Document ID: SEC-2017-1986-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2017-12-04T05:00Z

[Federal Register Volume 82, Number 231 (Monday, December 4, 2017)]
[Notices]
[Pages 57313-57316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25987]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82164; File No. SR-CBOE-2017-074]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Clarifying 
How the Options Regulatory Fee is Assessed and Collected

November 28, 2017.
    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 November 17, 2017, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Fees Schedule relating to the 
Options Regulator Fee (``ORF'').
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its Fees Schedule to clarify how the 
ORF is assessed and collected.\3\
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    \3\ The Exchange initially filed the proposed rule changes on 
November 16, 2017 (SR-CBOE-2017-073). On November 17, 2017 the 
Exchange withdrew SR-CBOE-2017-073 and then subsequently submitted 
this filing (SR-CBOE-2017-074).
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Background
    The ORF was established in October 2008 as a replacement of 
Registered Representative fees.\4\ The ORF is assessed by the Exchange 
to each Trading Permit Holder for options transactions executed or 
cleared by the Trading Permit Holder that are cleared by The Options 
Clearing Corporation (``OCC'') in the customer range (i.e., 
transactions that clear in a customer account at OCC) regardless of the 
exchange on which the transaction occurs.\5\
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    \4\ See Securities Exchange Act Release No. 58817 (October 20, 
2008), 73 FR 63744 (October 27, 2008) (the ``Original ORF Filing'').
    \5\ The ORF also applies to customer-range transactions executed 
during Extended Trading Hours as defined in Cboe Options Rule 
1.1(rrr).
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    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of Trading Permit Holder 
(``TPH'') customer options business, including performing routine 
surveillances, investigations, examinations, financial monitoring, as 
well as policy, rulemaking, interpretive and enforcement activities.\6\ 
The Exchange believes that revenue generated from the ORF, when 
combined with all of the Exchange's other regulatory fees and fines, 
will cover a material portion, but not all, of the Exchange's 
regulatory costs.
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    \6\ The Exchange notes that its regulatory responsibilities with 
respect to TPH compliance with options sales practice rules have 
largely been allocated to FINRA under a 17d-2 agreement. The ORF is 
not designed to cover the cost of that options sales practice 
regulation. See Securities Exchange Act Release No. 76309 (October 
29, 2015), 80 FR 68361 (November 4, 2015).
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    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with its other regulatory fees and 
fines, does not exceed the Exchange's total regulatory costs. The 
Exchange monitors its regulatory costs and revenues at a minimum on a 
semi-annual basis. If the Exchange determines regulatory revenues 
exceed or are insufficient to cover a material portion of its 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Commission. The Exchange notifies TPHs of 
adjustments to the ORF via regulatory circular. The Exchange endeavors 
to provide TPHs with such notice at least 30 calendar days prior to the 
effective date of the change.
    Under the Exchange's current process, the ORF is assessed to TPHs 
and collected indirectly from TPHs through their clearing firms by OCC 
on behalf of the Exchange. The following scenarios reflect how the ORF 
is currently assessed and collected (these apply regardless if the 
transaction is executed on the Exchange or on an away exchange):
    1. If a TPH is the executing clearing firm on a transaction 
(``Executing Clearing Firm''), the ORF is assessed to and collected 
from that TPH by OCC on behalf of the Exchange.
    2. If a TPH is the Executing Clearing Firm and the transaction is 
``given up'' to a different TPH that clears the transaction (``Clearing 
Give-up''), the ORF is assessed to the Executing Clearing Firm (the ORF 
is the obligation of the Executing Clearing Firm). The ORF is collected 
from the Clearing Give-up.
    3. If the Executing Clearing Firm is a non-TPH and the Clearing 
Give-up is a TPH, the ORF is assessed to and collected from the 
Clearing Give-up.

