[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Notices]
[Pages 35169-35172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15469]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86390; File No. SR-NYSEArca-2019-49]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the NYSE
Arca Options Fee Schedule by Revising the Options Regulatory Fee
July 16, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 2, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 amend the NYSE Arca Options Fee Schedule
(``Fee Schedule'') by revising the Options Regulatory Fee (``ORF''),
effective August 1, 2019. The proposed rule change is available on the
Exchange's website at www.nyse.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 self-regulatory organization
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 those 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.
[[Page 35170]]
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 amend the Fee Schedule to revise the
amount of the ORF, effective August 1, 2019. Specifically, to respond
to increased options transaction volumes in 2018, which reverted (in
part) in the first half of 2019, the Exchange proposes to lower the ORF
to $0.0054 (from $0.0055) per contract side for the remainder of 2019.
Background
As a general matter, the Exchange may only use regulatory funds
such as ORF ``to fund the legal, regulatory, and surveillance
operations'' of the Exchange.\4\ More specifically, the ORF is designed
to recover a material portion, but not all, of the Exchange's
regulatory costs for the supervision and regulation of OTP Holders and
OTP Firms (the ``OTP Regulatory Costs''). The majority of the OTP
Regulatory Costs are direct expenses, such as the costs related to in-
house staff, third-party service providers, and technology. The direct
expenses support the day-to-day regulatory work relating to the OTP
Holders or OTP Firms, including surveillance, investigation,
examinations and enforcement. Such direct expenses represent
approximately 91% of the Exchange's total OTP Regulatory Costs. The
indirect expenses include human resources and other administrative
costs.
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\4\ The Exchange considers surveillance operations part of
regulatory operations. The limitation on the use of regulatory funds
also provides that they shall not be distributed. See Bylaws of NYSE
Arca, Inc., Art. II, Sec. 2.06.
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The ORF is assessed on OTP Holders or OTP Firms for options
transactions that are cleared by the OTP Holder or OTP Firm through the
Options Clearing Corporation (``OCC'') in the Customer range regardless
of the exchange on which the transaction occurs.\5\ All options
transactions must clear via a clearing firm and such clearing firms can
then choose to pass through all, a portion, or none of the cost of the
ORF to its customers, i.e., the entering firms. Because the ORF is
collected from OTP Holder or OTP Firm clearing firms by the OCC on
behalf of NYSE Arca,\6\ the Exchange believes that using options
transactions in the Customer range serves as a proxy for how to
apportion regulatory costs among such OTP Holders or OTP Firms. In
addition, the Exchange notes that the regulatory costs relating to
monitoring OTP Holders or OTP Firms with respect to Customer trading
activity are generally higher than the regulatory costs associated with
OTP Holders or OTP Firms that do not engage in Customer trading
activity, which tends to be more automated and less labor-intensive. By
contrast, regulating OTP Holders or OTP Firms that engage in Customer
trading activity is generally more labor intensive and requires a
greater expenditure of human and technical resources as the Exchange
needs to review not only the trading activity on behalf of Customers,
but also the OTP Holder's or OTP Firm's relationship with its Customers
via more labor-intensive exam-based programs.\7\ 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., OTP
Holder or OTP Firm proprietary transactions) of its regulatory program.
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\5\ See Fee Schedule, NYSE Arca GENERAL OPTIONS and TRADING
PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee
(``ORF''), available here, https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf.
\6\ See id. The Exchange uses reports from OCC when assessing
and collecting the ORF. The ORF is not assessed on outbound linkage
trades. An OTP Holder or OTP Firm is not assessed the fee until it
has satisfied applicable technological requirements necessary to
commence operations on NYSE Arca. See id.
\7\ The Exchange notes that 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 and other options SROs are parties to a 17d-2 agreement
allocating among the SROs regulatory responsibilities relating to
compliance by the common members with rules for expiring exercise
declarations, position limits, OCC trade adjustments, and Large
Option Position Report reviews. See, e.g., Securities Exchange Act
Release No. 61588 (February 25, 2010).
