[Federal Register Volume 81, Number 183 (Wednesday, September 21, 2016)]
[Notices]
[Pages 64960-64963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22656]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78849; File No. SR-BatsBZX-2016-42]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; 
Suspension of and Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Modify the Options 
Regulatory Fee

September 15, 2016.

I. Introduction

    On July 20, 2016, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the Options Regulatory Fee (``ORF'').\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78453 (August 1, 
2016), 81 FR 51954, 51955 (August 5, 2016) (``Notice''). The ORF is 
designed to recover a material portion of the costs to the Exchange 
for the supervision and regulation of Members' customer options 
activity. The Exchange has committed to 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. See id. at 51955.
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    In its filing, BZX proposed to amend the amount of its ORF and 
expand its application to non-Members.\4\ The proposed rule change was 
immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.\5\ The Commission published notice of 
filing of the proposed rule change in the Federal Register on August 5, 
2016.\6\ To date, the Commission has not received any comment letters 
on the Exchange's proposed rule change.
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    \4\ The term ``Member'' refers to ``any registered broker or 
dealer that has been admitted to membership in the Exchange.'' See 
BZX Rule 1.5(n).
    \5\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take 
effect upon filing with the Commission if it is designated by the 
exchange as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization on any person, whether 
or not the person is a member of the self-regulatory organization.'' 
15 U.S.C. 78s(b)(3)(A)(ii). Although the proposed rule change was 
effective upon filing, BZX indicated that it would not implement the 
fee until August 1, 2016. See Notice, supra note 3, at 51955. On 
August 22, 2016, the Exchange submitted a proposed rule change to 
delay the implementation of the modified ORF until February 1, 2017. 
See Securities Exchange Act Release No. 78746 (September 1, 2016), 
81 FR 62225 (September 8, 2016) (SR-BatsBZX-2016-52).
    \6\ See Notice, supra note 3, at 51954.
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    Pursuant to Section 19(b)(3)(C) of the Act, the Commission is 
hereby: (1) Temporarily suspending the proposed rule change; and (2) 
instituting proceedings to determine whether to approve or disapprove 
the proposal.

II. Summary of the Proposed Rule Change

    Previously, BZX assessed a per-contract ORF on each Member for all 
``customer'' range options transactions executed or cleared by the 
Member, regardless of the exchange on which the transaction 
occurred.\7\ In BatsBZX-2016-42, BZX proposed to lower the amount of 
the ORF from $0.0010 to $.0008 per contract side and also expanded its 
application to non-Members. Specifically, BZX proposed to modify and 
expand the application of its ORF to include all options transactions 
of any Member or non-Member, regardless of the exchange on which such 
transaction occurs, that clear at the Options Clearing Corporation 
(``OCC'') in the ``customer'' range.\8\
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    \7\ See id. at 51955.
    \8\ See id. Previously, BZX applied the ORF ``to each Member for 
all options transactions executed and cleared, or simply cleared by 
the Member . . . .'' As proposed, BZX deleted the reference to 
``executed'' and instead applied the ORF to all trades from any 
Member or non-Member that clears in the ``customer'' range.
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    In support of its proposal, the Exchange stated that expanding the 
application of the ORF to non-Members would remove an incentive for 
Members to clear their trades through non-Members to avoid the 
obligation to pay the ORF to BZX.\9\ The Exchange further stated that 
applying the ORF to Member and non-Member customer transactions would 
prevent options market participants from avoiding becoming a Member of 
BZX based on a desire to avoid being assessed the ORF by BZX.\10\
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    \9\ See id.
    \10\ See id.
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III. Suspension of the BZX Proposal

    Pursuant to Section 19(b)(3)(C) of the Act,\11\ at any time within 
60 days of the

[[Page 64961]]

