```

[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90157-90165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26411]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101547; File No. SR-ISE-2024-49]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt a New 
Approach to the Options Regulatory Fee (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 ISE, LLC (``ISE'' 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 90158]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend ISE's Pricing Schedule at Options 7, 
Section 9C regarding the Options Regulatory Fee.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments to be operative on January 1, 
2025.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/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
    ISE proposes to amend its current ORF in several respects. ISE 
proposes to amend its methodology of collection to: (1) specify that it 
is including options transactions in ISE proprietary products; and (2) 
assess ORF in all clearing ranges except market makers who clear as 
``M'' at The Options Clearing Corporation (``OCC''). Additionally, ISE 
will assess a different rate for trades executed on ISE (``Local ORF 
Rate'') and trades executed on non-ISE exchanges (``Away ORF Rate'').
Background on Current ORF
    Today, ISE assesses its ORF for each Customer \3\ option 
transaction that is either: (1) executed by a Member \4\ on ISE; or (2) 
cleared by an ISE Member at OCC in the Customer range,\5\ even if the 
transaction was executed by a non-Member of ISE, regardless of the 
exchange on which the transaction occurs.\6\ If the OCC clearing member 
is an ISE Member, 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 an ISE Member, ORF is collected only on 
the cleared Customer contracts executed at ISE, taking into account any 
CMTA instructions which may result in collecting the ORF from a non-
Member.\8\ The current ISE ORF is $0.0013 per contract side.
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    \3\ Today, 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 13 and 14 for 
descriptions of Priority Customers and Professional Customers.
    \4\ The term ``Member'' means an organization that has been 
approved to exercise trading rights associated with Exchange Rights. 
See General 1, Section 1(a)(13).
    \5\ Market 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 members mark orders with the correct account origin code.
    \6\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \7\ CMTA or Clearing Member Trade Assignment is a form of 
``give-up'' whereby the position will be assigned to a specific 
clearing firm at OCC.
    \8\ By way of example, if Broker A, an ISE Member, 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 
ISE from Broker A's clearing account at OCC via direct debit. While 
this transaction was executed on a market other than ISE, it was 
cleared by an ISE Member in the member's OCC clearing account in the 
Customer range, therefore there is a regulatory nexus between ISE 
and the transaction. If Broker A was not an ISE Member, then no ORF 
should be assessed and collected because there is no nexus; the 
transaction did not execute on ISE nor was it cleared by an ISE 
Member.
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    Today, in the case where a Member both executes a transaction and 
clears the transaction, the ORF will be assessed to and collected from 
that Member. Today, in the case where a Member executes a transaction 
and a different Member clears the transaction, the ORF will be assessed 
to and collected from the Member who clears the transaction and not the 
Member who executes the transaction. Today, in the case where a non-
Member executes a transaction at an away market and a Member clears the 
transaction, the ORF will be assessed to and collected from the Member 
who clears the transaction. Today, in the case where a Member executes 
a transaction on ISE and a non-Member clears the transaction, the ORF 
will be assessed to the Member that executed the transaction on ISE and 
collected from the non-Member who cleared the transaction. Today, in 
the case where a Member executes a transaction at an away market and a 
non-Member ultimately clears the transaction, the ORF will not be 
assessed to the Member who executed the transaction or collected from 
the non-Member 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 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.
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    \9\ The 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 
Members' options activity (``Options Regulatory Cost'').
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    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 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\
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    \10\ Direct and indirect expenses are based on the Exchange's 
2024 Regulatory Budget.
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    The ORF is designed to recover a material portion of the Options 
Regulatory Costs to the Exchange of the supervision and regulation of 
its Members, including performing routine surveillances, 
investigations, examinations, financial monitoring, and policy, 
rulemaking, interpretive, and enforcement activities.

[[Page 90159]]

Proposal for January 1, 2025
    ISE has been reviewing it methodologies for the assessment and 
collection of ORF. As a result of this review, ISE proposes to revamp 
the current process of assessing and collecting ORF in various ways. 
Below ISE 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, ISE proposes to assess ORF to each ISE 
Member for multi-listed options transactions, including options 
transactions in ISE proprietary products,\11\ cleared by OCC in all 
clearing ranges except market makers who clear as ``M'' at OCC 
(``Market Makers'') \12\ where: (1) the execution occurs on ISE or (2) 
the execution occurs on another exchange and is cleared by an ISE 
Member. With this change, ISE proposes to amend its current ORF to 
assess ORF on Priority Customer,\13\ Professional Customer,\14\ and 
Firm Proprietary \15\ and Broker-Dealer \16\ transactions. All market 
participants, except Market Makers, would be subject to ORF.
