Document ID: SEC-2021-0448-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2021-04-01T04:00Z

[Federal Register Volume 86, Number 61 (Thursday, April 1, 2021)]
[Notices]
[Pages 17223-17226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06673]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91420; File No. SR-ISE-2021-04]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend ISE's 
Pricing Schedule at Options 7, Section 9, Part C To Reduce the Options 
Regulatory Fee

March 26, 2021.
    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 March 16, 2021, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``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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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 9, Part C to reduce the Options Regulatory Fee or ``ORF''.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on April 1, 
2021.
    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
    Currently, ISE assesses an ORF of $0.0020 per contract side as 
specified in ISE's Pricing Schedule at Options 7, Section 9, Part C. 
The Exchange proposes to reduce the ORF from $0.0020 per contract side 
to $0.0018 per contract side as of April 1, 2021, in order to help 
ensure that revenue collected from the ORF, in combination with other 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs.
Collection of ORF
    Currently, ISE assesses its ORF for each customer option 
transaction that is either: (1) Executed by a member on ISE; or (2) 
cleared by an ISE member at The Options Clearing Corporation (``OCC'') 
in the customer range,\3\ even if the transaction was executed by a 
non-member of ISE, regardless of the exchange on which the transaction 
occurs.\4\ If the OCC clearing member is an ISE member, ORF is assessed 
and collected on all cleared customer contracts (after adjustment for 
CMTA \5\); 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.\6\
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    \3\ Participants must record the appropriate account origin code 
on all orders at the time of entry in order. The Exchange represents 
that it has surveillances in place to verify that members mark 
orders with the correct account origin code.
    \4\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \5\ 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.
    \6\ 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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    In the case where a member both executes a transaction and clears 
the transaction, the ORF is assessed to and collected from that member. 
In the case where a member executes a transaction and a different 
member clears the transaction, the ORF is assessed to and collected 
from the member who clears the transaction and not the member who 
executes the transaction. In the case where a non-member executes a 
transaction at an away market and a member clears the transaction, the 
ORF is assessed to and collected from the member who clears the 
transaction. In the case where a member executes a transaction on ISE 
and a non-member clears the transaction, the ORF is assessed to the 
member that executed the transaction on ISE and collected from the non-
member who cleared the transaction. In the case where a member executes 
a transaction at an away market and a non-member clears the 
transaction, the ORF is not 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
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a 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 ORF.
    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the 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. 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

[[Page 17224]]

include support from such areas as Office of the General Counsel, 
technology, and internal audit. Indirect expenses are estimated to be 
approximately 42% of the total regulatory costs for 2021. Thus, direct 
expenses are estimated to be approximately 58% of total regulatory 
costs for 2021.
    The ORF is designed to recover a material portion of the 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.
Proposal
    Based on the Exchange's most recent review, the Exchange is 
proposing to reduce the amount of ORF that will be collected by the 
Exchange from $0.0020 per contract side to $0.0018 per contract side. 
The Exchange issued an Options Trader Alert on February 8, 2021 
indicating the proposed rate change for April 1, 2021.\7\
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    \7\ See Options Trader Alert 2021-9.
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    The proposed decrease is based on recent options volumes which 
included an increase in retail investors. With respect to options 
volume, the Exchange experienced a significant increase particularly in 
the fourth quarter of 2020. For example, total options contract volume 
in November 2020 was 71% higher than the total options contract volume 
in November 2019.\8\ Below is industry data from OCC \9\ which 
illustrates the significant increase in volume during the fourth 
quarter of 2020.
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    \8\ See data from OCC at: https://www.businesswire.com/news/home/20201202005584/en/OCC-November-2020-Total-Volume-Up-71-Percent-From-a-Year-Ago.
    \9\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.

