90122 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 

163See SIFMA Letter at 6. 

164See FICC Letter at 6. 

165 17 CFR 240.17Ad–22(e)(6)(i). 

166 17 CFR 240.17ad–22(e)(23)(ii). 

167See SIFMA Letter at 7–8. 

168See id. 

169See FICC Letter at 7. 

170See id. 

171See id. 

172See id. 

173See id. 

174See id. 

175 17 CFR 240.17Ad–22(e)(23)(ii). 

176 15 U.S.C. 78q–1. 

177 15 U.S.C. 78s(b)(2). 

178 In approving the proposed rule change, the 

Commission considered the proposals’ impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). See also Sections II.A. and II.B. 

179 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

period.163 In response, FICC states that 

inclusion of that data is not necessary 

because the Impact Study’s two-year 

period achieves the purpose of 

demonstrating the effectiveness of the 

proposed MMA during periods of both 

low and high market volatility.164 The 

Commission agrees that the Impact 

Study’s two-year period sufficiently 

demonstrates the performance of the 

proposed MMA during periods of both 

low and high market volatility, as the 

two-year study period also included 

periods of both low and high market 

volatility. Inclusion of March 2020 in 

the Impact Study is not required for the 

Commission to evaluate the 

responsiveness of the MMA. 

Accordingly, the Proposed Rule 

Change is consistent with Rule 17ad– 

22(e)(6)(i) because the new MMA 

margin calculation and Margin Proxy 

clarifications should better enable FICC 

to establish a risk-based margin system 

that considers and produces relevant 

margin levels commensurate with the 

risks associated with liquidating 

participant portfolios in a default 

scenario during periods of extreme 

market volatility.165

E. Consistency With Rule 17Ad– 

22(e)(23)(ii) 

Rule 17Ad–22(e)(23)(ii) requires that 

FICC establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

provide sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 

incur by participating in FICC.166

One commenter states that the 

Proposed Rule Change lacks 

transparency, quick implementation, 

and tools and resources to support 

market preparedness to identify risks 

and costs associated with how FICC 

calculates margin amounts.167

Specifically, the commenter urges FICC 

to provide members with (1) daily VaR 

calculations, (2) an MMA calculator, 

and (3) a phased implementation of the 

MMA, including a parallel run period 

where the MMA is calculated but not 

invoked.168

In response, FICC states that it 

provides tools and resources to enable 

members to determine their margin 

requirements and the impact of FICC’s 

proposals.169 Specifically, FICC 

maintains the Real Time Matching 

Report Center, Clearing Fund 

Management System, FICC Customer 

Reporting Service, and FICC Risk Client 

Portal which are client accessible 

websites for accessing risk reports and 

other risk disclosures.170 These 

resources enable members to view 

Clearing Fund requirement information 

and margin component details, 

including portfolio breakdowns by 

CUSIP and amounts attributable to the 

sensitivity-based VaR model.171

Members are also able to view data on 

market amounts for current clearing 

positions and associated VaR 

Charges.172 Additionally, the FICC 

Client Calculator enables members to, 

among other things, enter ‘‘what-if’’ 

position data to determine hypothetical 

VaR Charges before trade execution. 

FICC states that as of June 24, 2024, 

FICC is in the process of enhancing the 

FICC Client Calculator to incorporate 

the MMA and FICC expects the 

enhancement to be available to members 

prior to implementation of the MMA, 

subject to the Commission’s 

approval.173 FICC also states that it is 

currently developing a tool that would 

enable non-members to assess potential 

VaR Charges (including MMA) as 

well.174

The extensive tools and resources that 

FICC makes available to members 

should enable members to obtain 

individualized information to determine 

their Clearing Fund requirements, 

margin component details, and assess 

the impact of FICC’s proposals. 

Additionally, FICC’s multiple member 

outreach efforts (before and after 

development of the Proposed Rule 

Change) provided members with 

relevant individualized impact analyses 

with which to evaluate the Proposed 

Rule Change. Accordingly, FICC has 

provided tools and resources sufficient 

for its members to evaluate their daily 

VaR and other margin-related 

calculations, rendering a phased 

implementation of the proposed MMA 

unwarranted. 

Based on the foregoing, FICC has 

provided sufficient information, tools, 

and resources to enable members to 

identify and evaluate the relevant risks 

and costs associated with the Proposed 

Rule Change, consistent with Rule 

17ad–22(e)(23)(ii).175

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular with the requirements of 

Section 17A of the Act 176 and the rules 

and regulations promulgated 

thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 177 that 

proposed rule change SR–FICC–2024– 

003, be, and hereby is, approved.178

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.179

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2024–26531 Filed 11–13–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101543; File No. SR–Phlx– 

2024–50] 

Self-Regulatory Organizations; Nasdaq 

PHLX LLC; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change to Lower the Current 

Options Regulatory Fee (ORF) and 

Adopt a New Approach to ORF in 2025 

November 7, 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 October 

31, 2024, Nasdaq PHLX LLC (‘‘Phlx’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Phlx’s Pricing Schedule at Options 7, 

Section 6D, Options Regulatory Fee. 

While the changes proposed herein 

are effective upon filing, the Exchange 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 90123 

3Today, ORF is collected from Customers, 

Professionals and broker-dealers that are not 

affiliated with a clearing member that clear in the 

‘‘C’’ range at OCC. See supra notes 18 and 19 for 

descriptions of Customers and Professionals. 

4The term ‘‘member organization’’ means a 

corporation, partnership (general or limited), 

limited liability partnership, limited liability 

company, business trust or similar organization, 

transacting business as a broker or a dealer in 

securities and which has the status of a member 

organization by virtue of (i) admission to 

membership given to it by the Membership 

Department pursuant to the provisions of General 

3, Sections 5 and 10 or the By-Laws or (ii) the 

transitional rules adopted by the Exchange pursuant 

to Section 6–4 of the By-Laws. References herein to 

officer or partner, when used in the context of a 

member organization, shall include any person 

holding a similar position in any organization other 

than a corporation or partnership that has the status 

of a member organization. See General 1, Section 

1(17). 

5Market participants must record the appropriate 

account origin code on all orders at the time of 

entry of the order. The Exchange represents that it 

has surveillances in place to verify that member 

organizations mark orders with the correct account 

origin code. 

6The Exchange uses reports from OCC when 

assessing and collecting the ORF. 

7CMTA or Clearing Member Trade Assignment is 

a form of ‘‘give-up’’ whereby the position will be 

assigned to a specific clearing firm at OCC. 

8By way of example, if Broker A, a Phlx member 

organization, routes a Customer order to CBOE and 

the transaction executes on CBOE and clears in 

Broker A’s OCC Clearing account, ORF will be 

collected by Phlx from Broker A’s clearing account 

at OCC via direct debit. While this transaction was 

executed on a market other than Phlx, it was 

cleared by a Phlx member organization in the 

member organization’s OCC clearing account in the 

Customer range, therefore there is a regulatory 

nexus between Phlx and the transaction. If Broker 

A was not a Phlx member organization, then no 

ORF should be assessed and collected because there 

is no nexus; the transaction did not execute on Phlx 

nor was it cleared by a Phlx member organization. 

