
[Federal Register Volume 80, Number 18 (Wednesday, January 28, 2015)]
[Notices]
[Pages 4611-4617]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01508]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74114; File No. SR-BOX-2015-03]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Implement an Equity Rights Program

January 22, 2015.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of 
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on January 9, 2015, BOX Options Exchange LLC (the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposed rule change pursuant to Section 
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change 
to implement an equity rights program, to be effective January 12, 
2015. There are no proposed changes to any rule text.

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 implement an equity rights program (the 
``Program'') in which BOX Options Participants registered with the 
Exchange for purposes of participating in options trading on the BOX 
market, a facility of the Exchange (``BOX''), as an order flow provider 
or market maker (``Participants'') may elect to participate.\5\
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    \5\ The Program was made available to all options traders. 
However, any interested party must first become a Participant (in 
addition to meeting the Program's eligibility criteria and making 
the initial cash payment) in order to participate in the Program.
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    The Exchange is submitting two proposed rule changes with the 
Commission in connection with implementation of the Program. First, the 
Exchange is submitting this proposed rule change under Section 
19(b)(3)(A)(ii) of the Securities Exchange Act of 1934 (the ``Act'') 
\6\ and Rule 19b-4(f)(2) thereunder,\7\ for immediate effectiveness, 
inasmuch as it establishes or changes a due, fee, or other charge 
imposed by the Exchange. Second, the Exchange will be submitting a 
separate proposed rule change under Section 19(b)(1) of the Act \8\ and 
Rule 19b-4 thereunder,\9\ subject to Commission approval, to make 
changes to its company governance documents, including to accommodate 
aspects of the Program that involve or affect the Subscription 
Agreement and proposed Members Agreement and the Amended and Restated 
Limited Liability Company Agreement (``Restated LLC Agreement'') of BOX 
Holdings Group LLC (``Holdings''), an affiliate of the Exchange. As 
discussed in greater detail below, the aspects of the Program that 
require changes to the company governance documents, including the 
acquisition of equity ownership in Holdings and any right related to 
such ownership, are contingent upon Commission approval of the company 
governance proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4(f)(2).
    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
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    Participants that elect to participate in the Program will have the 
right to acquire equity in, and receive distributions from, Holdings, 
an affiliate of the Exchange, in exchange for the achievement of 
certain order flow volume commitment thresholds on the Exchange over a 
period of five (5) years and a nominal initial cash payment. The 
purpose of the Program is to promote the long-term interests of the 
Exchange by providing incentives designed to encourage Participants and 
Holdings owners to contribute to the growth and success of BOX by being 
active liquidity providers and takers to provide enhanced levels of 
trading volume to BOX, through an opportunity to increase their 
proprietary interests in BOX's enterprise value.
    Upon initiation of the Program by Holdings, Participants that elect 
to participate in the Program, meet the eligibility criteria and make 
the initial cash payment (``Subscribers'') will be issued Volume 
Performance Rights (``VPRs'') in tranches of twenty (20) VPRs (each, a 
``Tranche''). There will be a minimum subscription of two Tranches. A 
maximum of thirty (30) Tranches could be issued in connection with the 
Program.\10\
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    \10\ A maximum of 600 VPRs may be issued in connection with the 
Program (30 Tranches x 20 VPRs per Tranche). If the Program is 
oversubscribed, Tranches will be allocated on a pro-rata basis, 
rounded to the nearest whole Tranche, subject to the minimum of two 
Tranches.
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    Each VPR will include 8.5 unvested new Class C Membership Units of 
Holdings (``Class C Units'') \11\ and an average daily transaction 
volume commitment (``VPR Volume Commitment'') with respect to 
Qualifying Contract Equivalents equal to 0.0055% of the Industry ADV 
\12\ for a total of five (5) years (twenty (20) consecutive measurement 
quarters).\13\ The VPR Volume Commitment threshold will change based on 
the movement of the Industry ADV.
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    \11\ 8.5 Class C Units will equal approximately 0.05% of the 
fully diluted equity of Holdings, assuming all 600 VPRs are 
subscribed. The total equity ownership of Holdings held by any one 
Subscriber will be limited to 20%.
