Document ID: SEC-2022-0147-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2022-02-01T05:00Z

[Federal Register Volume 87, Number 21 (Tuesday, February 1, 2022)]
[Notices]
[Pages 5548-5552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01973]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94065; File No. SR-Phlx-2022-03]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Reduce Phlx's 
Options Regulatory Fee

January 26, 2022.
    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 January 20, 2022, Nasdaq PHLX LLC (``Phlx'' 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend Phlx's Pricing Schedule at Options 
7, Section 6, Part D to reduce the Phlx Options Regulatory Fee or 
``ORF''.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on February 1, 
2022.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/

[[Page 5549]]

rulebook/phlx/rules, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    Phlx previously filed to waive its ORF from October 1, 2021 through 
January 31, 2022.\3\ The Waiver Filing provided that Phlx would 
continue monitoring the amount of revenue collected from the ORF to 
determine if regulatory revenues would exceed regulatory costs when it 
recommenced assessing ORF on February 1, 2022. If so, the Exchange 
committed to adjust its ORF.\4\ At this time, after a review of its 
regulatory revenues and regulatory costs, the Exchange proposes to 
reduce the ORF from $0.0042 (the amount of the ORF prior to the waiver) 
to $0.0034 per contract side as of February 1, 2022, to ensure that 
revenue collected from the ORF, in combination with other regulatory 
fees and fines, does not exceed the Exchange's total regulatory costs.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 92585 (August 5, 
2021), 86 FR 44096 (August 11, 2021) (SR-Phlx-2021-39) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
Phlx's Options Regulatory Fee) (``Waiver Filing'').
    \4\ Id. at 44098.
---------------------------------------------------------------------------

    The options industry continues to experience high options trading 
volumes and volatility. At this time, Phlx believes that the options 
volume it experienced in the second half of 2021 is likely to persist 
into 2022. The anticipated options volume would impact Phlx's ORF 
collection which, in turn, has caused Phlx to propose reducing the ORF 
to ensure that revenue collected from the ORF, in combination with 
other regulatory fees and fines, would not exceed the Exchange's total 
regulatory costs.
Collection of ORF
    Upon recommencement of the ORF on February 1, 2022,\5\ Phlx will 
assess its ORF for each customer option transaction that is either: (1) 
Executed by a member organization \6\ on Phlx; or (2) cleared by a Phlx 
member organization at The Options Clearing Corporation (``OCC'') in 
the customer range,\7\ even if the transaction was executed by a non-
member organization of Phlx, regardless of the exchange on which the 
transaction occurs.\8\ If the OCC clearing member is a Phlx member 
organization, ORF will be assessed and collected on all cleared 
customer contracts (after adjustment for CMTA \9\); and (2) if the OCC 
clearing member is not a Phlx member organization, ORF will be 
collected only on the cleared customer contracts executed at Phlx, 
taking into account any CMTA instructions which may result in 
collecting the ORF from a non-member organization.\10\
---------------------------------------------------------------------------

    \5\ Prior to the Waiver Filing, the Exchange similarly collected 
ORF as described herein.
    \6\ The term ``member organization'' means a corporation, 
partnership (general or limited), limited liability partnership, 
limited liability company, business trust or similar organization, 
transacting business as a broker or a dealer in securities and which 
has the status of a member organization by virtue of (i) admission 
to membership given to it by the Membership Department pursuant to 
the provisions of General 3, Sections 5 and 10 or the By-Laws or 
(ii) the transitional rules adopted by the Exchange pursuant to 
Section 6-4 of the By-Laws. References herein to officer or partner, 
when used in the context of a member organization, shall include any 
person holding a similar position in any organization other than a 
corporation or partnership that has the status of a member 
organization. See General 1, Section 1(17).
    \7\ Participants must record the appropriate account origin code 
on all orders at the time of entry of the order. The Exchange 
represents that it has surveillances in place to verify that member 
organizations mark orders with the correct account origin code.
    \8\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \9\ 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.
    \10\ By way of example, if Broker A, a Phlx member organization, 
routes a customer order to CBOE and the transaction executes on CBOE 
and clears in Broker A's OCC Clearing account, ORF will be collected 
by Phlx from Broker A's clearing account at OCC via direct debit. 
While this transaction was executed on a market other than Phlx, it 
was cleared by a Phlx member organization in the member 
organization's OCC clearing account in the customer range, therefore 
there is a regulatory nexus between Phlx and the transaction. If 
Broker A was not a Phlx member organization, then no ORF should be 
assessed and collected because there is no nexus; the transaction 
did not execute on Phlx nor was it cleared by a Phlx member 
organization.
---------------------------------------------------------------------------