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    \11\ Proprietary products are products with intellectual 
property rights that are not multi-listed. ISE lists proprietary 
products.
    \12\ Capacity ``M'' covers Market Makers registered on ISE and 
market makers registered at non-ISE exchanges.
    \13\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in Nasdaq ISE Options 1, 
Section 1(a)(37). Unless otherwise noted, when used in this Pricing 
Schedule the term ``Priority Customer'' includes ``Retail''. See 
Options 7, Section 1(c).
    \14\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer. See Options 7, 
Section 1(c). The ``C'' range at OCC includes both Priority Customer 
and Professional Customer transactions.
    \15\ A ``Firm Proprietary'' order is an order submitted by a 
Member for its own proprietary account. See Options 7, Section 1(c).
    \16\ A ``Broker-Dealer'' order is an order submitted by a Member 
for a broker-dealer account that is not its own proprietary account. 
See Options 7, Section 1(c). A Broker-Dealer clears in the ``F'' 
range at OCC.
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    The ORF would be collected by OCC on behalf of ISE from (1) ISE 
clearing members for all Priority Customer, Professional Customer, Firm 
Proprietary and Broker-Dealer transactions they clear or (2) non-
members for all Priority Customer, Professional Customer, Firm 
Proprietary and Broker-Dealer transactions they clear that were 
executed on ISE. This model collects ORF where there is a nexus with 
ISE and does not collect ORF from a non-Member 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 ISE (``Local ORF 
Rate'') and trades executed on non-ISE exchanges (``Away ORF Rate'') by 
market participants. For Priority Customer, Professional Customer, and 
broker-dealer (not affiliated with a clearing member) transactions that 
clear in the ``C'' range at OCC transactions (collectively 
``Customers'') the Exchange proposes to assess a Local ORF Rate of 
$0.01169 per contract and an Away ORF Rate of $0.00 per contract. For 
Firm Proprietary and Broker-Dealer transactions that clear in the ``F'' 
range at OCC (collectively ``Firm Proprietary and Broker-Dealer 
Transactions'') the Exchange proposes to assess a Local ORF Rate of 
$0.000067 per contract and an Away ORF Rate of $0.000067 per contract. 
The combined amount of Local ORF and Away ORF collected may not exceed 
88% of Options Regulatory Cost. ISE will ensure that ORF Regulatory 
Revenue does not exceed Options Regulatory Cost. As is the case today, 
the Exchange will notify Members via an Options Trader Alert of these 
changes at 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.\17\ To that end, the Exchange plotted Customer volumes from 
each exchange \18\ 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[supcaret]2 (``R-Squared'') \19\ results 
came from a standard y = Mx +B format for regulatory expense. The R-
Squared 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.
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    \17\ This 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.
    \18\ The Exchange utilized data from all Nasdaq affiliated 
options exchanges to create this model from 2023 Q3 through 2024Q2 
(``Time Period'').
    \19\ R-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 R-squared is: R2=1-Unexplained Variation/Total 
Variation.

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[[Page 90160]]

[GRAPHIC] [TIFF OMITTED] TN14NO24.006

    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 Proprietary 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 Proprietary and Broker-Dealer Transaction Local and Away ORF, 
typically increased the R-Squared (goodness of fit) to >97% across 
multiple historical periods.\20\
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    \20\ The 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.
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    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 Proprietary 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 Proprietary 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 
Proprietary and Broker-Dealer 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 
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 Members' transactions, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. As discussed above, Options 
Regulatory Costs include

[[Page 90161]]

direct regulatory expenses \21\ and certain indirect expenses in 
support of the regulatory function.\22\
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    \21\ 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.
    \22\ The indirect expenses include support from such areas as 
Office of the General Counsel, technology, finance and internal 
audit.
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    Finally, the Exchange notes that this proposal will sunset on July 
1, 2025, at which point the Exchange would revert back to the ORF 
methodology and rate ($0.0013 per contract side) that was in effect 
prior to this rule change.\23\
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    \23\ The Exchange proposes to reconsider the sunset date in 2025 
and determine whether to proceed with the proposed ORF structure at 
that time.
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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.\24\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\25\ 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) \26\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(4).
    \26\ 15 U.S.C. 78f(b)(5).
