[Federal Register Volume 90, Number 232 (Friday, December 5, 2025)]
[Notices]
[Pages 56235-56241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-21990]
[[Page 56235]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104294; File No. SR-SAPPHIRE-2025-32]
Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of
Filing of Amendment No. 1 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment No. 1, To Amend Exchange Rule 527
December 2, 2025.
On August 15, 2025, MIAX Sapphire, LLC (``MIAX Sapphire'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Exchange Rule 527,
Exchange Liability, to provide a one-time accommodation payment to
Members for claims arising from the systems difficulties that the
Exchange experienced on June 3, 2025 as a result of an operational
error. The proposed rule change was published for comment in the
Federal Register on September 3, 2025.\3\ The Commission has received
no comment letters on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities and Exchange Act Release No. 103795 (Aug. 28,
2025), 90 FR 42651.
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On September 25, 2025, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On September 26, 2025, the Exchange filed Amendment No. 1 to
the proposed rule change as described in Items I and II below, which
Items have been prepared by the Exchange. Amendment No. 1 amended and
replaced the proposed rule change as originally filed and superseded
such filing in its entirety. The Commission is publishing this notice
and order to solicit comments on the proposed rule change, as modified
by Amendment No. 1, from interested persons and to institute
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 104050, 90 FR 47008
(Sept. 30, 2025). The Commission designated December 2, 2025, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 527, Exchange
Liability, to provide a one-time payment to Members \7\ for claims
arising from the system difficulties that the Exchange experienced on
June 3, 2025 as a result of an operational error (referred to herein as
the ``Operational Error''). Upon approval of this proposal by the U.S.
Securities and Exchange Commission (the ``Commission''), the Exchange
will implement the payment process described in proposed subparagraph
(e) to Exchange Rule 527 and expects to fully compensate all Members
that incurred a loss validated by the Exchange as a result of the
Operational Error (described in more detail below). The Exchange
initially submitted this rule filing (SR-SAPPHIRE-2025-32) to the
Commission on August 15, 2025 (the ``Initial Rule Filing''). This
Amendment No. 1 supersedes the Initial Rule Filing and replaces it in
its entirety.
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\7\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of the
Exchange's Rules for purposes of trading on the Exchange as an
``Electronic Exchange Member'' or ``Market Maker.'' Members are
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
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The text of the proposed rule change is available on the Exchange's
website at https://www.miaxglobal.com/markets/us-options/miax-sapphire/rule-filings and at the Exchange's principal office.
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
On June 3, 2025, the Exchange experienced system difficulties as a
result of the Operational Error, which caused the Exchange's
simulation/testing environment to connect to the MIAX Sapphire
production ports and inject data into the MIAX Sapphire matching
engines in the live trading environment. Upon discovery of this issue,
trading in all symbols on the Exchange was halted at 11:49 a.m.\8\ and
the Exchange published a Trading Alert at 11:53 a.m. to announce the
trading halt. In the interest of ensuring fair and orderly markets and
for the protection of investors, the Exchange determined that it would
cancel all trades that occurred between approximately 11:18 a.m. and
11:33 a.m. (the ``Timeframe'').\9\ Members were notified at 1:07 p.m.
that all trades during that time period would be canceled. By 1:54
p.m., the Exchange provided all impacted Members with specific trade
details relating to their canceled trades. The Exchange fully
remediated the issue and all trading systems began operating normally
that same day. The Exchange issued several alerts throughout this
period, including alerts to announce the halt, that the Exchange would
cancel all trades, the time when the Exchange would resume trading, the
time for Members to submit claims for losses, and a post mortem of the
Operational Error.\10\
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\8\ All times referenced in this filing are in Eastern Standard
Time.
\9\ The Exchange canceled these trades under the authority
provided by Exchange Rule 523, Authority to Take Action Under
Emergency Conditions. See Exchange Rule 523(a) (providing that the
``Chairman of the Board . . . shall have the power to halt or
suspend trading . . . for the maintenance of a fair and orderly
market or the protection of investors . . . due to emergency
conditions . . . such as (1) . . . loss or interruption of
facilities utilized by the Exchange . . .'').
