[Federal Register Volume 84, Number 157 (Wednesday, August 14, 2019)]
[Notices]
[Pages 40441-40445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17387]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86607; File No. SR-PEARL-2019-23]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Its
Options Regulatory Fee
August 8, 2019.
Pursuant to the provisions of 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 August 1, 2019, MIAX PEARL, LLC (``MIAX PEARL''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a 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 is filing a proposal to amend the MIAX PEARL Fee
Schedule (the ``Fee Schedule'') to amend its Options Regulatory Fee
(``ORF'').
The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL's principal office, 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
Currently, the Exchange charges an ORF in the amount of $0.0028 per
contract side. The Exchange proposes to decrease this ORF to $0.0020
per contract side. In light of historical and projected volume changes
and shifts in the industry and on the Exchange, as well as changes to
the Exchange's regulatory cost structure, the Exchange is proposing to
change the amount of ORF that will be collected by the Exchange. The
Exchange's proposed change to the ORF should balance the Exchange's
regulatory revenue against the anticipated regulatory costs.
The per-contract ORF will continue to be assessed by MIAX PEARL to
each MIAX PEARL Member for all options transactions, including Mini
Options, cleared or ultimately cleared by the Member which are cleared
by the Options Clearing Corporation (``OCC'') in the ``customer''
range, regardless of the exchange on which the transaction occurs. The
ORF will be collected by OCC on behalf of MIAX PEARL from either (1) a
Member that was the ultimate clearing firm for the transaction or (2) a
non-Member that was the ultimate clearing firm where a Member was the
executing clearing firm for the transaction. The Exchange uses reports
from OCC to determine the identity of the executing clearing firm and
ultimate clearing firm.
To illustrate how the ORF is assessed and collected, the Exchange
provides the following set of examples. If the transaction is executed
on the Exchange and the ORF is assessed, if there is no change to the
clearing account of the original transaction, then the ORF is collected
from the Member that is the executing clearing firm for the
transaction. (The Exchange notes that, for purposes of the Fee
Schedule, when there is no change to the clearing account of the
original transaction, the executing clearing firm is deemed to be the
ultimate clearing firm.) If there is a change to the clearing account
of the original transaction (i.e., the executing
[[Page 40442]]
clearing firm ``gives-up'' or ``CMTAs'' the transaction to another
clearing firm), then the ORF is collected from the clearing firm that
ultimately clears the transaction--the ultimate clearing firm. The
ultimate clearing firm may be either a Member or non-Member of the
Exchange. If the transaction is executed on an away exchange and the
ORF is assessed, then the ORF is collected from the ultimate clearing
firm for the transaction. Again, the ultimate clearing firm may be
either a Member or non-Member of the Exchange. The Exchange notes,
however, that when the transaction is executed on an away exchange, the
Exchange does not assess the ORF when neither the executing clearing
firm nor the ultimate clearing firm is a Member (even if a Member is
``given-up'' or ``CMTAed'' and then such Member subsequently ``gives-
up'' or ``CMTAs'' the transaction to another non-Member via a CMTA
reversal). Finally, the Exchange will not assess the ORF on outbound
linkage trades, whether executed at the Exchange or an away exchange.
``Linkage trades'' are tagged in the Exchange's system, so the Exchange
can readily tell them apart from other trades. A customer order routed
to another exchange results in two customer trades, one from the
originating exchange and one from the recipient exchange. Charging ORF
on both trades could result in double-billing of ORF for a single
customer order, thus the Exchange will not assess ORF on outbound
linkage trades in a linkage scenario. This assessment practice is
identical to the assessment practice currently utilized by the
Exchange's affiliates, Miami International Securities Exchange, LLC
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald'').\3\
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\3\ See Securities Exchange Act Release Nos. 85162 (February 15,
2019), 84 FR 5783 (February 22, 2019) (SR-MIAX-2019-01); 85251
(March 6, 2019), 84 FR 8931 (March 12, 2019) (SR-EMERALD-2019-01).
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As a practical matter, when a transaction that is subject to the
ORF is not executed on the Exchange, the Exchange lacks the information
necessary to identify the order entering member for that transaction.
There are a multitude of order entering market participants throughout
the industry, and such participants can make changes to the market
centers to which they connect, including dropping their connection to
one market center and establish themselves as participants on another.
For these reasons, it is not possible for the Exchange to identify, and
thus assess fees such as an ORF, on order entering participants on away
markets on a given trading day. Clearing members, however, are
distinguished from order entering participants because they remain
identified to the Exchange on information the Exchange receives from
OCC regardless of the identity of the order entering participant, their
location, and the market center on which they execute transactions.
Therefore, the Exchange believes it is more efficient for the operation
of the Exchange and for the marketplace as a whole to collect the ORF
from clearing members.
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. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset ORF.
As discussed below, the Exchange believes it is appropriate to
charge the ORF only to transactions that clear as customer at the OCC.
The Exchange believes that its broad regulatory responsibilities with
respect to a Member's activities supports applying the ORF to
transactions cleared but not executed by a Member. The Exchange's
regulatory responsibilities are the same regardless of whether a Member
enters a transaction or clears a transaction executed on its behalf.