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ORF Revenue and Monitoring of ORF
Exchange rules establish that the Exchange may only increase or
decrease the ORF semi-annually, that any such fee change will be
effective on the first business day of February or August, and that
market participants must be notified of any such change via Trader
Update at least 30 calendar days prior to the effective date of the
change.\8\
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\8\ See Fee Schedule, supra note 5.
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Because the ORF is based on options transactions volume, ORF
revenue to the Exchange is variable. For example, if options
transactions reported to OCC in a given month increase, the ORF
collected from OTP Holders or OTP Firms will increase as well.
Similarly, if options transactions reported to OCC in a given month
decrease, the ORF collected from OTP Holders or OTP Firms will decrease
as well. Accordingly, the Exchange monitors the amount of revenue
collected from the ORF to ensure that this revenue 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 Securities and Exchange Commission (the
``Commission'').
In addition, because Exchange rules establish that ORF may be
adjusted only every six months, the Exchange does not believe it is
appropriate to adjust ORF based on short-term changes in options
transaction volume.\9\ For example, if options volume materially
increases or decreases during a six-month period, the Exchange believes
it is appropriate to wait an additional six-month period to assess
whether such increase or decrease in options volume either continues,
is sustained at that level, or reverses in such a way that the average
reported options transaction volume in fact has remained stable year
over year.
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\9\ In 2013, in response to feedback from participants
requesting greater certainty as to when ORF changes may occur, the
Exchange modified its Fee Schedule to specify that it may only
increase or decrease the ORF semi-annually. See Securities Exchange
Act Release No. 70500 (September 25, 2013), 78 FR 60361 (October 1,
2013) (SR-NYSEArca-2013-91).
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Proposal
The Exchange is proposing to decrease the amount of ORF that will
be collected by the Exchange from $0.0055 per contract side to $0.0054
per contract side. The Exchange proposes this change because from 2017
to 2018, options transaction volume increased to a level that if the
ORF is not adjusted, the ORF revenue to the Exchange year-over-year
could exceed a material portion of the Exchange's regulatory costs.
The last time the Exchange changed the ORF fee was February
2014.\10\ Over that time, options transaction volumes fluctuated with a
slight increase beginning in 2017. But prior to the 2018 increases in
options transaction volume, any prior options transaction volume
increases did not result in the ORF revenue to the Exchange increasing
to levels such that the Exchange recovered via the ORF more than a
material portion of the Exchange's regulatory costs. The Exchange
believes that 2018 was a unique year because, from 2017 to 2018, there
was a 23.95% year-over-
[[Page 35171]]
year increase in Total Industry Customer equity and ETF option average
daily volume (``TCADV'').\11\ By contrast, the year-over-year TCADV in
prior years was down between 2014 and 2016. For example, TCADV
decreased 3.1% from 2014 to 2015 and 2.3% from 2015 to 2016. The year-
over-year options volume experienced a slight uptick from 2016 to 2017,
when TCADV increased 2.0%, which was followed in 2018 by the 23.95%
spike in volume. In 2019, options volume has declined year-over-year by
4.5%--which is the largest drop in year-over-year options volume since
2011 to 2012. Thus, options volumes for the first five months of 2019
have not sustained the 2018 volume level and have in fact declined from
that level.
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\10\ See Securities Exchange Act Release No. 71007 (January 24,
2014), 79 FR 5499 (January 31, 2014) (SR-NYSEArca-2014-06).
\11\ TCADV includes OCC calculated Customer volume of all types,
including Complex Order transactions and QCC transactions, in equity
and ETF options. The Exchange believes that TCADV is a proxy for how
to measure trends in options transaction volume. See supra note 5,
Fee Schedule, Endnote 8.
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To determine whether ORF fees should be adjusted, the Exchange has
reviewed not only the increase in options transaction volume in 2018,
but also options transaction volume in the first five months of 2019.
