[Federal Register Volume 84, Number 193 (Friday, October 4, 2019)]
[Notices]
[Pages 53210-53213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87168; File No. SR-EMERALD-2019-29]


Self-Regulatory Organizations; MIAX Emerald, LLC; Suspension of 
and Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Modify the Options Regulatory Fee

September 30, 2019.

I. Introduction

    On August 1, 2019, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change (File No. SR-EMERALD-2019-29) to modify the amount 
of its Options Regulatory Fee (``ORF'').\3\ The proposed rule change 
was immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.\4\ The proposed rule change was 
published for comment in the Federal Register on August 14, 2019.\5\ 
The Commission received one comment letter on the proposal.\6\ Pursuant 
to Section 19(b)(3)(C) of the Act,\7\ the Commission is hereby: (1) 
Temporarily suspending File No. SR-EMERALD-2019-29; and (2) instituting 
proceedings to determine whether to approve or disapprove File No. SR-
EMERALD-2019-29.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86606 (August 8, 
2019), 84 FR 40449 (August 14, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take 
effect upon filing with the Commission if it is designated by the 
exchange as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization on any person, whether 
or not the person is a member of the self-regulatory organization.'' 
15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ See Notice, supra note 3.
    \6\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Ellen Greene, Managing Director, Securities Industry and 
Financial Markets Association (``SIFMA''), dated August 27, 2019 
(``SIFMA Letter'').
    \7\ 15 U.S.C. 78s(b)(3)(C).
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II. Description of the Proposed Rule Change

    The Exchange proposes to increase the amount of its ORF from 
$0.00060 to $0.0013 per contract.\8\ The Exchange assesses the ORF to 
each MIAX Emerald member for all options transactions that are 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.\9\ The Exchange noted 
that its ORF is designed to recover a material portion, but not all, of 
the Exchange's regulatory costs for the supervision and regulation of 
members' customer option business.\10\ Noting that it adjusts the ORF 
amount periodically to ensure that the revenue from the ORF in 
combination with its other regulatory fees and fines does not exceed 
its regulatory costs, the Exchange proposed to increase the amount of 
its ORF ``[i]n light of recent market volumes on the Exchange and 
changes to the Exchange's regulatory costs.'' \11\
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    \8\ See Notice, supra note 3, at 40449.
    \9\ See id. The ORF is collected by OCC on behalf of MIAX 
Emerald 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. See id.
    \10\ Id. at 40450.
    \11\ See id. at 40451.
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III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\12\ at any time within 
60 days of the date of filing of an immediately effective proposed rule 
change pursuant to Section 19(b)(1) of the Act,\13\ the Commission 
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. As discussed below, the Commission believes a temporary 
suspension of the proposed rule change is necessary and appropriate to 
allow for additional analysis of the proposed rule

[[Page 53211]]

change's consistency with the Act and the rules thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(C).
    \13\ 15 U.S.C. 78s(b)(1).
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    When exchanges file their proposed rule changes with the 
Commission, including fee filings like the Exchange's present proposal, 
they are required to provide a statement supporting the proposal's 
basis under the Act and the rules and regulations thereunder applicable 
to the exchange.\14\ The instructions to Form 19b-4, on which exchanges 
file their proposed rule changes, specify that such statement ``should 
be sufficiently detailed and specific to support a finding that the 
proposed rule change is consistent with [those] requirements'' \15\
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    \14\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \15\ See id.
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    Section 6 of the Act, including Sections 6(b)(4), (5), and (8), 
require the rules of an exchange to: (1) Provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using the exchange's facilities; \16\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; \17\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\18\
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    \16\ 15 U.S.C. 78f(b)(4).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78f(b)(8).
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    In justifying its proposal, the Exchange stated in its filing that 
its proposal is reasonable because the proposed adjustment to the 
amount of its ORF ``will serve to balance the Exchange's regulatory 
revenue against the anticipated regulatory costs.'' \19\ In determining 
the amount of the proposed ORF, the Exchange said that it considered: 
(1) Historical and projected volume changes and shifts in the industry 
and on the Exchange, and (2) changes to the Exchange's regulatory cost 
structure.\20\ The Exchange also asserted that the ORF is equitably 
allocated and not unfairly discriminatory because the fees are imposed 
on ``all members on all their transactions that clear as customer at 
OCC'' and therefore members are charged based on the amount of customer 
business they conduct.\21\ In addition, the Exchange stated that the 
regulatory costs relating to monitoring members with respect to 
customer trading activity are generally higher than the regulatory 
costs associated with monitoring members that do not engage in customer 
trading activity, which tends to be more automated and less labor-
intensive.\22\
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    \19\ See Notice, supra note 3, at 40451.
    \20\ See id. at 40449.
    \21\ See id. at 40451.
    \22\ See id.
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    As noted above, the Commission received one comment letter on the 
proposal, in which the commenter argued that the Exchange has not 
provided sufficient information to satisfy the statutory requirements 
under the Act.\23\ Specifically, the commenter stated that the Exchange 
should ``include quantitative data showing anticipated revenues, costs 
and profitability'' and describe the methodology used for any 
estimations of baseline and expected costs and revenues to support the 
Exchange's assertions that the proposed ORF is an equitable allocation 
of reasonable fees among members.\24\ The commenter also stated that 
the Exchange should provide support for its assertions that assessing 
ORF only on transactions cleared at OCC in the ``customer'' range 
represents an equitable allocation that is not unfairly 
discriminatory.\25\ Lastly, the commenter argued that the Exchange 
should not be permitted to charge ORF for trades occurring on other 
exchanges unless the Exchange can support its assertion concerning its 
``authority to act on activities occurring outside its own market.'' 
\26\
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    \23\ See SIFMA Letter, supra note 6, at 1-2.
    \24\ See id. at 2.
    \25\ See id.
    \26\ See id.
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    In temporarily suspending the Exchange's proposed rule change, the 
Commission intends to further consider whether the proposal to modify 
the amount of the ORF is consistent with the statutory requirements 
applicable to a national securities exchange under the Act. In 
particular, the Commission will consider whether the proposed rule 
change satisfies the standards under the Act and the rules thereunder 
requiring, among other things, that an exchange's rules provide for the 
equitable allocation of reasonable fees among members, issuers, and 
other persons using its facilities; not permit unfair discrimination 
between customers, issuers, brokers or dealers; and do not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\27\
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    \27\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule change.\28\
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    \28\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change