[[Page 57314]]

    4. If a TPH is the Executing Clearing Firm and a non-TPH is the 
Clearing Give-up, the ORF is assessed to the Executing Clearing Firm. 
The ORF is the obligation of the Executing Clearing Firm but is 
collected from the non-TPH Clearing Give-up (for the reasons described 
below).
    5. No ORF is assessed if a TPH is neither the Executing Clearing 
Firm nor the Clearing Give-up.
    The Exchange uses an OCC cleared trades file to determine the 
Executing Clearing Firm and the Clearing Give-up.\7\
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    \7\ The Exchange notes that in the case where a non-self-
clearing TPH executes a transaction on the Exchange, the TPH's 
guaranteeing Clearing Trading Permit Holder is reflected as the 
Executing Clearing Firm in the OCC cleared trades file and the ORF 
is assessed to and collected from the Executing Clearing Firm.
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    In each of scenarios 1 through 4 above, if the transaction is 
transferred pursuant to a Clearing Member Trade Assignment (``CMTA'') 
arrangement to another clearing firm who ultimately clears the 
transaction, the ORF is collected from the clearing firm that 
ultimately clears the transaction (which firm may be a non-TPH) by OCC 
on behalf of the Exchange. Using CMTA transfer information provided by 
the OCC, the Exchange subtracts the ORF charge from the monthly ORF 
bill of the clearing firm that transfers the position and adds the 
charge to the monthly ORF bill of the clearing firm that receives the 
CMTA transfer (i.e., the ultimate clearing firm).\8\ This process is 
performed at the end of each month on each transfer in the OCC CMTA 
transfer file for that month.\9\
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    \8\ See Cboe Options Regulatory Circular RG09-030 (``ORF FAQ''), 
Question 15.
    \9\ The Exchange notes that OCC provides the Exchange and other 
exchanges with information to assist in excluding CMTA transfers 
done to correct bona fide errors from the ORF calculation. 
Specifically, if a clearing firm gives up or CMTA transfers a 
position to the wrong clearing firm, the firm that caused the error 
will send an offsetting CMTA transfer to that firm and send a new 
CMTA transfer to the correct firm. The offsetting CMTA transfer is 
marked with a CMTA Transfer ORF Indicator which results in the 
original erroneous transfer being excluded from the ORF calculation.
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Proposed Amendments to the Fees Schedule
    The Exchange proposes to amend its Fees Schedule in the following 
four respects to clarify how the ORF is assessed and collected.
    First, the Exchange proposes to amend its Fees Schedule to clarify 
that the ORF is collected by OCC on behalf of the Exchange from the 
Clearing Trading Permit Holder (``CTPH'') or non-CTPH that ultimately 
clears the transaction. While the ORF is an obligation of TPHs, due to 
industry request the ORF is collected from the clearing firm that 
ultimately clears the eligible trade, even if such firm is a not a TPH. 
The Exchange, OCC and the industry agreed to this collection method in 
response to comments that by collecting the ORF in this manner TPHs and 
non-TPHs could more easily pass-through the ORF to their customers.\10\ 
In the Original ORF Filing, the Exchange stated that it expects TPHs 
will pass-through the ORF to their customers in the same manner that 
firms pass-through to their customers the fees charged by self-
regulatory organizations (``SROs'') to help the SROs meet their 
obligations under Section 31 of the Exchange Act.\11\
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    \10\ See ORF FAQ, Question 9.
    \11\ See ORF FAQ, Question 10.
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    Accordingly, in scenario 4 above the ORF is collected from the non-
CTPH that clears the transaction in order to facilitate the pass-
through of the ORF to the end-customer. Likewise, collection of the ORF 
from the ultimate (CMTA) clearing firm facilitates the passing of the 
