Document ID: SEC-2023-1155-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MEMX, LLC
Posted Date: 2023-10-04T04:00Z

[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68692-68697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21934]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98585; File No. SR-MEMX-2023-25]

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

September 28, 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 September 27, 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) to adopt 
an Options Regulatory Fee (``ORF'') that would automatically sunset on 
September 30, 2024. The Exchange proposes to implement the changes to 
the Fee Schedule pursuant to this proposal on September 27, 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 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
    In preparation for the launch of the Exchange's options market 
(``MEMX Options''),\4\ the Exchange proposes to establish an ORF in the 
amount of $0.0015 per contract side. The amount of the proposed fee is 
based on historical industry volume, projected volumes on the Exchange, 
and projected Exchange regulatory costs. The Exchange's proposed ORF 
should balance the Exchange's regulatory revenue against the 
anticipated regulatory costs. As discussed more fully below, the 
Exchange proposes that the ORF will automatically sunset on September 
30, 2024.
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    \4\ 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 plans to 
launch MEMX Options in September of 2023.
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    The per-contract ORF will be 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 \5\ for the transaction; or (2) a non-Member 
that was the ultimate clearing firm where a Member was the executing 
clearing firm \6\ for the transaction.
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    \5\ 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.
    \6\ 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 will be 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-

[[Page 68693]]

billing of ORF for a single customer order, thus the Exchange will not 
assess ORF on outbound linkage trades in a linkage scenario.\7\
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    \7\ 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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    As a practical matter, when a transaction that is subject to the 
ORF is not executed on the Exchange, the Exchange lacks the information 
necessary to identify the order entering member for that transaction. 
There are countless order entering market participants, and each day 
such participants can drop their connection to one market center and 
establish themselves as participants on another. For these reasons, it 
is not possible for the Exchange to identify, and thus assess fees such 
as an ORF, on order entering participants on away markets on a given 
trading day.
    Clearing members, however, are distinguished from order entering 
participants because they remain identified to the Exchange on 
information the Exchange receives from the OCC regardless of the 
identity of the order entering participant, their location, and the 
market center on which they execute transactions. Therefore, the 
Exchange believes it is more efficient for the operation of the 
Exchange and for the marketplace as a whole to collect the ORF from 
clearing members. Additionally, this collection method was originally 
instituted for the benefit of clearing firms that desired to have the 
ORF be collected from the clearing firm that ultimately clears the 
transaction.
    As discussed below, 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 a Member's activities support applying the ORF to 
transactions cleared but not executed by a Member. The Exchange's 
regulatory responsibilities are the same regardless of whether a Member 
enters an order that executes or clears a transaction executed on its 
behalf. The Exchange will regularly review all such activities, 
including performing surveillance for position limit violations, end of 
day and intra-day manipulation, front-running, contrary exercise advice 
violations and insider trading. These activities span across multiple 
exchanges.
    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 notes that its regulatory responsibilities 
with respect to Member compliance with options sales practice rules 
have been allocated to the Financial Industry Regulatory Authority 
(``FINRA'') under a 17d-2 Agreement. The ORF is not designed to cover 
the cost of options sales practice regulation. Finally, the Exchange 
notes that it takes into account all regulatory sources of funding, 
including fines collected by the Exchange in connection with 
disciplinary matters, when determining the appropriate ORF rate.
    The Exchange will 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 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. Going forward, the Exchange will notify Members of 
adjustments to the ORF via regulatory circular at least 30 calendar 
days prior to the effective date of the change.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by Members and their associated 
persons under the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants trading on the 
Exchange. The Exchange will not be able to effectively surveil for such 
conduct without looking at and evaluating activity across all options 
markets. Many of the Exchange's market surveillance programs require 
the Exchange to look at and evaluate activity across all options 
markets, such as surveillance for position limit violations, end of day 
and intra-day manipulation, front-running and contrary exercise advice 
violations/expiring exercise declarations. While much of this activity 
relates to the execution of orders, the ORF is assessed on and 
collected from clearing firms. The Exchange, because it lacks access to 
information on the identity of the entering firm for executions that 
occur on away markets, believes it is appropriate to assess the ORF on 
its Members' clearing activity, based on information the Exchange 
receives from the OCC, including for away market activity. Among other 
reasons, doing so better and more accurately captures activity that 
occurs away from the Exchange but which may relate to activity 
occurring on the Exchange. Without reviewing activity on a market-wide 
basis, the Exchange would not be able to effectively identify 
potentially problematic cross-market activity, with a portion occurring 
on other options

