Document ID: SEC-2018-0153-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2018-01-26T05:00Z

[Federal Register Volume 83, Number 18 (Friday, January 26, 2018)]
[Notices]
[Pages 3813-3816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01362]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82547; File No. SR-BOX-2018-02]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Clarify the Manner in Which the Exchange Assesses Its Options 
Regulatory Fee

January 19, 2018.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of 
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on January 12, 2018, BOX Options Exchange LLC (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 
Exchange filed the proposed rule change pursuant to Section 
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule to 
clarify the manner in which the Exchange assesses its Options 
Regulatory Fee (``ORF''). The text of the proposed rule change is 
available from the principal office of the Exchange, at the 
Commission's Public Reference Room and also on the Exchange's internet 
website at http://boxexchange.com.

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

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

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

1. Purpose
    The Exchange proposes to amend the BOX Fee Schedule (the ``Fee 
Schedule'') to clarify the manner in which the Exchange assesses its 
Options Regulatory Fee (``ORF''). Currently, the Exchange charges an 
ORF in the amount of $0.0038 per contract side. The proposed rule 
change does not change the amount of the ORF, but instead modifies the 
rule text to clarify how the ORF is assessed and collected. The 
proposed rule change also aligns the ORF rule text of the Exchange to 
rule text recently adopted by Miami International Securities Exchange 
(``MIAX'').\5\
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    \5\ See Securities Exchange Act Release No. 81063 (June 30, 
2017, 82 FR 31668 (July 7, 2017) (SR-MIAX-2017-31).
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    The per-contract ORF will continue to be assessed by BOX Options to 
each BOX Options Participant for all options transactions, cleared or 
ultimately cleared by the BOX Options Participant that are cleared by 
the Options Clearing Corporation (``OCC'') in the customer range, 
regardless of the exchange on which the transaction occurs. The ORF 
will be collected by OCC on behalf of BOX from either (1) a Participant 
that was the ultimate clearing firm for the transaction or (2) a non-
Participant that was the ultimate clearing firm where a Participant was 
the executing clearing firm for the transaction. The Exchange uses 
reports from OCC to determine the identity of the executing clearing 
firm and ultimate clearing firm.
    To illustrate how the ORF is assessed and collected, the Exchange 
provides the following set of examples. If the transaction is executed 
on the Exchange and the ORF is assessed, if there is no change to the 
clearing account of the original transaction, then the ORF is collected 
from the Participant that is the executing clearing firm for the 
transaction. (The Exchange notes that, for purposes of the Fee 
Schedule, when there is no change to the clearing account of the 
original transaction, the executing clearing firm is deemed to be the 
ultimate clearing firm.) If there is a change to the clearing account 
of the original transaction (i.e., the executing clearing firm ``gives-
up'' or ``CMTAs'' the transaction to another clearing firm), then the 
ORF is collected from the clearing firm that ultimately clears the 
transaction--the ultimate clearing firm. The ultimate clearing firm may 
be either a Participant or non-Participant of the Exchange. If the 
transaction is executed on an away exchange and the ORF is assessed, 
then the ORF is collected from the ultimate clearing firm for the 
transaction. Again, the ultimate clearing firm may be either a 
Participant or non-Participant of the Exchange. The Exchange notes, 
however, that when the transaction is executed on an away exchange, the 
Exchange does not assess the ORF when neither the executing clearing 
firm nor the ultimate clearing firm is a Participant (even if a 
Participant is ``given-up'' or ``CMTAed'' and then such Participant 
subsequently ``gives-up'' or ``CMTAs'' the transaction to another non-
Participant via a CMTA