\10\ See Regulatory, Technical and Trading Alerts issued by the
Exchange on June 3, 2025 and June 4, 2025, available at https://miaxglobal.com/alert/2025/06/03/miax-sapphire-options-exchange-halted-all-symbols-114929-am; https://www.miaxglobal.com/alert/2025/06/03/miax-sapphire-options-exchange-busting-all-trades-between-111828506201536; https://www.miaxglobal.com/alert/2025/06/03/miax-sapphire-options-exchange-will-resume-trading-230-pm; https://www.miaxglobal.com/alert/2025/06/03/miax-sapphire-options-exchange-all-trades-busted-between-111828506201536; https://www.miaxglobal.com/alert/2025/06/03/miax-sapphire-options-claims-related-issue-today-sapphire-options; and https://www.miaxglobal.com/alert/2025/06/04/miax-sapphire-options-exchange-post-mortem.
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Since the June 3, 2025 Operational Error, Members compiled their
trade data showing losses as a result of the Operational Error and the
Exchange canceling all trades during the Timeframe. The Exchange
reviewed the events of June 3, 2025 with the goal of proposing a fair
and equitable payment policy that is consistent with the Exchange Act
and MIAX Sapphire's
[[Page 56236]]
self-regulatory obligations. The Exchange believes this proposal
reflects MIAX Sapphire's effort to: (i) identify the categories of
investors and Members that the Operational Error caused objective,
discernible harm, and the type and scope of such harm; and (ii) propose
an objectively reasonable and balanced payment plan for paying Members
and their investor customers for such harm by providing a payment in
excess of the Exchange's current rules regarding limitation of
liability. MIAX Sapphire has undertaken this effort notwithstanding the
liability protections afforded by its contractual limitations of
liability and Exchange Rule 527--the rule that MIAX Sapphire proposes
to modify.
The Exchange's current limitation of liability rules, described in
detail below, limit the maximum amount of compensation Members are able
to receive from the Exchange arising out of a system issue that impacts
the use or enjoyment of the facilities or services afforded by the
Exchange, such as the Operational Error. In the interest of protecting
Members and their investor customers,\11\ the Exchange proposes to
amend Exchange Rule 527 to provide a one-time voluntary payment for
claims arising from the June 3, 2025 Operational Error.
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\11\ The majority of claims are from customers of Member firms
who utilize a Member firm as their introducing broker to access and
submit orders to the Exchange for execution.
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This type of payment plan is not without precedent. In 2012, the
Nasdaq Stock Market LLC (``Nasdaq'') experienced system difficulties in
the Nasdaq halt and imbalance cross process in connection with the
initial public offering (``IPO'') of Facebook, Inc. (``Facebook''). In
response, Nasdaq filed with the Commission a proposal to establish a
payment policy providing compensation for impacted investors in excess
of Nasdaq's then-applicable limitation of liability rules, which
proposal was approved by the Commission.\12\
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\12\ See Securities Exchange Act Release No. 69216 (March 22,
2013), 78 FR 19040 (March 28, 2013) (SR-NASDAQ-2012-090); see also
Nasdaq Rules, Equity 2, Section 17. The Exchange's proposal differs
from the Nasdaq payment filing in several minor respects but
ultimately provides a substantively similar payment plan for Members
impacted by the Operational Error to be compensated in excess of the
Exchange's current limitation of liability limits. Nasdaq also
undertook a two-step process to compensate its members and customers
by first proposing the payment policy and then filing a separate
rule proposal with the Commission to implement the payment policy.
See Securities Exchange Act Release No. 71098 (December 17, 2023),
78 FR 77540 (December 23, 2013) (SR-NASDAQ-2013-152). The Exchange
proposes a single-step process since the Exchange has already
received and validated all claims from Members that were impacted by
the Operational Error; brought the proposed payment plan and total
value of eligible claims to its Board of Directors for approval; and
is ready to promptly compensate Members for their validated claims
upon approval of this proposal by the Commission.
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Current Limitation of Liability Provisions
Exchange Rule 527(a) describes the general limitations on liability
of the Exchange, its directors, officers, committee members, limited
liability company members, employees or agents. Exchange Rule 527(a)
provides, in relevant part, that except as provided in paragraph (b) of
Exchange Rule 527 or otherwise expressly provided in the Exchange's
rules, neither the Exchange nor its directors, officers, committee
members, limited liability company members, employees or agents shall
be liable to Members or persons associated therewith for any loss,
expense, damages, or other claims arising out of the use or enjoyment
of the facilities or services afforded by the Exchange, including the
interruption in or failure or unavailability of such facilities or
services, or any action taken or omitted in respect to the business of
the Exchange. Exchange Rule 527(a) provides limited exceptions to these
limitations in connection with Exchange employee acts where the extent
of such loss, expense, damages or claims are attributable to the
willful misconduct, gross negligence, bad faith or fraudulent or
criminal acts of the Exchange or its officers, employees or agents
acting within the scope of their authority.
