[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37955-37958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17049]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81344; File No. SR-NASDAQ-2017-068]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Revise the NASDAQ Options Market LLC Rules Regarding 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, The NASDAQ Stock Market LLC (``Nasdaq'' 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 The NASDAQ Options Market LLC 
(``NOM'') Rules at Chapter XV, Section 5 to: (i) Make adjustments to 
the amount of its Options Regulatory Fee (``ORF''); and (ii) more 
closely reflect the manner in which NOM assesses and collects its ORF.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments [sic] become operative on August 
1, 2017.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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
    NOM initially filed to establish its ORF in 2011.\3\ The Exchange 
has amended its ORF several times since the inception of this fee.\4\ 
At this time, the Exchange proposes to: (i) Amend the amount of its 
ORF; and (ii) revise NOM's Rules at Chapter XV, Section 5 to more 
closely reflect the manner in which NOM assesses and collects its ORF.
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    \3\ See Securities Exchange Act Release No. 65913 (December 8, 
2011), 76 FR 77883 (December 14, 2011) (SR-NASDAQ-2011-163) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Options Regulatory Fee).
    \4\ See Securities Exchange Act Release Nos. 76950 (January 21, 
2016), 81 FR 4687 January 27, 2016)(SR-NASDAQ-2016-003); and 78360 
(July 19, 2016), 81 FR 48475 (July 25, 2016) (SR-NASDAQ-2016-096).
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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.
Proposal 1--Amend the Amount of the ORF
    The Exchange assesses an ORF of $0.0021 per contract side. The 
Exchange proposes to increase the ORF from $0.0021 per contract side to 
$0.0027 per contract side as of August 1, 2017 to account for a 
reduction in market volume. The Exchange's proposed change to the ORF 
should balance the Exchange's regulatory cost [sic] against the 
anticipated revenue. The Exchange regularly reviews its ORF to ensure 
that the ORF, in combination with its other regulatory fees and fines, 
does not exceed regulatory costs. The Exchange believes this adjustment 
will permit the Exchange to cover a material portion of its regulatory 
costs, while not exceeding regulatory costs.
    The Exchange notified its Participants of this ORF adjustment 
thirty (30) calendar days prior to the proposed operative date.\5\
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    \5\ See Options Trader Alert #2017-54.
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Proposal 2--Reflect the Manner in Which NOM Assesses and Collects Its 
ORF
    Currently, NOM assesses its ORF for each Customer option 
transaction that is either: (1) Executed by a Participant on NOM; or 
(2) cleared by a NOM Participant at The Options Clearing Corporation 
(``OCC'') in the Customer range,\6\ even if the transaction was 
executed by a non-member of NOM, regardless of the exchange on which 
the transaction occurs.\7\ If the OCC clearing member is a NOM 
Participant, 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 NOM Participant, ORF is collected only on the cleared 
Customer contracts executed at NOM, taking into account any CMTA 
instructions which may result in collecting the ORF from a non-member.
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    \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.
    \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.
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    By way of example, if Broker A, a NOM Participant, routes a 
Customer

[[Page 37956]]

order to CBOE and the transaction executes on CBOE and clears in Broker 
A's OCC Clearing account, ORF will be collected by NOM from Broker A's 
clearing account at OCC via direct debit. While this transaction was 
executed on a market other than NOM, it was cleared by a NOM 
Participant in the Participant's OCC clearing account in the Customer 
range, therefore there is a regulatory nexus between NOM and the 
transaction. If Broker A was not a NOM Participant, then no ORF should 
be assessed and collected because there is no nexus; the transaction 
did not execute on NOM nor was it cleared by a NOM Participant.
    In the case where a Participant both executes a transaction and 
clears the transaction, the ORF is assessed to and collected from the 
Participant only once. In the case where a Participant executes a 
transaction and a different Participant clears the transaction, the ORF 
is assessed to and collected from the Participant who clears the 
transaction and not the Participant who executes the transaction. In 
the case where a non-member executes a transaction at an away market 
and a Participant clears the transaction, the ORF is assessed to and 
collected from the Participant who clears the transaction. In the case 
where a Participant executes a transaction on NOM and a non-member 
clears the transaction, the ORF is assessed to the Participant that 
executed the transaction and collected from the non-member who cleared 
the transaction. In the case where a Participant executes a transaction 
at an away market and a non-member clears the transaction, the ORF is 
not assessed to the Participant 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 Participant 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 Nasdaq'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 Participants, 
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 
Chapter XV, Section 5 to remove certain rule text and include new text 
to make clear the manner in which ORF is assessed and collected on NOM.
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.
Proposal 1--Amend the Amount of the ORF
    The Exchange believes that increasing the ORF from $0.0021 per 
contract side to $0.0027 per contract side as of August 1, 2017 is 
reasonable because the Exchange's collection of ORF needs to be 
balanced against the amount of regulatory cost collected [sic] by the 
Exchange. The Exchange believes that the proposed adjustments noted 
herein will serve to balance the Exchange's regulatory cost against the 
anticipated regulatory revenue. The Exchange regularly reviews its ORF 
to ensure that the ORF, in combination with its other regulatory fees 
and fines, does not exceed regulatory costs.
    The Exchange believes that increasing the ORF from $0.0021 per 
contract side to $0.0027 per contract side as of August 1, 2017 is 
equitable and not unfairly discriminatory because this modest increase 
will serve to balance the Exchange's regulatory revenue against the 
anticipated regulatory costs. The ORF seeks to recover the costs of 
supervising and regulating members, including performing routine 
surveillances, investigations, examinations, financial monitoring, and 
policy, rulemaking, interpretive, and enforcement activities.
    Moreover, the Exchange believes the ORF ensures fairness by 
assessing fees to those Participants 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. Participant proprietary transactions) of its 
regulatory program.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Participants' Customer options business 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. 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 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

[[Page 37957]]

that the proposed amount of the fee is reasonable.
Proposal 2--Reflect the Manner in Which NOM 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 Participants 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 Participant'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 Participant 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 Participant'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 NOM 
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 NOM from Exchange 
clearing members for all Customer transactions they clear or from non-
members for all Customer transactions they clear that were executed on 
NOM. 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 technical resources than 
regulating non-Customer trading activity. Surveillance, regulation and 
examination of non-Customer trading activity generally 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-NASDAQ-2017-068 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-NASDAQ-2017-068. 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

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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-NASDAQ-2017-068, 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. 2017-17049 Filed 8-11-17; 8:45 am]
 BILLING CODE 8011-01-P