    \12\ The Industry ADV for a period is calculated by multiplying 
(i) two (2) times (ii) the quotient of (A) the aggregate number of 
cleared U.S. options transactions executed on a U.S. national 
exchange or facility thereof in U.S. listed securities on trading 
days during the period, as reported by the Options Clearing 
Corporation (``OCC''), divided by (B) the number of trading days 
during the period. A ``trading day'' is generally any day on which 
the BOX market is open for business, subject to certain 
qualifications to be defined in the Members Agreement. Certain 
industry transactions are excluded from the calculation of Industry 
ADV as described below.
    \13\ The first measurement quarter is expected to begin 
measuring order flow on January 12, 2015, and end on March 31, 2015, 
and thus the first measurement period will be slightly shorter than 
a standard measurement quarter.
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    There are four categories of Contract Equivalents, which are based 
on the Participant account types set forth in the Exchange's Fee 
Schedule:

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     Public Customer: 0.71 executed orders equates to one (1) 
Contract Equivalent.
     Market Maker: 1.10 executed orders equates to one (1) 
Contract Equivalent.
     Broker/Dealer: 1.35 executed orders equates to one (1) 
Contract Equivalent.
     Professional Customer: \14\ 1.35 executed orders equates 
to one (1) Contract Equivalent.
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    \14\ A ``Professional'' Customer is defined in Exchange Rule 
100(a)(50) to mean ``any person or entity that (i) is not a broker 
or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s).''
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    The escalation of the weight assigned to each category is generally 
consistent with the fees charged to each account type in the Exchange's 
Fee Schedule. Qualifying Contract Equivalents are Contract Equivalents, 
other than Excluded Member Contracts (described below), executed by a 
Class C Member (or its affiliates) on the Exchange either for its own 
account or for a customer, including orders routed to the Exchange by 
such Class C Member (or its affiliates).
    All holders of Holdings' outstanding equity, including Subscribers 
holding Class C Units (``Class C Members''), are eligible to receive an 
annual distribution, distributed on a pro-rata basis, equal to 95% of 
Holdings' consolidated net income, plus depreciation and less capital 
expenditures, subject to availability.\15\ Any such distribution 
amounts will be calculated after taking into account all financial and 
regulatory needs of the Exchange, as determined by the Exchange.\16\ 
Distributions are payable on Class C Units associated with both vested 
and unvested VPRs. Distributions to Subscribers will be based on the 
Subscriber's achievement of its Annual Volume Commitment \17\ for that 
year. If a Subscriber achieves at least 100% of its Annual Volume 
Commitment for all of the VPRs it holds for the distribution year, the 
Subscriber will receive its full distribution on its Class C Units. If 
a Subscriber achieves less than 100%, but at least 70%, of its Annual 
Volume Commitment, its distribution on its Class C Units will be 
prorated. If a Subscriber achieves less than 70% of its Annual Volume 
Commitment, it will receive no distribution on its Class C Units. Any 
unpaid distributions resulting from failure of Subscribers to achieve 
their Annual Volume Commitments during the measurement year will first 
be redistributed pro-rata to Subscribers that achieved volume in excess 
of their Annual Volume Commitment for the measurement year, with a 
maximum redistributed distribution amount equal to the Subscriber's 
regular distribution multiplied by the percent by which its transaction 
volume exceeded its Annual Volume Commitment for that measurement year. 
Distributions available for redistribution that are not redistributed 
to Subscribers will be redistributed pro-rata to holders of Holdings' 
other classes of equity securities: Class A Membership Units and Class 
B Membership Units (collectively with the Class C Units, ``Units'').
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    \15\ Distributions on Class C Units will not be paid until the 
Commission approves the related rule change filed by the Exchange 
concerning revisions to its company governance documents. 
Distributions payable on Class C Units that accrue before Commission 
approval of the related company governance rule filing will be held 
in a segregated account until Commission approval is obtained. If 
the Commission does not approve the related company governance rule 
filing by July 1, 2016, a Subscriber may terminate its Subscription 
Agreement with Holdings and any and all distributions with respect 
to that Subscriber held in the segregated account will be released 
back to Holdings and distributed to existing Members in accordance 
with the terms of the Article 8 of the LLC Agreement.