Exchange Rule 527(b) further describes exceptions to the Exchange's
general limitation of liability rule that allows for the payment of
compensation to Members for Exchange System \13\ issues, subject to
certain conditions, which limit the maximum amount of Exchange
liability. The exceptions under Exchange Rule 527(b) apply whenever
custody of an unexecuted order \14\ or quote \15\ is transmitted by a
Member to or through the Exchange's System or to any other automated
facility of the Exchange whereby the Exchange assumes responsibility
for the transmission or execution of the order or quote, provided that
the Exchange has acknowledged receipt of such order or quote.
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\13\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
\14\ The term ``order'' means a firm commitment to buy or sell
option contracts. See Exchange Rule 100.
\15\ The term ``quote'' or ``quotation'' means a bid or offer
entered by a Market Maker as a firm order that updates the Market
Maker's previous bid or offer, if any. When the term order is used
in these Rules and a bid or offer is entered by the Market Maker in
the option series to which such Market Maker is registered, such
order shall, as applicable, constitute a quote or quotation for
purposes of these Rules. See Exchange Rule 100.
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Subparagraphs (b)(1) through (b)(3) of Exchange Rule 527 set forth
the limits for claims made by Members, individually and in the
aggregate, related to Exchange System issues that impact the use or
enjoyment of the facilities of the Exchange. The liability limits
provided for in Exchange Rules 527(b)(1)-(3) are as follows: (1) as to
any one or more claims made by a single Member growing out of the use
or enjoyment of the facilities afforded by the Exchange on a single
trading day, the Exchange shall not be liable in excess of the larger
of $100,000 or the amount of any recovery obtained by the Exchange
under any applicable insurance maintained by the Exchange; (2) as to
the aggregate of all claims made by all Members growing out of the use
or enjoyment of the facilities afforded by the Exchange on a single
trading day, the Exchange shall not be liable in excess of the larger
of $250,000 or the amount of the recovery obtained by the Exchange
under any applicable insurance maintained by the Exchange; and (3) as
to the aggregate of all claims made by all Members growing out of the
use or enjoyment of the facilities afforded by the Exchange during a
single calendar month, the Exchange shall not be liable in excess of
the larger of $500,000 or the amount of the recovery obtained by the
Exchange under any applicable insurance maintained by the Exchange.
Exchange Rule 527(c) provides that if all of the claims arising out
of the use or enjoyment of the facilities afforded by the Exchange
cannot be fully satisfied because, in the aggregate, they exceed the
applicable maximum amount of liability provided for in subparagraph (b)
of Exchange Rule 527, then such maximum amount shall be allocated among
all such claims arising on a single trading day or during a single
calendar month, as applicable, based upon the proportion that each
claim bears to the sum of all claims. Subparagraph (c) further provides
that in order for claims to be included in this allocation, Members
must submit written notice of their claim to the Exchange no later than
the opening of trading on the next business day following the day on
which the use or enjoyment of Exchange facilities giving rise to the
claim occurred.
Background of the Operational Error and Calculation of Losses
As described above, due to the Operational Error on June 3, 2025,
the Exchange determined to cancel all trades executed on MIAX Sapphire
[[Page 56237]]
between 11:18 a.m. and 11:33 a.m. Upon learning of the Operational
Error, members of the Exchange's Regulatory Operations Department
contacted all Members to discuss the Operational Error, the Exchange's
proposed method of remedying trades based on erroneous simulation/
testing environment data, and the manner in which Members should submit
claims for compensation. Members were advised to immediately contact
their customers and to compile execution reports for trades made during
the Timeframe of the Operational Error as well as execution reports for
``replacement trades'' \16\ made following the Timeframe of the
Operational Error to fulfill the original terms of the trades that the
Exchange canceled. In some instances, Members executed new valid trades
at away-exchanges. Some Members executed the new valid trade several
days following the Operational Error as some of their customers did not
learn of the cancelations until they logged back into their brokerage
accounts.\17\ Members summed the difference between the execution price
of the canceled trade on MIAX Sapphire and the execution price for the
replacement trade made on MIAX Sapphire or at an away-exchange and then
provided such information to the Exchange. This information included
the following for each original trade that was cancelled by the
Exchange that took place during the Timeframe of the Operational Error
and each replacement trade: (A) trade date; (B) execution time; (C)
symbol; (D) strike price; (E) expiration date; (F) side (buy or sell);
(G) quantity; (H) venue (on MIAX Sapphire or an away-exchange); (I)
notional value; and (J) claimed loss amount.