9The regulatory costs for options comprise a 

subset of the Exchange’s regulatory budget that is 

specifically related to options regulatory expenses 

and encompasses the cost to regulate all member 

organizations’ options activity (‘‘Options Regulatory 

Cost’’). 

has designated certain amendments to 

be operative on November 1, 2024, and 

other amendments to be operative on 

January 1, 2025, as noted in the Exhibit 

5 and herein. 

The text of the proposed rule change 

is available on the Exchange’s website at 

https://listingcenter.nasdaq.com/ 

rulebook/phlx/rules, at the principal 

office of the Exchange, and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Phlx proposes to amend its current 

ORF in several respects. In summary, 

first, Phlx proposes to reduce its ORF 

from $0.0034 to $0.0022 per contract 

side from November 1, 2024, through 

December 31, 2024. Second, as of 

January 1, 2025, Phlx proposes to 

amend its methodology of collection to: 

(1) specify that it is including options 

transactions in Phlx proprietary 

products; and (2) assess ORF in all 

clearing ranges except market makers 

who clear as ‘‘M’’ at The Options 

Clearing Corporation (‘‘OCC’’). 

Additionally, Phlx will assess a 

different rate for trades executed on 

Phlx (‘‘Local ORF Rate’’) and trades 

executed on non-Phlx exchanges 

(‘‘Away ORF Rate’’). Each change will 

be described below in greater detail. 

Background on Current ORF 

Today, Phlx assesses its ORF for each 

Customer 3 option transaction that is 

either: (1) executed by a member 

organization 4 on Phlx; or (2) cleared by 

a Phlx member organization at OCC in 

the Customer range,5 even if the 

transaction was executed by a nonmember organization of Phlx, regardless 

of the exchange on which the 

transaction occurs.6 If the OCC clearing 

member is a Phlx member organization, 

ORF is assessed and collected on all 

ultimately cleared Customer contracts 

(after adjustment for CMTA 7); and (2) if 

the OCC clearing member is not a Phlx 

member organization, ORF is collected 

only on the cleared Customer contracts 

executed at Phlx, taking into account 

any CMTA instructions which may 

result in collecting the ORF from a nonmember organization.8

Today, in the case where a member 

organization both executes a transaction 

and clears the transaction, the ORF will 

be assessed to and collected from that 

member organization. Today, in the case 

where a member organization executes 

a transaction and a different member 

organization clears the transaction, the 

ORF will be assessed to and collected 

from the member organization who 

clears the transaction and not the 

member organization who executes the 

transaction. Today, in the case where a 

non-member organization executes a 

transaction at an away market and a 

member organization clears the 

transaction, the ORF will be assessed to 

and collected from the member 

organization who clears the transaction. 

Today, in the case where a member 

organization executes a transaction on 

Phlx and a non-member organization 

clears the transaction, the ORF will be 

assessed to the member organization 

that executed the transaction on Phlx 

and collected from the non-member 

organization who cleared the 

transaction. Today, in the case where a 

member organization executes a 

transaction at an away market and a 

non-member organization ultimately 

clears the transaction, the ORF will not 

be assessed to the member organization 

who executed the transaction or 

collected from the non-member 

organization who cleared the 

transaction because the Exchange does 

not have access to the data to make 

absolutely certain that ORF should 

apply. Further, the data does not allow 

the Exchange to identify the member 

organization executing the trade at an 

away market. 

ORF Revenue and Monitoring of ORF 

Today, the Exchange monitors the 

amount of revenue collected from the 

ORF (‘‘ORF Regulatory Revenue’’) to 

ensure that it, in combination with other 

regulatory fees and fines, does not 

exceed Options Regulatory Costs.9 In 

determining whether an expense is 

considered an Options Regulatory Cost, 

the Exchange reviews all costs and 

makes determinations if there is a nexus 

between the expense and a regulatory 

function. The Exchange notes that fines 

collected by the Exchange in connection 

with a disciplinary matter offset Options 

Regulatory Cost. 

ORF Regulatory Revenue, when 

combined with all of the Exchange’s 

other regulatory fees and fines, is 

designed to recover a material portion of 

the Options Regulatory Costs to the 

Exchange of the supervision and 

regulation of member Customer options 

business including performing routine 

surveillances, investigations, 

examinations, financial monitoring, and 

policy, rulemaking, interpretive, and 

enforcement activities. Options 

Regulatory Costs include direct 

regulatory expenses and certain indirect 

expenses in support of the regulatory 

function. The direct expenses include 

in-house and third-party service 

provider costs to support the day-to-day 

regulatory work such as surveillances, 

investigations and examinations. The 

indirect expenses are only those 


ddrumheller on DSK120RN23PROD with NOTICES1
90124 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 

10 Direct and indirect expenses are based on the 

Exchange’s 2024 Regulatory Budget. 

11See https://www.nasdaqtrader.com/ 

MicroNews.aspx?id=OTA2024-53. The Exchange 

plans on issuing a second Options Trader Alert 

announcing changes for January 1, 2025. 

12The Exchange notes that its regulatory 

responsibilities with respect to member and 

member organization compliance with options sales 

practice rules have largely been allocated to FINRA 

under a 17d–2 agreement. The ORF is not designed 

to cover the cost of that options sales practice 

regulation. 

13The Exchange will provide members and 

member organizations with such notice at least 30 

calendar days prior to the effective date of the 

change. 

14The Exchange notes that in connection with 

this proposal, it provided the Commission 

confidential details regarding the Exchange’s 

projected regulatory revenue, including projected 

revenue from ORF, along with a projected 

regulatory expense. 

15The Exchange proposes to delete language in 

the Pricing Schedule at Options 7, Section 6D that 

will be obsolete as of November 1, 2024. 

16Proprietary products are products with 

intellectual property rights that are not multi-listed. 

Phlx lists several proprietary products. 

17Capacity ‘‘M’’ covers Market Makers registered 

on Phlx and market makers registered at non-Phlx 

exchanges. 

18The term ‘‘Customer’’ applies to any 

transaction that is identified by a member or 

member organization for clearing in the Customer 

range at The Options Clearing Corporation (‘‘OCC’’) 

which is not for the account of a broker or dealer 

or for the account of a ‘‘Professional’’ (as that term 

is defined in Options 1, Section 1(b)(45)). See 

Options 7, Section 1(c). 

19The term ‘‘Professional’’ applies to transactions 

for the accounts of Professionals, as defined in 

Options 1, Section 1(b)(45) means any person or 

entity that (i) is not a broker or dealer in securities, 

and (ii) places more than 390 orders in listed 

options per day on average during a calendar month 

for its own beneficial account(s). See Options 7, 

Section 1(c). 

20The term ‘‘Firm’’ applies to any transaction that 

is identified by a member or member organization 

for clearing in the Firm range at OCC. See Options 

7, Section 1(c). 

21The term ‘‘Broker-Dealer’’ applies to any 

transaction which is not subject to any of the other 

transaction fees applicable within a particular 

category. See Options 7, Section 1(c). A BrokerDealer clears in the ‘‘F’’ range at OCC. 

expenses that are in support of the 

regulatory functions, such areas include 

Office of the General Counsel, 

technology, finance, and internal audit. 

Indirect expenses will not exceed 35% 

of the total Options Regulatory Costs. 

Thus, direct expenses would be 65% of 

total Options Regulatory Costs for 

2024.10

The ORF is designed to recover a 

material portion of the Options 

Regulatory Costs to the Exchange of the 

supervision and regulation of its 

member organizations, including 

performing routine surveillances, 

investigations, examinations, financial 

monitoring, and policy, rulemaking, 

interpretive, and enforcement activities. 

