[Federal Register Volume 89, Number 5 (Monday, January 8, 2024)]
[Notices]
[Pages 965-971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00080]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99259; File No. SR-MEMX-2023-38]


Self-Regulatory Organizations; MEMX LLC; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend the 
Exchange's Fee Schedule To Establish an Options Regulatory Fee 
(``ORF'')

January 2, 2024.
    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 December 20, 2023, MEMX LLC (``MEMX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the 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 with the Commission a proposed rule change 
to amend the Exchange's fee schedule applicable to Members \3\ (the 
``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and (c) to 
establish an Options Regulatory Fee (``ORF'') that would automatically 
sunset on May 31, 2024. The Exchange proposes to implement the changes 
to the Fee Schedule pursuant to this proposal immediately. The text of 
the proposed rule change is provided in Exhibit 5.
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    \3\ See Exchange Rule 1.5(p).
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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 establish an ORF in the amount of $0.0015 
per contract side, effective immediately.\4\ The amount of the proposed 
fee is based on historical industry volume, projected volumes on the 
Exchange, and projected Exchange regulatory costs. The Exchange's 
proposed ORF should balance the Exchange's regulatory revenue against 
the anticipated regulatory costs. As discussed more fully below, the 
Exchange proposes that the ORF will automatically sunset on May 31, 
2024.
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    \4\ The Exchange initially filed the proposed Fee Schedule 
changes on December 1, 2023 (SR-MEMX-2023-33). On December 13, 2023, 
the Exchange withdrew that filing and submitted SR-MEMX-2023-34. On 
December 19, 2023, the Exchange withdrew SR-MEMX-2023-34 and 
submitted SR-MEMX-2023-36. On December 20, 2023, the Exchange 
withdrew SR-MEMX-2023-36 and submitted this filing.
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    MEMX previously filed a proposal to establish an ORF in the amount 
of $0.0015 per contract side on September 27, 2023 (the ``Initial ORF 
Filing''),\5\ which was immediately effective upon filing with the 
Commission pursuant to Section 19(b)(3)(A) of the Act.\6\ The Initial 
ORF Filing was published for comment in the Federal Register on October 
4, 2023.\7\ The Commission received no comments on the Initial ORF 
Filing before November 24, 2023. On that date, the Commission issued a 
Suspension of and Order Instituting Proceedings to Determine whether to 
Approve or Disapprove a Proposed Rule Change to Amend its Fee Schedule 
to Establish an Options Regulatory Fee (``the OIP'') and requested 
public comment and additional information on various aspects of the 
Initial ORF Filing.\8\ To date, the Commission has

[[Page 966]]