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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 ISE Member or 
cleared by an ISE Member. With this amendment, ISE would begin to 
assess Firm Proprietary and Broker-Dealer Transactions an ORF, provided 
the transactions were executed by an ISE Member or cleared by an ISE 
Member, including options transactions in 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 Firm Proprietary 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 
Members, except Market Makers, would be assessed ORF.
    The Exchange believes that assessing all Members, 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. Primary Market Makers are 
obligated to quote in the Opening Process and intra-day.\27\ 
Additionally, Market Makers may enter quotes in the Opening Process to 
open an option series and they are required to quote intra-day.\28\ 
Further, unlike other market participants, Primary 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.\29\ Also, Primary 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. Primary Market Makers and Competitive Market 
Makers pay Access Fees \30\ 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 ISE 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 ISE 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 \31\ and therefore de 
minimis.
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    \27\ See ISE Options 3, Section 8 and Options 2, Section 5.
    \28\ Id.
    \29\ See ISE Options 2, Section 4(b)(1) and (3).
    \30\ See ISE Options 7, Section 8A.
    \31\ See ISE Options 2, Section 6(b)(1) and (2). The total 
number of contracts executed during a quarter by a Competitive 
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 by such Competitive Market Maker in classes to which it is 
appointed and with respect to which it was quoting pursuant to 
Options 2, Section 5(e)(1). The total number of contracts executed 
during a quarter by a Primary 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 per each Primary Market 
Maker Membership.
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    The Exchange believes including options transactions in ISE 
proprietary products is reasonable, equitable and not unfairly 
discriminatory because ISE 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. ISE notes that there are a small 
number of ISE proprietary products transacted as compared to multi-list 
options. Also, ISE 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 an ISE 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 Proprietary and Broker-Dealer 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 ISE's Options Regulatory Cost.\32\ Customer

[[Page 90162]]

transactions in combination with Firm Proprietary and Broker-Dealer 
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 Proprietary and 
Broker-Dealer Transactions.\33\ 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, Customer information 
is known by Members of the Exchange and is not readily available to 
ISE.\34\ 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 
ISE'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.
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    \32\ The 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 labor-intensive. 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 
non-Customer component of the regulatory program.
    \33\ See ISE Options 10 Rules.
    \34\ The Know Your Customer or ``KYC'' provision is the 
obligation of the broker-dealer.
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    In contrast, the Options Regulatory Cost of regulating Firm 
Proprietary and Broker-Dealer 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.
[GRAPHIC] [TIFF OMITTED] TN14NO24.007

    With this model, the addition of Firm Proprietary 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 Proprietary and Broker-
Dealer Transactions as compared to Customer transactions. Therefore, 
with the proposed model, the regulation of Firm Proprietary 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 Proprietary and Broker-
Dealer Transactions occurs both on the Exchange and across options 
markets. To that end, the Exchange proposes to assess Firm Proprietary 
and Broker-Dealer Transactions both a Local ORF and an Away ORF in 
contrast to

[[Page 90163]]

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 Proprietary and Broker-Dealer 
Transactions an Away ORF. With this model, while the regulation of Firm 
Proprietary and Broker-Dealer Transactions is less resource intensive 
than the regulation of Customer transactions, it occurs both on the 
Exchange and across options markets.\35\ The Exchange believes that 
assessing the Firm Proprietary and Broker-Dealer Transactions the same 
rate for Local ORF and Away ORF is appropriate given the lower volume 
that is attributed to these Members 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 
Proprietary and Broker-Dealer Members.\36\ While not large in number, 
when compared to the overall number of Exchange rules that are 
surveilled by ISE for on-Exchange activity, the Away ORF that would be 
assessed to Firm Proprietary and Broker-Dealer regulation would account 
for those costs. Additionally, the Exchange believes that limiting the 
amount of ORF assessed for activity that occurs on non-ISE exchanges 
avoids overlapping ORFs that would otherwise be assessed by ISE 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.
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    \35\ ISE pays the Financial Industry Regulatory Authority 
(``FINRA'') to perform certain cross-market 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.
    \36\ ISE conducts surveillances and enforces ISE Rules, however 
only a subset of those rules is subject to cross-market 
surveillance, such as margin and position limits. Of note, some ISE 
trading rules are automatically enforced by ISE's System.