    \16\ Article 8 of the LLC Agreement generally describes, and the 
Restated LLC Agreement generally will describe, how the distribution 
amounts will be calculated.
    \17\ ``Annual Volume Commitment'' is calculated, with respect to 
any measurement year for any Class C Member, by multiplying (i) the 
number of VPRs held by such Class C Member as of the first day of 
the measurement year by (ii) the VPR Volume Commitment for such 
measurement year. The first measurement year's Annual Volume 
Commitment will be reduced as part of a phase-in period as described 
below.
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    One VPR per Tranche will be eligible to vest each quarter of the 
five (5) year Program period, subject to the Subscriber meeting its 
Quarterly Volume Commitment \18\ for all VPRs it holds for that 
quarter. In addition, Subscribers may earn additional VPRs or lose VPRs 
upon exceeding or failing to meet their VPR Volume Commitments during 
the Program period, as detailed below.
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    \18\ ``Quarterly Volume Commitment'' is calculated with respect 
to any measurement quarter for any Class C Member, by multiplying 
(i) the number of VPRs held by such Class C Member as of the first 
day of the measurement quarter by (ii) the VPR Volume Commitment for 
such measurement quarter.
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    If a Subscriber fails to meet its Tranche Volume Commitment 
(calculated as VPR Volume Commitment x 20 for a full Tranche) for a 
measurement quarter, a VPR eligible to vest for that Tranche in that 
quarter will not vest.\19\ However, for any measurement quarter in 
which a Subscriber achieves less than 100%, but at least 70%, of its 
Tranche Volume Commitment, the Subscriber may ``make up'' the shortfall 
for vesting purposes by achieving order flow during the next two 
consecutive measurement quarters at least equal to its requisite 
Quarterly Volume Commitment for each quarter plus the shortfall amount 
for that Tranche.\20\ If the shortfall is so ``made up,'' one VPR per 
Tranche will vest at the end of the measurement quarter in which the 
shortfall is made up, in addition to any other VPRs that would 
otherwise vest. If a Subscriber fails to ``make up'' the shortfall 
within the two immediately subsequent measurement quarters, or if a 
Subscriber fails to meet at least 70% of its Tranche Volume Commitment, 
the VPR eligible to vest for that Tranche will fail to vest and become 
available to be reallocated to interested Subscribers to the extent 
such interested Subscribers achieved order flow volume above their 
Quarterly Volume Commitment for that measurement quarter. If a 
Subscriber exceeds 100% of its Quarterly Volume Commitment in any 
measurement quarter, the Subscriber will be eligible to earn 
reallocated VPRs from the pool of VPRs available for reallocation. The 
number of VPRs received in such reallocation will depend upon the 
Subscriber's achieved volume in excess of its Quarterly Volume 
Commitment and the extent to which other Subscribers miss or exceed 
their own Quarterly Volume Commitments.
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    \19\ Notwithstanding, the Program is currently designed to allow 
for an initial phase-in period during the first two measurement 
quarters of the Program, during which each Subscriber's Quarterly 
Volume Commitment will be reduced to 40% for the first measurement 
quarter and 70% for the second measurement quarter. All subsequent 
measurement quarters will require a 100% Quarterly Volume 
Commitment. As such, for the first measurement year, each 
Subscriber's Annual Volume Commitment will be 77.5% of the Annual 
Volume Commitment calculation.
    \20\ For the sake of clarity, a portion of the shortfall can be 
made up in either or both measurement quarters in the ``make-up'' 
period.