Proposal for November 1, 2024, Through 

December 31, 2024 

Based on Phlx’s most recent review of 

its ORF Regulatory Revenues as 

compared to its ORF Regulatory Costs in 

light of recent fines, Phlx proposes to 

reduce the amount of ORF that will be 

collected by the Exchange from $0.0034 

to $0.0022 per contract side from 

November 1, 2024, through December 

31, 2024. The Exchange issued an 

Options Trader Alert on September 16, 

2024, that specified the proposed rate 

change for November 1, 2024.11

Phlx notes that there can be no 

assurance that the Options Regulatory 

Costs for the remainder of 2024 will not 

differ materially from these expectations 

and prior practice, nor can the Exchange 

predict with certainty whether options 

volume will remain at the current level 

going forward. The Exchange notes 

however, that when combined with 

regulatory fees and fines, the Options 

Regulatory Revenue that may be 

generated utilizing an ORF rate of 

$0.0034 per contract side may result in 

Options Regulatory Revenue which 

exceeds the Exchange’s estimated 

Options Regulatory Costs for 2024 as a 

result of fines. The Exchange therefore 

proposes to reduce its ORF to $0.0022 

per contract side to ensure that Options 

Regulatory Revenue does not exceed the 

Exchange’s estimated Options 

Regulatory Costs in 2024. Particularly, 

the Exchange believes that reducing the 

ORF when combined with all of the 

Exchange’s other regulatory fees and 

fines, would allow the Exchange to 

continue covering a material portion of 

its Options Regulatory Costs, while 

lessening the potential for generating 

excess revenue that may otherwise 

occur using the rate of $0.0034 per 

contract side.12

The Exchange will continue to 

monitor the amount of Options 

Regulatory Revenue collected from the 

ORF to ensure that Options Regulatory 

Revenue, in combination with its other 

regulatory fees and fines, does not 

exceed Options Regulatory Costs. If the 

Exchange determines Options 

Regulatory Revenue exceed Options 

Regulatory Costs, the Exchange will 

adjust the ORF by submitting a fee 

change filing to the Commission and 

notifying 13 its members and member 

organizations via an Options Trader 

Alert.14

Proposal for January 1, 2025 

Phlx has been reviewing it 

methodologies for the assessment and 

collection of ORF. As a result of this 

review, Phlx proposes to revamp the 

current process of assessing and 

collecting ORF in various ways.15 Below 

Phlx will explain the modelling it 

performed and the outcomes of the 

modelling which have led the Exchange 

to propose the below changes. 

Effective January 1, 2025, Phlx 

proposes to assess ORF to each Phlx 

member organization for multi-listed 

options transactions and options 

transactions in Phlx proprietary 

products,16 cleared by OCC in all 

clearing ranges except market makers 

who clear as ‘‘M’’ at OCC (‘‘Market 

Makers’’) 17 where: (1) the execution 

occurs on Phlx or (2) the execution 

occurs on another exchange and is 

cleared by a Phlx member organization. 

With this change, Phlx proposes to 

amend its current ORF to assess ORF on 

Customer,18 Professional,19 Firm 20 and 

Broker-Dealer 21 transactions. All market 

participants, except Market Makers, 

would be subject to ORF. 

The ORF would be collected by OCC 

on behalf of Phlx from (1) Phlx clearing 

members for all Customer, Professional, 

Firm and Broker-Dealer transactions 

they clear or (2) non-members for all 

Customer, Professional, Firm and 

Broker-Dealer transactions they clear 

that were executed on Phlx. This model 

collects ORF where there is a nexus 

with Phlx and does not collect ORF 

from a non-member organization where 

the transaction takes place away from 

the Exchange. 

Further, effective January 1, 2025, the 

Exchange proposes to establish a 

different ORF for trades executed on 

Phlx (‘‘Local ORF Rate’’) and trades 

executed on non-Phlx exchanges 

(‘‘Away ORF Rate’’) by market 

participants. For Customer, 

Professional, and broker-dealer (not 

affiliated with a clearing member) 

transactions that clear in the ‘‘C’’ range 

at OCC (collectively ‘‘Customers’’) the 

Exchange proposes to assess a Local 

ORF Rate of $0.0187 per contract and an 

Away ORF Rate of $0.00 per contract. 

For Firm and Broker-Dealer transactions 

that clear in the ‘‘F’’ range at OCC 

(collectively ‘‘Firm and Broker-Dealer 

Transactions’’) the Exchange proposes 

to assess a Local ORF Rate of $0.000107 

per contract and an Away ORF Rate of 

$0.000107 per contract. The combined 

amount of Local ORF and Away ORF 

collected may not exceed 88% of 

Options Regulatory Cost. Phlx will 

ensure that ORF Regulatory Revenue 

does not exceed Options Regulatory 

Cost. As is the case today, the Exchange 

will notify member organizations via an 

Options Trader Alert of these changes at 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 90125 

22This new model seeks to provide a new 

approach to attributing Options Regulatory Cost to 

Options Regulatory Expense. In creating this model, 

the exchange did not rely on data from a single SRO 

as it had in the past. 

23The Exchange utilized data from all Nasdaq 

affiliated options exchanges to create this model 

from 2023 Q3 through 2024Q2 (‘‘Time Period’’). 

24R-Squared is a statistical measure that indicates 

how much of the variation of a dependent variable 

is explained by an independent variable in a 

regression model. The formula for calculating Rsquared is: R2=1¥Unexplained Variation/Total 

Variation. 

25The Exchange notes that various exchanges 

negotiate their respective contracts independently 

with FINRA creating some variability. Additionally, 

an exchange with a floor component would create 

some variability. 

least 30 calendar days prior to January 

1, 2025. 

The Exchange utilized historical and 

current data from its affiliated options 

exchanges to create a new regression 

model that would tie expenses 

attributable to regulation to a respective 

source.22 To that end, the Exchange 

plotted Customer volumes from each 

exchange 23 against Options Regulatory 

Cost from each exchange for the Time 

Period. Specifically, the Exchange 

utilized standard charting functionality 

to create a linear regression. The 

charting functionality yields a ‘‘slope’’ 

of the line, representing the marginal 

cost of regulation, as well as an 

‘‘intercept,’’ representing the fixed cost 

of regulation. The Exchange considered 

using non-linear models, but concluded 

that the best R∧2 (‘‘R-Squared’’) 24

results came from a standard y = Mx +B 

format for regulatory expense. The RSquared for the below charting method 

ranged from 85% to 95% historically. 

As noted, the plots below represent the 

Time Period. The X-axis reflects 

Customer volumes by exchange, by 

quarter and the Y-axis reflects 

regulatory expense by exchange. 