[[Page 68694]]

exchanges and a portion on the Exchange. Again, the Exchange reiterates 
that it will not collect the ORF on executions that occur on away 
markets that are cleared by non-Members, except for the limited 
scenario where a Member clears a transaction and ultimately ``gives-
up'' the trade to a non-Member via CMTA.\8\ The Exchange believes that 
assessing the ORF on Member clearing firms equitably distributes the 
collection of the ORF in a fair and reasonable manner.
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    \8\ To reiterate, in this instance, the ORF would be collected 
from the non-Member ultimate CMTA clearing firm but assessed to the 
Member executing clearing firm.
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    In addition to its own surveillance programs, the Exchange will 
work with other SROs and exchanges on intermarket surveillance related 
issues in connection with its regulatory program for options. 
Specifically, the Exchange and other options exchanges are required to 
populate a consolidated options audit trail (``COATS'') \9\ system in 
order to surveil a Member's activities across markets. Further, through 
its participation in the Intermarket Surveillance Group (``ISG''),\10\ 
the Exchange will share information and coordinate inquiries and 
investigations with other exchanges designed to address potential 
intermarket manipulation and trading abuses. The Exchange's 
participation in ISG helps it to satisfy the requirement that it has 
coordinated surveillance with markets on which security futures are 
traded and markets on which any security underlying security futures 
are traded to detect manipulation and insider trading.\11\
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    \9\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
    \10\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by co-operatively 
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.
    \11\ See Section 6(h)(3)(I) of the Act.
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    The Exchange believes that charging the ORF across markets will 
avoid having Members direct their trades to other markets in order to 
avoid the fee and to thereby avoid paying for their fair share for 
regulation. If the ORF did not apply to activity across markets then a 
Member would send their orders to the least cost, least regulated 
exchange (to the extent permissible under the Options Linkage plan, 
which, among other requirements, prohibits trading through of better 
priced quotations). Other exchanges do impose a similar fee on their 
member's [sic] activity, and their fees will extend to include the 
activities of their own members on the Exchange. In other words, upon 
launch of the Exchange, other exchanges will charge the ORF for 
executions occurring on MEMX Options cleared by their customers.\12\ In 
fact, all sixteen (16) registered options exchanges currently impose 
ORF on their members, and, similar to the Exchange, the majority of the 
options exchanges launched over the last decade have implemented an ORF 
on the day of launch or shortly thereafter in order to properly fund 
their regulatory programs.\13\
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    \12\ See Securities Exchange Act Release Nos. 58817 (October 20, 
2008), 73 FR 63744 (October 27, 2008) (SR-CBOE-2008-05) (notice of 
filing and immediate effectiveness of Cboe Exchange, Inc. (``CBOE'') 
adopting an ORF applicable to transactions across all options 
exchanges); 61133 (December 9, 2009), 74 FR 66715 (December 16, 
2009) (SR-Phlx-2009-100) (notice of filing and immediate 
effectiveness of Nasdaq PHLX LLC (``Phlx'') adopting an ORF 
applicable to transactions across all options exchanges); 61154 
(December 11, 2009), 74 FR 67278 (December 18, 2009) (SR-ISE-2009-
105) (notice of filing and immediate effectiveness of Nasdaq ISE, 
LLC (``ISE'') adopting an ORF applicable to transactions across all 
options exchanges); 61388 (January 20, 2010), 75 FR 4431 (January 
27, 2010) (SR-BX-2010-001) (notice of filing and immediate 
effectiveness of Nasdaq OMX BX, Inc. (``BX'') adopting an ORF 
applicable to transactions across all options exchanges); 70200 
(August 14, 2013) 78 FR 51242 (August 20, 2013) (SR-Topaz-2013-01)) 
(notice of filing and immediate effectiveness of Nasdaq GEMX, LLC 
(``GEMX''), formerly known as ISE Gemini and Topaz Exchange, 
adopting an ORF applicable to transactions across all options 
exchanges); 64400 (May 4, 2011), 76 FR 27118 (May 10, 2011) (SR-