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    In addition to the reallocation of individual VPRs described above, 
if a Subscriber fails to meet its Tranche Volume Commitment for one or 
more Tranches in at least two (which need not be consecutive) 
measurement quarters, including after any applicable ``make up'' period 
as described above, all of the Subscriber's VPRs in such Tranche(s), 
whether vested or unvested, will become available to be reallocated to 
interested Subscribers to the extent such interested Subscribers 
achieved, on average from the beginning of the Program through the most 
recent measurement quarter, order flow volume above their applicable 
Quarterly Volume Commitment. If a Subscriber, on average from the 
beginning of the Program through the most recent

[[Page 4613]]

measurement quarter, exceeds 100% of its Quarterly Volume Commitment, 
the Subscriber will be eligible to earn reallocated VPRs from the pool 
of such Tranches available for reallocation. The number of VPRs 
received in such reallocation will depend upon the Subscriber's 
achieved volume, on average from the beginning of the Program through 
the most recent measurement quarter, in excess of its applicable 
Quarterly Volume Commitment and the extent to which other Subscribers 
miss or exceed their own Quarterly Volume Commitments.
    Notwithstanding the foregoing, once a Subscriber has achieved forty 
(40) vested VPRs, and subsequently when each additional level of twenty 
(20) VPRs vest, those VPRs will become protected from reallocation.
    Any reallocated VPR will come with the same Class C Units ownership 
rights and VPR Volume Commitment obligations. If the number of VPRs 
available for reallocation is insufficient to reallocate fully to all 
eligible Subscribers, the available VPRs will be relocated on a pro-
rata basis based on each eligible Subscriber's percentage of the 
aggregate excess volume achieved by all eligible Subscribers. If the 
number of VPRs available for reallocation exceeds the interest or 
availability of eligible Subscribers, Holdings may cancel any such 
excess VPRs not reallocated.
    As noted above, only Qualifying Contract Equivalents will be 
included in the calculation of a Subscriber's VPR Volume Commitment. 
The following Excluded Member Contracts are not Qualifying Contract 
Equivalents, and thus will not count towards a Subscriber's VPR Volume 
Commitment: (1) Excluded Industry Transactions, i.e., executed and 
cleared transactions (i) in a proprietary product traded on a U.S. 
equity options exchange other than the Exchange (and not traded on the 
Exchange), (ii) that are Strategic Transactions,\21\ or (iii) that are 
otherwise agreed to be Excluded Industry Transactions by Holdings and 
holders of at least a majority of the outstanding Class C Units 
(including both vested and unvested Class C Units) in writing; (2) 
transactions that the Class C Member has notified Holdings shall not be 
credited to such Member for purposes of calculating the Member's actual 
order volume; (3) transactions determined to have been in violation of 
any applicable law, statute, regulation, rule, official directive or 
guideline (whether or not having the force of law) of any governmental 
authority with legal jurisdiction or of any self-regulatory 
organization with supervisory authority; and (4) transactions with 
respect to which it is unlawful for the Class C Member to receive 
compensation.
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    \21\ ``Strategic Transactions'' will be defined in the Members 
Agreement and will include any transaction in a product that, with 
respect to any day on which BOX is open for business, is one of the 
top twenty (20) highest equity or ETF volume products reported by 
the OCC for such trading day and for which a majority of the volume 
of cleared transactions in such product reported by OCC consists of 
executed and cleared transactions involving: (i) Reveals and 
conversions; (ii) dividend spreads; (iii) deep-in-the-money call and 
put spreads; (iv) short stock interest spreads; (v) merger spreads; 
(vi) box spreads; or (vii) jelly rolls. This definition will be 
subject to change by subsequent amendment of the Members Agreement. 
Strategic Transactions will be excluded from the VPR Volume 
Commitment calculation to the extent it is possible to identify such 
transactions.
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    Any disputes with respect to Quarterly Volume Commitment 
calculations may be appealed to the Holdings board of directors. If 
such dispute is not resolved within sixty (60) calendar days following 
the end of any applicable measurement quarter, Subscribers may request 
the dispute be resolved by an independent accounting firm appointed by 
a majority of the Subscribers requesting the audit and reasonably 
acceptable to Holdings.
