Document ID: SEC-2016-0221-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2016-02-10T05:00Z

[Federal Register Volume 81, Number 27 (Wednesday, February 10, 2016)]
[Notices]
[Pages 7163-7166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02605]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77053; File No. SR-BX-2016-007]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Adopt an 
Options Regulatory Fee

February 4, 2016.
    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 21, 2016, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``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 proposes to institute a new transaction based 
``Options Regulatory Fee'' or ``ORF.''
    While fee changes pursuant to this proposal are effective upon 
filing, the Exchange has designated these changes to be operative on 
February 1, 2016.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxbx.cchwallstreet.com/, 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
    The Exchange proposes to amend BX Options Rule at Chapter XV, 
Section 5, which is currently reserved, to adopt an ORF.\3\
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    \3\ The Exchange does not currently assess a registered 
representative fee to its members.
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    In order to offset the cost of the Exchange's regulatory programs, 
the Exchange proposes to [sic] an ORF of $0.0003 per contract. The ORF 
would be assessed by the Exchange to each BX Participant for all 
options transactions executed or cleared by the BX Participant that are 
cleared by The Options Clearing Corporation (``OCC'') in the Customer 
range, i.e., transactions that clear in the Customer account of the BX 
Participant's clearing firm at OCC, regardless of the marketplace of 
execution. The Exchange would impose the ORF on all options 
transactions executed by a BX Participant, even if the transactions do 
not take place on BX.\4\
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    \4\ The ORF would apply to all customer orders executed by a BX 
Participant on BX. Exchange rules require each BX Participant to 
submit trade information in order to allow the Exchange to properly 
prioritize and match orders and quotations and report resulting 
transactions to the OCC. See Exchange Rules Chapter V, Section 7. 
The Exchange represents that it has surveillances in place to verify 
that BX Participants comply with the Rule.
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    The ORF would also be assessed on transactions that are not 
executed by a BX Participants [sic] but are ultimately cleared by a BX 
Participant. For example, if a BX Participant executed a transaction 
and a BX Participant cleared the transaction, the ORF would be assessed 
to the BX Participant who executed the transaction. Also, if a non-BX 
Participant executed a transaction and a BX Participant cleared the 
transaction, the ORF would be assessed to the BX Participant who 
cleared the transaction.
    The Exchange believes it is appropriate to charge the ORF only to 
transactions that clear as Customer at OCC. The Exchange believes that 
its broad regulatory responsibilities with respect to BX Participants' 
activities supports applying the ORF to transactions cleared but not 
executed by a BX Participant. The Exchange's regulatory 
responsibilities are the same regardless of whether a BX Participant 
executes a transaction or clears a transaction executed on its behalf. 
The

[[Page 7164]]