fee to the end-customer. In those cases where the ORF is collected from 
a non-CTPH, the Exchange (through OCC) collects the ORF as a 
convenience for the TPH whose obligation it is to pay the fee to the 
Exchange.
    As described above, under the Exchange's current process the 
Exchange subtracts the ORF from a CMTA transferor's ORF bill and adds 
it to the CMTA transferee's ORF bill for every transfer in the monthly 
OCC CMTA transfer file. Going forward, in order to avoid potentially 
collecting the ORF on any transactions that are not subject to the ORF, 
the Exchange will perform a check to determine whether the CMTA 
transferor or transferee is a TPH. If either the CMTA transferor or 
transferee is a TPH, the Exchange will collect the ORF from the 
transferee through the process described above. If neither the 
transferor nor transferee is a TPH, the Exchange will not include that 
transfer as part of such process (i.e., the Exchange will not debit the 
ORF from the transferor or collect the ORF from the transferee). The 
consequence of this change is that there may be a very small number of 
instances each month in which a position that was assessed the ORF 
would not be passed to the ultimate clearing firm and the charge would 
remain with (and be collected from) the original clearing firm. The 
Exchange expects to implement this change for December 2017 ORF billing 
after a necessary system enhancement has been completed.
    Second, the Exchange proposes to amend its Fees Schedule to clarify 
that the ORF is assessed by the Exchange to each TPH for options 
transactions cleared by the TPH (as opposed to ``executed or cleared'' 
by the TPH) that are cleared by OCC in the customer range regardless of 
the exchange on which the transaction occurs. As described above, 
whether a transaction is subject to the ORF is determined by whether a 
TPH is the Executing Clearing Firm or the Clearing Give-up as reflected 
in the OCC cleared trades file. Only the Executing Clearing Firm and 
the Clearing Give-up on the transaction are identified on the OCC file. 
Accordingly, because the ORF is always assessed to a CTPH, the Exchange 
proposes to remove the words ``executed or'' from the Fee Schedule 
description of the ORF to clarify that the ORF is assessed for options 
transactions cleared by a TPH.
    Third, the Exchange proposes to clarify its process for assessing 
the ORF on linkage transactions. An options order entered on the 
Exchange may be routed to and executed on another exchange pursuant to 
the Options Order Protection and Locked/Crossed Market Plan. The 
Exchange may engage a routing broker to provide routing services to the 
Exchange as described in Cboe Options Rule 6.14B (``Routing Services'') 
to facilitate linkage transactions. A customer order routed by a 
routing broker for execution at another exchange results in a 
transaction on that exchange and an obligation of the routing broker to 
pay the options regulatory fee, if any, of that exchange. After 
receiving a fill on the away exchange, the routing broker trades 
against the original order entered on the Exchange and incurs the Cboe 
Options ORF. Pursuant to its agreement with the routing broker, the 
Exchange reimburses the routing broker for any options regulatory fee 
assessed by the Exchange and by the away market on which the customer 
order was executed. As a result, only the original customer order 
executed on the Exchange is assessed the ORF. The Exchange proposes to 
amend its Fees Schedule to clarify that, with respect to linkage 
transactions, the Exchange reimburses its routing broker providing 
Routing Services pursuant to Cboe Options Rule 6.14B for options 
regulatory fees it incurs in connection with the Routing Services it 
provides.
    Fourth, the Exchange proposes to change the method it uses to 
assess the ORF to better align with the Exchange's Fees Schedule. 
Currently, the Exchange assesses the ORF to a TPH based on the OCC 
clearing number(s) that the TPH registers with the Exchange. A TPH may 
have additional OCC clearing numbers