    In the case where a member organization both executes a transaction 
and clears the transaction, the ORF will be assessed to and collected 
from that member organization. In the case where a member organization 
executes a transaction and a different member organization clears the 
transaction, the ORF will be assessed to and collected from the member 
organization who clears the transaction and not the member organization 
who executes the transaction. In the case where a non-member 
organization executes a transaction at an away market and a member 
organization clears the transaction, the ORF will be assessed to and 
collected from the member organization who clears the transaction. In 
the case where a member executes a transaction on Phlx and a non-member 
organization clears the transaction, the ORF will be assessed to the 
member organization that executed the transaction on Phlx and collected 
from the non-member organization who cleared the transaction. In the 
case where a member organization executes a transaction at an away 
market and a non-member organization clears the transaction, the ORF 
will not be assessed to the member organization who executed the 
transaction or collected from the non-member organization who cleared 
the transaction because the Exchange does not have access to the data 
to make absolutely certain that ORF should apply. Further, the data 
does not allow the Exchange to identify the member organization 
executing the trade at an away market.
ORF Revenue and Monitoring of ORF
    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 \11\ and member organization 
customer options business including

[[Page 5550]]

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 
include support from such areas as Office of the General Counsel, 
technology, and internal audit. Indirect expenses were approximately 
38% of the total regulatory costs for 2021. Thus, direct expenses were 
approximately 62% of total regulatory costs for 2021.\12\
---------------------------------------------------------------------------

    \11\ The term ``member'' means a permit holder which has not 
been terminated in accordance with the By-Laws and these Rules of 
the Exchange. A member is a natural person and must be a person 
associated with a member organization. Any references in the rules 
of the Exchange to the rights or obligations of an associated person 
or person associated with a member organization also includes a 
member. See General 1, Section 1(16).
    \12\ The Exchange will set a 2022 Regulatory Budget in the first 
quarter of 2022.
---------------------------------------------------------------------------

    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its members and 
member organizations, 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 $0.0042 per contract side to $0.0034 per contract side. 
The Exchange issued an Options Trader Alert on December 31, 2021 
indicating the proposed rate change for February 1, 2022.\13\
---------------------------------------------------------------------------

    \13\ See Options Trader Alert 2021-63.
---------------------------------------------------------------------------

    The proposed reduction is based on a sustained high level of 
options volume in 2021. The below table displays average daily volume 
for 2021.\14\
---------------------------------------------------------------------------

    \14\ The OCC data from December 2021 numbers reflect only 13 
trading days as this information is through December 17, 2021. 
Volume data in the table represents numbers of contracts; each 
contract has two sides.
[GRAPHIC] [TIFF OMITTED] TN01FE22.000

    To date, fourth quarter options average daily volume in 2021 has 
been higher than options average daily volume in any of the prior three 
quarters of 2021. With respect to customer options volume across the 
industry, total customer options contract average daily volume, to 
date, in 2021 is 36,565,398 as compared to total customer options 
contract average daily volume in 2020 which was 27,002,511.\15\
---------------------------------------------------------------------------

    \15\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
---------------------------------------------------------------------------