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\16\ For the purposes of this filing and the proposed new rule
text, unless stated otherwise, the term ``replacement trade'' shall
be construed to mean the new trade executed by a Member on MIAX
Sapphire or at an away-exchange that was executed to replace the
original trade that was canceled by MIAX Sapphire during the
Timeframe of the Operational Error. See proposed Exchange Rule
527(e)(1)(iii).
\17\ For example, the Exchange was made aware that certain
retail customers that send orders to an Exchange Member for
execution do not routinely check their brokerage accounts and only
learned of the canceled trade due to the Operational Error days
after originally placing the trade.
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After receipt of all Members' claims over the course of several
weeks, Exchange officials reviewed each claimed loss by validating the
canceled trade execution prices reported during the Timeframe of the
Operational Error and the execution prices of the subsequent
replacement trades. For trading losses that resulted from a Member
executing the replacement trade on MIAX Sapphire, the Exchange: (A)
first validated that the canceled trade took place on MIAX Sapphire
during the Timeframe of the Operational Error based on the Member's
MPID; \18\ (B) validated the execution price of the canceled trade; (C)
validated that the replacement trade took place on MIAX Sapphire; and
(D) validated the execution price of the replacement trade. The measure
of loss was calculated based on the difference between the execution
price of the canceled trade and the execution price of the replacement
trade.
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\18\ The term ``MPID'' means unique market participant
identifier. See Exchange Rule 100.
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For trading losses that resulted from a Member executing the
replacement trade on an away-exchange, the Exchange: (A) first
validated that the canceled trade took place on MIAX Sapphire during
the Timeframe of the Operational Error based on the Member's MPID; (B)
validated the execution price of the canceled trade; and (C) validated
the execution price of the replacement trade by comparing such price
against the closing or opening price of the option, depending on the
time of execution, as well as the size of the replacement trade in
comparison to the original trade that was canceled. The measure of loss
was calculated based on the difference between the execution price of
the canceled trade and the execution price of the replacement trade.
The Exchange determined to use the closing or opening price of the
option for replacement trades executed on away-exchanges as an initial
check to determine whether the claimed replacement trade execution
price was within a reasonable range for that particular option. As
described above, the Exchange issued an alert to inform all Members
that it would cancel all trades during the Timeframe of the Operational
Error on June 3, 2025 at 1:07 p.m. At 1:54 p.m., the Exchange notified
Members of the specific trade details for their canceled trades. As a
result, the Exchange believes that customers of Members may not have
been aware of the Operational Error until a day or two (or longer)
following the Operational Error, thereby not executing the replacement
trade until that time.\19\ Exchange officials utilized closing and
opening options trade prices between June 3, 2025 and June 6, 2025,\20\
depending on the date when Members executed the replacement trades, as
a reasonable baseline to compare against replacement values supplied by
the Members to validate the claimed losses. In particular, if the
replacement trade took place a day or more after the Operational Error,
Exchange officials were able to utilize the Cboe Exchange, Inc.
LiveVol[supreg] analytics platform to filter options executions by
price and day to determine if the claimed replacement trade execution
price and size aligned with trade executions in the same option series
and size at the later date and, if so, the new execution price. The
Exchange did not unilaterally adjust any individual claim submitted by
a Member. During the review and validation process by Exchange
officials, if it was determined a claim amount could not be
independently validated in an objective manner, an Exchange official
contacted the Member to obtain the necessary information to make such
validation. The Exchange did not make any subjective determination
regarding each Member's claim. The Exchange's Regulatory Operations
Department followed up with all Members and received all claims from
Members, including the total value of such claims, all of which were
validated by Exchange officials using the methodology described above.
In total, the Exchange's Regulatory Operations Department reviewed and
validated over 2,200 claims that occurred during the Operational Error,
all of which are eligible to be compensated.
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\19\ See supra note 17.
\20\ Based on records provided by Members with claimed losses,
June 6, 2025 was the latest date that a Member executed a valid
replacement trade.