received no comment letters in response to the OIP. The Exchange 
withdrew the Initial ORF Filing on December 1, 2023 and submitted a new 
proposal for immediate effectiveness (``Second ORF Filing''). In order 
to make certain clarifying changes, the Exchange withdrew the Second 
ORF Filing on December 13, 2023, and submitted a third proposal for 
immediate effectiveness (``Third ORF Filing''). Again, in order to make 
certain clarifying changes, the Exchange withdrew the Third ORF Filing 
on December 19, 2023, and submitted a fourth proposal for immediate 
effectiveness (``Fourth ORF Filing''). Finally, on December 20, 2023, 
in order to correct an inadvertent administrative error, the Exchange 
withdrew the Fourth ORF Filing and submitted this proposal for 
immediate effectiveness (``Fifth ORF Filing''). The Second, Third, 
Fourth, and this Fifth ORF Filing propose the same fee as in the 
Initial ORF Filing, but with a modified sunset date of May 31, 2024, 
which is four months prior to the proposed sunset date in the Initial 
ORF Filing. Additionally, this filing responds to certain questions and 
points raised in the OIP.
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    \5\ See Securities Exchange Act Release No. 98585 (September 28, 
2023), 88 FR 68692 (October 4, 2023) (SR-MEMX-2023-25).
    \6\ 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).
    \7\ See supra note 5.
    \8\ See Securities Exchange Act Release No. 99017 (November 24, 
2023), 88 FR 83590 (November 30, 2023) (SR-MEMX-2023-25). 
Additionally, on November 24, 2023, solely for the purposes of 
consistent billing for the entire month of November 2023, the 
Exchange filed SR-MEMX-2023-31 with the Commission, which proposed 
to keep the Initial ORF rate of $0.0015 per contract side that had 
been charged since September 27th in place for November 24 through 
November 30, 2023. See Securities Exchange Act Release No. 99112 
(December 7, 2023) (SR-MEMX-2023-31). The Exchange notes that in 
connection with this filing, it is removing language from its Fee 
Schedule indicating the Initial ORF rate would be in place through 
November 30, as this language is now obsolete.
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    As explained in the Initial ORF Filing, the per-contract ORF will 
be collected by the Options Clearing Corporation (``OCC'') on behalf of 
the Exchange for each options transaction, cleared or ultimately 
cleared by an Exchange member in the ``customer'' range, regardless of 
the exchange on which the transaction occurs. The ORF is collected from 
either: (1) a Member that was the ultimate clearing firm \9\ for the 
transaction; or (2) a non-Member that was the ultimate clearing firm 
where a Member was the executing clearing firm \10\ for the 
transaction.
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    \9\ The Exchange takes into account any CMTA transfers when 
determining the ultimate clearing firm for a transaction. CMTA or 
Clearing Member Trade Assignment is a form of ``give up'' whereby 
the position will be assigned to a specific clearing firm at the 
OCC.
    \10\ Throughout this filing, ``executing clearing firm'' means 
the clearing firm through which the entering broker indicated that 
the transaction would be cleared at the time it entered the original 
order which executed, and that clearing firm could be a designated 
``give up'', if applicable. The executing clearing firm may be the 
ultimate clearing firm if no CMTA transfer occurs. If a CMTA 
transfer occurs, however, the ultimate clearing firm would be the 
clearing firm that the position was transferred to for clearing via 
CMTA.
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    To illustrate how the ORF will be assessed and collected, the 
Exchange provides the following set of examples.
    1. For all transactions executed on the Exchange, if the ultimate 
clearing firm is a Member of the Exchange, the ORF is assessed to and 
collected from that Member. If the ultimate clearing firm is not a 
Member of the Exchange, the ORF is collected from that non-Member 
clearing firm but assessed to the executing clearing firm.
    2. If the transaction is executed on an away exchange, the ORF is 
only assessed and collected if either the executing clearing firm or 
ultimate clearing firm are Members of the Exchange. If the ultimate 
clearing firm is a Member of the Exchange, the ORF is assessed to and 
collected from that ultimate clearing firm. If the ultimate clearing 
firm is not a Member of the Exchange, the ORF is assessed to the 
executing clearing firm (again, only if that executing clearing firm is 
a Member of the Exchange), and collected from the ultimate clearing 
firm. Thus, to reiterate, if neither the executing clearing firm nor 
the ultimate clearing firm are members of the Exchange, no ORF is 
assessed or collected.
    Finally, the Exchange will not assess the ORF on outbound linkage 
trades. ``Linkage trades'' are tagged in the Exchange's system, so the 
Exchange can distinguish them from other trades. A customer order 
routed to another exchange results in the appearance of 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.\11\
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    \11\ To clarify, as stated previously, the Exchange will assess 
and collect the ORF for each customer options transaction that is 
cleared by a Member of the Exchange, regardless of where the 
transaction occurs. As such, transactions may fall into this 
category that originated from customer orders entered on the 
Exchange that were routed to and executed on an away market pursuant 
to the Options Linkage Plan. However, the Exchange will not assess 
the ORF in this instance on the original entering broker on MEMX 
Options, which would result in a potential double billing. Instead, 
the Exchange will only assess and collect from the ultimate clearing 
firm, and only if the ultimate clearing firm or the executing 
clearing firm is a MEMX Options Member (because the transaction 
ultimately occurs on an away market).
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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 countless order entering market participants, and each day 
such participants can drop 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 the 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. Additionally, this collection method 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. The clearing firms may then choose to pass through all, a 
portion, or none of the cost of the ORF to its customers, i.e., the 
entering firms.
    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 support 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 an order that executes or clears a transaction executed on 
behalf of another party. The Exchange will regularly review all such 
activities, including performing surveillance for position limit 
violations, end of day and intra-day 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

