Document ID: SEC-2012-1321-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: C2 Options Exchange, Inc.
Posted Date: 2012-08-10T04:00Z

[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47902-47905]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19609]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67596; File No. SR-C2-2012-023]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Options Regulatory Fee

August 6, 2012.
    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 31, 2012, C2 Options Exchange, Incorporated (the 
``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to institute a new transaction-based 
``Options Regulatory Fee''. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.c2exchange.com/Legal/
), 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
    In order to offset more fully the cost of the Exchange's regulatory 
programs, the Exchange proposes to adopt a transaction-based Options 
Regulatory Fee (``ORF'') of $0.0015 per contract. The Exchange is 
adopting an ORF due to substantial increases in resources devoted to 
regulatory services, including the recent hiring of many new employees, 
increased office space and regulatory systems enhancements. The 
proposed fee would be operative on August 1, 2012.
    The ORF would be assessed by the Exchange to each Permit Holder for 
all options transactions executed or cleared by the Permit Holder that 
are cleared by The Options Clearing Corporation (``OCC'') in the 
customer range, i.e., transactions that clear in a customer account at 
OCC, regardless of the marketplace of execution. In other words, the 
Exchange would impose the ORF on all customer-range transactions 
executed by a Permit Holder, even if the transactions do not take place 
on the Exchange.\3\ The ORF would also be charged for transactions that 
are not

[[Page 47903]]

executed by a Permit Holder but are ultimately cleared by a Permit 
Holder. In the case where a Permit Holder executes a transaction and a 
Permit Holder clears the transaction, the ORF would be assessed to the 
Permit Holder who executed the transaction. In the case where a non-
Permit Holder executes a transaction and a Permit Holder clears the 
transaction, the ORF would be assessed to the Permit Holder who clears 
the transaction. The Exchange believes that its broad regulatory 
responsibilities with respect to Permit Holders' activities supports 
applying the ORF to transactions cleared but not executed by a Permit 
Holder. The Exchange's regulatory responsibilities are the same 
regardless of whether a Permit Holder executes 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, frontrunning, contrary exercise advice 
violations and insider trading.\4\ These activities span across 
multiple exchanges.
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    \3\ Exchange rules require each Permit Holder to record the 
appropriate account origin code on all orders at the time of entry 
in order to allow the Exchange to properly prioritize and route 
orders and assess transaction fees pursuant to the rules of the 
Exchange and report resulting transactions to the OCC. C2 order 
origin codes are defined in C2 Regulatory Circular RG10-4. The 
Exchange represents that it has surveillances in place to verify 
that Permit Holders mark orders with the correct account origin 
code.
    \4\ 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 ORF would be collected indirectly from Permit Holders through 
their clearing firms by OCC on behalf of the Exchange. The Exchange 
expects that Permit Holders 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 Permit Holder 
customer options business, 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.\5\ The Exchange notes that its regulatory 
responsibilities with respect to Permit Holder 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.
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    \5\ The Exchange collects other regulatory revenues from Firm 
Designated Examining Authority Fees and Communication Review Fees. 
See C2 Fees Schedule, Section 8.
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    The Exchange would 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 regulatory costs and revenues at a minimum 
on an annual basis. If the Exchange determines regulatory revenues 
exceed regulatory costs, the Exchange would adjust the ORF by 
submitting a fee change filing to the Commission. The Exchange would 
notify Permit Holders of adjustments to the ORF via regulatory 
circular.
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all Permit Holders on all their customer 
options business. The Exchange believes the proposed ORF is reasonable 
because it will raise revenue related to the amount of customer options 
business conducted by Permit Holders, and thus the amount of Exchange 
regulatory services those Permit Holders will require.
    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., Permit 
Holder proprietary options transactions) of its regulatory program.\6\
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    \6\ If the Exchange changes its method of funding regulation or 
if circumstances otherwise change in the future, the Exchange may 
decide to impose the ORF or a separate regulatory fee on Permit 
Holder proprietary options transactions if the Exchange deems it 
advisable.
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    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 Permit Holders 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-Permit Holders) 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, frontrunning 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 
Permit Holder 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).
    \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 Permit Holders direct their trades to other markets in 
order to avoid

[[Page 47904]]

the fee and to thereby avoid paying for their fair share of regulation. 
If the ORF did not apply to activity across markets then Permit Holders 
would send their orders to the least cost, least regulated exchange. 
Other exchanges could impose a similar fee on their member's activity, 
including the activity of those members on C2. 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 Permit Holders' 
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 
Permit Holder's customer options transactions.
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    \11\ The BOX Options Exchange, LLC (``BOX''), Chicago Board 
Options Exchange, Incorporated (``CBOE''), the International 
Securities Exchange, LLC (``ISE''), NYSE Arca, Inc. (``NYSEArca''), 
NYSE MKT LLC (``NYSE MKT''), NASDAQ OMX PHLX, LLC (``Phlx'') and 
NASDAQ Stock Market, LLC (``NASDAQ'') all charge ORFs.
    \12\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003).
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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.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\14\ which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its Permit Holders and other persons using its 
facilities.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
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    In particular, the Exchange believes the ORF is equitable and not 
unfairly discriminatory because it is objectively allocated to Permit 
Holders in that it would be charged to all Permit Holders on all their 
transactions that clear as customer at the OCC. Moreover, the Exchange 
believes the ORF ensures fairness by assessing higher fees to those 
Permit Holders 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. 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., Permit Holder 
proprietary options transactions) of its regulatory program.
    The ORF seeks to recover the costs of supervising and regulating 
Permit Holders 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 Permit 
Holder executes a transaction or clears a transaction executed on its 
behalf. The Exchange believes that this proposal is reasonable, 
equitable and not unfairly discriminatory for the foregoing reasons and 
also because this proposal would offset more fully the cost of the 
Exchange's regulatory programs. The Exchange is adopting an ORF due to 
substantial increases in resources devoted to regulatory services, 
including the recent hiring of many new employees, increased office 
space and regulatory systems enhancements.
    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 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, when combined 
with all of the Exchange's other regulatory fees, would recover a 
material portion, but not all, of C2'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. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
    \17\ Concept Release at 71268.
    \18\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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) \19\ of the Act and paragraph (f) of Rule 19b-4 \20\ 
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.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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 Number SR-C2-2012-023 on the subject line.

[[Page 47905]]

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-C2-2012-023. 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 such 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-C2-2012-023 and should be 
submitted by August 31, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19609 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P