NYSEAmex-2011-27) (notice of filing and immediate effectiveness of 
NYSE Amex LLC (``NYSE AMEX'') adopting an ORF applicable to 
transactions across all options exchanges); 64399 (May 4, 2011), 76 
FR 27114 (May 10, 2011) (SR-NYSEArca-2011-20) (notice of filing and 
immediate effectiveness of NYSE Arca, Inc. (``NYSE Arca'') adopting 
an ORF applicable to transactions across all options exchanges); 
65913 (December 8, 2011), 76 FR 77883 (December 14, 2011) (SR-
NASDAQ-2011-163) (notice of filing and immediate effectiveness of 
Nasdaq Options Market (``NOM'') adopting an ORF applicable to 
transactions across all options exchanges); 66979 (May 14, 2012), 77 
FR 29740 (May 18, 2012) (SR-BOX-2012-002) (notice of filing and 
immediate effectiveness of BOX Options Exchange LLC (``BOX'') 
adopting an ORF applicable to transactions across all options 
exchanges); 67596 (August 6, 2012), 77 FR 47902 (August 10, 2012) 
(SR-C2-2012-023) (notice of filing and immediate effectiveness of C2 
Options Exchange, Inc. (``C2'') adopting an ORF applicable to 
transactions across all options exchanges); 68711 (January 23, 2013) 
78 FR 6155 (January 29, 2013) (SR-MIAX-2013-01) (notice of filing 
and immediate effectiveness of Miami International Securities 
Exchange LLC (``MIAX'') adopting an ORF applicable to transactions 
across all options exchanges); 74214 (February 5, 2015), 80 FR 7665 
(February 11, 2015) (SR-BATS-2015-08) (notice of filing and 
immediate effectiveness of Cboe BZX Exchange, Inc. (``BZX'') 
formerly known as BATS, adopting an ORF applicable to transactions 
across all options exchanges); 80025 (February 13, 2017) 82 FR 11081 
(February 17, 2017) (SR-BatsEDGX-2017-04) (notice of filing and 
immediate effectiveness of Cboe EDGX Exchange, Inc. (``EDGX'') 
formerly known as Bats EDGX Exchange, Inc., adopting an ORF 
applicable to transactions across all options exchanges); 80875 
(June 7, 2017) 82 FR 27096 (June 13, 2017) (SR-PEARL-2017-26) 
(notice of filing and immediate effectiveness of MIAX Pearl, LLC 
(``MIAX Pearl'') adopting an ORF applicable to transactions across 
all options exchanges); 85127 (February 13, 2019) 84 FR 5173 
(February 20, 2019) (SR-MRX-2019-03) (notice of filing and immediate 
effectiveness of Nasdaq MRX, LLC (``MRX'') adopting an ORF 
applicable to transactions across all options exchanges); 85251 
(March 6, 2019) 84 FR 8931 (March 12, 2019) (SR-EMERALD-2019-01) 
(notice of filing and immediate effectiveness of MIAX Emerald LLC 
(``MIAX Emerald'') adopting an ORF applicable to transactions across 
all options exchanges).
    \13\ MIAX Options--effective 1/2/13, launch 12/7/12; ISE Topaz--
effective 8/5/13, launch same; MIAX Pearl--effective 2/6/17, launch 
same; MIAX Emerald--effective 3/1/19, launch same.
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRA's Trading Activity Fee 
\14\ and the ORF assessed by other options exchanges including, but not 
limited to, NYSE Amex, NYSE Arca, Cboe, BZX, EDGX, Phlx, Nasdaq ISE, 
Nasdaq GEMX, MIAX and BOX.\15\ While the Exchange does not have all the 
same regulatory responsibilities as FINRA, the Exchange believes that, 
like other exchanges that have adopted an ORF, its broad regulatory 
responsibilities with respect to a Member's activities, irrespective of 
where their transactions take place, supports a regulatory fee 
applicable to transactions on other markets. Unlike FINRA's Trading 
Activity Fee, the ORF would apply only to a Member's customer options 
transactions.
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    \14\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
    \15\ See supra note 13.
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    Additionally, the Exchange proposes to specify in the Fee Schedule 
that the Exchange may only increase or decrease the ORF semi-annually. 
In addition to submitting a proposed rule change to the Commission as 
required by the Act to increase or decrease the ORF, the Exchange will 
notify participants via a Regulatory Circular of any anticipated change 
in the amount of the fee at least 30 calendar days prior to the 
effective date of the change. The Exchange believes that by providing 
guidance on the timing of any changes to the ORF, the Exchange would 
make it easier for participants to ensure their systems are configured 
to properly account for the ORF.
    Lastly, the Exchange recognizes that in 2019, the Commission issued 
suspensions of and orders instituting proceedings to determine whether 
to approve or disapprove a proposed rule change to modify the Options