The results of this modelling 

indicated a high correlation and 

intercept for the baseline cost of 

regulating the options market as a 

whole. Specifically, the regression 

model indicated that (1) the marginal 

cost of regulation is easily measurable, 

and significantly attributable to 

Customer activity; and (2) the fixed cost 

of setting up a regulatory regime should 

arguably be dispersed across the 

industry so that all options exchanges 

have substantially similar revenue 

streams to satisfy the ‘‘intercept’’ 

element of cost. When seeking to offset 

the ‘‘set-up’’ cost of regulation, the 

Exchange attempted several levels of 

attribution. The most successful 

attribution was related to industry wide 

Firm and Broker-Dealer Transaction 

volume. Of note, through analysis of the 

results of this regression model, there 

was no positive correlation that could 

be established between Customer away 

volume and regulatory expense. This 

led the Exchange to utilize a model with 

a two-factor regression on a quarterly 

basis for the last four quarters of 

volumes relative to the pool of expense 

data for the six Nasdaq affiliated options 

exchanges. Once again, standard 

spreadsheet functionality (including the 

Data Analysis Packet) was used to 

determine the mathematics for this 

model. The results of this two-factor 

model, which resulted in the attribution 

of Customer Local ORF and Firm and 

Broker-Dealer Transaction Local and 

Away ORF, typically increased the RSquared (goodness of fit) to >97% across 

multiple historical periods.25

Utilizing the new regression model, 

and assumptions in the proposal, the 

model demonstrates that Customer 

volumes are directly attributable to 

marginal cost, and also shows that Firm 

and Broker-Dealer Transaction volumes 

industry-wide are a valid method (given 

the goodness of fit) to offset the fixed 

cost of regulation. Applying the 

regression coefficient values 

historically, the Exchange established a 

‘‘normalization’’ by per options 

exchange. This ‘‘normalization’’ 

encompassed idiosyncratic exchange 

expense-volume relationships which 

served to tighten the attributions further 

while not deviating by more than 30% 

from the mean for any single options 

exchange in the model. The primary 

driver of this need for ‘‘normalization’’ 

are negotiated regulatory contracts that 

were negotiated at different points in 

time, yielding some differences in per 

contract regulatory costs by exchange. 

Normalization is therefore the average of 

a given exchange’s historical (prior 4 

quarters) ratio of regulatory expense to 

revenue when using the regressed 

values (for Customer Local ORF and 

Firm and Broker-Dealer Transaction 

Local and Away ORF) that yields an 

effective rate by exchange. The 

‘‘normalization’’ was then multiplied to 

a ‘‘targeted collection rate’’ of 

approximately 88% to arrive at ORF 

rates for Customer, Firm and BrokerDealer Transactions. Of note, when 

comparing the ORF rates generated from 

this method, historically, there appears 

to be a very tight relationship between 

the estimated modeled collection and 

actual expense and the regulatory 

expenses for that same period. In 


ddrumheller on DSK120RN23PROD with NOTICES1EN14NO24.000</GPH>

6,000,000.00 

5,000,000.00 

ci. 4,000,000.00 

X 

~ 3,000,000.00 M 

QJ 

cc: 2,000,000.00 

1,000,000.00 

0.00 

Customer Volume vs Reg. Exp. 

0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 

Cust Volume 
90126 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 

26The direct expenses include in-house and 

third-party service provider costs to support the 

day-to-day regulatory work such as surveillances, 

investigations and examinations. 

27The indirect expenses include support from 

such areas as Office of the General Counsel, 

technology, finance and internal audit. 

28The Exchange proposes to reconsider the 

sunset date in 2025 and determine whether to 

proceed with the proposed ORF structure at that 

time. 

29 15 U.S.C. 78f(b). 

30 15 U.S.C. 78f(b)(4). 

31 15 U.S.C. 78f(b)(5). 

32 If the OCC clearing member is a Phlx member 

organization, ORF will be assessed and collected on 

all cleared Customer contracts (after adjustment for 

CMTA); and (2) if the OCC clearing member is not 

a Phlx member organization, ORF will be collected 

only on the cleared Customer contracts executed at 

Phlx, taking into account any CMTA instructions 

which may result in collecting the ORF from a nonmember organization. 

33 ISG is an industry organization formed in 1983 

to coordinate intermarket surveillance among the 

SROs by cooperatively sharing regulatory 

information pursuant to a written agreement 

between the parties. The goal of the ISG’s 

information sharing is to coordinate regulatory 

efforts to address potential intermarket trading 

abuses and manipulations. 

summary, the model does not appear to 

increase marginal returns. 

One other important aspect of this 

modeling is the input of Options 

Regulatory Costs. The Exchange notes 

that in defining Options Regulatory 

Costs it accounts for the nexus between 

the expense and options regulation. By 

way of example, the Exchange excludes 

certain indirect expenses such as 

payroll expenses, accounts receivable, 

accounts payable, marketing, executive 

level expenses and corporate systems. 

The Exchange would continue to 

monitor the amount of Options 

Regulatory Revenue collected from the 

ORF to ensure that it, in combination 

with other regulatory fees and fines, 

does not exceed Options Regulatory 

Costs. In determining whether an 

expense is considered an Options 

Regulatory Cost, the Exchange would 

continue to review all costs and makes 

determinations if there is a nexus 

between the expense and a regulatory 

function. The Exchange notes that fines 

collected by the Exchange in connection 

with a disciplinary matter will continue 

to offset Options Regulatory Cost. 

Members will continue to be provided 

with 30 calendar day notice of any 

change to ORF. 

As is the case today, ORF Regulatory 

Revenue, when combined with all of the 

Exchange’s other regulatory fees and 

fines, is designed to recover a material 

portion of the Options Regulatory Costs 

to the Exchange for the supervision and 

regulation of member organizations’ 

transactions, including performing 

routine surveillances, investigations, 

examinations, financial monitoring, and 

policy, rulemaking, interpretive, and 

enforcement activities. As discussed 

above, Options Regulatory Costs include 

direct regulatory expenses 26 and certain 

indirect expenses in support of the 

regulatory function.27

Finally, the Exchange notes that this 

proposal will be sunset on July 1, 2025, 

at which point the Exchange would 

revert back to the ORF methodology and 

rate ($0.0034 per contract side) that was 

in effect prior to this rule change.28

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) and the rules and regulations 

thereunder applicable to the Exchange 

and, in particular, the requirements of 

Section 6(b) of the Act.29 Specifically, 

the Exchange believes the proposed rule 

change is consistent with Section 6(b)(4) 

of the Act,30 which provides that 

Exchange rules may provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members, and other persons using its 

facilities. Additionally, the Exchange 

believes the proposed rule change is 

consistent with the Section 6(b)(5) 31

requirement that the rules of an 

exchange not be designed to permit 

unfair discrimination between 

customers, issuers, brokers, or dealers. 

Proposal for November 1, 2024, Through 

December 31, 2024 

The Exchange believes the proposed 

reduction of ORF is reasonable because 

it would help ensure that ORF 

Regulatory Revenue does not exceed a 

material portion of the Exchange’s ORF 

Regulatory Costs. As noted above, the 

ORF is designed to recover a material 

portion, but not all, of the Exchange’s 

ORF Regulatory Costs. Further, the 

Exchange believes the proposed fee 

change is reasonable because Customer 

transactions will be subject to a lower 

ORF than the rate that would otherwise 

be in effect on November 1, 2024. 

The Exchange had designed the ORF 

to generate ORF Regulatory Revenue 

that would be less than the amount of 

the Exchange’s ORF Regulatory Costs to 

ensure that it, in combination with its 

other regulatory fees and fines, does not 

exceed ORF Regulatory Costs, which is 

consistent with the view of the 

Commission that regulatory fees be used 

for regulatory purposes and not to 

support the Exchange’s business 

operations. As discussed above, 

however, after review of its ORF 

Regulatory Costs and ORF Regulatory 

Revenue which includes revenues from 

ORF and other regulatory fees and fines, 

the Exchange determined that absent a 

reduction in ORF, it may collect ORF 

Regulatory Revenue which would 

exceed its ORF Regulatory Costs. 