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    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.\37\
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    \37\ ISE would submit a rule change to the Commission to amend 
ORF rates.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on 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 inter-
market 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 January 1, 2025
    Excluding Market Makers does not impose an undue burden on intra-
market 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. Primary Market Makers are 
obligated to quote in the Opening Process and intra-day.\38\ 
Additionally, Market Makers may enter quotes in the Opening Process to 
open an option series and they are required to quote intra-day.\39\ 
Further, unlike other market participants, Primary 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.\40\ Also, Primary 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. Primary Market Makers and Competitive Market 
Makers pay Access Fees \41\ 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 ISE and are necessary for opening the 
market. Excluding Market Maker transactions from ORF does not impose an 
intra-market 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 ISE 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 \42\ and therefore de 
minimis.
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    \38\ See ISE Options 3, Section 8 and Options 2, Section 5.
    \39\ Id.
    \40\ See ISE Options 2, Section 4(b)(1) and (3).
    \41\ See ISE Options 7, Section 8A.
    \42\ See ISE Options 2, Section 6(b)(1) and (2). The total 
number of contracts executed during a quarter by a Competitive 
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 by such Competitive Market Maker in classes to which it is 
appointed and with respect to which it was quoting pursuant to 
Options 2, Section 5(e)(1). The total number of contracts executed 
during a quarter by a Primary 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 per each Primary Market 
Maker Membership.

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[[Page 90164]]

    Uniformly including options transactions in ISE proprietary 
products in ORF for all ISE Members 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. ISE notes that there are a small number of ISE 
proprietary products transacted as compared to multi-list options. 
Also, ISE 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 Proprietary and Broker-Dealer Transactions, 
in addition to Priority Customer and Professional Customer 
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 ISE's Options Regulatory Cost.\43\ Customer 
transactions in combination with Firm Proprietary 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 Proprietary and 
Broker-Dealer Transactions.\44\ 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 Members of the Exchange and is not readily available to 
ISE.\45\ 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 ISE's Customer regulation occurs to a large extent on 
Exchange.
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    \43\ The 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 labor-intensive. 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 
non-customer component of the regulatory program.
    \44\ See ISE Options 10 Rules.
    \45\ The Know Your Customer or ``KYC'' provision is the 
obligation of the broker-dealer.
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    The Exchange believes that assessing Firm Proprietary 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 Proprietary and 
Broker-Dealer Transactions is less resource intensive than the 
regulation of Customer transactions. With this model, the addition of 
Firm Proprietary 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 
Proprietary and Broker-Dealer Transactions occurs both on the Exchange 
and across options markets. To that end, the Exchange proposes to 
assess Firm Proprietary 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 ISE Members, 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 ISE Member. 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 Proprietary and 
Broker-Dealer Transactions an Away ORF does not create an undue burden 
on intra-market competition because while the regulation of Firm 
Proprietary and Broker-Dealer Transactions is less resource intensive 
than the regulation of Customer transactions, the regulation of Firm 
Proprietary and Broker-Dealer Transactions occurs both on the Exchange 
and across options markets.\46\ The Exchange believes that assessing 
Firm Proprietary and Broker-Dealer Transactions the same rate for Local 
ORF and Away ORF is appropriate given the lower volume that is 
attributed to these Members 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 Proprietary and Broker-Dealer 
Members.\47\ While not large in number, when compared to the overall 
number of Exchange rules that are surveilled by ISE for on-Exchange 
activity, the Away ORF that would be assessed to Firm Proprietary and 
Broker-Dealer Transactions would

[[Page 90165]]

account for those Options Regulatory Costs. Additionally, the Exchange 
believes that limiting the amount of ORF assessed for activity that 
occurs on non-ISE exchanges does not impose a burden on intra-market 
competition, rather it avoids overlapping ORFs that would otherwise be 
assessed by ISE 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 
Proprietary 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 Members of the Exchange in light of the volume different 
Members transact on the Exchange.
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    \46\ ISE pays the Financial Industry Regulatory Authority 
(``FINRA'') to perform certain cross-market 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.
    \47\ ISE conducts surveillances and enforces ISE Rules, however 
only a subset of those rules is subject to cross-market 
surveillance, such as margin and position limits. Of note, some ISE 
trading rules are automatically enforced by ISE's System.
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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 
19(b)(3)(A)(ii) of the Act \48\ and Rule 19b-4(f)(2) \49\ thereunder.
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    \48\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \49\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-49 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-ISE-2024-49. 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-ISE-2024-49 and should be 
submitted on or before December 5, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26411 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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