Document ID: SEC-2017-0997-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MIAX PEARL, LLC
Posted Date: 2017-06-13T04:00Z

[Federal Register Volume 82, Number 112 (Tuesday, June 13, 2017)]
[Notices]
[Pages 27096-27099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12153]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80875; File No. SR-PEARL-2017-26]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
PEARL Fee Schedule To Establish an Options Regulatory Fee (``ORF'')

June 7, 2017.
    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 May 26, 2017, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a 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 a proposal to amend the MIAX PEARL Fee 
Schedule (the ``Fee Schedule'') by establishing an Options Regulatory 
Fee (``ORF'').
    The Exchange initially filed the proposal on February 3, 2017 (SR-
PEARL-2017-09).\3\ That initial filing was withdrawn and replaced with 
a second filing on March 30, 2017 (SR-PEARL-2017-15).\4\ That second 
filing was withdrawn and replaced with a third filing on May 26, 2017 
(SR-PEARL-2017-26).
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    \3\ See Securities Exchange Act Release No. 80035 (February 14, 
2017), 82 FR 11272 (February 21, 2017)(SR-PEARL-2017-09).
    \4\ See Securities Exchange Act Release No. 80423 (April 10, 
2017), 82 FR 18045 (April 14, 2017)(SR-PEARL-2017-15). The 
replacement filings did not increase or decrease the amount of the 
ORF, but rather clarified the application of the ORF.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.miaxoptions.com/rule-filings/pearl, at MIAX's 
principal office, 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
    Currently, the Exchange charges an ORF in the amount of $0.0010 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 per-contract ORF will continue to be 
assessed by MIAX PEARL to each MIAX PEARL Member for all options 
transactions, including Mini Options, cleared or ultimately cleared by 
the Member which 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 MIAX PEARL from either (1) a Member that was the ultimate 
clearing firm for the transaction or (2) a non-Member that was the 
ultimate clearing firm where a Member 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 Member 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

[[Page 27097]]

clearing firm that ultimately clears the transaction--the ultimate 
clearing firm. The ultimate clearing firm may be either a Member or 
non-Member 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 Member or non-Member 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 Member 
(even if a Member is ``given-up'' or ``CMTAed'' and then such Member 
subsequently ``gives-up'' or ``CMTAs'' the transaction to another non-
Member via a CMTA 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. Charging ORF on both trades could result in double-billing of 
ORF for a single customer order, thus the Exchange will not assess ORF 
on outbound linkage trades in a linkage scenario. This assessment 
practice is identical to the assessment practice currently utilized by 
the Exchange's affiliate, Miami International Securities Exchange, LLC 
(``MIAX Options'').
    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 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 Member's' activities supports 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 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 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. 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.
    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 expects to monitor MIAX PEARL 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 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 (including non-
Members) 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 Members' 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 Member 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'') \5\ system in order to surveil a 
Member's activities across markets.
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    \5\ 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''),\6\ 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

[[Page 27098]]

markets on which security futures are traded and markets on which any 
security underlying security futures are traded to detect manipulation 
and insider trading.\7\
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    \6\ 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.
    \7\ 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. Other exchanges do impose a similar fee on their member's 
activity, including the activity of those members on MIAX PEARL.\8\
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    \8\ Similar regulatory fees have been instituted by PHLX (See 
Securities Exchange Act Release No. 61133 (December 9, 2009), 74 FR 
66715 (December 16, 2009) (SR-Phlx-2009-100)); ISE (See Securities 
Exchange Act Release No. 61154 (December 11, 2009), 74 FR 67278 
(December 18, 2009) (SR-ISE-2009-105)); and ISE Gemini (See 
Securities Exchange Act Release No. 70200 (August 14, 2013) 78 FR 
51242 (August 20, 2013) (SR-Topaz-2013-01)).
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRAs Trading Activity Fee \9\ 
and the NYSE Amex, NYSE Arca, CBOE, PHLX, ISE, ISE Gemini and BOX 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 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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    \9\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003) (SR-NASD-2002-148).
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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, 
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.
2. Statutory Basis
    The Exchange believes that its proposal to amend its fee schedule 
is consistent with Section 6(b) of the Act \10\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \11\ 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 \12\ 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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    \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 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.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Members' 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 initial level of the fee is reasonable.
    The Exchange believes that the proposal to limit 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 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 ORF is only 
assessed to a Member 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-Members. Once, however, the ORF 
is assessed to a Member for a particular transaction, the ORF may be 
collected from the Member or a non-Member, 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 Member. If there was a change to the clearing account of the 
original transaction and a non-Member becomes the ultimate clearing 
firm for that transaction, then the ORF will be collected from that 
non-Member. 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.

[[Page 27099]]

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 MIAX PEARL in establishing fees for 
services provided to its Members and others using its facilities will 
not have an impact on competition. As a new entrant in the already 
highly competitive environment for equity options trading, MIAX PEARL 
does not have the market power necessary to set prices for services 
that are unreasonable or unfairly discriminatory in violation of the 
Act. MIAX PEARL's proposed ORF, as described herein, are comparable to 
fees charged by other options exchanges for the same or similar 
services. The proposal to limit 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 Members 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

    Written comments were neither solicited nor 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,\13\ and Rule 19b-4(f)(2) \14\ 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 shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f)(2).
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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- PEARL-2017-26 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-PEARL-2017-26. 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 No. SR-PEARL-2017-26, and should 
be submitted on or before July 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-12153 Filed 6-12-17; 8:45 am]
 BILLING CODE 8011-01-P