date of filing of an immediately effective proposed rule change 
pursuant to Section 19(b)(1) of the Act,\12\ the Commission summarily 
may temporarily suspend the change in the rules of a self-regulatory 
organization made thereby 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.
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    \11\ 15 U.S.C. 78s(b)(3)(C).
    \12\ 15 U.S.C. 78s(b)(1).
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    The Commission believes it is appropriate in the public interest to 
temporarily suspend BZX's proposal to assess the ORF to non-Member 
customer transactions and solicit comment on and evaluate further 
whether it is consistent with the Act and the rules and regulations 
thereunder that are applicable to BZX.
    When exchanges file their proposed rule changes with the 
Commission, including fee filings like BZX's present proposal, they are 
required to provide a statement supporting the proposal's basis under 
the Act and the rules and regulations thereunder applicable to the 
exchange.\13\ The instructions to Form 19b-4, on which exchanges file 
their proposed rule changes, specify that such statement ``should be 
sufficiently detailed and specific to support a finding that the 
proposed rule change is consistent with [those] requirements . . . .'' 
\14\
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    \13\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \14\ See id.
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    Among other things, exchange proposed rule changes are subject to 
Section 6 of the Act, including Section 6(b)(4), which requires the 
rules of an exchange to ``provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities,'' and Section 6(b)(5), which 
requires the rules of an exchange to, among other things, be ``not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers . . . .'' \15\
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    \15\ 15 U.S.C. 78f(b)(4) and (5), respectively.
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    In justifying its proposal, the Exchange stated in its filing that 
its proposal is reasonable because the ORF supports the Exchange's 
market surveillance programs that evaluate activity across all options 
markets.\16\ BZX stated that it analyzes all options market activity in 
order to effectively meet its statutory obligation to enforce 
compliance by Members and their associated persons with the Act and the 
rules of the Exchange.\17\ The Exchange also argued that the proposed 
rule change is equitable and not unfairly discriminatory because it 
would avoid market participants clearing their transactions through 
non-Members in order to avoid paying an ORF to BZX.\18\ The Exchange 
further stated that applying the fee to both Member and non-Member 
activity will eliminate an incentive for options market participants to 
make exchange membership decisions based on a desire to avoid paying 
the ORF to BZX.\19\
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    \16\ See Notice, supra note 3, at 51956.
    \17\ See id.
    \18\ See id.
    \19\ See id.
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    The Exchange also stated that assessing an ORF on non-Members will 
allow it to charge an ORF on transactions that were initially submitted 
for clearing to a clearing broker that is a Member of BZX, but that 
were subsequently ``flipped'' to the account of a non-Member for 
clearing.\20\
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    \20\ See id. at 51955.
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    Finally, the Exchange noted that it has heard allegations from 
market participants that some options exchanges may also assess an ORF 
on all options transactions cleared by OCC in the customer range 
regardless of whether such transactions are executed or cleared by an 
exchange Member.\21\ The Commission notes, however, that no rules 
presently maintained by any exchange currently apply the ORF to non-
Members in the manner that BZX is now proposing.\22\
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    \21\ See id. at 51956.
    \22\ See id. at note 15 (noting that no options exchange's 
current rule text applies in such a manner).
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    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether assessing the ORF on transactions 
of non-Members--where no BZX Member executed or cleared the trade--is 
consistent with the statutory requirements applicable to a national 
securities exchange under the Act. In particular, the Commission will 
consider whether the proposed rule change satisfies the standards under 
the Act and the rules thereunder requiring, among other things, that an 
exchange's rules provide for the equitable allocation of reasonable 
fees among members, issuers, and other persons using its facilities; 
not permit unfair discrimination between customers, issuers, brokers or 
dealers; and do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\23\
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    \23\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule changes.\24\
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    \24\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the BZX 
Proposal

    In addition to temporarily suspending the proposal, the Commission 
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) 
\25\ and 19(b)(2) of the Act \26\ to determine whether the Exchange's 
proposed rule change should be approved or disapproved. Further, 
pursuant to Section 19(b)(2)(B) of the Act,\27\ the Commission is 
hereby providing notice of the grounds for disapproval under 
consideration. The Commission believes it is appropriate to institute 
disapproval proceedings at this time in view of the significant legal 
and policy issues raised by the proposal. Institution of disapproval 
proceedings does not indicate, however, that the Commission has reached 
any conclusions with respect to the issues involved.
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    \25\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \26\ 15 U.S.C. 78s(b)(2).
    \27\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding, or if the 
exchange consents to the longer period. See id.
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    As discussed above, pursuant to BZX's proposal, the Exchange would 
assess the ORF on Members and non-Members for all of their transactions 
cleared at OCC in the ``customer'' range. As noted above, the Act and 
the rules thereunder require that an exchange's rules, among other 
things, provide for the equitable allocation of reasonable fees among 
members, issuers, and other persons using its facilities; not permit 
unfair discrimination between customers, issuers, brokers or dealers; 
and not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of the Act. The Commission solicits 
comment on whether the Exchange's ORF fee proposal is