Exchange regularly reviews all such activities, including performing 
surveillance for position limit violations, manipulation, front-
running, contrary exercise advice violations and insider trading.\5\ 
These activities span across multiple exchanges.
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    \5\ The Exchange also participates in The Options Regulatory 
Surveillance Authority (``ORSA'') national market system plan and in 
doing so shares information and coordinates with other exchanges 
designed to detect the unlawful use of undisclosed material 
information in the trading of securities options. ORSA is a national 
market system comprised of several self-regulatory organizations 
whose functions and objectives include the joint development, 
administration, operation and maintenance of systems and facilities 
utilized in the regulation, surveillance, investigation and 
detection of the unlawful use of undisclosed material information in 
the trading of securities options. The Exchange compensates ORSA for 
the Exchange's portion of the cost to perform insider trading 
surveillance on behalf of the Exchange. The ORF will cover the costs 
associated with the Exchange's arrangement with ORSA.
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    The Exchange believes the initial level of the fee is reasonable 
because it relates to the recovery of the costs of supervising and 
regulating BX Participants. The proposed amount of the ORF is fair and 
reasonably allocated because it represents less than the Exchange's 
actual costs in administering its regulatory program. The ORF would be 
collected indirectly from BX Participants through their clearing firms 
by OCC on behalf of the Exchange. The Exchange expects that BX 
Participants will pass-through the ORF to their Customers in the same 
manner that firms pass-through to their Customers the fees charged by 
Self-Regulatory Organizations (``SROs'') to help the SROs meet their 
obligations under Section 31 of the Exchange Act.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of BX Participants, 
including performing routine surveillances, 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, will cover a material 
portion, but not all, of the Exchange's regulatory costs. The Exchange 
notes that its regulatory responsibilities with respect to BX 
Participant compliance with options sales practice rules have been 
allocated to FINRA under a 17d-2 agreement. The ORF is not designed to 
cover the cost of options sales practice regulation.
    The Exchange would monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other BX regulatory fees 
and fines, does not exceed the Exchange's total regulatory costs. The 
Exchange expects to monitor BX regulatory costs and revenues at a 
minimum on an annual basis. If the Exchange determines BX regulatory 
revenues exceed regulatory costs, the Exchange would adjust the ORF by 
submitting a fee change filing to the Commission. The Exchange would 
notify BX Participants of adjustments to the ORF via a Regulatory 
Information Circular.
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all BX Participants on all their 
Customer options business. The amount of resources required by the 
Exchange to regulate non-Customer trading activity is significantly 
less than the amount of resources the Exchange must dedicate to 
regulate Customer trading activity. The ORF seeks to recover the costs 
of supervising and regulating members, including performing routine 
surveillances, investigations, examinations, financial monitoring, and 
policy, rulemaking, interpretive, and enforcement activities. The 
Exchange believes the proposed ORF is reasonable because it will raise 
revenue related to the amount of Customer options business conducted by 
BX Participants and thus the amount of Exchange regulatory services 
required by those BX Participants.\6\
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    \6\ The Exchange expects that implementation of the proposed ORF 
will result generally in many traditional brokerage firms paying 
less regulatory fees while Internet and discount brokerage firms 
will pay more.
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    As a fully-electronic exchange without a trading floor, the amount 
of resources required by the Exchange to regulate non-Customer trading 
activity is significantly less than the amount of resources the 
Exchange must dedicate to regulate Customer trading activity. This is 
because 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., market 
maker) of its regulatory program.
    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 BX Participants and their 
associated persons with the Exchange Act and the Rules of the Exchange 
and to surveil for other manipulative conduct by market participants 
(including non-BX 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.\7\ Also, the 
Exchange and the other options exchanges are required to populate a 
consolidated options audit trail (``COATS'') system in order to surveil 
BX Participant activities across markets.\8\
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    \7\ The Exchange and other options SROs are parties to a 17d-2 
agreement allocating among the SROs regulatory responsibilities 
relating to compliance by the common members with rules for expiring 
exercise declarations, position limits, OCC trade adjustments, and 
Large Option Position Report reviews. See Securities Exchange Act 
Release No. 63430 (December 3, 2010), 75 FR 76758 (December 9, 
2010). The Commission notes that the current effective version of 
this 17d-2 plan is reflected in Securities Exchange Act Release No. 
76310 (Oct. 29, 2015), 80 FR 68354 (Nov. 4, 2015).
    \8\ 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''),\9\ 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 Exchange Act requirement 
that it have 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.\10\
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    \9\ 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.
    \10\ See Exchange Act Section 6(h)(3)(I).
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    The Exchange believes that charging the ORF across markets will 
avoid having BX Participants direct their trades to other markets in 
order to avoid the fee and to thereby avoid paying for their fair share 
of regulation. If the ORF did not apply to activity across markets