The Exchange regularly reviews all such activities, including
performing surveillance for position limit violations, manipulation,
front-running, contrary exercise advice violations and insider trading.
These activities span across multiple exchanges.
The ORF is designed to recover a material portion of the costs to
the Exchange of the supervision and regulation of Members' customer
options business, including performing routine surveillances and
investigations, as well as policy, rulemaking, interpretive and
enforcement activities. The Exchange believes that revenue generated
from the ORF, when combined with all of the Exchange's other regulatory
fees and fines, will cover a material portion, but not all, of the
Exchange's regulatory costs. The Exchange notes that its regulatory
responsibilities with respect to Member compliance with options sales
practice rules have been allocated to the Financial Industry Regulatory
Authority (``FINRA'') under a 17d-2 Agreement. The ORF is not designed
to cover the cost of options sales practice regulation.
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 the Exchange's total
regulatory costs. The Exchange will continue to monitor MIAX PEARL
regulatory costs and revenues at a minimum on a semi-annual basis. If
the Exchange determines regulatory revenues exceed or are insufficient
to cover a material portion of its regulatory costs, the Exchange will
adjust the ORF by submitting a fee change filing to the Commission. The
Exchange will notify Members of adjustments to the ORF via regulatory
circular at least 30 days prior to the effective date of the change.
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. While much of this activity
relates to the execution of orders, the ORF is assessed on and
collected from clearing firms. 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 Members' 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 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'') \4\ system in order to
[[Page 40443]]
surveil a Member's activities across markets.
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\4\ COATS effectively enhances intermarket options surveillance
by enabling the options exchanges to reconstruct the market promptly
to effectively surveil certain rules.
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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''),\5\ 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.\6\
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\5\ 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.
\6\ See Section 6(h)(3)(I) of the Act.
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The Exchange believes that charging the ORF across markets avoids
having Members direct their trades to other markets in order to avoid
the fee and to thereby avoid paying for their fair share for
regulation. If the ORF did not apply to activity across markets then a
Member would send their orders to the least cost, least regulated
exchange. Other exchanges do impose a similar fee on their members'
activity,\7\ including the activity of those members on MIAX PEARL,
MIAX and MIAX Emerald.\8\ The Exchange notes that there is established
precedent for an SRO charging a fee across markets, namely, FINRAs
Trading Activity Fee \9\ and the NYSE American LLC (``NYSE American''),
NYSE Arca, Inc. (``NYSE Arca''), Cboe Exchange, Inc. (``CBOE''), Nasdaq
PHLX LLC (``Phlx''), Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC
(``GEMX'') and BOX Exchange LLC (``BOX'') ORF. While the Exchange does
not have all the same regulatory responsibilities as FINRA, the
Exchange believes that, like other exchanges that have adopted an ORF,
its broad regulatory responsibilities with respect to a Member's
activities, irrespective of where their transactions take place,
supports a regulatory fee applicable to transactions on other markets.
Unlike FINRA's Trading Activity Fee, the ORF applies only to a Member's
customer options transactions.
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\7\ Similar regulatory fees have been instituted by Nasdaq PHLX
LLC (``Phlx'') (See Securities Exchange Act Release No. 61133
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-
100)); Nasdaq ISE, LLC (``ISE'') (See Securities Exchange Act
Release No. 61154 (December 11, 2009), 74 FR 67278 (December 18,
2009) (SR-ISE-2009-105)); and Nasdaq GEMX, LLC (``GEMX'') (See
Securities Exchange Act Release No. 70200 (August 14, 2013) 78 FR
51242 (August 20, 2013) (SR-Topaz-2013-01)).
\8\ See supra note 3.
\9\ See Securities Exchange Act Release No. 47946 (May 30,
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
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Additionally, the Exchange specifies in the Fee Schedule that the
Exchange may only increase or decrease the ORF semi-annually, and any
such fee change will be effective on the first business day of February
or August. In addition to submitting a proposed rule change to the
Commission as required by the Act to increase or decrease the ORF, the
Exchange notifies participants via a Regulatory Circular of any
anticipated change in the amount of the fee at least 30 calendar days
prior to the effective date of the change. The Exchange believes that
by providing guidance on the timing of any changes to the ORF, the
Exchange makes it easier for participants to ensure their systems are
configured to properly account for the ORF.
The Exchange is proposing to decrease the ORF from $0.0028 to
$0.0020, as of August 1, 2019. In light of recent market volumes on the
Exchange and changes to the Exchange's regulatory costs, the Exchange
is proposing to decrease the amount of ORF that will be collected by
the Exchange. As noted above, 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.
In connection with this filing, the Exchange notes that its
affiliates, MIAX and MIAX Emerald, will also be adjusting the ORF fees
that each of those exchanges charge. Including the proposed adjustments
to ORF of both MIAX and MIAX Emerald with the proposed adjustment by
the Exchange, MIAX PEARL and its affiliates' ORF will see a net
decrease from $0.0063 to $0.0053 with the proposed adjustments for
August 1, 2019.