[[Page 967]]

cover a material portion, but not all, of the Exchange's regulatory 
costs. 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 
surveillance, investigations and examinations. The indirect expenses 
include support from personnel in such areas as human resources, legal, 
information technology, facilities and accounting as well as shared 
costs necessary to operate the Exchange and to carry out its regulatory 
function, such as hardware, data center costs and connectivity. The 
Exchange acknowledges that these indirect expenses are also allocated 
towards other business operations, such as providing connectivity and 
market data services, for which the Exchange has also conducted a cost-
based analysis. As such, when analyzing the indirect expenses 
associated with its regulatory program, the Exchange did not double-
count any expenses, but instead, allocated a portion of the cost not 
already allocated to other fees imposed by the Exchange. Indirect 
expenses are anticipated to be approximately 24% of the total 
regulatory costs for 2023 and 2024. Thus, direct expenses are 
anticipated to be approximately 76% of the total regulatory costs for 
2023 and 2024. 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. Finally, the Exchange 
notes that it takes into account all regulatory sources of funding, 
including fines collected by the Exchange in connection with 
disciplinary matters, when determining the appropriate ORF rate.
    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. More 
specifically, the Exchange will ensure that revenue generated from ORF 
not exceed 75% of total annual regulatory costs. The Exchange will 
monitor 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. Going forward, the Exchange will notify Members of 
adjustments to the ORF via regulatory circular at least 30 calendar 
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 customer 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 trading 
on the Exchange. The Exchange will not be able to 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, 
end of day and intra-day 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 the OCC, including for away market activity. 
Among other reasons, doing so better and more accurately captures 
activity that occurs away from the Exchange but which may relate to 
activity occurring on the Exchange. Without reviewing activity on a 
market-wide basis, the Exchange would not be able to effectively 
identify potentially problematic cross-market activity, with a portion 
occurring on other options exchanges and a portion on the Exchange. 
Again, the Exchange reiterates that it will not collect the ORF on 
executions that occur on away markets that are cleared by non-Members, 
except for the limited scenario where a Member clears a transaction and 
ultimately ``gives-up'' the trade to a non-Member via CMTA.\12\ The 
Exchange believes that assessing the ORF on Member clearing firms 
equitably distributes the collection of the ORF in a fair and 
reasonable manner.
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    \12\ To reiterate, in this instance, the ORF would be collected 
from the non-Member ultimate CMTA clearing firm but assessed to the 
Member executing clearing firm.
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    In addition to its own surveillance programs, the Exchange will 
work with other SROs and exchanges on intermarket surveillance related 
issues in connection with its regulatory program for options. 
Specifically, the Exchange and other options exchanges are required to 
populate a consolidated options audit trail (``COATS'') \13\ system in 
order to surveil a Member's activities across markets. Further, through 
its participation in the Intermarket Surveillance Group (``ISG''),\14\ 
the Exchange will share information and coordinate 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.\15\
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    \13\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
    \14\ 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.
    \15\ See Section 6(h)(3)(I) of the Act.
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    The Exchange believes that charging the ORF across markets will 
avoid 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 (to the extent permissible under the Options Linkage plan, 
which, among other requirements, prohibits trading through of better 
priced quotations). Other exchanges do impose a similar fee on their 
members' activity, and their fees will extend to include the activities 
of their own members on the Exchange. In other words, since MEMX 
Options launched on September 27, 2023, other exchanges have charged 
the ORF for executions occurring on MEMX Options cleared by their 
customers.\16\ In fact, all

[[Page 968]]

