[Federal Register Volume 85, Number 157 (Thursday, August 13, 2020)]
[Notices]
[Pages 49405-49407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17352]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89471; File No. SR-CboeBZX-2020-05]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the Options Regulatory Fee
August 4, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 21, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to
amend its Fees Schedule relating to the Options Regulatory Fee. The
text of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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
The Exchange proposes to reduce the Options Regulatory Fee
(``ORF'') applicable to the Exchange's options platform (``BZX
Options'') from $0.0002 per contract to $0.0001 per contract, effective
August 3, 2020, in order to help ensure that revenue collected from the
ORF, in combination with other regulatory fees and fines, does not
exceed the Exchange's total regulatory costs.
The ORF is assessed by the Exchange to each Member for options
transactions cleared by the Member that are cleared by the Options
Clearing Corporation (``OCC'') in the customer range, regardless of the
exchange on which the transaction occurs.\3\ In other words, the
Exchange imposes the ORF on all customer-range transactions cleared by
a Member, even if the transactions do not take place on the Exchange.
The ORF is collected by OCC on behalf of the Exchange from the Clearing
Member or non-Clearing Member that ultimately clears the transaction.
With respect to linkage transactions, the Exchange reimburses its
routing broker providing Routing Services for options regulatory fees
it incurs in connection with the Routing Services it provides.
---------------------------------------------------------------------------
\3\ The Exchange notes ORF also applies to customer-range
transactions executed during Global Trading Hours.
---------------------------------------------------------------------------
Revenue generated from ORF, when combined with all of the
Exchange's other regulatory fees and fines, is designed to recover a
material portion of the regulatory costs to the Exchange of the
supervision and regulation of Member customer options business
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. Regulatory costs include
direct regulatory expenses and certain indirect expenses for work
allocated in support of the regulatory function. The direct expenses
include in-house and third-party service provider costs to support the
day to day regulatory work such as surveillances, investigations and
examinations. The indirect expenses include support from such areas as
human resources, legal, information technology, facilities and
accounting. These indirect expenses are estimated to be approximately
6% of BZX Options' total regulatory costs for 2020. Thus, direct
expenses are estimated to be approximately 94% of total regulatory
costs for 2020. In addition, it is BZX Options' practice that revenue
generated from ORF not exceed more than 75% of total annual regulatory
costs.
The Exchange monitors its 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 in a given year, the Exchange will adjust the ORF by
submitting a fee change filing to the Commission. The Exchange also
notifies Members of adjustments to the ORF via regulatory circular and/
or Exchange Notice.\4\ Based on the Exchange's most recent semi-annual
review, the Exchange is proposing to reduce the amount of ORF that will
be collected by the Exchange from $0.0002 per contract side to $0.0001
per contract side. The proposed decrease is based on the Exchange's
estimated projections for its
[[Page 49406]]
regulatory costs, which have decreased, balanced with recent options
volumes, which has significantly increased. For example, total options
contract volume in June 2020 was 82.2% higher than the total options
contract volume in June 2019.\5\ In fact, June 2020 was the highest
options volume month in the history of U.S. equity options industry.\6\
In particular, customer options volume across the industry has also
significantly increased year to date. For example, total customer
options contract volume in April 2020 was 50.27% higher than total
customer volume in April 2019 and total customer options contract
volume in May 2020, was 29.10% higher than total customer volume in May
2019. These expectations are estimated, preliminary and may change.
There can be no assurance that the Exchange's final costs for 2020 will
not differ materially from these expectations and prior practice, nor
can the Exchange predict with certainty whether options volume will
remain at the current level going forward. The Exchange notes however,
that when combined with the Exchange's other non-ORF regulatory fees
and fines, the revenue being generated by ORF using the current rate
results in revenue that is running in excess of the Exchange's
estimated regulatory costs for the year.\7\ Particularly, as noted
above, the options market has seen a substantial increase in volume
over the first half of the year, due in large part to the extreme
volatility in the marketplace as a result of the COVID-19 pandemic.
This unprecedented spike in volatility resulted in significantly higher
volume than was originally projected by the Exchange (thereby resulting
in substantially higher ORF revenue than projected). Moreover, in
addition to projected reductions in regulatory expenses, the Exchange
experienced further unanticipated reductions in costs, in connection
with COVID-19 (e.g., reduction in travel expenses).\8\ The Exchange
therefore proposes to decrease the ORF in order to ensure it does not
exceed its regulatory costs for the year. Particularly, the Exchange
believes that by decreasing the ORF, as amended, when combined with all
of the Exchange's other regulatory fees and fines, would allow the
Exchange to continue covering a material portion of its regulatory
costs, while lessening the potential for generating excess revenue that
may otherwise occur using the current rate.\9\
---------------------------------------------------------------------------
\4\ The Exchange provides Members with such notice at least 30
calendar days prior to the effective date of the change. The
Exchange notified Members of the proposed rate change for August 3,
2020 on July 1, 2020. See BZX Regulatory Circular RG20-042 ``Options
Regulatory Fee Decrease and Discontinuation of Regulatory Circular''
and Exchange Notice, C2020070100 ``Cboe Options Exchanges Regulatory
Fee Update Effective August 3, 2020.''
