Document ID: SEC-2020-1294-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2020-08-13T04:00Z

[Federal Register Volume 85, Number 157 (Thursday, August 13, 2020)]
[Notices]
[Pages 49405-49407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17352]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89471; File No. SR-CboeBZX-2020-05]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Options Regulatory Fee

August 4, 2020.
    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 July 21, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
amend its Fees Schedule relating to the Options Regulatory Fee. The 
text of the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to reduce the Options Regulatory Fee 
(``ORF'') applicable to the Exchange's options platform (``BZX 
Options'') from $0.0002 per contract to $0.0001 per contract, effective 
August 3, 2020, in order to help ensure that revenue collected from the 
ORF, in combination with other regulatory fees and fines, does not 
exceed the Exchange's total regulatory costs.
    The ORF is assessed by the Exchange to each Member for options 
transactions cleared by the Member that are cleared by the Options 
Clearing Corporation (``OCC'') in the customer range, regardless of the 
exchange on which the transaction occurs.\3\ In other words, the 
Exchange imposes the ORF on all customer-range transactions cleared by 
a Member, even if the transactions do not take place on the Exchange. 
The ORF is collected by OCC on behalf of the Exchange from the Clearing 
Member or non-Clearing Member that ultimately clears the transaction. 
With respect to linkage transactions, the Exchange reimburses its 
routing broker providing Routing Services for options regulatory fees 
it incurs in connection with the Routing Services it provides.
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    \3\ The Exchange notes ORF also applies to customer-range 
transactions executed during Global Trading Hours.
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    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the regulatory costs to the Exchange of the 
supervision and regulation of Member customer options business 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. 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 surveillances, investigations and 
examinations. The indirect expenses include support from such areas as 
human resources, legal, information technology, facilities and 
accounting. These indirect expenses are estimated to be approximately 
6% of BZX Options' total regulatory costs for 2020. Thus, direct 
expenses are estimated to be approximately 94% of total regulatory 
costs for 2020. In addition, it is BZX Options' practice that revenue 
generated from ORF not exceed more than 75% of total annual regulatory 
costs.
    The Exchange monitors its 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 in a given year, the Exchange will adjust the ORF by 
submitting a fee change filing to the Commission. The Exchange also 
notifies Members of adjustments to the ORF via regulatory circular and/
or Exchange Notice.\4\ Based on the Exchange's most recent semi-annual 
review, the Exchange is proposing to reduce the amount of ORF that will 
be collected by the Exchange from $0.0002 per contract side to $0.0001 
per contract side. The proposed decrease is based on the Exchange's 
estimated projections for its

[[Page 49406]]