sixteen (16) registered options exchanges currently impose ORF on their 
members, and, similar to the Exchange, the majority of the options 
exchanges launched over the last decade have implemented an ORF on the 
day of launch or shortly thereafter in order to properly fund their 
regulatory programs.\17\
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    \16\ See Securities Exchange Act Release Nos. 58817 (October 20, 
2008), 73 FR 63744 (October 27, 2008) (SR-CBOE-2008-05) (notice of 
filing and immediate effectiveness of Cboe Exchange, Inc. (``CBOE'') 
adopting an ORF applicable to transactions across all options 
exchanges); 61133 (December 9, 2009), 74 FR 66715 (December 16, 
2009) (SR-Phlx-2009-100) (notice of filing and immediate 
effectiveness of Nasdaq PHLX LLC (``Phlx'') adopting an ORF 
applicable to transactions across all options exchanges); 61154 
(December 11, 2009), 74 FR 67278 (December 18, 2009) (SR-ISE-2009-
105) (notice of filing and immediate effectiveness of Nasdaq ISE, 
LLC (``ISE'') adopting an ORF applicable to transactions across all 
options exchanges); 61388 (January 20, 2010), 75 FR 4431 (January 
27, 2010) (SR-BX-2010-001) (notice of filing and immediate 
effectiveness of Nasdaq OMX BX, Inc. (``BX'') adopting an ORF 
applicable to transactions across all options exchanges); 70200 
(August 14, 2013) 78 FR 51242 (August 20, 2013)(SR-Topaz-2013-01)) 
(notice of filing and immediate effectiveness of Nasdaq GEMX, LLC 
(``GEMX''), formerly known as ISE Gemini and Topaz Exchange, 
adopting an ORF applicable to transactions across all options 
exchanges); 64400 (May 4, 2011), 76 FR 27118 (May 10, 2011) (SR-
NYSEAmex-2011-27) (notice of filing and immediate effectiveness of 
NYSE Amex LLC (``NYSE AMEX'') adopting an ORF applicable to 
transactions across all options exchanges); 64399 (May 4, 2011), 76 
FR 27114 (May 10, 2011) (SR-NYSEArca-2011-20) (notice of filing and 
immediate effectiveness of NYSE Arca, Inc. (``NYSE Arca'') adopting 
an ORF applicable to transactions across all options exchanges); 
65913 (December 8, 2011), 76 FR 77883 (December 14, 2011) (SR-
NASDAQ-2011-163) (notice of filing and immediate effectiveness of 
Nasdaq Options Market (``NOM'') adopting an ORF applicable to 
transactions across all options exchanges); 66979 (May 14, 2012), 77 
FR 29740 (May 18, 2012) (SR-BOX-2012-002) (notice of filing and 
immediate effectiveness of BOX Options Exchange LLC (``BOX'') 
adopting an ORF applicable to transactions across all options 
exchanges); 67596 (August 6, 2012), 77 FR 47902 (August 10, 2012) 
(SR-C2-2012-023) (notice of filing and immediate effectiveness of C2 
Options Exchange, Inc. (``C2'') adopting an ORF applicable to 
transactions across all options exchanges); 68711 (January 23, 2013) 
78 FR 6155 (January 29, 2013) (SR-MIAX-2013-01) (notice of filing 
and immediate effectiveness of Miami International Securities 
Exchange LLC (``MIAX'') adopting an ORF applicable to transactions 
across all options exchanges); 74214 (February 5, 2015), 80 FR 7665 
(February 11, 2015) (SR-BATS-2015-08) (notice of filing and 
immediate effectiveness of Cboe BZX Exchange, Inc. (``BZX'') 
formerly known as BATS, adopting an ORF applicable to transactions 
across all options exchanges); 80025 (February 13, 2017) 82 FR 11081 
(February 17, 2017) (SR-BatsEDGX-2017-04) (notice of filing and 
immediate effectiveness of Cboe EDGX Exchange, Inc. (``EDGX'') 
formerly known as Bats EDGX Exchange, Inc., adopting an ORF 
applicable to transactions across all options exchanges); 80875 
(June 7, 2017) 82 FR 27096 (June 13, 2017) (SR-PEARL-2017-26) 
(notice of filing and immediate effectiveness of MIAX Pearl, LLC 
(``MIAX Pearl'') adopting an ORF applicable to transactions across 
all options exchanges); 85127 (February 13, 2019) 84 FR 5173 
(February 20, 2019) (SR-MRX-2019-03) (notice of filing and immediate 
effectiveness of Nasdaq MRX, LLC (``MRX'') adopting an ORF 
applicable to transactions across all options exchanges); 85251 
(March 6, 2019) 84 FR 8931 (March 12, 2019) (SR-EMERALD-2019-01) 
(notice of filing and immediate effectiveness of MIAX Emerald LLC 
(``MIAX Emerald'') adopting an ORF applicable to transactions across 
all options exchanges).
    \17\ MIAX Options--effective 1/2/13, launch 12/7/12; ISE Topaz--
effective 8/5/13, launch same; MIAX Pearl--effective 2/6/17, launch 
same; MIAX Emerald--effective 3/1/19, launch same.
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRA's Trading Activity Fee 
\18\ and the ORF assessed by other options exchanges including, but not 