[[Page 57315]]

that are not registered with the Exchange because they are used by the 
TPH to clear activity on other exchanges. If a TPH uses a non-CBOE 
Options registered OCC clearing number on a transaction and that 
clearing number is denoted as the Executing Clearing Firm or the 
Clearing Give-up, the ORF is not assessed to that transaction because 
the clearing number is not known to the Exchange. Such transactions are 
subject to the ORF under the Exchange's Fees Schedule because the 
Executing Clearing Firm or the Clearing Give-up was a TPH. The ORF is 
assessed at the TPH entity level, not at the OCC clearing number level.
    In order to conform its ORF billing practice to its Fees Schedule, 
the Exchange proposes to amend the Fees Schedule to require TPHs, 
pursuant to Cboe Options Rule 15.1,\12\ to provide the Exchange with a 
complete list of its OCC clearing numbers. The Exchange would use the 
list provided solely for ORF billing purposes. TPHs would be required 
to keep such information up to date with the Exchange. The Exchange 
will issue a Regulatory Circular to provide TPHs with notice of this 
change and a deadline for initial submission of its OCC clearing 
numbers list. The Exchange expects to implement this change for 
December 2017 ORF billing in order for the Exchange to provide TPHs 
with notice of this new requirement and time to comply.\13\
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    \12\ Cboe Options Rule 15.1 provides that no Trading Permit 
Holder shall refuse to make available to the Exchange such books, 
records or other information as may be called for under the Rules or 
as may be requested in connection with an investigation by the 
Exchange.
    \13\ The Exchange notes that its Fees Schedule includes other 
requirements for TPHs to provide certain information to the Exchange 
related to Exchange fees. For example, footnote 13 of the Fees 
Schedule requires TPHs to submit a rebate request form with 
supporting documentation in order to receive a rebate of transaction 
fees for certain options transactions.
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    The Exchange also proposes a couple of minor clean up changes to 
the Fees Schedule. The ORF is listed as being $0.0064 per contract 
through January 31, 2016 and $0.0081 per contract effective February 1, 
2016. As these dates have passed and the ORF is now simply $0.0081 per 
contract, the Exchange proposes to delete the reference to the ORF 
being $0.0064 per contract through January 31, 2016 and the February 1, 
2016 effective date of the $0.0081 per contract ORF.
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.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\15\ which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its Trading Permit Holders and other persons using its 
facilities. Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) \16\ requirement that the 
rules of an exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposal to collect the ORF from non-TPHs 
that ultimately clear the transaction is an equitable allocation of 
reasonable dues, fees, and other charges among its Trading Permit 
Holders and other persons using its facilities. The Exchange notes that 
there is a material distinction between ``assessing'' the ORF and 
``collecting'' the ORF. The Exchange does not assess the ORF to non-
TPHs. The ORF is an obligation of TPHs. Once, however, the ORF is 
assessed to a TPH for a particular transaction, the ORF may be 
collected from a TPH or a non-TPH, depending on how the transaction is 
cleared at OCC. If there was no change to the clearing number of the 
original transaction, the ORF would be collected from the TPH. If there 
was a change to the clearing number of the original transaction and a 
non-TPH becomes the ultimate clearing firm for that transaction, then 
the ORF will be collected from that non-TPH. The Exchange believes that 
this collection practice is reasonable and appropriate, and was 
originally instituted at the request of the industry for the ORF be 
collected from the clearing firm that ultimately clears the transaction 
in order to facilitate the passing of the fee to the end-customer.
    The Exchange believes it is reasonable, equitable and 
nondiscriminatory not to pass the ORF to a CMTA transferee when neither 
the CMTA transferor nor the transferee is a TPH because this would help 
ensure the ORF is not collected on any transactions that may not be 
subject to the ORF.
    The Exchange believes the proposal to clarify that the ORF is 
assessed to TPHs for options transactions cleared by the TPH (as 
opposed to executed or cleared) is reasonable because it adds clarity 
to the Fees Schedule by better and more accurately describing the 
application of the ORF. The Exchange believes it is appropriate to 
charge the ORF only to transactions that clear as customer at the OCC. 
The Exchange believes that its broad regulatory responsibilities with 
respect to its TPH's activities supports applying the ORF to 
transactions cleared by a TPH. The Exchange's regulatory 
responsibilities are the same regardless of whether a TPH executes a 
transaction or clears a transaction executed on its behalf. The 
Exchange regularly reviews all such activity, including performing 
surveillance for position limit violations, manipulation, insider 
trading, front-running and contrary exercise advice violations. The 
Exchange believes the proposal is equitable and not unfairly 
discriminatory because it would apply in the same manner to TPHs 
subject to the ORF. The ORF is only assessed to a TPH with respect to a 
particular transaction in which it is either the Executing Clearing 
Firm or the Clearing Give-up.
    The Exchange believes it is reasonable, equitable and 
nondiscriminatory to reimburse its routing broker for any options 
regulatory fees the broker incurs in connection with Routing Services 
because this helps ensure the Exchange does not charge the ORF more 
than once to a single customer order.
    The Exchange believes the proposal to require TPHs to provide the 
Exchange with a complete list of its OCC clearing numbers is reasonable 
because it would enable the Exchange to conform its ORF billing 
practice to its Fees Schedule by capturing transactions executed or 
cleared by TPHs. The Exchange believes the proposal is equitable and 
not unfairly discriminatory because it would apply in the same manner 
to TPHs subject to the ORF.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
not intended to address any competitive issues but rather to provide 
more clarity and transparency regarding how the Exchange assesses and 
collects the ORF. The Exchange believes any burden on competition 
imposed by the proposed rule change is outweighed by the need to help 
the Exchange adequately fund its regulatory activities to ensure 
compliance with the Exchange Act.

[[Page 57316]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\ 
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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-CBOE-2017-074 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 No. SR-CBOE-2017-074. 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 Web site (http://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 Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying
    information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-CBOE-2017-074, and should be submitted on 
or before December 26, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-25987 Filed 12-1-17; 8:45 am]
BILLING CODE 8011-01-P