[[Page 64962]]

consistent with these standards and whether BZX has sufficiently met 
its burden in presenting a statutory analysis of how its proposal meets 
these standards.
    In particular, the grounds for possible disapproval under 
consideration include whether BZX's proposal is consistent with the 
following sections of the Act:
     Section 6(b)(4) of the Act, which requires that the rules 
of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities;'' \28\
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    \28\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act, which requires, among other 
things, that the rules of a national securities exchange not be 
``designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers;'' \29\ and
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    \29\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act, which requires that the rules 
of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of [the Act].'' \30\
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    \30\ 15 U.S.C. 78f(b)(8).
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    In particular, the Commission is considering whether a sufficient 
regulatory nexus exists between the Exchange and a non-Member to 
justify imposition of the ORF on such non-Member. If a non-Member does 
not execute a trade on BZX's market, or utilize the services of a 
Member of BZX to either execute the trade on another market or clear 
the trade, then the non-Member would not be utilizing the facilities of 
the exchange or the services of a Member of the Exchange. Further, when 
it initially adopted an ORF, the Exchange noted that the ORF would be 
``designed to recover a material portion of the costs to the Exchange 
of the supervision and regulation of Members' customer options 
business, including performing routine surveillances and 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities'' \31\ (emphasis added). The Commission notes, 
however, that the Exchange's proposed expansion of the ORF to non-
Members deviates from this principle in that the exercise of an 
exchange's regulatory jurisdiction and the application of its fee 
schedule is generally confined to the exchange's Members and persons 
using its facilities.\32\ In other words, BZX's proposal preliminarily 
appears to expand a fee that is specifically designed to fund the 
exchange's regulatory operations in part, by assessing the fee to a 
class of person over whom the Exchange does not have any direct 
regulatory responsibility or jurisdiction and who have not directly or 
indirectly accessed the Exchange's facilities or utilized the services 
of a Member of the Exchange. Accordingly, the proposal's application of 
the ORF to non-Members who do not use the facilities of the Exchange or 
the services of a Member of the Exchange may prevent the Commission 
from making a finding that the proposal is consistent with the Act and 
the rules and regulations thereunder.\33\
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    \31\ Securities Exchange Act Release No. 74214 (February 5, 
2015), 80 FR 7665 (February 11, 2015) (File No. SR-BATS-2015-08).
    \32\ See, e.g., Section 6(b)(4), which addresses fees that an 
exchange charges ``among its members and issuers and other persons 
using its facilities.'' 15 U.S.C. 78f(b)(4).
    \33\ See 15 U.S.C. 78s(b)(2)(C)(ii) (setting forth the standard 
for disapproval of a proposed rule change as follows: ``The 
Commission shall disapprove a proposed rule change of a self-
regulatory organization if it does not make a finding described in 
clause (i).''). Section 19(b)(2)(C)(i) provides that ``[t]he 
Commission shall approve a proposed rule change of a self-regulatory 
organization if it finds that such proposed rule change is 
consistent with the requirements of [the Act] and the rules and 
regulations issued under [the Act] that are applicable to such 
organization.''
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by October 12, 2016. 
Rebuttal comments should be submitted by October 26, 2016. The 
Commission asks that commenters address the sufficiency and merit of 
the Exchange's statements in support of the proposal, which are set 
forth in the Notice,\34\ in addition to any other comments they may 
wish to submit about the proposed rule change. In particular, the 
Commission seeks comment on the following:
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    \34\ See Notice, supra note 3.
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     Commenters' views on the appropriateness of an options 
exchange assessing an ORF on options transactions executed at an away 
market that are cleared by OCC in the ``customer'' range that are 
neither executed, nor cleared, by a Member of the exchange assessing 
the ORF;
     Commenters' views on the Exchange's assertion that ``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.'' \35\;
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    \35\ See Notice, supra note 3, at 51955.
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     Commenters' views on the Exchange's argument that ``[i]f 
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 [sic] will avoid options participants from 
terminating their membership status on or not becoming a [sic] Members 
of certain exchanges simply to avoid being assessed [sic] ORF.'' \36\;
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    \36\ See id.
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     Whether any other options exchange is currently assessing 
an ORF on non-Members for their options transactions that are cleared 
by OCC in the ``customer'' range in contravention to a stated rule of 
such exchange; and
     Finally, whether any options exchange currently assesses 
an ORF on a clearing member that does not ultimately clear a customer 
transaction, but merely transfers it to the account of a non-Member for 
clearance and settlement, and, if so, whether doing so is consistent 
with the current ORF rule text of such options exchange.
    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule changes, 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 Number SR-BatsBZX-2016-42 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2016-42. The 
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

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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 such 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 publicly available. All 
submissions should refer to File Number SR-BatsBZX-2016-42 and should 
be submitted on or before October 12, 2016. Rebuttal comments should be 
submitted by October 26, 2016.

VI. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\37\ that File No. SR-BatsBZX-2016-42, be and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \37\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(57) and (58).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22656 Filed 9-20-16; 8:45 am]
 BILLING CODE 8011-01-P