limited to, NYSE Amex, NYSE Arca, Cboe, BZX, EDGX, Phlx, Nasdaq ISE, 
Nasdaq GEMX, MIAX and BOX.\19\ 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 would apply only to a Member's customer options 
transactions.
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    \18\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
    \19\ See supra note 16.
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    Additionally, the Exchange proposes to specify in the Fee Schedule 
that the Exchange may only increase or decrease the ORF semi-annually. 
In addition to submitting a proposed rule change to the Commission as 
required by the Act to increase or decrease the ORF, the Exchange will 
notify 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 would 
make it easier for participants to ensure their systems are configured 
to properly account for the ORF.
    Lastly, the Exchange recognizes that in 2019, the Commission issued 
suspensions of and orders instituting proceedings to determine whether 
to approve or disapprove a proposed rule change to modify the Options 
Regulatory Fee of NYSE American, NYSE Arca, MIAX, MIAX Pearl, MIAX 
Emerald, Cboe, Cboe EDGX Options, and C2.\20\ Each of those exchanges 
had filed to increase their ORF, and the Commission indicated that each 
of those filings lacked detail and specificity, signaling that more 
information was needed to speak to whether the proposed increased ORFs 
were reasonable, equitably allocated and not unfairly discriminatory, 
particularly given that the ORF is assessed on transactions that clear 
in the ``customer'' range and regardless of the exchange on which the 
transaction occurs. The Commission also noted that the filings provided 
only broad general statements regarding options transaction volume and 
did not provide any information on those exchanges' historic or 
projected options regulatory costs (including the costs of regulating 
activity that cleared in the ``customer'' range and the costs of 
regulating activity that occurred off exchange), the amount of 
regulatory revenue they had generated and expected to generate from the 
ORF as well as other sources, or the ``material portion'' of options 
regulatory expenses that they sought to recover from the ORF. Each of 
those exchanges withdrew their filings, but continue charging ORF today 
as discussed above. Since that time, MEMX Options is the first new 
options exchange to launch and as noted previously, its Initial ORF 
Filing was also suspended.\21\ Unlike its competitors noted above, 
however, the Exchange is the only exchange that does not have a 
previously implemented ORF to continue charging notwithstanding said 
suspensions. As such, the Exchange would be at an unfair competitive 
disadvantage if it were not allowed to charge the ORF to recover a 
material portion, but not all, of the Exchange's regulatory costs for 
the supervision and regulation of activity of its Members which as 
noted above, is charged by all sixteen (16) currently operating options 
exchanges.
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    \20\ See Securities Exchange Act Release No. 87168 (September 
30, 2019), 84 FR 53210 (October 4, 2019) (SR-Emerald-2019-29); 
Securities Exchange Act Release No. 87167 (September 30, 2019), 84 
FR 53189 (October 4, 2019) (SR-PEARL-2019-23); Securities Exchange 
Act Release No. 87169 (September 30, 2019), 84 FR 53195 (October 4, 
2019) (SR-MIAX-2019-35); Securities Exchange Act Release No. 87170 
(September 30, 2019), 84 FR 53213 (October 4, 2019) (SR-CBOE-2019-
040); Securities Exchange Act Release No. 87172 (September 30, 2019) 
84 FR 53192 (October 4, 2019) (SR-CboeEDGX-2019-051); Securities 
Exchange Act Release No 87171 (September 30, 2019), 84 FR 53200 
(October 4, 2019) (SR-C2-2019-018); Securities Exchange Act Release 
No. 86832 (August 30, 2019), 84 FR 46980 (September 6, 2019) (SR-
NYSEArca-2019-49); Securities Exchange Act Release No. 86833 (August 
30, 2019) 84 FR 47029 (September 6, 2019) (SR-NYSEAMER-2019-27).
    \21\ See supra note 8.
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    In the OIP, the Commission emphasized the potential lack of 
sufficiently detailed ``quantitative and qualitative evidence'' in 
support of the Exchange's proposal. As an example, as it relates to the 
Exchange's imposition of ORF on executions cleared in a customer 
capacity, the Commission suggested the Exchange provide, amongst other 
data points, the percentage of volume expected to clear