Indeed, the Exchange notes that when 

taking into account the potential that 

recent options volume persists, it 

estimates the ORF may generate ORF 

Regulatory Revenue that would cover 

more than the approximated Exchange’s 

projected ORF Regulatory Costs due to 

fines. As such, the Exchange believes 

it’s reasonable and appropriate to 

reduce the ORF amount from $0.0034 to 

$0.0022 per contract side. 

The Exchange also believes the 

proposed fee change is equitable and 

not unfairly discriminatory in that it is 

charged to all member organizations on 

all their transactions that clear in the 

Customer range at OCC.32 The Exchange 

believes the ORF ensures fairness by 

assessing higher fees to those member 

organizations that require more 

Exchange regulatory services based on 

the amount of Customer options 

business they conduct. Regulating 

Customer trading activity is much more 

labor intensive and requires greater 

expenditure of human and technical 

resources than regulating non-Customer 

trading activity, which tends to be more 

automated and less labor-intensive. For 

example, there are costs associated with 

main office and branch office 

examinations (e.g., staff expenses), as 

well as investigations into Customer 

complaints and the terminations of 

registered persons. As a result, the costs 

associated with administering the 

Customer component of the Exchange’s 

overall regulatory program are 

materially higher than the costs 

associated with administering the nonCustomer component of its regulatory 

program. Moreover, the Exchange notes 

that it has broad regulatory 

responsibilities with respect to activities 

of its members and member 

organizations, a small portion of which 

takes place on away exchanges. Indeed, 

the Exchange cannot effectively review 

for such conduct without looking at and 

evaluating activity regardless of where it 

transpires. In addition to its own 

surveillance programs, the Exchange 

also works with other SROs and 

exchanges on intermarket surveillance 

related issues. Through its participation 

in the Intermarket Surveillance Group 

(‘‘ISG’’) 33 the Exchange shares 

information and coordinates inquiries 

and investigations with other exchanges 

designed to address potential 

intermarket manipulation and trading 

abuses. Accordingly, there is a strong 

nexus between the ORF and the 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 90127 

34See Phlx Options 3, Section 8 and Options 2, 

Section 5. 

35 Id. 

36See Phlx Options 2, Section 5(a)(3) and (5). 

37See Phlx Options 7, Section 8, B. 

38See Phlx Options 7, Section 8, C. 

39See Phlx Options 7, Section 8, D. 

40See Phlx Options 2, Section 6(a). The total 

number of contracts executed during a quarter by 

a Market Maker and Lead Market Maker in options 

series to which it is not appointed may not exceed 

twenty-five percent (25%) of the total number of 

contracts executed by the Market Maker and Lead 

Market Maker in options series. 

41The Exchange notes that the regulatory costs 

relating to monitoring member organizations with 

respect to Customer trading activity are generally 

higher than the regulatory costs associated with 

member organizations that do not engage in 

Customer trading activity, which tends to be more 

automated and less labor-intensive. By contrast, 

regulating member organizations that engage in 

Customer trading activity is generally more labor 

intensive and requires a greater expenditure of 

human and technical resources as the Exchange 

needs to review not only the trading activity on 

behalf of Customers, but also the member 

organization’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 nonCustomer component of the regulatory program. 

42See Phlx Options 10 Rules. 

Exchange’s regulatory activities with 

respect to Customer trading activity of 

its members and member organizations. 

Proposal for January 1, 2025 

The Exchange believes the proposed 

ORF to be assessed on January 1, 2025, 

is reasonable, equitable and not unfairly 

discriminatory for various reasons. First, 

as of January 1, 2025, the Exchange 

would expand the collection of ORF to 

all clearing ranges, except Market 

Makers, provided the transaction was 

executed by an Phlx member 

organization or cleared by an Phlx 

member organization. With this 

amendment, Phlx would begin to assess 

Firm and Broker-Dealer Transactions an 

ORF, provided the transactions were 

executed by a Phlx member organization 

or cleared by a Phlx member 

organization. Additionally, the 

Exchange would assess an ORF for 

options transactions in Phlx proprietary 

products. Second, as of January 1, 2025, 

the Exchange would assess different 

rates to Customer transactions for the 

Local ORF Rate and Away ORF Rate as 

compared to Firms and Broker-Dealer 

Transactions. Third, as of January 1, 

2025, the combined amount of Local 

ORF and Away ORF collected would 

not exceed 88% of Options Regulatory 

Cost as all member organizations, except 

Market Makers, would be assessed ORF. 

The Exchange believes that assessing 

all member organizations, except Market 

Makers, an ORF is reasonable, equitable 

and not unfairly discriminatory. While 

the Exchange acknowledges that there is 

a cost to regulate Market Makers, unlike 

other market participants, Market 

Makers have various regulatory 

requirements with respect to quoting as 

provided for in Options 2, Section 4. 

Specifically, Market Makers have 

certain quoting requirements with 

respect to their assigned options series 

as provided in Options 2, Section 5. 

Lead Market Makers are obligated to 

quote in the Opening Process and intraday.34 Additionally, Market Makers may 

enter quotes in the Opening Process to 

open an option series and they are 

required to quote intra-day.35 Further, 

unlike other market participants, Lead 

Market Makers and Market Makers have 

obligations to compete with other 

Market Makers to improve the market in 

all series of options classes to which the 

Market Maker is appointed and to 

update market quotations in response to 

changed market conditions in all series 

of options classes to which the Market 

Maker is appointed.36 Also, Lead Market 

Makers and Market Makers incur other 

costs imposed by the Exchange related 

to their quoting obligations in addition 

to other fees paid by other market 

participants. Market Makers are subject 

to a number of fees, unlike other market 

participants. Market Makers pay 

Streaming Quote Trader Fees,37 Remote 

Market Maker Organization (RMO) 

Fee,38 and Remote Lead Market Maker 

Fee 39 in addition to other fees paid by 

other market participants. These 

liquidity providers are critical market 

participants in that they are the only 

market participants that are required to 

provide liquidity to Phlx and are 

necessary for opening the market. 

Excluding Market Maker transactions 

from ORF allows these market 

participants to manage their costs and 

consequently their business model more 

effectively thus enabling them to better 

allocate resources to other technologies 

that are necessary to manage risk and 

capacity to ensure that these market 

participants continue to compete 

effectively on Phlx in providing tight 

displayed quotes which in turn benefits 

markets generally and market 

participants specifically. Finally, the 

Exchange notes that Market Makers may 

transact orders in addition to submitting 

quotes on the Exchange. This proposal 

would except orders submitted by 

Market Makers, in addition to quotes, 

for purposes of ORF. Market Makers 

utilize orders in their assigned options 

series to sweep the order book. The 

Exchange believes the quantity of orders 

utilized by Market Makers in their 

assigned series is de minimis. In their 

unassigned options series, Market 

Makers utilize orders to hedge their risk 

or respond to auction. The Exchange 

notes that the number of orders 

submitted by Market Makers in their 

unassigned options series are far below 

the cap 40 and therefore de minimis. 

