[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37964-37966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17048]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81343; File No. SR-Phlx-2017-54]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Pricing Schedule With Respect to the Options Regulatory Fee

August 8, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 26, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to revise Section IV, Part D of the Pricing 
Schedule to more closely reflect the manner in which Phlx assesses and 
collects its Options Regulatory Fee (``ORF'').
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 aspects of such 
statements.

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

1. Purpose
    Phlx initially filed to establish its ORF in 2009.\3\ The Exchange 
has amended its ORF several times since the inception of this fee.\4\ 
At this time, the Exchange proposes to revise Section IV, Part D of the 
Pricing Schedule to more closely reflect the manner in which Phlx 
assesses and collects its ORF.
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    \3\ See Securities Exchange Act Release No. 61133 (December 9, 
2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-100) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to an Options Regulatory Fee).
    \4\ See Securities Exchange Act Release Nos. 61529 (February 17, 
2010), 75 FR 8421 (February 24, 2010) (SR-Phlx-2010-17); 62619 (July 
30, 2010), 75 FR 47874 (August 9, 2010) (SR-Phlx-2010-100); 63436 
(December 6, 2010), 75 FR 77021 (December 10, 2010) (SR-Phlx-2010-
166); 65897 (December 6, 2011), 76 FR 77277 (December 12, 2011) (SR-
Phlx-2011-163); 66664 (March 27, 2012), 77 FR 19743 (April 2, 2012) 
(SR-Phlx-2012-36); 71569 (February 19, 2014), 79 FR 10593 (February 
25, 2014) (SR-Phlx-2014-12); 75749 (August 21, 2015), 80 FR 52073 
(August 27, 2017) (SR-Phlx-2015-71); 77032 (February 2, 2016), 81 FR 
6560 (February 8, 2016) (SR-Phlx-2016-04); and 79751 (January 6, 
2017), 82 FR 3826 (January 12, 2017) (SR-Phlx-2017-02).
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    The Exchange supports a common approach for the assessment and 
collection of ORF among the various options exchanges that assess such 
a fee. Furthermore, the Exchange supports guidance from the Commission 
regarding regulatory cost structures to ensure equal knowledge and 
treatment among options markets assessing ORF.
    The Exchange assesses an ORF of $0.0045 per contract side. This 
proposed rule change does not seek to amend the amount of the ORF. 
Currently, Phlx assesses its ORF for each Customer option transaction 
that is either: (1) Executed by a member \5\ on Phlx; or (2) cleared by 
a Phlx member at The Options Clearing Corporation (``OCC'') in the 
Customer range,\6\ even if the transaction was executed by a non-member 
of Phlx, regardless of the exchange on which the transaction occurs.\7\ 
If the OCC clearing member is a Phlx member, ORF is assessed and 
collected on all cleared Customer contracts (after adjustment for CMTA 
\8\); and (2) if the OCC clearing member is not a Phlx member, ORF is 
collected only on the cleared Customer contracts executed at Phlx, 
taking into account any CMTA instructions which may result in 
collecting the ORF from a non-member.
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    \5\ For purposes of this filing the term ``member'' shall mean 
either a ``member'' or a ``member organization.''
    \6\ Exchange Rules require each member to record the appropriate 
account origin code on all orders at the time of entry in order to 
allow the Exchange to properly prioritize and route orders and 
assess transaction fees pursuant to the Rules of the Exchange and 
report resulting transactions to OCC. The Exchange represents that 
it has surveillances in place to verify that members mark orders 
with the correct account origin code.
    \7\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \8\ CMTA or Clearing Member Trade Assignment is a form of 
``give-up'' whereby the position will be assigned to a specific 
clearing firm at OCC. Phlx Rule 1052 provides that every Clearing 
Member is responsible for the clearance of the Exchange options 
transactions of such Clearing Member and of each member who gives up 
the name of such Clearing Member in an Exchange options transaction, 
provided the Clearing Member has authorized such member to give up 
its name with respect to Exchange options transactions.
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    By way of example, if Broker A, a Phlx member, routes a Customer 
order to CBOE and the transaction executes on CBOE and clears in Broker 
A's OCC Clearing account, ORF will be collected by Phlx from Broker A's 
clearing account at OCC via direct debit. While this transaction was 
executed on a market other than Phlx, it was cleared by a Phlx member 
in the member's OCC clearing account in the Customer range, therefore 
there is a regulatory nexus between Phlx and the transaction. If Broker 
A was not a Phlx member, then no ORF should be assessed and collected 
because there is no nexus; the