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Proposal
The Exchange now proposes to amend Exchange Rule 527 to provide a
one-time payment for Members with claims arising from the Operational
Error that the Exchange experienced on June 3, 2025 that exceed the
limitations provided for in Exchange Rule 527(b)(1)-(3), including the
amount of compensation on a per-Member basis. The modifications
proposed in this rule change are not intended to and do not affect the
limitations of liability set forth in the Exchange's agreements or
Commission-sanctioned rules, or those limitations or immunities that
bar claims for damages against MIAX Sapphire as a matter of law.
Rather, as noted above, they reflect the Exchange's determination to
adopt a fair and equitable payment policy that takes into account the
impacts of the Exchange's Operational Error on Members and their
investor customers.
The Exchange proposes to establish new paragraph (e), which will
state that notwithstanding paragraphs (b)(1)-(3)
[[Page 56238]]
and paragraph (c) \21\ of Exchange Rule 527 for the single trading of
June 3, 2025 and the full calendar month of June 2025, for the
aggregate of all claims alleged by all market participants related to
the system difficulties as a result of the Operational Error on June 3,
2025, where the Exchange's simulation/testing environment connected to
the production ports (the ``Operational Error''), the total amount of
the Exchange's liability shall not exceed $525,000. Further,
eligibility of all claims for payment shall be determined in accordance
with proposed Exchange Rule 527(e) and only applies to claims
previously filed with and validated by the Exchange and no new
additional claims will be accepted. As noted above, the Exchange
received all claims related to the Operational Error and expects that,
subject to Commission approval of this proposal, all Members will be
fully compensated for their claims as a result of the Operational
Error.
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\21\ As mentioned above, subparagraph (c) of Exchange Rule 527
provides that ``[i]f all of the claims arising out of the use or
enjoyment of the facilities afforded by the Exchange cannot be fully
satisfied because in the aggregate they exceed the applicable
maximum amount of liability provided for in paragraph (b) . . . then
such maximum amount shall be allocated among all such claims arising
on a single trading day or during a single calendar month, as
applicable, written notice of which has been given to the Exchange
no later than the opening of trading on the next business day
following the day on which the use or enjoyment of Exchange
facilities giving rise to the claim occurred, based upon the
proportion that each such claim bears to the sum of all such
claims'' (emphasis added). See Exchange Rule 527(c). Accordingly,
the Exchange proposes that the notice requirement of Exchange Rule
527(c) will not apply to claims submitted under proposed paragraph
(e) to Exchange Rule 527.
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Proposed subparagraph (e)(1) of Exchange Rule 527 will provide that
all claims for compensation under this paragraph (e) shall arise solely
from realized trading losses from executions that occurred on the
Exchange on June 3, 2025 between 11:18 a.m. and 11:33 a.m. Eastern Time
that the Exchange subsequently canceled pursuant to Exchange Rule 523,
causing Members to execute a new trade on the Exchange or at an away-
exchange to replace the canceled trade. The measure of loss was
determined by the Exchange pursuant to the methods set forth in
proposed subparagraphs (e)(1)(i)-(ii), described below.
Proposed subparagraph (e)(1)(i) of Exchange Rule 527 will provide
that for trading losses that resulted from a Member executing the
replacement trade on MIAX Sapphire, the Exchange: (A) first validated
that the canceled trade took place on MIAX Sapphire during the
Timeframe of the Operational Error based on the Member's MPID; (B)
validated the execution price of the canceled trade; (C) validated that
the replacement trade took place on MIAX Sapphire; and (D) validated
the execution price of the replacement trade. The measure of loss was
calculated based on the difference between the execution price of the
canceled trade and the replacement trade.
Proposed subparagraph (e)(1)(ii) of Exchange Rule 527 will provide
that for trading losses that resulted from a Member executing the
replacement trade on an away-exchange, the Exchange: (A) first
validated that the canceled trade took place on MIAX Sapphire during
the Timeframe of the Operational Error based on the Member's MPID; (B)
validated the execution price of the canceled trade; and (C) validated
the execution price of the replacement trade by comparing such price
against the closing or opening price of the option, depending on the
time of execution, as well as the size of the replacement trade in
comparison to the original trade that was canceled. The measure of loss
was calculated based on the difference between the execution price of
the canceled trade and the replacement trade.
Proposed subparagraph (e)(1)(iii) of Exchange Rule 527 will provide
a definition for the term ``replacement trade,'' as described
above.\22\
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\22\ See supra note 16.
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Proposed subparagraph (e)(2) of Exchange Rule 527 will state that
in no event shall the Exchange make any payments on claims pursuant to
proposed paragraph (e) until the rule proposal filed with the
Commission setting forth the aggregate amount of eligible claims
becomes effective and final. The Exchange proposes to make all payments
for approved claims in cash.