The Exchange believes including 

options transactions in Phlx proprietary 

products is reasonable, equitable and 

not unfairly discriminatory because 

Phlx lists various proprietary products 

for which the Exchange incurs Options 

Regulatory Costs. The Exchange believes 

that only exchanges that list proprietary 

products should be able to collect a 

Local ORF on their products. Phlx notes 

that there are a small number of Phlx 

proprietary products transacted as 

compared to multi-list options. Also, 

Phlx would only collect an ORF for 

proprietary products transacted on its 

market. As such, the Exchange believes 

that only a Local ORF should be applied 

to a Phlx proprietary product. 

The Exchange believes that assessing 

different rates to Customer transactions 

for the Local ORF Rate and Away ORF 

Rate as compared to Firm and BrokerDealer Transactions and collecting no 

more than 88% of Options Regulatory 

Cost is reasonable, equitable and not 

unfairly discriminatory. Customer 

transactions account for a material 

portion of Phlx’s Options Regulatory 

Cost.41 Customer transactions in 

combination with Firm and BrokerDealer Transactions account for a large 

portion of the Exchange’s surveillance 

expense. Therefore, the Exchange 

believes that 88% of Options Regulatory 

Cost is appropriate and correlates to the 

degree of regulatory responsibility and 

Options Regulatory Cost borne by the 

Exchange. With respect to Customer 

transactions, options volume continues 

to surpass volume from other options 

participants. Additionally, there are 

rules in the Exchange’s Rulebook that 

deal exclusively with Customer 

transactions, such as rules involving 

doing business with a Customer, which 

would not apply to Firm and BrokerDealer Transactions.42 For these 

reasons, regulating Customer trading 

activity is ‘‘much more labor-intensive’’ 

and therefore, more costly. The 

Exchange believes that a large portion of 

the Options Regulatory Cost relates to 

Customer allocation because obtaining 

Customer information may be more time 

intensive. For example, non-Customer 

market participants are subject to 

various regulatory and reporting 

requirements which provides the 

Exchange certain data with respect to 

these market participants. In contrast, 


ddrumheller on DSK120RN23PROD with NOTICES1
90128 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 

43The Know Your Customer or ‘‘KYC’’ provision 

is the obligation of the broker-dealer. 

44Phlx pays the Financial Industry Regulatory 

Authority (‘‘FINRA’’) to perform certain crossmarket surveillances on its behalf. In order to 

perform cross-market surveillances, Consolidated 

Audit Trail (‘‘CAT’’) data is utilized to match 

options transactions to underlying equity 

transactions. This review is data intensive given the 

volumes of information that are being reviewed and 

analyzed. 

Customer information is known by 

member organizations of the Exchange 

and is not readily available to Phlx.43

The Exchange may have to take 

additional steps to understand the facts 

surrounding particular trades involving 

a Customer which may require 

requesting such information from a 

broker-dealer. Further, Customers 

require more Exchange regulatory 

services based on the amount of options 

business they conduct. For example, 

there are Options Regulatory Costs 

associated with main office and branch 

office examinations (e.g., staff 

expenses), as well as investigations into 

Customer complaints and the 

terminations of registered persons. As a 

result, the Options Regulatory Costs 

associated with administering the 

Customer component of the Exchange’s 

overall regulatory program are 

materially higher than the Options 

Regulatory Costs associated with 

administering the non-Customer 

component when coupled with the 

amount of volume attributed to such 

Customer transactions. Utilizing the 

new regression model, and assumptions 

in the proposal, it appears that Phlx’s 

Customer regulation occurs to a large 

extent on Exchange. Utilizing the new 

regression model, and assumptions in 

the proposal, the Exchange does not 

believe that significant Options 

Regulatory Costs should be attributed to 

Customers for activity that may occur 

across options markets. To that end, 

with this proposal, the Exchange would 

assess Customers a Local ORF, but not 

an Away ORF rate. 

In contrast, the Options Regulatory 

Cost of regulating Firm and BrokerDealer Transactions is materially less 

than the Options Regulatory Costs of 

regulating Customer transactions, as 

explained above. The below chart 

derived from OCC data reflects the 

percentage of transactions by market 

participant. 

With this model, the addition of Firm 

and Broker-Dealer Transactions to the 

collection of ORF does not entail 

significant volume when compared to 

Customer transactions. As these market 

participants are more sophisticated, the 

Exchange notes that there are not the 

same protections in place for Firm and 

Broker-Dealer Transactions as compared 

to Customer transactions. Therefore, 

with the proposed model, the regulation 

of Firm and Broker-Dealer Transactions 

is less resource intensive than the 

regulation of Customer transactions. 

However, the Exchange notes that it 

appears from the new regression model 

and assumptions in the proposal, that 

unlike Customer transactions, the 

regulation of Firm and Broker-Dealer 

Transactions occurs both on the 

Exchange and across options markets. 

To that end, the Exchange proposes to 

assess Firm Range Transactions both a 

Local ORF and an Away ORF in contrast 

to Customer transactions that would 

only be assessed a Local ORF. The 

Exchange believes that not assessing 

Market Maker transactions an ORF 

permits these market participants to 

utilize their resources to quote tighter in 

the market. Tighter quotes benefits 

Customers as well as other market 

participants who interact with that 

liquidity. 

The Exchange’s proposal to establish 

both a Local ORF Rate and an Away 

ORF Rate and allocate the portion of 

Options Regulatory Cost differently 

between the two separate rates, by 

market participant, ensures that the 

Local ORF Rate and Away ORF Rate 

reflect the amount of Options 

Regulatory Costs associated with 

different types of surveillances and are 

reasonable, equitable and not unfairly 

discriminatory. The Exchange is 

responsible for regulating activity on its 

market as well as activity that may 

occur across options markets. The 

Exchange believes that it is reasonable, 

equitable and not unfairly 

discriminatory to assess only Firm and 

Broker-Dealer Transactions an Away 

ORF. With this model, while the 

regulation of Firm and Broker-Dealer 

Transactions is less resource intensive 

than the regulation of Customer 

transactions, it occurs both on the 

Exchange and across options markets.44

The Exchange believes that assessing 

the Firm and Broker-Dealer 


ddrumheller on DSK120RN23PROD with NOTICES1EN14NO24.001</GPH>

Industry Capacity Market.Share% January 2, 2019 to September 30, 2024 

55% 

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40% 

35% 

30% • 

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20% 

15% 

10% 

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2019 2020 2021 2022 

Type 

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7.024 
Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 90129 

45Phlx conducts surveillances and enforces Phlx 

Rules, however only a subset of those rules is 

subject to cross-market surveillance, such as margin 

and position limits. Of note, some Phlx trading 

rules are automatically enforced by Phlx’s System. 

46Phlx would submit a rule change to the 

Commission to amend ORF rates. 

47See Phlx Options 3, Section 8 and Options 2, 

Section 5. 48 Id. 49See Phlx Options 2, Section 5(a)(3) and (5). 50See Phlx Options 7, Section 8, B. 

51See Phlx Options 7, Section 8, C. 

52See Phlx Options 7, Section 8, D. 

53See Phlx Options 2, Section 6. The total 

number of contracts executed during a quarter by 

a Market Maker in options classes to which it is not 

appointed may not exceed twenty-five percent 

(25%) of the total number of contracts traded. In the 

Exchange’s experience, Market Maker’s are 

generally below the 25% cap. 

