Document ID: SEC-2023-1437-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MEMX, LLC
Posted Date: 2023-12-13T05:00Z

[Federal Register Volume 88, Number 238 (Wednesday, December 13, 2023)]
[Notices]
[Pages 86417-86420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27261]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99112; File No. SR-MEMX-2023-31]

Self-Regulatory Organizations; MEMX LLC; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend the 
Exchange's Fee Schedule To Adopt a Temporary Options Regulatory Fee

December 7, 2023.
    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 24, 2023, MEMX LLC (``MEMX'' or the ``Exchange'') 
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 is filing with the Commission a proposed rule change 
to amend the Exchange's fee schedule applicable to Members \3\ (the 
``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and (c) relating 
to the Options Regulatory Fee. The Exchange proposes to implement the 
changes to the Fee Schedule pursuant to this proposal on November 24, 
2023. The text of the proposed rule change is provided in Exhibit 5.
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    \3\ See Exchange Rule 1.5(p).
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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

[[Page 86418]]

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
    The Exchange proposes to amend the Fee Schedule to revise the ORF 
charged solely for the dates of November 24 through November 30, 2023.
Background
    By way of background, the per-contract ORF is collected by the 
Options Clearing Corporation (``OCC'') on behalf of the Exchange for 
each options transaction, cleared or ultimately cleared by an Exchange 
member in the ``customer'' range, regardless of the exchange on which 
the transaction occurs. The ORF is collected from either: (1) a Member 
that was the ultimate clearing firm \4\ for the transaction; or (2) a 
non-Member that was the ultimate clearing firm where a Member was the 
executing clearing firm \5\ for the transaction.
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    \4\ The Exchange takes into account any CMTA transfers when 
determining the ultimate clearing firm for a transaction. CMTA or 
Clearing Member Trade Assignment is a form of ``give up'' whereby 
the position will be assigned to a specific clearing firm at the 
OCC.
    \5\ Throughout this filing, ``executing clearing firm'' means 
the clearing firm through which the entering broker indicated that 
the transaction would be cleared at the time it entered the original 
order which executed, and that clearing firm could be a designated 
``give up'', if applicable. The executing clearing firm may be the 
ultimate clearing firm if no CMTA transfer occurs. If a CMTA 
transfer occurs, however, the ultimate clearing firm would be the 
clearing firm that the position was transferred to for clearing via 
CMTA.
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    To illustrate how the ORF is assessed and collected, the Exchange 
provides the following set of examples.
    1. For all transactions executed on the Exchange, if the ultimate 
clearing firm is a Member of the Exchange, the ORF is assessed to and 
collected from that Member. If the ultimate clearing firm is not a 
Member of the Exchange, the ORF is collected from that non-Member 
clearing firm but assessed to the executing clearing firm.
    2. If the transaction is executed on an away exchange, the ORF is 
only assessed and collected if either the executing clearing firm or 
ultimate clearing firm are Members of the Exchange. If the ultimate 
clearing firm is a Member of the Exchange, the ORF is assessed to and 
collected from that ultimate clearing firm. If the ultimate clearing 
firm is not a Member of the Exchange, the ORF is assessed to the 
executing clearing firm (again, only if that executing clearing firm is 
a Member of the Exchange), and collected from the ultimate clearing 
firm. Thus, to reiterate, if neither the executing clearing firm nor 
the ultimate clearing firm are members of the Exchange, no ORF is 
assessed or collected.
    Finally, the Exchange will not assess the ORF on outbound linkage 
trades. ``Linkage trades'' are tagged in the Exchange's system, so the 