[[Page 969]]

in the customer range both on and off Exchange compared to the 
percentage of volume expected to clear in a range other than customer 
both on and off Exchange; the percentage of the Exchange's regulatory 
budget that would be attributable to the regulation of orders that are 
expected to clear in the customer-range compared to the percentage of 
the Exchange's regulatory budget that would be attributable to orders 
that are expected to clear in a range other than customer; and the 
anticipated percentage of the Exchange's regulatory level of effort 
that would be attributable to the regulation of orders that are 
expected to clear in the customer range compared to the regulatory 
level of effort that would be attributable to orders that are expected 
to clear in a range other than customer.\22\ While the Exchange could 
endeavor to ``project'' data points such as execution volumes separated 
by capacity on and off the Exchange and percentages of regulatory 
effort dedicated to the like, such an exercise would be futile. As a 
newly launched exchange, the Exchange simply does not have sufficient 
data (i.e., fulsome execution records and regulatory surveillance data) 
in order to accurately make the projections noted by the Commission at 
this time. Again, however, while the Exchange commits to gathering this 
and other relevant data to inform its approach to the ORF after the 
sunset period, not being able to charge the ORF in the meantime puts 
the Exchange at an unfair disadvantage and ultimately discourages 
competition in the space.
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    \22\ See OIP, supra note 8, at 13 and 14.
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    As such, the Exchange proposes that the ORF proposed herein will 
automatically sunset on May 31, 2024, approximately six months after 
the operative date of this filing. The Exchange believes this will 
allow it the time to gather the necessary data, including its actual 
regulatory costs and revenues, as well as the cost of regulating 
executions that clear in a customer capacity and executions that occur 
on away markets, while also allowing it to adequately cover a portion 
of the projected costs associated with the regulation of its Members 
and avoid the unfair competitive disadvantage it would be placed at if 
it were disallowed to collect ORF during the time period needed to 
assess and collect data it does not have as a new options exchange. 
Such a process will inform the Exchange's approach to the ORF after the 
sunset date. To reiterate, as a new exchange, not having the 
opportunity to fund its regulatory program through the same regulatory 
fee charged by every other options exchange would place an undue 
competitive disadvantage upon the Exchange's regulatory program and 
options business as a whole. Further, the Exchange emphasizes that 
other exchanges will be charging ORF for transactions occurring on MEMX 
Options, and as such, it follows that the Exchange that is primarily 
responsible for monitoring those transactions should also be able to 
charge the ORF for activity occurring on its own market, as well as 
transactions it surveils on away markets.
    The Exchange is proposing to establish an ORF in the amount of 
$0.0015 per contract side, to be operative immediately, and that will 
automatically sunset on May 31, 2024. The amount of the proposed fee is 
based on historical industry volume, projected volumes on the Exchange, 
and projected Exchange regulatory costs. As noted above, the Exchange 
will continually gather relevant data throughout the sunset period and 
review its ORF to ensure that the ORF, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. The 
Exchange believes that this proposal will permit the Exchange to cover 
a material portion of its regulatory costs, while not exceeding 
regulatory costs, and gather the necessary data to provide the 
Commission evidence to inform its approach to the ORF after the sunset 
period.
    The Exchange notified current and future Members via a Regulatory 
Circular of the proposed ORF at least 30 calendar days prior to the 
proposed operative date, on August 1, 2023,\23\ as well as on November 
27, 2023,\24\ as was necessary in light of the OIP. The Exchange 
believes that the prior notification to future market participants will 
ensure that the future market participants are prepared to configure 
their systems to properly account for the proposed ORF.
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    \23\ See MEMX Options Regulatory Notice 23-07, https://info.memxtrading.com/regulatory-notice-23-07/memx-options-options-regulatory-fee/, MEMX Options Regulatory Notice 23-10, https://info.memxtrading.com/regulatory-notice-23-10/options-regulatory-fee-effective-date/, and MEMX Options Regulatory Notice 23-15, https://info.memxtrading.com/regulatory-notice-23-15/options-regulatory-fee-effective-date/.
    \24\ See MEMX Options Regulatory Notice 23-22, https://info.memxtrading.com/regulatory-notice-23-22/memx-options-options-regulatory-fee/.
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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 \25\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \26\ 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 \27\ 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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    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(4).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that establishing an ORF in the amount of 
$0.0015 is reasonable because the Exchange's collection of ORF needs to 
be balanced against the amount of projected regulatory costs incurred 
by the Exchange. The Exchange believes that the amount proposed herein 
will serve to balance the Exchange's regulatory revenue against the 
anticipated regulatory costs. Moreover, the proposed amount is lower 
than the amount of ORF assessed on other exchanges.\28\ The Exchange 
notes that while certain options exchanges do charge a lower ORF than 
that proposed by the Exchange, each of these options exchanges is part 
of an exchange ``group'' (i.e., affiliated with other options 
exchanges). In turn, each of these exchange groups charges more than 
two (2) to five (5) times the amount of ORF as a group when compared to 
the Exchange's proposed ORF rate.\29\