regulatory costs, which have decreased, balanced with recent options 
volumes, which has significantly increased. For example, total options 
contract volume in June 2020 was 82.2% higher than the total options 
contract volume in June 2019.\5\ In fact, June 2020 was the highest 
options volume month in the history of U.S. equity options industry.\6\ 
In particular, customer options volume across the industry has also 
significantly increased year to date. For example, total customer 
options contract volume in April 2020 was 50.27% higher than total 
customer volume in April 2019 and total customer options contract 
volume in May 2020, was 29.10% higher than total customer volume in May 
2019. These expectations are estimated, preliminary and may change. 
There can be no assurance that the Exchange's final costs for 2020 will 
not differ materially from these expectations and prior practice, nor 
can the Exchange predict with certainty whether options volume will 
remain at the current level going forward. The Exchange notes however, 
that when combined with the Exchange's other non-ORF regulatory fees 
and fines, the revenue being generated by ORF using the current rate 
results in revenue that is running in excess of the Exchange's 
estimated regulatory costs for the year.\7\ Particularly, as noted 
above, the options market has seen a substantial increase in volume 
over the first half of the year, due in large part to the extreme 
volatility in the marketplace as a result of the COVID-19 pandemic. 
This unprecedented spike in volatility resulted in significantly higher 
volume than was originally projected by the Exchange (thereby resulting 
in substantially higher ORF revenue than projected). Moreover, in 
addition to projected reductions in regulatory expenses, the Exchange 
experienced further unanticipated reductions in costs, in connection 
with COVID-19 (e.g., reduction in travel expenses).\8\ The Exchange 
therefore proposes to decrease the ORF in order to ensure it does not 
exceed its regulatory costs for the year. Particularly, the Exchange 
believes that by decreasing the ORF, as amended, when combined with all 
of the Exchange's other regulatory fees and fines, would allow the 
Exchange to continue covering a material portion of its regulatory 
costs, while lessening the potential for generating excess revenue that 
may otherwise occur using the current rate.\9\
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    \4\ The Exchange provides Members with such notice at least 30 
calendar days prior to the effective date of the change. The 
Exchange notified Members of the proposed rate change for August 3, 
2020 on July 1, 2020. See BZX Regulatory Circular RG20-042 ``Options 
Regulatory Fee Decrease and Discontinuation of Regulatory Circular'' 
and Exchange Notice, C2020070100 ``Cboe Options Exchanges Regulatory 
Fee Update Effective August 3, 2020.''
    \5\ See https://www.theocc.com/Newsroom/Press-Releases/2020/07-01-OCC-June-2020-Total-Volume-Up-Nearly-81-Perc.
    \6\ Id. The previous record for highest U.S. equity options 
volume was March 2020. For further context, the Exchange notes that 
The Options Clearing Corporation total volume for March 2020 was up 
62.8% as compared to March 2019.
    \7\ Consistent with Rule 15.2 (Regulatory Revenue), the Exchange 
notes that notwithstanding the excess ORF revenue collected to date, 
it has not used such revenue for nonregulatory purposes.
    \8\ The Exchange notes that in connection with proposed ORF rate 
changes, it provides the Commission confidential details regarding 
the Exchange's projected regulatory revenue, including projected 
revenue from ORF, along with a breakout of its projected regulatory 
expenses, including both direct and indirect allocations.
    \9\ The Exchange notes that its regulatory responsibilities with 
respect to Member compliance with options sales practice rules have 
largely been allocated to FINRA under a 17d-2 agreement. The ORF is 
not designed to cover the cost of that options sales practice 
regulation.
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    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.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act \11\, which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its Members and other persons using its facilities. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \12\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the 
current rate. Moreover, the proposed reduction is necessary in order 
for the Exchange to not collect revenue in excess of its anticipated 
regulatory costs, in combination with other regulatory fees and fines, 
which is consistent with the Exchange's practices. The Exchange had 
designed the ORF to generate revenues that would be less than or equal 
to 75% of the Exchange's regulatory costs, which is consistent with the 
view of the Commission that regulatory fees be used for regulatory 
purposes and not to support the Exchange's business operations. As 
discussed above, however, after its semi-annual review of its 
regulatory costs and regulatory revenues, which includes revenues from 
ORF and other regulatory fees and fines, the Exchange determined that 
absent a reduction in ORF, it would be collecting revenue in excess of 
75% of its regulatory costs. Indeed, the Exchange notes that when 
taking into account the recent options volume, coupled with the 
projected reduction in regulatory costs, it estimates the ORF will 
generate revenues that would cover more than the approximated 75% of 
the Exchange's projected regulatory costs. Moreover, when coupled with 
the Exchange's other regulatory fees and revenues, the Exchange 
estimates ORF to generate over 100% of the Exchange's projected 
regulatory costs. As such, the Exchange believes it's reasonable and 
appropriate to decrease the ORF amount from $0.0002 to $0.0001 per 
contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all Members on all 
their transactions that clear in the customer range at the OCC. The 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those Members that require more Exchange regulatory services based on 
the amount of customer options business they conduct. Regulating 
customer trading activity is much more labor intensive and requires 
greater expenditure of human and technical resources than regulating 
non-customer trading activity, which tends to be more automated and 
less labor-intensive. For example, there are costs associated with main 
office and branch office examinations (e.g., staff and travel 
expenses), as well as investigations into customer complaints and the 
terminations of Registered persons. As a result, the costs associated 
with administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Member proprietary 
transactions) of its regulatory program.\13\ Moreover, the Exchange 
notes that it has broad regulatory responsibilities with respect to its 
Members' activities, irrespective of where their transactions take 
place. Many of the Exchange's surveillance programs for customer 
trading activity may require the Exchange to look at

[[Page 49407]]

activity across all markets, such as reviews related to position limit 
violations and manipulation. Indeed, the Exchange cannot effectively 
review for such conduct without looking at and evaluating activity 
regardless of where it transpires. In addition to its own surveillance 
programs, the Exchange also works with other SROs and exchanges on 
intermarket surveillance related issues. Through its participation in 
the Intermarket Surveillance Group (``ISG'') \14\ the Exchange shares 
information and coordinates inquiries and investigations with other 
exchanges designed to address potential intermarket manipulation and 
trading abuses. Accordingly, there is a strong nexus between the ORF 
and the Exchange's regulatory activities with respect to its Member's 
customer trading activity.
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    \13\ If the Exchange changes its method of funding regulation or 
if circumstances otherwise change in the future, the Exchange may 
decide to modify the ORF or assess a separate regulatory fee on 
Member proprietary transactions if the Exchange deems it advisable.
    \14\ 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.
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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. This proposal does not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF applies to all customer activity, thereby raising 
regulatory revenue to offset regulatory expenses. It also supplements 
the regulatory revenue derived from non-customer activity. The Exchange 
notes, however, the proposed change is not designed to address any 
competitive issues. Indeed, this proposal does not create an 
unnecessary or inappropriate inter-market burden on competition because 
it is a regulatory fee that supports regulation in furtherance of the 
purposes of the Act. The Exchange is obligated to ensure that the 
amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    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) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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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 No. SR-CboeBZX-2020-057 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-CboeBZX-2020-057. 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-CboeBZX-2020-057, and should be submitted 
on or before September 3, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17352 Filed 8-12-20; 8:45 am]
BILLING CODE 8011-01-P