Exchange can distinguish them from other trades. A customer order 
routed to another exchange results in the appearance of two customer 
trades, one from the originating exchange and one from the recipient 
exchange. Charging ORF on both trades could result in double-billing of 
ORF for a single customer order, thus the Exchange will not assess ORF 
on outbound linkage trades in a linkage scenario.\6\
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    \6\ To clarify, as stated previously, the Exchange will assess 
and collect the ORF for each customer options transaction that is 
cleared by a Member of the Exchange, regardless of where the 
transaction occurs. As such, transactions may fall into this 
category that originated from customer orders entered on the 
Exchange that were routed to and executed on an away market pursuant 
to the Options Linkage Plan. However, the Exchange will not assess 
the ORF in this instance on the original entering broker on MEMX 
Options, which would result in a potential double billing. Instead, 
the Exchange will only assess and collect from the ultimate clearing 
firm, and only if the ultimate clearing firm or the executing 
clearing firm is a MEMX Options Member (because the transaction 
ultimately occurs on an away market).
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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 Members' customer 
options business, including performing routine surveillances and 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities. 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. Regulatory costs include direct regulatory 
expenses and certain indirect expenses for work allocated 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 surveillance, investigations and examinations. The 
indirect expenses include support from personnel in such areas as human 
resources, legal, information technology, facilities and accounting as 
well as shared costs necessary to operate the Exchange and to carry out 
its regulatory function, such as hardware, data center costs and 
connectivity. The Exchange acknowledges that these indirect expenses 
are also allocated towards other business operations, such as providing 
connectivity and market data services, for which the Exchange has also 
conducted a cost-based analysis. As such, when analyzing the indirect 
expenses associated with its regulatory program, the Exchange did not 
double-count any expenses, but instead, allocated a portion of the cost 
not already allocated to other fees imposed by the Exchange. Indirect 
expenses are anticipated to be approximately 24% of the total 
regulatory costs for 2023 and 2024. Thus, direct expenses are 
anticipated to be approximately 76% of the total regulatory costs for 
2023 and 2024.
    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. More 
specifically, the Exchange will ensure that revenue generated from ORF 
not exceed more than 75% of total annual regulatory costs. The Exchange 
will monitor 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 will also notify Members of adjustments to 
the ORF via regulatory circular, including for the change being 
proposed herein.\7\ In preparation for the launch of the Exchange's 
options market (``MEMX Options''),\8\ the Exchange proposed to 
establish an ORF in the amount of $0.0015 per contract side, effective 
September 27, 2023.\9\ The amount of the proposed fee was based on 
historical industry volume, projected volumes on the Exchange, and 
projected Exchange regulatory costs. Additionally, the Exchange 
proposed that the ORF would automatically sunset on September 30, 2024.
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    \7\ See Exchange Regulatory Notice 23-22, located at: https://info.memxtrading.com/category/alerts-notices/reg/.
    \8\ On August 8, 2022, the Commission approved SR-MEMX-2022-10, 
which proposed rules for the trading of options on the Exchange. See 
Securities Exchange Act Release No. 95445 (August 8, 2022), 87 FR 
49894 (August 12, 2022) (SR-MEMX-2022-010). The Exchange launched 
MEMX Options on September 27, 2023.
    \9\ See Securities Exchange Act Release No. 98585 (September 28, 
2023), 88 FR 68692 (October 4, 2023) (SR-MEMX-2023-25).