Proposed subparagraph (e)(3) of Exchange Rule 527 will provide that
payments to Members under proposed paragraph (e) are contingent upon
the submission to the Exchange of an attestation within 14 calendar
days after the effective date of the rule proposal described in
proposed paragraph (e)(2), detailing the following for each original
trade that was cancelled by the Exchange that took place during the
Timeframe of the Operational Error and each replacement trade: (A)
trade date; (B) execution time; (C) symbol; (D) strike price; (E)
expiration date; (F) side (buy or sell); (G) quantity; (H) venue (on
MIAX Sapphire or an away-exchange); (I) notional value; and (J) claimed
loss amount. Proposed subparagraph (e)(3) of Exchange Rule 527 will
also state that failure to provide the required attestation will void
the Member's eligibility to receive a payment pursuant to proposed
paragraph (e) of Exchange Rule 527. The Exchange will also require each
Member to maintain books and records that detail the nature and amount
of these losses.\23\
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\23\ Nasdaq included similar requirements in its payment policy
and rule text related to the Facebook IPO system issues. See Nasdaq
Rules, Equity 2, Section 17(b)(3)(I)(i).
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Proposed subparagraph (e)(4) of Exchange Rule 527 will provide that
all payments to Members under proposed paragraph (e) will be contingent
upon the execution and delivery to the Exchange of a release by the
Member of all claims by it or its affiliates \24\ against the Exchange
or its affiliates for losses that arise out of, are associated with, or
relate in any way to the Operational Error or to any actions or
omissions related in any way to the Operational Error. Failure to
provide the required release within 14 calendar days after the
effective date of the rule proposal described in proposed subparagraph
(e)(2) will void the Member's eligibility to receive a payment pursuant
to this proposed paragraph (e). The purpose of imposing the release
requirement notwithstanding the limitations of liability and
immunities, which apply in any event pursuant to the Exchange's rules
and agreements and/or otherwise as a matter of law, are to avoid the
disruption and expense of unnecessary litigation in connection with the
June 3, 2025 Operational Error and to ensure equal treatment of all
claimants.\25\
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\24\ The term ``affiliate'' of or person ``affiliated with''
another person means a person who, directly, or indirectly,
controls, is controlled by, or is under common control with, such
other person. See Exchange Rule 100.
\25\ Nasdaq also included a similar release requirement in its
payment policy and rule text related to the Facebook IPO system
issues. See Nasdaq Rules, Equity 2, Section 17(b)(3)(H).
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The proposed payment policy proposed herein is a voluntary step
taken by the Exchange to provide a substantial and rare payment to its
Members and their customers, and participation in the program is
likewise voluntary on the part of Members. The Exchange believes this
type of occurrence warrants the establishment of a payment plan
because, prior to the Operational Error, neither the Exchange nor any
of its affiliates experienced a systems issue similar to that of the
Operational Error. The Exchange believes that it would be inequitable
to approve the Exchange's voluntary program without also allowing it to
[[Page 56239]]
establish conditions that promote certainty and finality.\26\
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\26\ See Securities Exchange Act Release No. 69216 (March 22,
2013), 78 FR 19040 (March 28, 2013) (SR-NASDAQ-2012-090). In the
approval order for the payment plan that Nasdaq proposed for its
systems issues related to the Facebook IPO, the Commission approved
similar conditions as proposed herein in order for Nasdaq members to
be compensated for their claims.
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The Exchange notes that it has received all claims that apply to
the Operational Error and that no new additional claims will be
accepted. As described above, immediately following the June 3, 2025
Operational Error, the Exchange's Regulatory Operations Department
spoke to each Member to discuss the Operational Error, the Exchange's
proposed method of remedying trades based on erroneous simulation/
testing environment data and the manner in which Members should submit
claims for compensation. The Exchange independently verified each
Member's claim and confirmed the loss amount with each Member prior to
submitting this rule filing. The Exchange believes its proposal is
designed to implement a fair and equitable payment policy that takes
into account the impacts of the Operational Error on the investing
public and Exchange Members.
The total claims received by the Exchange and validated equal
approximately $500,000.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\27\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\28\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors and the public interest. The Exchange also believes
the proposed rule change is consistent with the Section 6(b)(5) \29\
requirement that the rules of an exchange not be designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
\29\ Id.