[[Page 970]]

While the Exchange understands and agrees that each additional options 
exchange is its own legal entity with regulatory obligations under the 
Act to regulate its members, the Exchange also believes that there is 
significant scale that can be achieved for an exchange group that 
operates multiple exchanges, including with respect to regulation, and 
that it is this scale that allows such options exchanges to operate 
with such a low assessment of ORF. In other words, the initial fixed 
costs associated with implementing an exchange group's options 
regulatory program are scalable as additional options exchanges are 
launched by that exchange group.
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    \28\ See, e.g., NYSE Arca Options Fees and Charges, Options 
Regulatory Fee (``ORF'') and NYSE American Options Fees Schedule, 
Section VII(A), which provide that ORF is assessed at a rate of 
$0.0055 per contract for each respective exchange. See also Nasdaq 
PHLX, Options 7 Pricing Schedule, Section 6(D), which provides for 
an ORF rate of $0.0034 per contract, Cboe Options Fee Schedule, 
which provides an ORF rate of $0.0017 per contract, Nasdaq Options 
Market, Options 7 Pricing Schedule, Section 5, which provides an ORF 
rate of $0.0016 per contract, BOX Options Fee Schedule Section 
II(C), which provides an ORF rate of $0.00295 per contract, MIAX 
Options Fee Schedule, Section 2(b), which provides an ORF rate of 
$0.0019 per contract, MIAX Pearl Fee Schedule, Section 2(b), which 
provides an ORF rate of $0.0018 per contract.
    \29\ Each of MIAX Emerald, Cboe BZX Options, Cboe C2 Options, 
Cboe EDGX Options, Nasdaq ISE Gemini, Nasdaq ISE and Nasdaq BX 
Options charges a lower rate than $0.0015 per contract, which is the 
rate proposed by the Exchange. However, the Cboe exchanges, 
comprised of four options exchanges, charges an aggregate ORF rate 
of $0.0021 per contract (more than the Exchange's proposed rate), 
the MIAX exchanges, comprised of three options exchanges, charges an 
aggregate ORF rate of $0.0043 per contract (nearly 3 times the 
Exchange's proposed rate); and the Nasdaq exchanges, comprised of 
six options exchanges, charges an aggregate ORF rate of $0.0084 per 
contract (nearly 6 times the Exchange's proposed rate). The Exchange 
notes that the NYSE exchanges, comprised of two options exchanges, 
charges an aggregate ORF rate of $0.011 per contract (over 7 times 
the Exchange's proposed rate).
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    The Exchange believes the proposed ORF 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 generally more labor intensive 
and requires greater expenditure of human and technical resources than 
regulating non-customer trading activity as the Exchange needs to 
review not only the trading activity on behalf of customers, but also 
the Member's relationship with its customers via more labor-intensive 
exam-based programs. As a result, the costs associated with 
administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Member proprietary 
transactions) of its regulatory program. Again, the Exchange intends to 
quantify the amount of time and resources spent on customer trading 
activity during the sunset period and take into account that 
information in order to inform its approach to the ORF thereafter.
    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 75% of the 
Exchange's regulatory costs, which is consistent with the Exchange's 
by-laws that state in Section 17.4(b): ``[a]ny Regulatory Funds shall 
not be used for non-regulatory purposes or distributed, advanced or 
allocated to any Company Member, but rather, shall be applied to fund 
regulatory operations of the Company (including surveillance and 
enforcement activities) . . .''.\30\ In this regard, the Exchange 
believes that the amount of the fee is reasonable.
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    \30\ See MEMX LLC--LLC Agreement at https://info.memxtrading.com/regulation/governance/.
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    The Exchange believes that the proposal to limit changes to the ORF 
to twice a year with advance notice is reasonable because it will give 
participants certainty on the timing of changes, if any, and better 
enable them to properly account for ORF charges among their customers. 
The Exchange believes that limiting changes to the ORF to twice a year 
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 the proposal to collect 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 Exchange does not 
assess the ORF to non-Members in any instance. For all executions, 
regardless of where they occur, the ORF is collected from the ultimate 
clearing firm, regardless of whether that clearing firm is a Member, 
but only if the original executing clearing firm is a Member. If the 
original executing clearing firm is a not a Member, no ORF is assessed 
or collected. If the original executing clearing firm is a Member, 
while the ORF may be collected from the ultimate non-Member clearing 
firm, the ORF is assessed to the Member executing clearing firm. The 
Exchange believes that this collection practice is reasonable and 
appropriate, given its broad regulatory responsibilities with respect 
to its Members activity, as well as the fact that this collection 
method 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.
    The Exchange believes that implementing the proposed ORF with a 
sunset date of approximately six months after the operative date is 
reasonable because it will give the Exchange adequate time to collect 
and analyze pertinent data while ensuring the Exchange, as a new 
entrant into equity options trading, is able to adequately fund its 
regulatory program to the same extent as its competitors. As noted 
above, the Exchange emphasizes that other exchanges will be charging 
ORF for transactions occurring on MEMX Options, and as such, it follows 
that the Exchange that is primarily responsible for monitoring those 
transactions should also be able to charge the ORF for activity 
occurring on its own market, as well as transactions it surveils on 
away markets.
    The Exchange believes that implementing the ORF with the sunset 
provision is equitable and not unfairly discriminatory because it will 
apply in the same manner to all Members that are subject to the ORF and 
the Exchange will provide such Members with advance notice of any 
changes to the ORF imposed by the Exchange.