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[[Page 86419]]

OIP and Current Proposal
    As noted above, on September 27, 2023, the Exchange filed to 
establish an ORF in the amount of $0.0015 per contract side (the 
``initial ORF filing'') and began assessing and collecting the ORF as 
proposed in the initial ORF filing. However, on November 24, 2023, the 
Commission issued the Suspension of and Order Instituting Proceedings 
to Determine whether to Approve or Disapprove a Proposed Rule Change to 
Amend its Fee Schedule to Establish an Options Regulatory Fee (``the 
OIP'').\10\ As a result of the OIP, on November 24, 2023, the Exchange 
would revert back to not charging the ORF.
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    \10\ See Securities Exchange Act Release No. 99017 (November 24, 
2023) (SR-MEMX-2023-25).
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    To ensure consistency of ORF assessments for the full month of 
November 2023, the Exchange proposes to modify the Fee Schedule to 
specify that the amount of the ORF that will be collected by the 
Exchange through November 30, 2023 (i.e., the last trading day of the 
month of November), will be $0.0015 per contract side (the ``Initial 
ORF Rate'').\11\ The Exchange believes that revenue generated from the 
ORF as adopted on September 27, 2023 will continue to cover a material 
portion, but not all, of the Exchange's regulatory costs.
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    \11\ This proposal is not intended to be responsive to any 
issues that may be raised in the OIP, but to instead address the 
immediate issue of billing for November 24-30th.
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    In general, the Exchange endeavors to notify Members of any change 
in the amount of the ORF at least 30 calendar days prior to the 
effective date of the change via regulatory notice; however, the 
Exchange notes that as a result of the OIP, such notice in this 
instance could not be given 30 days in advance. Lastly, since the 
proposed ORF will only be charged up through November 30, 2023, the 
Exchange proposes to delete the bullet point on the Fee Schedule that 
indicates that the ORF will automatically sunset on September 30, 2024, 
given that this sunset provision no longer applies and conflicts with 
the proposal herein.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with section 6(b) of the Act \12\ in general, and 
furthers the objectives of section 6(b)(4) of the Act \13\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities. The Exchange also believes the proposal furthers 
the objectives of section 6(b)(5) of the Act \14\ in that it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general to protect investors and the 
public interest and is not designed to permit unfair discrimination 
between customers, issuers, brokers and dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
    \14\ 15 U.S.C. 78f(b)(5).
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The Proposal Is Reasonable
    The Exchange believes that the proposed Initial ORF Rate of $0.0015 
is reasonable because it would help maintain fair and orderly markets 
and benefit investors and the public interest because it would ensure 
transparency and consistency of the ORF for the entire month of 
November 2023. Specifically, the proposal would ensure that the amount 
of ORF collected by the Exchange for the trading days of November 24th, 
27th, 28th, 29th, and 30th, 2023 will be the same rate collected on 
every other trading day since the ORF was implemented. The Exchange's 
by-laws state in Section 17.4(b): ``[a]ny Regulatory Funds shall not be 
used for non-regulatory purposes or distributed, advanced or allocated 
to any Company Member, but rather, shall be applied to fund regulatory 
operations of the Company (including surveillance and enforcement 
activities) . . .''.\15\ In this regard, the Exchange believes that the 
amount of the fee is reasonable. The Exchange also believes the 
proposal to delete the bullet point in the Fee Schedule that indicates 
the ORF will automatically sunset on September 24, 2024 is reasonable 
because such sunset provision is no longer applicable and conflicts 
with the proposal herein that the ORF apply up through November 30, 
2023.
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    \15\ See MEMX LLC--LLC Agreement at https://info.memxtrading.com/regulation/governance/.
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The Proposed Fee Is an Equitable Allocation of Fees
    The Exchange believes its proposal is an equitable allocation of 
fees among its market participants. The Exchange believes that the 
proposed Initial ORF Rate would not place certain market participants 
at an unfair disadvantage because all options transactions must clear 
via a clearing firm. Such clearing firms can then choose to pass 
through all, a portion, or none of the cost of the ORF to its 
customers, i.e., the entering firms. Because the ORF is collected from 
Member clearing firms by the OCC on behalf of the Exchange, the 
Exchange believes that using options transactions in the Customer range 
serves as a proxy for how to apportion regulatory costs among such 
Members. In addition, 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 (e.g., Member proprietary transactions) of its 
regulatory program. Thus, the Exchange believes the Initial ORF Rate 
would be equitably allocated in that it is charged to all Members on 
all their transactions that clear in the Customer range at the OCC.
The Proposed Fee Is Not Unfairly Discriminatory
    The Exchange believes that the proposal is not unfairly 
discriminatory. The Exchange believes that the Initial ORF Rate would 
not place certain market participants at an unfair disadvantage because 
all options transactions must clear via a clearing firm. Such clearing 
firms can then choose to pass through all, a portion, or none of the 
cost of the ORF to its customers, i.e., the entering firms. Because the 
ORF is collected from Member clearing firms by the OCC on behalf of the 
Exchange, the Exchange believes that using options transactions in the 
Customer range serves as a proxy for how to apportion regulatory costs 
among such Members. In addition, 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

[[Page 86420]]

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 
(e.g., Member proprietary transactions) of its regulatory program. 
Thus, the Exchange believes the Initial ORF Rate (like the rate 
assessed for every other day since the ORF was implemented), is not 
unfairly discriminatory because it is charged to all Members on all 
their transactions that clear in the Customer range at the OCC.

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.
Intramarket Competition
    The Exchange believes the proposed change will change will not 
impose an undue burden on competition as it is charged to all Members 
on all their transactions that clear in the Customer range at the OCC; 
thus, the amount of ORF imposed is based on the amount of Customer 
volume transacted. The Exchange believes that the proposed ORF would 
not place certain market participants at an unfair disadvantage because 
all options transactions must clear via a clearing firm. Such clearing 
firms can then choose to pass through all, a portion, or none of the 
cost of the ORF to its customers, i.e., the entering firms. In 
addition, because the ORF is collected from Member clearing firms by 
the OCC on behalf of the Exchange, the Exchange believes that using 
options transactions in the Customer range serves as a proxy for how to 
apportion regulatory costs among such Members.
Intermarket Competition
    The proposed fee change is not designed to address any competitive 
issues. Rather, the proposed change is designed to help the Exchange 
adequately fund its regulatory activities while seeking to ensure that 
total regulatory revenues do not exceed total regulatory costs.

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)(ii) of the Act \16\ and Rule 19b-4(f)(2) \17\ thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 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-MEMX-2023-31 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-MEMX-2023-31. 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-MEMX-2023-31 and should be 
submitted on or before January 3, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27261 Filed 12-12-23; 8:45 am]
BILLING CODE 8011-01-P