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The Exchange believes that the proposal to expand its limitation of
liability payment policy in this unique set of circumstances will
balance several important goals in keeping with the foregoing statutory
objectives. First, the Exchange acknowledges that the June 3, 2025
Operational Error had an impact on certain of its Members and their
customers. As a result, the Exchange believes that the public interest
would be served by a payment policy that quantifies and provides
compensation for customer losses that were directly attributable to
those system issues in an objectively discernible manner. Specifically,
the Exchange believes that the public interest would be served by the
Exchange making payments in excess of its limitation of liability rules
to fully compensate Members that provided details regarding their
claimed losses as a result of the Operational Error in an objectively
discernible manner. The Exchange further believes that the public
interest would be served by the Exchange providing as a payment the
loss differential for the trade execution canceled by MIAX Sapphire and
the replacement trade--that is the difference between the price that
was expected upon execution on MIAX Sapphire during the Timeframe of
the Operational Error and the subsequent execution price for the
replacement trade that was actually obtained on the Exchange or at an
away-exchange.
Second, the Exchange believes that it is important to recognize the
regulatory policy objectives underlying Exchange Rule 527 and ensure
that they are not compromised. Hundreds of billions of dollars (or
more) of securities transactions are matched through the systems of the
Exchange and other exchanges every day. Through the operation of those
systems, exchanges provide invaluable services in support of capital
formation, price discovery, and investor protection. If exchanges could
be called upon to bear all costs associated with system malfunctions
and the varying reactions of market participants taken in their wake,
the potential would exist for a single catastrophic event to bankrupt
one or multiple exchanges, with attendant consequences for investor
confidence and macroeconomic stability. Alternatively, the cost of
providing exchange services would have to rise dramatically for all
investors to cover this material and new risk.\30\ In addition,
exchanges would be less inclined to implement innovative systems \31\
consistent with the goals of Section 6(b)(5) of the Act.\32\
Accordingly, the Commission has recognized that it is consistent with
the purposes of the Act for a self-regulatory organization to limit its
liability with respect to the use of such facilities by its members
through rules such as Exchange Rule 527.\33\
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\30\ See Securities Exchange Act Release No. 67507 (July 26,
2012), 77 FR 45706 (August 1, 2012) (SR-NASDAQ-2012-090) (Notice of
Filing of Proposed Rule Change to Amend Rule 4626--Limitation of
Liability). Nasdaq stated in their filing that trading costs in the
United States are among the lowest in the world, and thus a
contributor to economic growth. Id. The Nasdaq filing cites the
following sources as examples for this assertion: Michael S. Pagano,
Which Factors Influence Trading Costs in Global Equity Markets?, THE
J. OF TRADING, Winter 2009, at 7; Ian Domowitz et al., Liquidity,
Volatility, and Equity Trading Costs Across Countries and Over Time,
4 INT'L FIN. 221 (Summer 2001); Asli Demirg[uuml][ccedil]-Kunt &
Ross Levine, Bank-based and Market-based Financial Systems: Cross-
country Comparisons 51 (The World Bank Working Paper No. 2143, July
1999). Id.
\31\ See Securities Exchange Act Release No. 14777 (May 17,
1978) (SR-CBOE-78-14) (in proposing a limitation on liability, the
Cboe Exchange, Inc. explained that an exchange ``cannot proceed with
innovative systems and procedures for the execution, clearance, and
settlement of Exchange transactions . . . unless it is protected
against losses which might be incurred by members as a result of
their use of such systems,'' and further that ``[t]o the extent [a
limitation of liability rule] enables the Exchange to proceed with
innovative systems, competition should be enhanced''); see also
Securities Exchange Act Release No. 58137 (July 10, 2008), 73 FR
41145 (July 17, 2008) (SR-NYSE-2008-55) (explaining that exchange's
limitation of liability rule encourages vendors to provide services
to the exchange, which results in faster and more innovative
products for order entry, execution, and dissemination of market
information).
\32\ 15 U.S.C. 78f(b)(5) (requiring that an exchange's rules be
``designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in securities, 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 not [be] designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, or
to regulate by virtue of any authority conferred by this chapter
matters not related to the purposes of this chapter or the
administration of the exchange'').
\33\ See, e.g., Cboe Rule 1.10; Cboe EDGX Rule 11.14; Cboe BZX
Rule 11.16; BOX Rule 7230; Nasdaq Rules, Equity 2, Section 17.