Based on 2019 transaction volumes, which are down by 4.5%, the Exchange
projects that for the remainder of 2019, options transaction volume
likely will continue to decline from the 2018 high.
The Exchange believes that is has sufficient information based both
on the 2018 options transaction volume and the trend in options
transaction volume in 2019 to determine how to adjust the ORF for the
second half of 2019. Taking into consideration both the increase in
options transaction volume in 2018--which translated to increased ORF
revenue to the Exchange--and the reduced options transaction volume in
2019, which results in reduced ORF revenue to the Exchange, the
Exchange proposes to decrease the ORF from $0.0055 to $0.0054 per
contract side, effective August 1, 2019.\12\ The proposed decrease is
based on the Exchange's estimated projections for its regulatory costs,
balanced with the recent increase in options volumes. The Exchange
cannot predict whether options volume will remain at the 2018 level
going forward and projections for future regulatory costs are
estimated, preliminary and may change. However, the Exchange believes
that revenue generated from the ORF (as modified) will continue to
cover a material portion, but not all, of the Exchange's regulatory
costs.
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\12\ See proposed Fee Schedule, NYSE Arca GENERAL OPTIONS and
TRADING PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee
(``ORF''). The Exchange proposes to make clear that the current fee
would be in effect until the end of July. See id.
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Consistent with the Fee Schedule, the Exchange has notified OTP
Holders or OTP Firms of the proposed change to the ORF via Trader
Update at least of the thirty (30) calendar days prior to the proposed
operative date, August 1, 2019.\13\ The Exchange believes that this
will ensure that market participants are prepared to configure their
systems to account properly for the revised ORF.
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\13\ See current (and proposed) Fee Schedule, Fee Schedule, NYSE
Arca GENERAL OPTIONS and TRADING PERMIT (OTP) FEES, Regulatory Fees,
Options Regulatory Fee (``ORF''). See also Trader Update, dated June
25, 2018, NYSE Options--Options Regulatory Fee (ORF) Modifications,
available here: https://www.nyse.com/trader-update/history#110000139057.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \14\ of the Act, in general, and
Section 6(b)(4) and (5) \15\ of the Act, in particular, in that it is
designed to provide for the equitable allocation of reasonable dues,
fees, and other charges among its members and other persons using its
facilities and does not unfairly discriminate between customers,
issuers, brokers, or dealers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposal Is Reasonable
The Exchange believes the proposed fee change is reasonable because
it would help ensure that revenue collected from the ORF does not
exceed a material portion of the Exchange's regulatory costs. The
Exchange has designed the ORF to generate revenues that would be less
than or equal to the Exchange's regulatory costs, which is consistent
with the view of the Commission that regulatory fees be used for
regulatory purposes and not to support the Exchange's business side. As
noted above, the Exchange may only use regulatory funds such as ORF
``to fund the legal, regulatory, and surveillance operations'' of the
Exchange.\16\ In this regard, the ORF is designed to recover a material
portion, but not all, of the Exchange's regulatory costs for the
supervision and regulation of OTP Regulatory Costs.
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\16\ See supra note 4.
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To determine whether ORF fees should be adjusted, the Exchange
considered not only the increase in options transaction volume in 2018,
but also options transaction volume in the first five months of 2019,
which is down. Based on 2019 options transaction volume (to date),
which is down by 4.5%, and the Exchange's projection that such volumes
will remain stable at best and continue to decline at worse, the
Exchange believes it is reasonable to decrease the amount of ORF
collected by the Exchange from $0.0055 per contract side to $0.0054 per
contract side.