\5\ See https://www.theocc.com/Newsroom/Press-Releases/2020/07-01-OCC-June-2020-Total-Volume-Up-Nearly-81-Perc.
\6\ Id. The previous record for highest U.S. equity options
volume was March 2020. For further context, the Exchange notes that
The Options Clearing Corporation total volume for March 2020 was up
62.8% as compared to March 2019.
\7\ Consistent with Rule 15.2 (Regulatory Revenue), the Exchange
notes that notwithstanding the excess ORF revenue collected to date,
it has not used such revenue for nonregulatory purposes.
\8\ The Exchange notes that in connection with proposed ORF rate
changes, it provides the Commission confidential details regarding
the Exchange's projected regulatory revenue, including projected
revenue from ORF, along with a breakout of its projected regulatory
expenses, including both direct and indirect allocations.
\9\ The Exchange notes that its regulatory responsibilities with
respect to Member compliance with options sales practice rules have
largely been allocated to FINRA under a 17d-2 agreement. The ORF is
not designed to cover the cost of that 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.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\10\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act \11\, which provides that Exchange rules may provide
for the equitable allocation of reasonable dues, fees, and other
charges among its Members and other persons using its facilities.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \12\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(4).
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes the proposed fee change is reasonable because
customer transactions will be subject to a lower ORF fee than the
current rate. Moreover, the proposed reduction is necessary in order
for the Exchange to not collect revenue in excess of its anticipated
regulatory costs, in combination with other regulatory fees and fines,
which is consistent with the Exchange's practices. The Exchange had
designed the ORF to generate revenues that would be less than or equal
to 75% of 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 operations. As
discussed above, however, after its semi-annual review of its
regulatory costs and regulatory revenues, which includes revenues from
ORF and other regulatory fees and fines, the Exchange determined that
absent a reduction in ORF, it would be collecting revenue in excess of
75% of its regulatory costs. Indeed, the Exchange notes that when
taking into account the recent options volume, coupled with the
projected reduction in regulatory costs, it estimates the ORF will
generate revenues that would cover more than the approximated 75% of
the Exchange's projected regulatory costs. Moreover, when coupled with
the Exchange's other regulatory fees and revenues, the Exchange
estimates ORF to generate over 100% of the Exchange's projected
regulatory costs. As such, the Exchange believes it's reasonable and
appropriate to decrease the ORF amount from $0.0002 to $0.0001 per
contract side.
The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory in that it is charged to all Members on all
their transactions that clear in the customer range at the OCC. The
Exchange believes the ORF ensures fairness by assessing higher fees to
those Members that require more Exchange regulatory services 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. For example, there are costs associated with main
office and branch office examinations (e.g., staff and travel
expenses), as well as investigations into customer complaints and the
terminations of Registered persons. 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., Member proprietary
transactions) of its regulatory program.\13\ Moreover, the Exchange
notes that it has broad regulatory responsibilities with respect to its
Members' activities, irrespective of where their transactions take
place. Many of the Exchange's surveillance programs for customer
trading activity may require the Exchange to look at
[[Page 49407]]
activity across all markets, such as reviews related to position limit
violations and manipulation. Indeed, the Exchange cannot effectively
review for such conduct without looking at and evaluating activity
regardless of where it transpires. In addition to its own surveillance
programs, the Exchange also works with other SROs and exchanges on
intermarket surveillance related issues. Through its participation in
the Intermarket Surveillance Group (``ISG'') \14\ the Exchange shares
information and coordinates inquiries and investigations with other
exchanges designed to address potential intermarket manipulation and
trading abuses. Accordingly, there is a strong nexus between the ORF
and the Exchange's regulatory activities with respect to its Member's
customer trading activity.
---------------------------------------------------------------------------
\13\ If the Exchange changes its method of funding regulation or
if circumstances otherwise change in the future, the Exchange may
decide to modify the ORF or assess a separate regulatory fee on
Member proprietary transactions if the Exchange deems it advisable.
\14\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
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.
---------------------------------------------------------------------------
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. This proposal does not create
an unnecessary or inappropriate intra-market burden on competition
because the ORF applies to all customer activity, thereby raising
regulatory revenue to offset regulatory expenses. It also supplements
the regulatory revenue derived from non-customer activity. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. Indeed, 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\
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 will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
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-CboeBZX-2020-057 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-CboeBZX-2020-057. 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-CboeBZX-2020-057, and should be submitted
on or before September 3, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17352 Filed 8-12-20; 8:45 am]
BILLING CODE 8011-01-P