    In addition to temporarily suspending the proposal, the Commission 
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) 
\29\ and 19(b)(2)(B) of the Act \30\ to determine whether the 
Exchange's proposed rule change should be approved or disapproved. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, the Commission seeks and encourages interested persons to 
provide additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
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    \29\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \30\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\31\ the Commission is 
providing notice of the grounds for possible disapproval under 
consideration:
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    \31\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding, or if the 
exchange consents to the longer period. See id.
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     Whether the Exchange has demonstrated how its proposed fee 
is consistent with Section 6(b)(4) of the Act, which requires that the 
rules of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities;'' \32\ 
(emphasis added);
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    \32\ 15 U.S.C. 78f(b)(4).
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     Whether the Exchange has demonstrated how its proposed fee 
is consistent with Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange not be 
``designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers'' \33\ (emphasis added); and
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    \33\ 15 U.S.C. 78f(b)(5).

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[[Page 53212]]

     Whether the Exchange has demonstrated how its proposed fee 
is consistent with Section 6(b)(8) of the Act, which requires that the 
rules of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of [the Act].'' \34\
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    \34\ 15 U.S.C. 78f(b)(8).
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    As noted above, the proposal purports to modify the amount of the 
ORF in response to changes in options transaction volume in a manner 
that is designed to recover a material portion, but not all, of the 
Exchange's regulatory costs for the supervision and regulation of its 
options participants. However, the Exchange's statements in support of 
the proposed rule change are general in nature and lack detail and 
specificity.\35\ For example, the Exchange provides only a broad 
general statement regarding options transaction volume and does not 
provide any information on the Exchange's historic or projected options 
regulatory costs (including the costs of regulating activity that 
clears in the ``customer'' range and the costs of regulating activity 
that occurs away from the Exchange), the amount of regulatory revenue 
it has generated and expects to generate from the ORF as well as other 
sources, or the ``material portion'' of options regulatory expenses 
that it seeks to recover from the ORF. Similarly, the Exchange has not 
provided information to support its assertion that regulating customer 
trading activity is ``much more labor-intensive'' and therefore, more 
costly.\36\
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    \35\ See, e.g., SIFMA Letter, supra note 6, at 2 (arguing that 
the Exchange has ``not provided enough information . . .to satisfy 
the Exchange Act standards'').
    \36\ See Notice, supra note 3, at 40451. See also SIFMA Letter, 
supra note 6, at 2.
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    As the commenter stated, without more information in the filing on 
the Exchange's regulatory revenues attributable to ORF as well as 
regulatory revenue from other sources, and more information on the 
Exchange's regulatory costs to supervise and regulate members, 
including, e.g., customer versus non-customer activity and on-exchange 
versus off-exchange activity, the proposal lacks information that can 
speak to whether the proposed ORF is reasonable, equitably allocated, 
and not unfairly discriminatory, particularly given that the ORF is 
assessed only on transactions that clear in the ``customer'' range and 
regardless of the exchange on which the transaction occurs, and that 
the ORF is designed to recover a material portion, but not all, of the 
Exchange's regulatory costs for the supervision and regulation of 
activity across all members.\37\
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    \37\ See SIFMA Letter, supra note 6, at 2.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder. . .is on the [SRO] 
that proposed the rule change.'' \38\ The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding,\39\ and any failure of an SRO to provide this information may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with the 
Act and the applicable rules and regulations.\40\
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    \38\ 17 CFR 201.700(b)(3).
    \39\ See id.
    \40\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposed fees are consistent with the Act, and 
specifically, with its requirements that exchange fees be reasonable 
and equitably allocated and not be unfairly discriminatory.\41\
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    \41\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by October 25, 2019. 
Rebuttal comments should be submitted by November 8, 2019. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\42\
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    \42\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by an SRO. See Securities 
Acts Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule changes, including whether the 
proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-EMERALD-2019-29 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-EMERALD-2019-29. The file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet 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 such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. 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 publicly available. All submissions 
should refer to File No. SR-EMERALD-2019-29 and should be submitted on 
or before October 25, 2019. Rebuttal comments should be submitted by 
November 8, 2019.

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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\43\ that File No. SR-EMERALD-2019-29, be and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \43\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(57) and (58).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21592 Filed 10-3-19; 8:45 am]
BILLING CODE 8011-01-P