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Regulatory Fee of NYSE American, NYSE Arca, MIAX, MIAX Pearl, MIAX 
Emerald, Cboe, Cboe EDGX Options, and C2.\16\ Each of those exchanges 
had filed to increase their ORF, and the Commission indicated that each 
of those filings lacked detail and specificity, signaling that more 
information was needed to speak to whether the proposed increased ORFs 
were reasonable, equitably allocated and not unfairly discriminatory, 
particularly given that the ORF is assessed on transactions that clear 
in the ``customer'' range and regardless of the exchange on which the 
transaction occurs. The Commission also noted that the filings provided 
only broad general statements regarding options transaction volume and 
did not provide any information on those exchanges' historic or 
projected options regulatory costs (including the costs of regulating 
activity that cleared in the ``customer'' range and the costs of 
regulating activity that occurred off exchange), the amount of 
regulatory revenue they had generated and expected to generate from the 
ORF as well as other sources, or the ``material portion'' of options 
regulatory expenses that they sought to recover from the ORF. Each of 
those exchanges withdrew their filings, but continue charging ORF today 
as discussed above. Since that time, MEMX Options is the first new 
options exchange to launch, and as such, would be at an unfair 
competitive disadvantage if it were not allowed to charge the ORF to 
recover a material portion, but not all, of the Exchange's regulatory 
costs for the supervision and regulation of activity of its Members 
which as noted above, is charged by all 16 currently operating options 
exchanges. Given that the Exchange is not in possession of the data it 
would require in order to provide the information the SEC requested in 
its orders instituting proceedings to determine whether to approve or 
disapprove proposed rule changes to modify the Options Regulatory Fee 
of other options exchanges,\17\ the Exchange believes it appropriate to 
revisit its ORF once it has the actual data and experience that will be 
available upon operating the Exchange and its regulatory program.
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    \16\ See Securities Exchange Act Release No. 87168 (September 
30, 2019), 84 FR 53210 (October 4, 2019) (SR-Emerald-2019-29); 
Securities Exchange Act Release No. 87167 (September 30, 2019), 84 
FR 53189 (October 4, 2019) (SR-PEARL-2019-23); Securities Exchange 
Act Release No. 87169 (September 30, 2019), 84 FR 53195 (October 4, 
2019) (SR-MIAX-2019-35); Securities Exchange Act Release No. 87170 
(September 30, 2019), 84 FR 53213 (October 4, 2019) (SR-CBOE-2019-
040); Securities Exchange Act Release No. 87172 (September 30, 2019) 
84 FR 53192 (October 4, 2019) (SR-CboeEDGX-2019-051); Securities 
Exchange Act Release No 87171 (September 30, 2019), 84 FR 53200 
(October 4, 2019) (SR-C2-2019-018); Securities Exchange Act Release 
No. 86832 (August 30, 2019), 84 FR 46980 (September 6, 2019) (SR-
NYSEArca-2019-49); Securities Exchange Act Release No. 86833 (August 
30, 2019) 84 FR 47029 (September 6, 2019) (SR-NYSEAMER-2019-27).
    \17\ See id.
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    As such, the Exchange proposes that the ORF proposed herein will 
automatically sunset on September 30, 2024, approximately one year 
after the operative date. The Exchange believes this will allow it the 
time to gather the necessary data, including its actual regulatory 
costs and revenues, as well as the cost of regulating executions that 
clear in a customer capacity and executions that occur on away markets, 
while also allowing it to adequately cover a portion of the projected 