    As noted above, the Exchange will be submitting a separate proposed 
rule change, subject to Commission approval, to make changes to its 
company governance documents to accommodate certain aspects of the 
Program that involve or affect the rights and limitations associated 
with Class C Unit ownership. For example, the total equity ownership of 
all classes of Units held by any one Subscriber will be limited to 
20%.\22\ Also, the Restated LLC Agreement will provide that Subscribers 
will have the right to vote the Class C Units associated with vested 
VPRs on matters submitted for a vote of all holders of Units, and the 
Class C Units will vote with all other classes of Units as a single 
class. Subscribers will also have the right to designate one individual 
to a new Advisory Committee organized by Holdings, whose purpose will 
be to advise and make recommendations to Holdings with respect to the 
Exchange's competitiveness in the marketplace.\23\ In addition, 
Subscribers with Class C Units associated with vested VPRs that 
represent greater than 4% of all outstanding Units will have the right 
to appoint one (1) director to the Holdings board of directors.\24\ As 
noted, these and other rights associated with Class C Unit ownership 
are contingent upon Commission approval of the company governance rule 
filing.
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    \22\ Any purported transfer of Class C Units or ownership of 
Class C Units in violation of this 20% ownership limit by a 
Subscriber will be subject to limitations set forth in the Restated 
LLC Agreement, including the non-recognition of voting rights of 
Class C Units in excess of the 20% ownership limit.
    \23\ The Members Agreement will provide that only Class C 
Members will be able to designate members to the Advisory Committee.
    \24\ The Restated LLC Agreement will provide that existing 
Holdings Members will continue to have the right to designate a 
director to the Holdings board of directors. Each Class A or Class B 
Member will have the right to appoint one (1) director to the 
Holdings board of directors if it owns in excess of 2.5% of all 
outstanding Units. In addition, any Member that owns greater than 
14% and 28% of all outstanding Units will have the right to appoint 
two (2) and three (3) directors, respectively. No Member will be 
allowed to designate more than three (3) directors to the Holdings 
board of directors.
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    The Program will also foster key changes to the governance of 
Holdings, assuming Commission approval of the separate company 
governance proposed rule change. The Program will foster the removal of 
MX US 2, Inc.\25\ from being a direct majority owner of Holdings. 
Assuming full participation in the Program, the ownership of Holdings 
by current Unitholders, including MX US 2, Inc., will be diluted such 
that no single Unitholder will have a majority ownership of Holdings. 
Also, upon vesting of VPRs associated with Class C Units equal to at 
least 10% of the total outstanding Units, the non-compete obligations 
applicable to MX US 2, Inc. in the Restated LLC Agreement will expire 
and be of no further effect, automatically and without further 
action.\26\ In addition, upon vesting of VPRs associated with Class C 
Units equal to at least 25% of the total outstanding Units, the Major 
Action veto for the benefit of MX US 2, Inc. and IB Exchange Corp. in 
the Restated LLC Agreement will expire and be of no further effect, 
automatically and without further action.\27\ Finally, the Restated LLC 
Agreement will include a requirement that, subject to the other 
provisions of the Restated LLC

[[Page 4614]]

Agreement, including the Major Action veto discussed above, holders of 
at least 67% of all outstanding Units must vote to approve certain 
major company actions by Holdings.\28\ As noted, these and other 
governance changes are contingent upon Commission approval of the 
company governance rule filing.
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    \25\ MX US 2, Inc., which is indirectly owned by TMX Group, 
Inc., a Canadian entity, currently owns approximately 54% of 
Holdings.
    \26\ Article 16, Section 16.1 of the LLC Agreement generally 
provides, and the Restated LLC Agreement generally will provide, 
that, so long as MX US 2, Inc. and its affiliates own 4% or more of 
Holdings, it shall not invest in more than 5% or participate in the 
creation and/or operation of a competing business.
    \27\ Section 4.4 of the LLC Agreement generally provides, and 
the Restated LLC Agreement generally will provide, that certain 
Major Actions (as defined therein) shall not be effective unless 
approved by the Holdings board of directors, including all of the 
directors designated by each of MX US 2, Inc. and IB Exchange Corp. 
Further, the Restated LLC Agreement will provide that Sections 4.4 
and 14.12 of the BOX Market LLC Agreement will also be amended, at 
the same time as the Holdings Major Actions provision expires, to 
provide that the corresponding provisions in the BOX Market LLC 
Agreement relating to Major Actions (as defined therein) will have 
no further effect.
    \28\ The Restated LLC Agreement will set forth the terms and 
conditions of this ``supermajority'' provision.