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 will not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF will apply 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. This proposal will not 
create an unnecessary or inappropriate inter-market burden on 
competition because it will be a regulatory fee that supports 
regulation and customer protection 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. The 
Exchange's proposed ORF, as described herein, is lower than or 
comparable to fees charged by other options exchanges (though as noted 
above, some exchange groups do have options exchanges operating with a 
lower ORF on a

[[Page 971]]

standalone basis). The proposal to limit the changes to the ORF to 
twice a year 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.
    The Exchange notes that while it does not believe that its proposed 
ORF will impose any burden on inter-market competition, the Exchange 
not charging an ORF or being precluded from charging an ORF would, in-
fact, represent a significant burden on competition. As noted above, 
the Exchange is a new entrant in the highly competitive environment for 
equity options trading. As also noted above, all sixteen (16) 
registered options exchanges currently impose the ORF on their members, 
and, similar to the Exchange, the majority of the options exchanges 
launched over the last decade have implemented an ORF on the day of 
launch or shortly thereafter.\31\ Such ORF fees imposed by other 
options exchanges currently do and will continue to extend to 
executions occurring on the Exchange. The Exchange believes that in 
order to compete with these existing options exchanges, it must, in 
fact, impose an ORF on its Members, and that the inability to do so 
would result in an unfair competitive disadvantage to the Exchange. 
Given the Commission's questions, as articulated in various orders 
instituting proceedings and the OIP, the Exchange has proposed its ORF 
with a sunset that will allow the Exchange the time to gather the 
necessary data, including its actual regulatory costs and revenues, as 
well as the cost of regulating executions that clear in the customer 
capacity and executions that occur on away markets, while also allowing 
it to adequately cover a portion of the projected costs associated with 
the regulation of its Members.
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    \31\ See supra, note 17.
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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)(ii) of the Act \32\ and Rule 19b-4(f)(2) \33\ thereunder.
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    \32\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \33\ 17 CFR 240.19b-4(f)(2).
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    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 change should be approved or 
disapproved.

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-MEMX-2023-38 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-MEMX-2023-38. 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-MEMX-2023-38 and should be 
submitted on or before January 29, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00080 Filed 1-5-24; 8:45 am]
BILLING CODE 8011-01-P