costs associated with the regulation of its Members. Such a process 
will inform the Exchange's approach to the ORF after the sunset date. 
To reiterate, as a new exchange, not having the opportunity to fund its 
regulatory program through the same regulatory fee charged by every 
other options exchange would place an undue competitive disadvantage 
upon the Exchange's regulatory program and options business as a whole. 
Further, the Exchange emphasizes that other exchanges will be charging 
ORF for transactions occurring on MEMX Options, and as such, it follows 
that the Exchange that is primarily responsible for monitoring those 
transactions should also be able to charge the ORF for activity 
occurring on its own market, as well as transactions it surveils on 
away markets. In particular, by adopting a one-year sunset to its 
proposed ORF, the Exchange will be the only options exchange (of 
seventeen) that will be required to demonstrate to the Commission that 
the existing fee is reasonable, equitably allocated and not unfairly 
discriminatory in the next year. Absent rulemaking by the Commission, 
all other sixteen (16) options exchanges will be able to continue 
charging ORF as they do today, and as they have for years.
    The Exchange is proposing to establish an ORF in the amount of 
$0.0015 per contract side, to be operative on September 27, 2023, which 
is the date the Exchange's options platforms is scheduled to launch, 
and that will automatically sunset on September 30, 2024. The amount of 
the proposed fee is based on historical industry volume, projected 
volumes on the Exchange, and projected Exchange regulatory costs. As 
noted above, the Exchange will continually gather relevant data 
throughout the sunset period and review its ORF to ensure that the ORF, 
in combination with its other regulatory fees and fines, does not 
exceed regulatory costs. The Exchange believes that this proposal will 
permit the Exchange to cover a material portion of its regulatory 
costs, while not exceeding regulatory costs, and gather the necessary 
data to provide the Commission evidence to inform its approach to the 
ORF after the sunset period.
    The Exchange notified current and future Members via a Regulatory 
Circular of the proposed ORF at least 30 calendar days prior to the 
proposed operative date, on August 1, 2023.\18\ The Exchange believes 
that the prior notification to future market participants will ensure 
that the future market participants are prepared to configure their 
systems to properly account for the proposed ORF.
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    \18\ See MEMX Options Regulatory Notice 23-07, https://info.memxtrading.com/regulatory-notice-23-07-memx-options-options-regulatory-fee/, MEMX Options Regulatory Notice 23-10, https://info.memxtrading.com/regulatory-notice-23-10-options-regulatory-fee-effective-date/, and MEMX Options Regulatory Notice 23-15, https://info.memxtrading.com/regulatory-notice-23-15-options-regulatory-fee-effective-date/.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \19\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \20\ 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 \21\ 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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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that establishing an ORF in the amount of 
$0.0015 is reasonable because the Exchange's collection of ORF needs to 
be balanced against the amount of projected regulatory costs incurred 
by the Exchange. The Exchange believes that the amount proposed herein 
will serve to balance the Exchange's regulatory revenue against the 
anticipated regulatory costs. Moreover, the proposed amount is lower 
than the

