[Federal Register Volume 81, Number 183 (Wednesday, September 21, 2016)]
[Notices]
[Pages 64963-64965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78850; File No. SR-BatsEDGX-2016-33]


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

September 15, 2016.

I. Introduction

    On July 20, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') 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 adopt an 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. 78452 (August 1, 
2016), 81 FR 51951 (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 51952.
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    In its filing, EDGX adopted an ORF in the amount of $0.0002 per 
contract and proposed to assess the fee to all ``customer'' range 
options transactions cleared by Members \4\ and non-Members. 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 
EDGX 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, EDGX indicated that it would not implement 
the fee until August 1, 2016. See Notice, supra note 3, at 51953. On 
August 22, 2016, the Exchange submitted a proposed rule change to 
delay the implementation of the ORF until February 1, 2017. See 
Securities Exchange Act Release No. 78745 (September 1, 2016), 81 FR 
62185 (September 8, 2016) (SR-BatsEDGX-2016-48).
    \6\ See Notice, supra note 3, at 51951.
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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

    In its proposed rule change filing, EDGX proposed to adopt an ORF 
in the amount of $0.0002 per contract side that it would assess on 
Members and non-Members. Specifically, under the proposal, EDGX would 
assess the ORF on all options transactions that clear at the Options 
Clearing Corporation (``OCC'') in the ``customer'' range, regardless of 
the exchange on which the transaction occurs.\7\ Under the proposal, 
the ORF would apply to all Member and non-Member options transactions 
that clear at OCC in the ``customer'' range.\8\
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    \7\ See id. at 51952.
    \8\ See id.
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    In support of its proposal, the Exchange stated that applying 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 
EDGX.\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 EDGX based on a desire 
to avoid being assessed the ORF by EDGX.\10\
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    \9\ See id.
    \10\ See id.
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III. Suspension of the EDGX Proposal

    Pursuant to Section 19(b)(3)(C) of the Act,\11\ at any time within 
60 days of the 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 EDGX's proposal to assess the ORF to Member and 
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 EDGX.
    When exchanges file their proposed rule changes with the 
Commission, including fee filings like EDGX'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

[[Page 64964]]

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\ EDGX further 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 EDGX.\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 EDGX.\19\
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    \16\ See Notice, supra note 3, at 51953.
    \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 EDGX, but that 
were subsequently ``flipped'' to the account of a non-Member for 
clearing.\20\
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    \20\ See id. at 51952.
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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 EDGX is now proposing.\22\
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    \21\ See id. at 51953.
    \22\ See id. at note 16 (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 EDGX 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 change.\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 EDGX 
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 EDGX'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 consistent with 
these standards and whether EDGX 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 EDGX'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 EDGX's market, or utilize the services of a 
Member of EDGX 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, the 
Exchange notes that the ORF would be ``designed to recover a

[[Page 64965]]

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.'' \31\ 
The Commission notes, however, that the Exchange's proposed application 
of the ORF to non-Members raises concerns 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, EDGX's proposal preliminarily 
appears to apply 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\ See Notice, supra note 3, at 51952.
    \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 id. at 51952.
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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-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 Number SR-BatsEDGX-2016-33. 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 
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-BatsEDGX-2016-33 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-BatsEDGX-2016-33, 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. 2016-22657 Filed 9-20-16; 8:45 am]
 BILLING CODE 8011-01-P