[[Page 37965]]

transaction did not execute on Phlx nor was it cleared by a Phlx 
member.
    In the case where a member both executes a transaction and clears 
the transaction, the ORF is assessed to and collected from the member 
only once. In the case where a member executes a transaction and a 
different member clears the transaction, the ORF is assessed to and 
collected from the member who clears the transaction and not the member 
who executes the transaction. In the case where a non-member executes a 
transaction at an away market and a member clears the transaction, the 
ORF is assessed to and collected from the member who clears the 
transaction. In the case where a member executes a transaction on Phlx 
and a non-member clears the transaction, the ORF is assessed to the 
member that executed the transaction and collected from the non-member 
who cleared the transaction. In the case where a member executes a 
transaction at an away market and a non-member clears the transaction, 
the ORF is not assessed to the member who executed the transaction or 
collected from the non-member who cleared the transaction because the 
Exchange does not have access to the data to make absolutely certain 
that ORF should apply. Further, the data does not allow the Exchange to 
identify the member executing the trade at an away market.
ORF Revenue and Monitoring of ORF
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a regulatory cost, the Exchange reviews all costs and makes 
determinations if there is a nexus between the expense and a regulatory 
function. For example, a cost related to PSX, the Exchange's equity 
platform, would not be considered an expense that is compared to ORF 
revenue. An options surveillance employee's cost, however would be an 
expense that is compared to ORF revenue. The Exchange notes that fines 
collected by the Exchange in connection with a disciplinary manner 
offset ORF.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its members, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and 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, will cover a 
material portion, but not all, of the Exchange's regulatory costs. The 
Exchange will continue 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 regulatory costs. If the Exchange 
determines regulatory revenues exceed regulatory costs, the Exchange 
will adjust the ORF by submitting a fee change filing to the 
Commission.
    Finally, the Exchange notes that it is amending its rule text at 
Section IV, Part D to remove outdated rule text and include new rule 
text to make clear the manner in which ORF is assessed and collected on 
Phlx.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act\10\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using its facility and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes the proposed clarifications in the Fee 
Schedule to the ORF further the objectives of Section 6(b)(4) of the 
Act and are equitable and reasonable since they expressly describe the 
Exchange's existing practices regarding the manner in which the 
Exchange assesses and collects its ORF.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions 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 to surveil for 
other manipulative conduct by market participants (including non-
members) trading on the Exchange. The Exchange cannot effectively 
surveil for such conduct 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 Exchange, because it 
lacks access to information on the identity of the entering firm for 
executions that occur on away markets, believes it is appropriate to 
assess the ORF on its member's clearing activity, based on information 
the Exchange receives from OCC, including for away market activity. 
Among other reasons, doing so better and more accurately captures 
activity that occurs away from the Exchange over which the Exchange has 
a degree of regulatory responsibility. In so doing, the Exchange 
believes that assessing ORF on member clearing firms in certain 
instances equitably distributes the collection of ORF in a fair and 
reasonable manner. Also, the Exchange and the other options exchanges 
are required to populate a consolidated options audit trail (``COATS'') 
\11\ system in order to surveil a member's activities across 
markets.\12\
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    \11\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
    \12\ 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''), the Exchange shares information and 
coordinates inquiries and investigations with other exchanges 
designed to address potential intermarket manipulation and trading 
abuses. The Exchange's participation in ISG helps it to satisfy the 
requirement that it has coordinated surveillance with markets on 
which security futures are traded and markets on which any security 
underlying security futures are traded to detect manipulation and 
insider trading. See Section 6(h)(3)(I) of the Act. 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.
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    The Exchange believes that assessing the ORF to each Exchange 
member for options transactions cleared by OCC in the Customer range 
where the execution occurs on another exchange and is cleared by a Phlx 
member is an equitable allocation of reasonable dues, fees, and other 
charges among its members and issuers and other persons using its 
facilities. The ORF is collected by OCC on behalf of Phlx from Exchange 
clearing members for all Customer transactions they clear or from non-
members for all Customer transactions they clear that were executed on 
Phlx. The Exchange believes that this collection practice is reasonable 
and appropriate because higher fees are assessed to those members that 
require more Exchange regulatory services based on the amount of 
Customer options business they conduct.
    Regulating Customer trading activity is more labor intensive and 
requires greater expenditure of human and

[[Page 37966]]

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 anticipated to be typically 
higher than the costs associated with administering the non-Customer 
component of its regulatory program. The Exchange proposes assessing 
higher fees to those members that will require more Exchange regulatory 
services based on the amount of Customer options business they conduct. 
Additionally, the dues and fees paid by members go into the general 
funds of the Exchange, a portion of which is used to help pay the costs 
of regulation. The Exchange has in place a regulatory structure to 
surveil, conduct examinations and monitor the marketplace for 
violations of Exchange Rules. The ORF assists the Exchange to fund the 
cost of this regulation of the marketplace.

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 enable the 
Exchange to recover a material portion of the Exchange's cost related 
to its regulatory activities. The Exchange is obligated to ensure that 
the amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

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

    No written comments were either solicited or received.

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)(ii) of the Act.\13\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

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-Phlx-2017-54 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-Phlx-2017-54. 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-Phlx-2017-54, and should be 
submitted on or before September 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17048 Filed 8-11-17; 8:45 am]
 BILLING CODE 8011-01-P