[[Page 68696]]

amount of ORF assessed on other exchanges.\22\ The Exchange notes that 
while certain options exchanges do charge a lower ORF than that 
proposed by the Exchange, each of these options exchanges is part of an 
exchange ``group'' (i.e., affiliated with other options exchanges). In 
turn, each of these exchange groups charges more than two (2) to five 
(5) times the amount of ORF as a group when compared to the Exchange's 
proposed ORF rate.\23\ While the Exchange understands and agrees that 
each additional options exchange is its own legal entity with 
regulatory obligations under the Act to regulate its members, the 
Exchange also believes that there is significant scale that can be 
achieved for an exchange group that operates multiple exchanges, 
including with respect to regulation, and that it is this scale that 
allows such options exchanges to operate with such a low assessment of 
ORF. In other words, the initial fixed costs associated with 
implementing an exchange group's options regulatory program are 
scalable as additional options exchanges are launched by that exchange 
group.
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    \22\ See, e.g., NYSE Arca Options Fees and Charges, Options 
Regulatory Fee (``ORF'') and NYSE American Options Fees Schedule, 
Section VII(A), which provide that ORF is assessed at a rate of 
$0.0055 per contract for each respective exchange. See also Nasdaq 
PHLX, Options 7 Pricing Schedule, Section 6(D), which provides for 
an ORF rate of $0.0034 per contract, Cboe Options Fee Schedule, 
which provides an ORF rate of $0.0030 per contract, Nasdaq Options 
Market, Options 7 Pricing Schedule, Section 5, which provides an ORF 
rate of $0.0016 per contract, BOX Options Fee Schedule Section 
II(C), which provides an ORF rate of $0.00295 per contract, MIAX 
Options Fee Schedule, Section 2(b), which provides an ORF rate of 
$0.0019 per contract, MIAX Pearl Fee Schedule, Section 2(b), which 
provides an ORF rate of $0.0018 per contract.
    \23\ Each of MIAX Emerald, Cboe BZX Options, Cboe C2 Options, 
Cboe EDGX Options, Nasdaq ISE Gemini, Nasdaq ISE and Nasdaq BX 
Options charges a lower rate than $0.0015 per contract, which is the 
rate proposed by the Exchange. However, the Cboe exchanges, 
comprised of four options exchanges, charges an aggregate ORF rate 
of $0.0034 per contract (over 2 times the Exchange's proposed rate), 
the MIAX exchanges, comprised of three options exchanges, charges an 
aggregate ORF rate of $0.0043 per contract (nearly 3 times the 
Exchange's proposed rate); and the Nasdaq exchanges, comprised of 
six options exchanges, charges an aggregate ORF rate of $0.0084 per 
contract (nearly 6 times the Exchange's proposed rate). The Exchange 
notes that the NYSE exchanges, comprised of two options exchanges, 
charges an aggregate ORF rate of $0.011 per contract (over 7 times 
the Exchange's proposed rate).
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    The Exchange believes the proposed ORF is equitable and not 
unfairly discriminatory because it is objectively allocated to Members 
in that it is charged to all Members on all their transactions that 
clear as customer at the OCC. Moreover, the Exchange believes the ORF 
ensures fairness by assessing fees to those Members that are directly 
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. 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. Again, the Exchange intends to 
quantify the amount of time and resources spent on customer trading 
activity during the sunset period.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Members' customer options business including 
performing routine surveillances and investigations, as well as policy, 
rulemaking, interpretive, and enforcement activities. The Exchange will 
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 the Exchange's total regulatory costs. The Exchange has designed 
the ORF to generate revenues that, when combined with all of the 
Exchange's other regulatory fees, will be less than 75% of the 
Exchange's regulatory costs, which is consistent with the Exchange's 
by-laws that 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). . .'' \24\. In this regard, the Exchange 
believes that the amount of the fee is reasonable.
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    \24\ See MEMX LLC--LLC Agreement at https://info.memxtrading.com/regulation/governance/.
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    The Exchange believes that the proposal to limit changes to the ORF 
to twice a year with advance notice is reasonable because it will give 
participants certainty on the timing of changes, if any, and better 
enable them to properly account for ORF charges among their customers. 
The Exchange believes that limiting changes to the ORF to twice a year 
is equitable and not unfairly discriminatory because it will apply in 
the same manner to all Members that are subject to the ORF and provide 
them with additional advance notice of changes to that fee.
    The Exchange believes that the proposal to collect the ORF from 
non-Members when such non-Members ultimately clear the transaction 
(that is, when the non-Member is the ``ultimate clearing firm'' for a 
transaction in which a Member was assessed the ORF), is an equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers 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-Members in any instance. For all executions, 
regardless of where they occur, the ORF is collected from the ultimate 
clearing firm, regardless of whether that clearing firm is a Member, 
but only if the original executing clearing firm is a Member. If the 
original executing clearing firm is a not a Member, no ORF is assessed 
or collected. If the original executing clearing firm is a Member, 
while the ORF may be collected from the ultimate non-Member clearing 
firm, the ORF is assessed to the Member executing clearing firm. The 
Exchange believes that this collection practice is reasonable and 
appropriate, given its broad regulatory responsibilities with respect 
to its Members activity, as well as the fact that this collection 
method was originally instituted for the benefit of clearing firms that 
desired to have the ORF be collected from the clearing firm that 
ultimately clears the transaction.
    The Exchange believes that implementing the proposed ORF with a 
sunset date of approximately one year after the operative date is 
reasonable because it will give the Exchange adequate time to collect 
and analyze pertinent data while ensuring the Exchange, as a new 
entrant into equity options trading, is able to adequately fund its 
regulatory program to the same extent as its competitors. As noted 
above, by adopting a one-year sunset to its proposed ORF, the Exchange 
will be the only options exchange (of seventeen) that will be required 
to demonstrate to the Commission that the existing fee is reasonable, 
equitably allocated and not unfairly discriminatory in the next year. 
Absent rulemaking by the Commission, all other sixteen (16) options 
exchanges will be able to continue charging ORF as they do today, and 
as they have for years. Further, the Exchange emphasizes that other 
exchanges will be charging ORF for transactions occurring on MEMX 
Options, and as such, it follows that the Exchange that is primarily 
responsible for monitoring those

