ See NYSE Arca Options fee schedule available at https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf (dated June 6, 2016); and NYSE 
Amex fee schedule available at https://www.nyse.com/publicdocs/nyse/markets/amex-options/NYSE_Amex_Options_Fee_Schedule.pdf (dated June 
9, 2016).
    \15\ See CBOE fee schedule available at http://www.cboe.com/framed/pdfframed.aspx?content=/publish/feeschedule/CBOEFeeSchedule.pdf&section=SEC_RESOURCES&title=CBOE%20Fee%20Schedule
 (dated May 16, 2016).
---------------------------------------------------------------------------

    The Exchange believes applying the ORF to transactions executed or 
cleared by non-Members is equitable and not unfairly discriminatory 
because it should avoid having transactions cleared through non-Members 
in order to avoid the fee and to thereby avoid paying for their fair 
share for regulation.\16\ If the ORF did not apply to activity across 
markets then a non-Member would send their orders to the least cost, 
least regulated exchange. In addition, applying the fee to all Members' 
and non-Members' activity across all market will avoid options 
participants from terminating their membership status on or not 
becoming a Members of certain exchanges simply to avoid being assessed 
ORF. Moreover, the Exchange believes the ORF ensures fairness by 
assessing fees to those Members and non-Members that are directly based 
on the amount of customer options business they conduct.
---------------------------------------------------------------------------

    \16\ Despite rule text to the contrary, the Exchange believes 
based on conversations with market participants that other options 
exchanges currently charge an ORF on all options transactions 
cleared by the OCC in the customer range regardless of whether they 
are executed or cleared by their member.
---------------------------------------------------------------------------

    The Exchange also believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions by a non-Member 
regardless of the exchange on which the transactions occur. The 
Exchange has a statutory obligation to enforce compliance by Members 
and their associated persons under the Act and the rules of the 
Exchange and cannot effectively surveil for manipulative conduct by 
market participants (including non-Members) trading on the Exchange 
without looking at and evaluating activity across all options markets. 
Many of the Exchange's market surveillance programs require the 
Exchange to look at and evaluate activity across all options markets, 
such as surveillance for position limit violations, manipulation, 
front-running and contrary exercise advice violations/expiring exercise 
declarations.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Members' and non-Members' customer options 
business including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. The Exchange will monitor, on 
at least a semi-annual basis the amount of revenue collected from the 
ORF to ensure that it, in combination with its other regulatory fees 
and fines, does not exceed the Exchange's total regulatory costs. If 
the Exchange determines regulatory revenues exceed or are insufficient 
to cover a material portion of its regulatory costs, the Exchange will 
adjust the ORF by submitting a fee change filing to the Commission. The 
Exchange will notify Members and non-Members of adjustments to the ORF 
via regulatory circular.
    The Exchange has designed the ORF to generate revenues that, when 
combined with all of the Exchange's other regulatory fees, will be less 
than or equal to the Exchange's regulatory costs, which is consistent 
with the Commission's view that regulatory fees be used for regulatory 
purposes and not to support the Exchange's business side. In this 
regard, the Exchange believes that the initial level of the fee is 
reasonable.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The ORF is not intended to have 
any impact on competition. Rather, it is designed to

[[Page 51954]]

enable the Exchange to recover a material portion of the Exchange's 
cost related to its regulatory activities. The proposed ORF is also 
comparable to, and in most instances less than, ORF fees charged by 
other options exchanges. Further, the expansion of ORF to non-Members 
is also not designed to have an impact on competition as the Exchange 
believes based on conversations from market participants that it is 
consistent with the practice by other exchanges in applying ORF to non-
Member transactions, despite rule text to the contrary.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 
thereunder.\18\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-BatsEDGX-2016-33 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-BatsEDGX-2016-33. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BatsEDGX-2016-33, and should be 
submitted on or before August 26, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18570 Filed 8-4-16; 8:45 am]
 BILLING CODE 8011-01-P