[Federal Register Volume 88, Number 161 (Tuesday, August 22, 2023)]
[Notices]
[Pages 57146-57149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17978]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98146; File No. SR-C2-2023-019]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fees Schedule Relating to the Options Regulatory Fee

August 16, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 57147]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 14, 2023, Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I and II, 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

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2 Options'') 
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/options/regulation/rule_filings/ctwo/), 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to reduce the Options Regulatory Fee 
(``ORF'') from $0.0003 per contract to $0.0002 per contract 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.\3\
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    \3\ The Exchange initially filed the proposed rule change on 
August 1, 2023 (SR-C2-2023-018). On August 14, 2023, the Exchange 
withdrew that filing and submitted this filing.
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    The ORF is assessed by C2 Options to each Trading Permit Holder 
(``TPH'') for options transactions cleared by the TPH that are cleared 
by the Options Clearing Corporation (``OCC'') in the customer range, 
regardless of the exchange on which the transaction occurs.\4\ In other 
words, the Exchange imposes the ORF on all customer-range transactions 
cleared by a TPH, 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 Trading Permit Holder (``CTPH'') or non-CTPH that 
ultimately clears the transaction. With respect to linkage 
transactions, C2 Options reimburses its routing broker providing 
Routing Services pursuant to C2 Options Rule 5.36 for options 
regulatory fees it incurs in connection with the Routing Services it 
provides.
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    \4\ The Exchange notes ORF also applies to customer-range 
transactions executed during Global Trading Hours.
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    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 TPH 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 25% of C2's total 
regulatory costs for 2023. Thus, direct expenses are estimated to be 
approximately 75% of total regulatory costs for 2023. In addition, it 
is C2 Options' practice that revenue generated from ORF not exceed more 
than 75% of total annual regulatory costs.
    These expectations are estimated, preliminary and may change. There 
can be no assurance that the Exchange's final costs for 2023 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 combined revenue that is running in excess of the Exchange's 
estimated regulatory costs for the year.\5\ Particularly, as discussed 
above, the options market has seen a substantial increase in volume 
over the first half of the year, up even from last year's unprecedented 
volume. This increase resulted in higher volume than was originally 
projected by the Exchange (thereby resulting in higher ORF revenue than 
projected). Moreover, in addition to projected reductions in regulatory 
expenses, the Exchange's expenses have been reduced.\6\ Accordingly, 
because revenue generated by the current ORF rates, when combined with 
the Exchange's other non-ORF regulatory fees and fines, is expected to 
exceed the Exchange's regulatory costs for the year, the Exchange 
proposes to decrease its ORF rate. 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.\7\
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    \5\ Consistent with Rule 2.2 (Regulatory Revenue), the Exchange 
notes that notwithstanding the excess ORF revenue collected to date, 
it has not used such revenue for nonregulatory purposes.
    \6\ 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.
    \7\ The Exchange notes that its regulatory responsibilities with 
respect to TPH 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.

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[[Page 57148]]

    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 TPHs of adjustments to the ORF via Exchange Notice, including 
for the change being proposed herein.\8\ 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 $0.0003 per 
contract side to $0.0002 per contract side. The proposed decrease is 
based on the Exchange's estimated projections for its regulatory costs, 
which have decreased, balanced with recent options volumes, which has 
increased. For example, total options contract volume in June 2023 was 
approximately 19% higher than the total options contract volume in June 
2022 and the total options contract volume in March 2023 was 
approximately 12% higher than the total options contract volume in 
March 2022.\9\ In fact, March 2023 was the high total volume in month 
in the history of U.S. equities options industry and May 2023 was the 
third highest options volume month in the history of U.S. equity 
options industry.\10\ The below table displays monthly total volumes 
for 2023.\11\
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    \8\ See Exchange Notice, C2023071301 ``Cboe Options Exchanges 
Regulatory Fee Update Effective August 1, 2023.'' The Exchange will 
endeavor to provide TPHs with notice of any future changes at least 
30 calendar days prior to the effective date of the change.
    \9\ See https://www.theocc.com/newsroom/press-releases/2023/07-05-occ-clears-962-6m-contracts-in-june-2023,-up-19-4-year-over-year 
and https://www.theocc.com/newsroom/press-releases/2023/04-04-occ-clears-over-1b-total-contracts-in-march-2023-highest-month-on-record-and-up-12-2-year.
    \10\ Id. See also https://www.theocc.com/newsroom/press-releases/2023/06-02-occ-clears-949-1m-contracts-in-may-2023-third-highest-month-on-record.
    \11\ Volume data in the table represents numbers of contracts; 
each contract has two sides. June numbers reflect volumes through 
June 29, 2023.

------------------------------------------------------------------------
                Month                   Total volume     Customer sides
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January 2023........................       919,299,330       802,712,235
February 2023.......................       883,234,837       780,284,838
March 2023..........................     1,052,984,722       915,674,991
April 2023..........................       760,808,909       673,183,772
May 2023............................       944,534,205       826,490,407
June 2023...........................       909,616,267       801,688,960
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    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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with section 
6(b)(4) of the Act,\13\ which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its TPHs and other persons using its facilities. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the section 6(b)(5) \14\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
    \14\ 15 U.S.C. 78f(b)(5).
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    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 to 
lessen the potential that the Exchange collects 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 $0.0003 to $0.0002 per 
contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all TPHs 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 TPHs 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., TPH proprietary 
transactions) of its regulatory program.\15\ Moreover, the Exchange 
notes that it has broad regulatory responsibilities with respect to its 
TPHs' activities, irrespective of where their transactions take place.

[[Page 57149]]

Many of the Exchange's surveillance programs for customer trading 
activity may require the Exchange to look at 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 irregardless 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'') \16\ 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 TPHs' 
customer trading activity.
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    \15\ 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 TPH 
proprietary transactions if the Exchange deems it advisable.
    \16\ 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.
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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 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-C2-2023-019 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 number SR-C2-2023-019. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-C2-2023-019 and should be 
submitted on or before September 12, 2023.

    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).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17978 Filed 8-21-23; 8:45 am]
BILLING CODE 8011-01-P