[[Page 3814]]

reversal). Finally, the Exchange will not assess the ORF on outbound 
linkage trades, whether executed at the Exchange or an away exchange. 
``Linkage trades'' are tagged in the Exchange's system, so the Exchange 
can readily tell them apart from other trades. A customer order routed 
to another exchange results in two customer trades, one from the 
originating exchange and one from the recipient exchange.
    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 Participant for that 
transaction. There are countless order entering market participants, 
and each day such participants can and often do 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 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.
    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 Participant's activities supports applying the ORF to 
transactions cleared but not executed by a Participant. The Exchange's 
regulatory responsibilities are the same regardless of whether a 
Participant enters a transaction or clears a transaction executed on 
its behalf. The Exchange regularly reviews all such activities, 
including performing surveillance for position limit violations, 
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 Participants' 
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. The Exchange notes that its regulatory 
responsibilities with respect to Participant 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.
    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 the Exchange's total 
regulatory costs. The Exchange will continue to monitor BOX Options 
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 notify Participants of adjustments to the ORF via 
regulatory circular at least 30 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 Participants and their associated 
persons under the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants (including non-
Participants) trading on the Exchange. The Exchange cannot 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, 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 Participants' clearing activity, based on information the Exchange 
receives from OCC, including for away market activity. Among other 
reasons, doing so better and more accurately captures activity that 
occurs away from the Exchange over which the Exchange has a degree of 
regulatory responsibility. In so doing, the Exchange believes that 
assessing ORF on Participant clearing firms equitably distributes the 
collection of ORF in a fair and reasonable manner. Also, the Exchange 
and the other options exchanges are required to populate a consolidated 
options audit trail (``COATS'') \6\ system in order to surveil a 
Participant's activities across markets.
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    \6\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
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    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\7\ the Exchange shares information and coordinates 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.\8\
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    \7\ 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.
    \8\ 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 Participants 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 
Participant would send their orders to the least cost, least regulated 
exchange. Other exchanges do impose a similar fee on their member's 
activity.\9\
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    \9\ Similar regulatory fees have been instituted by MIAX (See 
Securities Exchange Act Release No. 68711 (January 23, 2013), 78FR 
6115 (January 29, 2013) (SR-MIAX-2013-01); MIAX PEARL (See 
Securities Exchange Act Release No. 808075 (June 7, 2017), 82FR 
27096 (SR-PEARL-2017-26); Nasdaq PHLX (See Securities Exchange Act 
Release No. 61133 (December 9, 2009), 74FR 66715 (December 16, 2009) 
(SR-Phlx-2009-100)); Nasdaq ISE (See Securities Exchange Act Release 
No. 61154 (December 11, 2009), 74FR 67278 (December 18, 2009) (SR-
ISE-2009-105)); and Nasdaq GEMX (See Securities Exchange Act Release 
No. 70200 (August 14, 2013) 78FR 51242 (August 20, 2013) (SR-Topaz-
2013-01)).
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    The Exchange notes that there is established precedent for an SRO

[[Page 3815]]