Transactions the same rate for Local 

ORF and Away ORF is appropriate 

given the lower volume that is 

attributed to these member 

organizations combined with the 

activity that is required to be regulated 

both on the Exchange and across 

options markets. The Exchange notes 

that there are Exchange rules that 

involve cross market surveillances that 

relate to activities conducted by Firm 

and Broker-Dealer Members.45 While 

not large in number, when compared to 

the overall number of Exchange rules 

that are surveilled by Phlx for onExchange activity, the Away ORF that 

would be assessed to Firm and BrokerDealer regulation would account for 

those costs. Additionally, the Exchange 

believes that limiting the amount of 

ORF assessed for activity that occurs on 

non-Phlx exchanges avoids overlapping 

ORFs that would otherwise be assessed 

by Phlx and other options exchanges 

that also assess an ORF. Also, the 

Exchange’s proposal continues to ensure 

that Options Regulatory Revenue, in 

combination with other regulatory fees 

and fines, does not exceed Options 

Regulatory Costs. Fines collected by the 

Exchange in connection with a 

disciplinary matter will continue to 

offset Options Regulatory Cost. 

Capping the combined amount of 

Local ORF and Away ORF collected at 

88% of Options Regulatory Cost 

commencing January 1, 2025, is 

reasonable, equitable and not unfairly 

discriminatory as given these factors. 

The Exchange will review the ORF 

Regulatory Revenue at the end of 

January 2025 and would amend the ORF 

if it finds that its ORF Regulatory 

Revenue exceeds its projections.46

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 intra-market competition 

not necessary or appropriate in 

furtherance of the purposes of the Act. 

The proposed changes to ORF do not 

impose an undue burden on intermarket competition because ORF is a 

regulatory fee that supports regulation 

in furtherance of the purposes of the 

Act. The Exchange notes, however, the 

proposed change is not designed to 

address any competitive issues. The 

Exchange is obligated to ensure that the 

amount of ORF Regulatory Revenue, in 

combination with its other regulatory 

fees and fines, does not exceed ORF 

Regulatory Cost. 

Proposal for November 1, 2024, Through 

December 31, 2024 

The Exchange’s proposal to reduce its 

ORF from $0.0034 to $0.0022 per 

contract side from November 1, 2024, 

through December 31, 2024, does not 

create an unnecessary or inappropriate 

burden on intra-market competition 

because the ORF applies to all Customer 

activity, thereby raising regulatory 

revenue to offset regulatory expenses. It 

also supplements the regulatory revenue 

derived from non-customer activity. 

Proposal for January 1, 2025 

Excluding Market Makers does not 

impose an undue burden on intramarket competition because, unlike 

other market participants, Market 

Makers have various regulatory 

requirements with respect to quoting as 

provided for in Options 2, Section 4. 

Specifically, Market Makers have 

certain quoting requirements with 

respect to their assigned options series 

as provided in Options 2, Section 5. 

Lead Market Makers are obligated to 

quote in the Opening Process and intraday.47 Additionally, Market Makers may 

enter quotes in the Opening Process to 

open an option series and they are 

required to quote intra-day.48 Further, 

unlike other market participants, Lead 

Market Makers and Market Makers have 

obligations to compete with other 

Market Makers to improve the market in 

all series of options classes to which the 

Market Maker is appointed and to 

update market quotations in response to 

changed market conditions in all series 

of options classes to which the Market 

Maker is appointed.49 Also, Lead Market 

Makers and Market Makers incur other 

costs imposed by the Exchange related 

to their quoting obligations in addition 

to other fees paid by other market 

participants. Market Makers are subject 

to a number of fees, unlike other market 

participants. Market Makers pay 

Streaming Quote Trader Fees,50 Remote 

Market Maker Organization (RMO) 

Fee,51 and Remote Lead Market Maker 

Fee 52 in addition to other fees paid by 

other market participants. These 

liquidity providers are critical market 

participants in that they are the only 

market participants that are required to 

provide liquidity to Phlx and are 

necessary for opening the market. 

Excluding Market Maker transactions 

from ORF does not impose an intramarket burden on competition, rather it 

allows these market participants to 

manage their costs and consequently 

their business model more effectively 

thus enabling them to better allocate 

resources to other technologies that are 

necessary to manage risk and capacity to 

ensure that these market participants 

continue to compete effectively on Phlx 

in providing tight displayed quotes 

which in turn benefits markets generally 

and market participants specifically. 

Finally, the Exchange notes that Market 

Makers may transact orders on the 

Exchange, in addition to submitting 

quotes. The Exchange’s proposal to 

except orders submitted by Market 

Makers, in addition to quotes, for 

purposes of ORF does not impose an 

undue burden on intra-market 

competition because Market Makers 

utilize orders in their assigned options 

series to sweep the order book. Further, 

the Exchange believes the quantity of 

orders utilized by Market Makers in 

their assigned series is de minimis. In 

their unassigned options series, Market 

Makers utilize orders to hedge their risk 

or respond to auction. The Exchange 

notes that the number of orders 

submitted by Market Makers in their 

unassigned options series are far below 

the cap 53 and therefore de minimis. 

Uniformly including options 

transactions in Phlx proprietary 

products in ORF for all Phlx member 

organizations does not impose an undue 

burden on intra-market competition. 

The Exchange believes that only 

exchanges that list proprietary products 

should be able to collect a Local ORF on 

their products. Phlx notes that there are 

a small number of Phlx proprietary 

products transacted as compared to 

multi-list options. Also, Phlx would 

only collect an ORF for proprietary 

products transacted on its market. 

The Exchange’s proposal to expand 

the clearing ranges to specifically 

include Firm and Broker-Dealer 

Transactions, in addition to Customer 

and Professional transactions, as of 

January 1, 2025, does not impose an 

undue burden on intra-market 

competition as Customer transactions 

account for a material portion of Phlx’s 


ddrumheller on DSK120RN23PROD with NOTICES1
90130 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 

54The Exchange notes that the regulatory costs 

relating to monitoring Members with respect to 

customer trading activity are generally higher than 

the regulatory costs associated with Members that 

do not engage in customer trading activity, which 

tends to be more automated and less laborintensive. By contrast, regulating Members that 

engage in customer trading activity is generally 

more labor intensive and requires a greater 

expenditure of human and technical resources 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 noncustomer component of the regulatory program. 

55See Phlx Options 10 Rules. 

56The Know Your Customer or ‘‘KYC’’ provision 

is the obligation of the broker-dealer. 

57Phlx pays the Financial Industry Regulatory 

Authority (‘‘FINRA’’) to perform certain crossmarket surveillances on its behalf. In order to 

perform cross-market surveillances, Consolidated 

Audit Trail (‘‘CAT’’) data is utilized to match 

options transactions to underlying equity 

transactions. This review is data intensive given the 

volumes of information that are being reviewed and 

analyzed. 

58Phlx conducts surveillances and enforces Phlx 

Rules, however only a subset of those rules is 

subject to cross-market surveillance, such as margin 

and position limits. Of note, some Phlx trading 

rules are automatically enforced by Phlx’s System. 