    There can be no assurance that the Exchange's costs for 2022 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 that may 
be generated utilizing an ORF rate of $0.0042 per contract side may 
result in revenue which exceeds the Exchange's estimated regulatory 
costs for 2022 if options volume persists. In 2021, options volume 
remained high, due in large part to the extreme volatility in the 
marketplace as a result of the COVID-19 pandemic. The Exchange 
therefore proposes to reduce its ORF to $0.0034 per contract side to 
ensure that revenue does not exceed the Exchange's estimated regulatory 
costs in 2022. Particularly, the Exchange believes that reducing the 
ORF when combined with all of the Exchange's other regulatory fees and 
fines, would allow the Exchange to continue covering a material portion 
of its regulatory costs, while lessening the potential for generating 
excess revenue that may otherwise occur using the rate of $0.0042 per 
contract side.\16\
---------------------------------------------------------------------------

    \16\ The Exchange notes that its regulatory responsibilities 
with respect to member and member organization compliance with 
options sales practice rules have largely been allocated to FINRA 
under a 17d-2 agreement. The ORF is not designed to cover the cost 
of that options sales practice regulation.
---------------------------------------------------------------------------

    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 \17\ its members and member organizations via 
an Options Trader Alert.\18\
---------------------------------------------------------------------------

    \17\ The Exchange will provide members and member organizations 
with such notice at least 30 calendar days prior to the effective 
date of the change.
    \18\ 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.
---------------------------------------------------------------------------

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.\19\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act \20\, which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its

[[Page 5551]]

members, member organizations, and other persons using its facilities. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \21\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the rate 
that would otherwise be in effect on February 1, 2022. Moreover, the 
proposed reduction is necessary for the Exchange to avoid collecting 
revenue, in combination with other regulatory fees and fines, that 
would be in excess of its anticipated regulatory costs 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 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 reduction in ORF, it may collect 
revenue which would exceed its regulatory costs. Indeed, the Exchange 
notes that when taking into account the potential that recent options 
volume persists, it estimates the ORF may generate revenues that would 
cover more than the approximated Exchange's projected regulatory costs. 
As such, the Exchange believes it's reasonable and appropriate to 
reduce the ORF amount from $0.0042 to $0.0034 per contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all member 
organizations on all their transactions that clear in the customer 
range at OCC.\22\ The Exchange believes the ORF ensures fairness by 
assessing higher fees to those member organizations that require more 
Exchange regulatory services based on the amount of customer options 
business they conduct. Regulating customer trading activity is much 
more labor intensive and requires greater expenditure of human and 
technical resources than regulating non-customer trading activity, 
which tends to be more automated and less labor-intensive. For example, 
there are costs associated with main office and branch office 
examinations (e.g., staff expenses), as well as investigations into 
customer complaints and the terminations of registered persons. As a 
result, the costs associated with administering the customer component 
of the Exchange's overall regulatory program are materially higher than 
the costs associated with administering the non-customer component 
(e.g., member and member organization proprietary transactions) of its 
regulatory program. Moreover, the Exchange notes that it has broad 
regulatory responsibilities with respect to activities of its members 
and member organizations, 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'') \23\ 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 and member organizations.
---------------------------------------------------------------------------

    \22\ If the OCC clearing member is a Phlx member organization, 
ORF will be assessed and collected on all cleared customer contracts 
(after adjustment for CMTA); and (2) if the OCC clearing member is 
not a Phlx member organization, ORF will be collected only on the 
cleared customer contracts executed at Phlx, taking into account any 
CMTA instructions which may result in collecting the ORF from a non-
member organization.
    \23\ 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.
---------------------------------------------------------------------------

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) \24\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \25\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    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) \26\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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:

[[Page 5552]]

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-Phlx-2022-03 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-Phlx-2022-03. 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, 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-Phlx-2022-03, and should be submitted on or 
before February 22, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01973 Filed 1-31-22; 8:45 am]
BILLING CODE 8011-01-P