[[Page 68697]]

transactions should also be able to charge the ORF for activity 
occurring on its own market, as well as transactions it surveils on 
away markets.
    The Exchange believes that implementing the ORF with the sunset 
provision is equitable and not unfairly discriminatory because it will 
apply in the same manner to all Members that are subject to the ORF and 
the Exchange will provide such Members with advance notice of any 
changes to the ORF imposed by the Exchange.

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 will not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF will apply to all customer activity, and is designed to 
enable the Exchange to recover a material portion of the Exchange's 
cost related to its regulatory activities. This proposal will not 
create an unnecessary or inappropriate inter-market burden on 
competition because it will be a regulatory fee that supports 
regulation and customer protection 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. 
Unilateral action by the Exchange in establishing fees for services 
provided to its Members and others using its facilities will not have 
an impact on competition. The Exchange's proposed ORF, as described 
herein, is lower than or comparable to fees charged by other options 
exchanges (though as noted above, some exchange groups do have options 
exchanges operating with a lower ORF on a standalone basis). The 
proposal to limit the changes to the ORF to twice a year with advance 
notice is not intended to address a competitive issue but rather to 
provide Members with better notice of any change that the Exchange may 
make to the ORF.
    The Exchange notes that while it does not believe that its proposed 
ORF will impose any burden on inter-market competition, the Exchange 
not charging an ORF or being precluded from charging an ORF would, in-
fact, represent a significant burden on competition. As noted above, 
the Exchange is a new entrant in the highly competitive environment for 
equity options trading. As also noted above, all sixteen (16) 
registered options exchanges currently impose ORF on their members, 
and, similar to the Exchange, the majority of the options exchanges 
launched over the last decade have implemented an ORF on the day of 
launch or shortly thereafter.\25\ Upon the launch of the Exchange, such 
ORF fees imposed by other options exchanges will extend to executions 
occurring on the Exchange. The Exchange believes that in order to 
compete with these existing options exchanges, it must, in fact, impose 
an ORF on its Members, and that the inability to do so would result in 
an unfair competitive disadvantage to the Exchange. Given the 
Commission's questions, as articulated in various orders instituting 
proceedings, the Exchange has proposed its ORF with a sunset that will 
allow the Exchange the time to gather the necessary data, including its 
actual regulatory costs and revenues, as well as the cost of 
regulations executions that clear in the customer capacity and 
executions that occur on away markets, while also allowing it to 
adequately cover a portion of the projected costs associated with the 
regulation of its Members.
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    \25\ See supra, note 13.
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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 \26\ and Rule 19b-4(f)(2) \27\ thereunder.
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    \26\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \27\ 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-2023-25 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-2023-25. 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-2023-25 and should be 
submitted on or before October 25, 2023

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21934 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P