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                                                      October        November        December         Q4 2020
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Total...........................................     633,365,184     673,660,858     753,568,354   2,060,594,396
Customer........................................     587,707,301     630,297,252     708,037,956   1,926,042,509
Total ADV.......................................   28,789,326.55   33,683,042.90   34,253,107.00   32,196,787.44
Customer ADV....................................   26,713,968.23   31,514,862.60   32,183,543.45   30,094,414.20
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    With respect to customer options volume across the industry, total 
customer options contract average daily volume in December 2020 was 
88.6% higher than total customer average daily volume in December 
2019.\10\
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    \10\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
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    There can be no assurance that the Exchange's final costs for 2021 
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 revenue being 
generated utilizing the current ORF rate results in revenue that is 
running in excess of the Exchange's estimated regulatory costs for the 
year.\11\ Particularly, as noted above, the options market has seen a 
substantial increase in volume in 2020, due in large part to the 
extreme volatility in the marketplace as a result of the COVID-19 
pandemic. This unprecedented spike in volatility resulted in 
significantly higher volume than was originally projected by the 
Exchange (thereby resulting in substantially higher ORF revenue than 
projected). The Exchange therefore proposes to decrease the ORF in 
order to ensure it does not exceed its regulatory costs for the year. 
Particularly, the Exchange believes that decreasing 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 
regulatory costs, while lessening the potential for generating excess 
revenue that may otherwise occur using the current rate.\12\
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    \11\ The Exchange notes that notwithstanding the excess ORF 
revenue collected to date, it has not used such revenue for non-
regulatory purposes.
    \12\ The Exchange notes that its regulatory responsibilities 
with respect to member 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.
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    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. If the 
Exchange determines regulatory revenues exceed regulatory costs, the 
Exchange will adjust the ORF by submitting a fee change filing to the 
Commission and notifying \13\ its members via an Options Trader 
Alert.\14\
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    \13\ The Exchange will provide members with such notice at least 
30 calendar days prior to the effective date of the change.
    \14\ The 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 expenses.
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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.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\16\ 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) \17\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the 
current rate. Moreover, the proposed reduction is necessary in order 
for the Exchange to not collect revenue in excess of its anticipated 
regulatory costs, in combination with other regulatory fees and fines, 
which is consistent with the Exchange's practices.
    The Exchange had designed the ORF to generate revenues that would 
be less than the amount of revenue collected from the ORF of the 
Exchange's regulatory costs to ensure that it, in combination with its 
other regulatory fees and fines, does not exceed 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 
regulatory costs and regulatory revenues, which includes revenues from 
ORF and other regulatory fees and fines, the Exchange determined that 
absent a

[[Page 17225]]

reduction in ORF, it may be collecting revenue in excess of its 
regulatory costs. Indeed, the Exchange notes that when taking into 
account the recent options volume, which included an increase in 
customer options transactions, it estimates the ORF will generate 
revenues that may cover more than the approximated Exchange's projected 
regulatory costs. Moreover, when coupled with the Exchange's other 
regulatory fees and revenues, the Exchange estimates ORF to generate 
over 100% of the Exchange's projected regulatory costs. As such, the 
Exchange believes it's reasonable and appropriate to decrease the ORF 
amount from $0.0020 to $0.0018 per contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all members on all 
their transactions that clear in the customer range at the OCC.\18\ The 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those members 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 non-customer component (e.g., member proprietary 
transactions) of its regulatory program. Moreover, the Exchange notes 
that it has broad regulatory responsibilities with respect to 
activities of its members, irrespective of where their transactions 
take place. Many of the Exchange's surveillance programs for customer 
trading activity may require the Exchange to look at activity across 
all markets, such as reviews related to position limit violations and 
manipulation. 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'') \19\ 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 Exchange's regulatory activities with respect to customer 
trading activity of its members.
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    \18\ If the OCC clearing member is an ISE member, ORF is 
assessed and collected on all cleared customer contracts (after 
adjustment for CMTA); 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.
    \19\ 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.
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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 competition not necessary or appropriate in 
furtherance of the purposes of the Act. This proposal does not create 
an unnecessary or inappropriate intra-market burden on 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. The Exchange 
notes, however, the proposed change is not designed to address any 
competitive issues. Indeed, this proposal does not create an 
unnecessary or inappropriate inter-market burden on competition because 
it is a regulatory fee that supports regulation in furtherance of the 
purposes of the Act. The Exchange is obligated to ensure that the 
amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

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 is effective upon filing pursuant to 
Section 19(b)(3)(A) \20\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \21\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \22\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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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 rule-comments@sec.gov. Please include 
File No. SR-ISE-2021-04 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-ISE-2021-04. 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 (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE,

[[Page 17226]]

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-ISE-2021-04, and should be 
submitted on or before April 22, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06673 Filed 3-31-21; 8:45 am]
BILLING CODE 8011-01-P