[[Page 7165]]

then BX Participants would send their orders to the lowest cost, least 
regulated exchange. Other exchanges could impose a similar fee on their 
member's activity, including the activity of those members on BX. In 
addition to the ORF that is currently in place at other exchanges,\11\ 
the Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRA's Trading Activity 
Fee.\12\ While the Exchange does not have all the same regulatory 
responsibilities as FINRA, the Exchange believes that, like the other 
exchanges that assess an ORF, its broad regulatory responsibilities 
with respect to BX Participants' 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 BX Participant's Customer options 
transactions.
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    \11\ See other options exchanges such as the Chicago Board 
Options Exchange, Incorporated (``CBOE''), C2 Options Exchange, Inc. 
(``C2''), NASDAQ OMX PHLX, LLC (``Phlx''), the International 
Securities Exchange, LLC (``ISE''), NYSE Arca, Inc. (``NYSEArca'') 
and [sic] NYSE AMEX LLC (``NYSEAmex''), BATS Exchange, Inc. 
(``BATS'') and The NASDAQ Options Market LLC (``NOM'').
    \12\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 3402 [sic] (June 6, 2003).
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    While fee changes pursuant to this proposal are effective upon 
filing, the Exchange has designated these changes to be operative on 
February 1, 2016.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act \14\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which the Exchange operates or controls, and is not 
designed to permit unfair discrimination between Customers, issuers, 
brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes the ORF is objectively allocated to BX 
Participants because it would be charged to all BX Participants on all 
their transactions that clear as Customer at the OCC. The Exchange 
believes it is appropriate to charge the ORF only to transactions that 
clear as Customer at the OCC because the Exchange is assessing higher 
fees to those Participants that require more Exchange regulatory 
services based on the amount of Customer options business they conduct. 
As a fully-electronic exchange without a trading floor, the amount of 
resources required by the Exchange to regulate non-Customer trading 
activity is significantly less than the amount of resources the 
Exchange must dedicate to regulate Customer trading activity. This is 
because 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.
    Moreover, the Exchange believes the ORF ensures fairness by 
assessing higher fees to those BX Participants that require more 
Exchange regulatory services based on the amount of Customer options 
business they conduct. The ORF seeks to recover the costs of 
supervising and regulating Options Participants including performing 
routine surveillances, investigations, examinations, financial 
monitoring, and policy, rulemaking, interpretive, and enforcement 
activities. The Exchange's regulatory responsibilities are the same 
regardless of whether a BX Participant executes a transaction or clears 
a transaction executed on its behalf. The Exchange believes that this 
proposal is reasonable, equitable and not unfairly [sic] for the 
foregoing reasons.
    The Commission has addressed the funding of an SRO's regulatory 
operations in the Concept Release Concerning Self-Regulation \15\ and 
the release on the Fair Administration and Governance of Self-
Regulatory Organizations.\16\ In the Concept Release, the Commission 
states that: ``Given the inherent tension between an SRO's role as a 
business and [sic] a regulator, there undoubtedly is a temptation for 
an SRO to fund the business side of its operations at the expense of 
regulation.'' \17\ In order to address this potential conflict, the 
Commission proposed in the Governance Release rules that would require 
an SRO to direct monies collected from regulatory fees, fines, or 
penalties exclusively to fund the regulatory operations and other 
programs of the SRO related to its regulatory responsibilities.\18\ The 
Exchange has designed the ORF to generate revenues that would recover a 
material portion of BX'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.
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    \15\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
    \16\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'') [sic].
    \17\ Concept Release at 71268.
    \18\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    In terms of intra-market competition, the ORF already exists on 
various options exchanges.\19\ Also, the ORF would be objectively 
allocated to all BX Participants on all their transactions that clear 
as Customer at the OCC. The Exchange believes it is appropriate to 
charge the ORF only to transactions that clear as Customer at the OCC 
because the Exchange is assessing higher fees to those Participants 
that require more Exchange regulatory services based on the amount of 
Customer options business they conduct. As a fully-electronic exchange 
without a trading floor, the amount of resources required by the 
Exchange to regulate non-Customer trading activity is significantly 
less than the amount of resources the Exchange must dedicate to 
regulate Customer trading activity. This is because 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.
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    \19\ See note 11 above.

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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 Act.\20\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 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 rule-comments@sec.gov. Please include 
File Number SR-BX-2016-007 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-BX-2016-007. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BX-2016-007 and should be 
submitted on or before March 2, 2016.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02605 Filed 2-9-16; 8:45 am]
 BILLING CODE 8011-01-P