charging a fee across markets, namely, FINRAs Trading Activity Fee \10\ 
and MIAX, MIAX Pearl, NYSE MKT, NYSE Arca, CBOE, Nasdaq PHLX, Nasdaq 
ISE, and Nasdaq GEMX ORF. 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 Participant'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 
Participant's customer options transactions.
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    \10\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68FR 34021 (June 6, 2003) (SR-NASD-2002-148).
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    Additionally, the Exchange specifies in the Fee Schedule that the 
Exchange may only increase or decrease the ORF semi-annually, and any 
such fee change will be effective on the first business day of February 
or August. 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.
    The Exchange also proposes to remove a sentence from the ORF 
section which states that Market Makers and Order Flow Providers will 
not be assessed the Fee until the firm has become a fully certified BOX 
Market Maker or Order Flow Provider, that has met and has satisfied 
certain minimum technological requirements necessary to be capable of 
commencing participation on BOX. The Exchange believes this sentence is 
no longer appropriate and adds confusion as to when the ORF applies.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \11\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \12\ 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 \13\ 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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    \11\ 15 US.C. 78f(b).
    \12\ 15 US.C. 78f(b)(4).
    \13\ 15 US.C. 78f(b)(5).
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    The Exchange believes the proposed clarifications in the Fee 
Schedule to the ORF furthers the objectives of Section 6(b)(4) of the 
Act and are equitable and reasonable since they expressly describe the 
Exchange's existing practices regarding the manner in which the 
Exchange assesses its ORF.
    The Exchange believes the ORF is equitable and not unfairly 
discriminatory because it is objectively allocated to Participants in 
that it is charged to all Participants on all their transactions that 
clear as customer at the OCC. Moreover, the Exchange believes the ORF 
ensures fairness by assessing fees to those Participants 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., Participant proprietary 
transactions) of its regulatory program.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Participants' customer options business 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. The Exchange will monitor, on 
at least a semi-annual basis 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 or 
equal to the Exchange's regulatory costs, which is consistent with the 
Commission's view that regulatory fees be used for regulatory purposes 
and not to support the Exchange's business side. In this regard, the 
Exchange believes that the current amount of the fee is reasonable.
    The Exchange believes that limiting changes to the ORF to twice a 
year on specific dates 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 the proposed change is equitable 
and not unfairly discriminatory because it will apply in the same 
manner to all Participants that are subject to the ORF and provide them 
with additional advance notice of changes to that fee.
    The Exchange believes that collecting the ORF from non-Participants 
when such non-Participants ultimately clear the transaction (that is, 
when the non-Participant is the ``ultimate clearing firm'' for a 
transaction in which a Participant 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 ORF is only 
assessed to a Participant with respect to a particular transaction in 
which it is either the executing clearing firm or ultimate clearing 
firm. The Exchange does not assess the ORF to non-Participants. Once, 
however, the ORF is assessed to a Participant for a particular 
transaction, the ORF may be collected from the Participant or a non- 
Participant, depending on how the transaction is cleared at OCC. If 
there was no change to the clearing account of the original 
transaction, the ORF would be collected from the Participant. If there 
was a change to the clearing account of the original transaction and a 
non-Participant becomes the ultimate clearing firm for that 
transaction, then the ORF will be collected from that non-Participant. 
The Exchange believes that this collection practice is reasonable and 
appropriate, and 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.
    Finally, the Exchange believes removing the sentence that states 
that the ORF will not be assessed until the firm has become a fully 
certified is reasonable, equitable and not unfairly discriminatory. The 
Exchange believes this sentence is no longer appropriate and adds 
confusion as to when the ORF applies. The removal of this sentence

[[Page 3816]]

will have no effect on the assessment of fees for current BOX 
Participants as they are all fully certified to transact business on 
the Exchange. Future BOX Participants will be assessed the ORF once 
their application has been approved; as BOX's regulatory responsibility 
begins as soon as a firm becomes a Participant and not when the 
Participant is technologically certified.

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. The ORF is not intended to have 
any impact on competition. Rather, it is designed to enable the 
Exchange to recover a material portion of the Exchange's cost related 
to its regulatory activities. 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 BOX in establishing fees for services 
provided to its Participants and others using its facilities will not 
have an impact on competition. In the highly competitive environment 
for equity options trading, BOX does not have the market power 
necessary to set prices for services that are unreasonable or unfairly 
discriminatory in violation of the Act. The Exchange's ORF, as 
described herein, is comparable to fees charged by other options 
exchanges for the same or similar services. The Exchange believes that 
limiting the changes to the ORF to twice a year on specific dates with 
advance notice is not intended to address a competitive issue but 
rather to provide Participants with better notice of any change that 
the Exchange may make to the ORF.

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 has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act \14\ and Rule 19b-4(f)(2) 
thereunder,\15\ because it establishes or changes a due, or fee.
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    \14\ 15 US.C. 78s(b)(3)(A)(ii).
    \15\ 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 the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-BOX-2018-02 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-BOX-2018-02. 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-BOX-2018-02, and should be submitted on or 
before February 16, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-01362 Filed 1-25-18; 8:45 am]
 BILLING CODE 8011-01-P