The Exchange notified Members via a Regulatory Circular of the
proposed change to the ORF at least thirty (30) calendar days prior to
the proposed operative date, on July 1, 2019.\10\ The Exchange believes
that the prior notification to market participants will ensure market
participants are prepared to configure their systems to properly
account for the ORF.
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\10\ See MIAX PEARL Regulatory Circular 2019-26 available at
https://www.miaxoptions.com/sites/default/files/circular-files/MIAX_PEARL_RC_2019_26.pdf.
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2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \11\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \12\ in
particular, in that it is an equitable allocation of reasonable dues,
fees, and other charges among its members and issuers and other persons
using its facilities. The Exchange also believes the proposal furthers
the objectives of Section 6(b)(5) of the Act \13\ in that it is
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general to protect investors and the
public interest and is not designed to permit unfair discrimination
between customers, issuers, brokers and dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that decreasing the ORF from $0.0028 to
$0.0020, as of August 1, 2019 is reasonable because the Exchange's
collection of ORF needs to be balanced against the amount of regulatory
costs incurred by the Exchange. The Exchange believes that the proposed
adjustments noted herein will serve to balance the Exchange's
regulatory revenue against the anticipated regulatory costs.
The Exchange believes that decreasing the ORF from $0.0028 to
$0.0020, as of August 1, 2019 is equitable and not unfairly
discriminatory because it is objectively allocated to Members in that
it is charged to all Members on all their transactions that clear as
customer at the OCC. Moreover, the Exchange believes the ORF ensures
fairness by assessing fees to those Members 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-
[[Page 40444]]
customer component (e.g., Member proprietary transactions) of its
regulatory program.
The ORF is designed to recover a material portion of the costs of
supervising and regulating Members' customer options business including
performing routine surveillances and investigations, as well as 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 that the proposed decrease to the fee is reasonable.
The Exchange believes that continuing to limit changes to the ORF
to twice a year on specific dates with advance notice is reasonable
because it gives participants certainty on the timing of changes, if
any, and better enables them to properly account for ORF charges among
their customers. The Exchange believes that continuing to limit changes
to the ORF to twice a year on specific dates is equitable and not
unfairly discriminatory because it will apply in the same manner to all
Members that are subject to the ORF and provide them with additional
advance notice of changes to that fee.
The Exchange believes that collecting the ORF from non-Members when
such non-Members ultimately clear the transaction (that is, when the
non-Member is the ``ultimate clearing firm'' for a transaction in which
a Member was assessed the ORF) is an equitable allocation of reasonable
dues, fees, and other charges among its members and issuers and other
persons using its facilities. The Exchange notes that there is a
material distinction between ``assessing'' the ORF and ``collecting''
the ORF. The ORF is only assessed to a Member with respect to a
particular transaction in which it is either the executing clearing
firm or ultimate clearing firm. The Exchange does not assess the ORF to
non-Members. Once, however, the ORF is assessed to a Member for a
particular transaction, the ORF may be collected from the Member or a
non-Member, depending on how the transaction is cleared at OCC. If
there was no change to the clearing account of the original
transaction, the ORF would be collected from the Member. If there was a
change to the clearing account of the original transaction and a non-
Member becomes the ultimate clearing firm for that transaction, then
the ORF will be collected from that non-Member. The Exchange believes
that this collection practice continues to be reasonable and
appropriate, and was originally instituted for the benefit of clearing
firms that desired to have the ORF be collected from the clearing firm
that ultimately clears the transaction.
B. Self-Regulatory Organization's Statement on Burden on Competition
MIAX PEARL 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. This proposal does not create
an unnecessary or inappropriate intra-market burden on competition
because the ORF applies to all customer activity, and is designed to
enable the Exchange to recover a material portion of the Exchange's
cost related to its regulatory activities. It also supplements the
regulatory revenue derived from non-customer activity. This proposal
does not create an unnecessary or inappropriate inter-market burden on
competition because it is a regulatory fee that supports regulation in
furtherance of the purposes of the Act. 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. Unilateral action by MIAX PEARL in establishing fees
for services provided to its Members and others using its facilities
will not have an impact on competition. In the highly competitive
environment for equity options trading, MIAX PEARL does not have the
market power necessary to set prices for services that are unreasonable
or unfairly discriminatory in violation of the Act. The Exchange's ORF,
as described herein, is comparable to fees charged by other options
exchanges for the same or similar services. The Exchange believes that
continuing to limit the changes to the ORF to twice a year on specific
dates with advance notice is not intended to address a competitive
issue but rather to provide Members with better notice of any change
that the Exchange may make to the ORF.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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,\14\ and Rule 19b-4(f)(2) \15\ thereunder.
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 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 to determine whether
the proposed rule should be approved or disapproved.
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\14\ 15 U.S.C. 78s(b)(3)(A)(ii).
\15\ 17 CFR 240.19b-4(f)(2).
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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-PEARL-2019-23 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-PEARL-2019-23. 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
[[Page 40445]]
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-PEARL-2019-23, and should be
submitted on or before September 4, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-17387 Filed 8-13-19; 8:45 am]
BILLING CODE 8011-01-P