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Moreover, if the potential for such catastrophic losses existed, as
noted above, it would need to be reflected in the fees charged by
exchanges to market participants in a manner that is not currently the
case, making trading more expensive for all investors all the time.
Rather, as the Commission has recognized, provisions such as Exchange
Rule 527 reflect the view that risks associated with system
malfunctions should be allocated among all exchange members, rather
than being borne solely by the exchange. Indeed, this view is
consistently reflected in the limitation of liability rules common
among United States exchanges.\34\ This view is also reflected in the
Exchange's proposal to condition any payment on
[[Page 56240]]
the execution of a release of claims against MIAX Sapphire for the
Operational Error experienced on June 3, 2025, because this condition
is aimed at avoiding unnecessary litigation and ensuring equal
treatment of all claimants.
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\34\ Id.
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The Exchange further believes that, consistent with Section 6(b)(5)
of the Act,\35\ its proposal will promote just and equitable principles
of trade and protect investors and the public interest by establishing
a fair process through which affected Members may be compensated for
the claims they submitted, which losses will be fully covered by the
proposed payment policy. The Exchange believes that this filing will
enhance the transparency of the process to compensate Members for their
losses. The Exchange further believes that its proposed process for
distributing payments will benefit investors and promote the public
interest by providing incentives for Members to use funds for the
benefit of investors. Specifically, the Exchange believes that its
proposal will benefit investors and promote the public interest by
requiring a claimant to submit to the Exchange an attestation detailing
the compensation the Member has provided or will provide to its
customers, and detailing the extent to which the Member incurred the
losses covered by the proposed payment when trading for its own
account.
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\35\ 15 U.S.C. 78f(b)(5).
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As described above, this type of proposal is not without precedent
and is based on the payment plan implemented by Nasdaq in 2012 for
system difficulties in the Nasdaq halt and imbalance cross process in
connection with the IPO of Facebook.\36\
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\36\ See supra note 12.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change would not impose any burden on
competition. The proposed rule change is designed to promote fairness
in the marketplace by providing compensation to Members and their
customers that experienced a loss as a result of the June 3, 2025
Operational Error. The Exchange believes that the proposed rule change
will not burden intra-market competition because all Members would be
subject to the same standards and requirements to receive payments as
set forth in proposed Exchange Rule 527(e). The Exchange believes that
the proposed rule change will not burden inter-market competition
because the proposed rule change is not designed to address any
competitive issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
SAPPHIRE-2025-32, as Modified by Amendment No. 1, and Grounds for
Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \37\ to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved. Institution of proceedings is appropriate at this time in
view of the legal and policy issues raised by the proposal. Institution
of proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, the
Commission seeks and encourages interested persons to provide comments
on the proposal to inform the Commission's analysis of whether to
approve or disapprove the proposed rule change, as modified by
Amendment No.1.
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\37\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2) of the Act,\38\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act,\39\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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 not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\40\
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\38\ 15 U.S.C. 78s(b)(2)(B).
\39\ 15 U.S.C. 78f(b)(5).
\40\ Id.
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, in addition to any
other comments they may wish to submit regarding the proposal, as
modified by Amendment No. 1. In particular, the Commission seeks
comment on whether the proposal to amend Exchange Rule 527 to provide a
one-time accommodation payment to Members for claims arising from an
operation error on June 3, 2025, in excess of the liability limits set
forth in Exchange Rule 527 for claims made by Members, is consistent
with the requirements of Section 6(b)(5) of the Act.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal, as modified by Amendment No. 1. In particular, the
Commission invites the written views of interested persons concerning
whether the proposed rule change is consistent with Section 6(b)(5) of
the Act \41\ or any other provision of the Act, or the rules and
regulations thereunder. Although there do not appear to be any issues
relevant to approval or disapproval that would be facilitated by an
oral presentation of data, views, and arguments, the Commission will
consider, pursuant to Rule 19b-4 under the Act,\42\ any request for an
opportunity to make an oral presentation.\43\
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\41\ 15 U.S.C. 78f(b)(5).
\42\ 17 CFR 240.19b-4.
\43\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants to the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved by December 26,
2025. Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by January 9, 2026.
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-SAPPHIRE-2025-32 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 56241]]
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-SAPPHIRE-2025-32. 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 filing 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-SAPPHIRE-2025-32 and should be submitted
on or before December 26, 2025. Rebuttal comments should be submitted
by January 9, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-21990 Filed 12-4-25; 8:45 am]
BILLING CODE 8011-01-P