The Proposal Is an Equitable Allocation of Fees
The Exchange believes its proposal is an equitable allocation of
fees among its market participants. The Exchange believes that the
proposed ORF would not place certain market participants at an unfair
disadvantage because all options transactions must clear via a clearing
firm. Such clearing firms can then choose to pass through all, a
portion, or none of the cost of the ORF to its customers, i.e., the
entering firms. Because the ORF is collected from OTP Holder or OTP
Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange
believes that using options transactions in the Customer range serves
as a proxy for how to apportion regulatory costs among such OTP Holders
or OTP Firms. In addition, the Exchange notes that the regulatory costs
relating to monitoring OTP Holders or OTP Firms with respect to
Customer trading activity are generally higher than the regulatory
costs associated with OTP Holders or OTP Firms that do not engage in
Customer trading activity, which tends to be more automated and less
labor-intensive. By contrast, regulating OTP Holders or OTP Firms that
engage in Customer trading activity is generally more labor intensive
and requires a greater expenditure of human and technical resources as
the Exchange needs to review not only the trading activity on behalf of
Customers, but also the OTP Holder's or OTP Firm's relationship with
its Customers via more labor-intensive exam-based programs. 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., OTP Holder or OTP Firm proprietary transactions) of its
regulatory program. Thus, the Exchange believes the modified ORF would
be equitably allocated in that it is charged to all OTP Holders or OTP
Firms on all their transactions that clear in the Customer range at the
OCC.
The Proposed Fee Is Not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory. The Exchange believes that the
[[Page 35172]]
proposed ORF would not place certain market participants at an unfair
disadvantage because all options transactions must clear via a clearing
firm. Such clearing firms can then choose to pass through all, a
portion, or none of the cost of the ORF to its customers, i.e., the
entering firms. Because the ORF is collected from OTP Holder or OTP
Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange
believes that using options transactions in the Customer range serves
as a proxy for how to apportion regulatory costs among such OTP Holders
or OTP Firms. In addition, the Exchange notes that the regulatory costs
relating to monitoring OTP Holders or OTP Firms with respect to
Customer trading activity are generally higher than the regulatory
costs associated with OTP Holders or OTP Firms that do not engage in
Customer trading activity, which tends to be more automated and less
labor-intensive. By contrast, regulating OTP Holders or OTP Firms that
engage in Customer trading activity is generally more labor intensive
and requires a greater expenditure of human and technical resources as
the Exchange needs to review not only the trading activity on behalf of
Customers, but also the OTP Holder's or OTP Firm's relationship with
its Customers via more labor-intensive exam-based programs. 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., OTP Holder or OTP Firm proprietary transactions) of its
regulatory program. Thus, the Exchange believes the modified ORF is not
unfairly discriminatory because it is charged to all OTP Holders or OTP
Firms on all their transactions that clear in the Customer range at the
OCC.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
Intramarket Competition. The Exchange believes the proposed fee
change would not impose an undue burden on competition as it is charged
to all OTP Holders or OTP Firms on all their transactions that clear in
the Customer range at the OCC; thus, the amount of ORF imposed is based
on the amount of Customer volume transacted. The Exchange believes that
the proposed ORF would not place certain market participants at an
unfair disadvantage because all options transactions must clear via a
clearing firm. Such clearing firms can then choose to pass through all,
a portion, or none of the cost of the ORF to its customers, i.e., the
entering firms. In addition, because the ORF is collected from OTP
Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca,
the Exchange believes that using options transactions in the Customer
range serves as a proxy for how to apportion regulatory costs among
such OTP Holders or OTP Firms.
Intermarket Competition. The proposed fee change is not designed to
address any competitive issues. Rather, the proposed change is designed
to help the Exchange adequately fund its regulatory activities while
seeking to ensure that total regulatory revenues do not exceed total
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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \17\ of the Act and subparagraph (f)(2) of Rule
19b-4 \18\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such 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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \19\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\19\ 15 U.S.C. 78s(b)(2)(B).
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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-NYSEArca-2019-49 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-NYSEArca-2019-49. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-NYSEArca-2019-49, and should be submitted
on or before August 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15469 Filed 7-19-19; 8:45 am]
BILLING CODE 8011-01-P