Options Regulatory Cost.54 Customer 

transactions in combination with Firm 

and Broker-Dealer Transactions account 

for a large portion of the Exchange’s 

surveillance expense. With respect to 

Customer transactions, options volume 

continues to surpass volume from other 

options participants. Additionally, there 

are rules in the Exchange’s Rulebook 

that deal exclusively with Customer 

transactions, such as rules involving 

doing business with a Customer, which 

would not apply to Firm and BrokerDealer Transactions.55 For these 

reasons, regulating Customer trading 

activity is ‘‘much more labor-intensive’’ 

and therefore, more costly. Further, the 

Exchange believes that a large portion of 

the Options Regulatory Cost relates to 

Customer allocation because obtaining 

Customer information may be more time 

intensive. For example, non-Customer 

market participants are subject to 

various regulatory and reporting 

requirements which provides the 

Exchange certain data with respect to 

these market participants. In contrast, 

Customer information is known by 

member organizations of the Exchange 

and is not readily available to Phlx.56

The Exchange may have to take 

additional steps to understand the facts 

surrounding particular trades involving 

a Customer which may require 

requesting such information from a 

broker-dealer. Further, Customers 

require more Exchange regulatory 

services based on the amount of options 

business they conduct. For example, 

there are Options Regulatory Costs 

associated with main office and branch 

office examinations (e.g., staff 

expenses), as well as investigations into 

Customer complaints and the 

terminations of registered persons. As a 

result, the Options Regulatory Costs 

associated with administering the 

Customer component of the Exchange’s 

overall regulatory program are 

materially higher than the Options 

Regulatory Costs associated with 

administering the non-Customer 

component when coupled with the 

amount of volume attributed to such 

Customer transactions. Not attributing 

significant Options Regulatory Costs to 

Customers for activity that may occur 

across options markets does not impose 

an undue burden on intra-market 

competition because the data in the 

regression model demonstrates that 

Phlx’s Customer regulation occurs to a 

large extent on Exchange. 

The Exchange believes that assessing 

Firm and Broker-Dealer Transactions a 

different ORF and assessing both a Local 

ORF and an Away ORF to these 

transactions does not impose an undue 

burden on intra-market competition 

because the regulation of Firm and 

Broker-Dealer Transactions is less 

resource intensive than the regulation of 

Customer transactions. With this model, 

the addition of Firm and Broker-Dealer 

Transactions to the collection of ORF 

does not entail significant volume when 

compared to Customer transactions. 

Unlike Customer transactions, the 

regulation of Firm and Broker-Dealer 

Transactions occurs both on the 

Exchange and across options markets. 

To that end, the Exchange proposes to 

assess Firm and Broker-Dealer 

Transactions both a Local ORF and an 

Away ORF. 

The Exchange’s proposal to allocate 

the portion of costs differently between 

the Local ORF and Away ORF does not 

create an undue burden on intra-market 

competition. The Exchange believes that 

each rate reflects the amount of Options 

Regulatory Costs associated with 

different types of surveillances and does 

not create an undue burden on 

competition as Phlx member 

organizations, excluding except Market 

Makers, would be uniformly assessed 

either a Local ORF Rate or an Away 

ORF Rate depending on where the 

transaction occurred and whether the 

transaction was executed or cleared by 

an Phlx member organization. Also, the 

Exchange would uniformly assess the 

Local ORF Rate and an Away ORF Rate 

by market participant. The Exchange is 

responsible for regulating activity on its 

market as well as activity that may 

occur across options markets. 

The Exchange believes that assessing 

only Firm and Broker-Dealer 

Transactions an Away ORF does not 

create an undue burden on intra-market 

competition because while the 

regulation of Firm and Broker-Dealer 

Transactions is less resource intensive 

than the regulation of Customer 

transactions, the regulation of Firm and 

Broker-Dealer transactions occurs both 

on the Exchange and across options 

markets.57 The Exchange believes that 

assessing Firm and Broker-Dealer 

Transactions the same rate for Local 

ORF and Away ORF is appropriate 

given the lower volume that is 

attributed to these member 

organizations combined with the 

activity that is required to be regulated 

both on the Exchange and across 

options markets. There are Exchange 

rules that involve cross market 

surveillances that relate to activities 

conducted by Firm and Broker-Dealer 

member organizations.58 While not large 

in number, when compared to the 

overall number of Exchange rules that 

are surveilled by Phlx for on-Exchange 

activity, the Away ORF that would be 

assessed to Firm and Broker-Dealer 

Transactions would account for those 

Options Regulatory Costs. Additionally, 

the Exchange believes that limiting the 

amount of ORF assessed for activity that 

occurs on non-Phlx exchanges does not 

impose a burden on intra-market 

competition, rather it avoids 

overlapping ORFs that would otherwise 

be assessed by Phlx and other options 

exchanges that also assess an ORF. With 

this model, Customer transactions 

would be assessed a higher Local ORF, 

while not being assessed an Away ORF 

as compared to Firm and Broker-Dealer 

Transactions. The Exchange believes 

that this difference in allocation is 

appropriate and correlates to the degree 

of regulatory responsibility and Options 

Regulatory Costs borne by different 

member organizations of the Exchange 

in light of the volume different member 

organizations transact on the Exchange. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were either 

solicited or received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective pursuant to Section 


ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices 90131 

59 15 U.S.C. 78s(b)(3)(A)(ii). 

60 17 CFR 240.19b–4(f)(2). 

61 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

4The term ‘‘hearing’’ means the hearing on the 

merits of an arbitration under Rule 13600. See Rule 

13100(o). 

5See Rule 13606(a)(1). Recordings made pursuant 

to Rule 13606(a)(1) are provided to parties free of 

charge. 

19(b)(3)(A)(ii) of the Act 59 and Rule 

19b–4(f)(2) 60 thereunder. 

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission 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 rule-comments@

sec.gov. Please include file number SR– 

Phlx–2024–50 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–Phlx–2024–50. 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–Phlx–2024–50 and should be 

submitted on or before December 5, 

2024. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.61

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2024–26409 Filed 11–13–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101561; File No. SR– 

FINRA–2024–018] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change To Amend FINRA Rule 

13606 (Record of Proceedings) To 

Provide Customers Access to a Copy 

of the Official Record of an 

Expungement Hearing 

November 7, 2024. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on November 

1, 2024, the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by FINRA. FINRA 

has designated the proposed rule change 

as constituting a ‘‘non-controversial’’ 

rule change under paragraph (f)(6) of 

Rule 19b–4 under the Act,3 which 

renders the proposal effective upon 

receipt of this filing by the Commission. 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to amend Rule 

13606 of the Code of Arbitration 

Procedure for Industry Disputes 

(‘‘Industry Code’’) to provide that the 

Director (‘‘Director’’) of FINRA Dispute 

Resolution Services (‘‘DRS’’) will 

provide a copy of the official record of 

an expungement hearing held pursuant 

to Rule 13805, and any transcription if 

the recording is transcribed, to any 

customers, upon request, who attend 

and participate in the expungement 

hearing, or who provide their position 

on the expungement request in writing. 

The proposed rule change would also 

amend Rule 12606 of the Code of 

Arbitration Procedure for Customer 

Disputes (‘‘Customer Code’’ and 

together with the Industry Code, 

‘‘Codes’’) and Rule 13606 to remove 

references to ‘‘tape’’ as a form of media 

that is used to record arbitration 

proceedings in the DRS arbitration 

forum. 

The text of the proposed rule change 

is available on FINRA’s website at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA 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. FINRA 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 

Rule 13606 provides that the Director 

of DRS will make a tape, digital, or other 

recording of every hearing 4 and the 

Director will provide a copy of the 

recording to any party upon request.5 In 

addition, Rule 13606 provides that the 

panel may order the parties to provide 


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