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    Any Participant may elect to subscribe to the Program subject to 
its satisfaction of eligibility requirements and making the initial 
cash payment. All applicant Participants will be subject to the same 
eligibility and designation criteria and all Subscribers will 
participate in the Program on the same terms, conditions and 
restrictions. To be designated as a Subscriber, an applicant must: (i) 
Represent and warrant that no grounds exist for the suspension or 
termination of the Subscriber's voting privileges or membership under 
the Limited Liability Company Agreement of Holdings, as may be amended 
from time to time (``LLC Agreement''), or the Restated LLC Agreement; 
(ii) qualify as an ``accredited investor'' as such term is defined in 
Rule 501(a) of Regulation D promulgated under the Securities Act of 
1933 (the ``Securities Act''); and (iii) have executed all required 
documentation for Program participation. In addition, the applicant 
must make a nominal cash payment of $10 per Class C Unit (which equates 
to $85 per VPR) by January 12, 2015, and subscribe to a minimum of two 
Tranches of 20 VPRs, for a total minimum initial cash payment of 
$3,400.\29\ Once a Participant becomes a Subscriber, Holdings may 
cancel any VPR held by the Subscriber if the Subscriber's membership in 
Holdings is terminated as provided in the LLC Agreement or Restated LLC 
Agreement.
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    \29\ Because, as noted above, the acquisition of equity 
ownership in Holdings, and any right related to such ownership, in 
connection with a Subscriber's participation in the Program is 
contingent upon Commission approval of the related company 
governance rule change, the initial cash payment will be held in 
escrow until the Commission approves the related company governance 
rule change. As disclosed to the Subscribers and provided in the 
Subscription Agreement, if the Commission does not approve the 
related company governance rule change by July 1, 2016, any 
Subscriber will be authorized to terminate its Subscription 
Agreement with the Holdings, upon which Holdings will promptly 
refund the terminating Subscriber's initial cash payment.
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    Neither VPRs nor Class C Units are expected to be registered for 
resale by Holdings and may not be transferred without complying with, 
or qualifying for an exemption from, the registration requirements of 
the Securities Act. Any transfer of Class C Units by an existing Class 
C Member will be subject to a primary right of first refusal for the 
benefit of Holdings and a secondary right of first refusal for the 
benefit of other Class C Members. Notwithstanding the foregoing, a 
Class C Member may transfer all of its rights and obligations related 
to the VPRs and Class C Units it holds to any affiliate without the 
consent of Holdings so long as, among other things, the affiliate is 
admitted as a member of Holdings as provided in the Restated LLC 
Agreement and becomes a party to, and bound by the terms and conditions 
of, the Members Agreement. Upon completion of all 20 measurement 
quarters (plus any applicable ``make up'' period), assuming Commission 
approval of the related company governance rule filing discussed above, 
all outstanding Class C Units associated with vested VPRs will be 
automatically converted into Class A Membership Units, and all 
outstanding Class C Units associated with unvested VPRs will be 
automatically cancelled.
    As discussed above, the purpose of the Program is to encourage 
Participants to direct greater trade volume to the Exchange to enhance 
trading volume in BOX. Toward that end, the Exchange has reached out to 
known options traders--both Participants and non-Participants--to gauge 
interest in the Program, including whether the Program would induce 
non-Participants to become Participants and, once Participants, direct 
trading volume to BOX. Increased volume will provide for greater 
liquidity and enhanced price discovery, which benefits all market 
participants. Other exchanges currently engage in the practice of 
incentivizing increased order flow in order to attract liquidity 
providers through equity sharing arrangements.\30\ The Program 
similarly intends to attract order flow, which will increase liquidity, 
thereby providing greater trading opportunities and tighter spreads for 
other market participants and causing a corresponding increase in order 
flow from these other market participants. The Program will similarly 
reward the liquidity providers that provide this additional volume with 
a potential proprietary interest in BOX.
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    \30\ See, e.g., Securities Exchange Act Release No. 62358 (June 
22, 2010), 75 FR 37861 (June 30, 2010) (SR-NSX-2010-006) (Notice of 
Filing and Immediate Effectiveness of National Stock Exchange, Inc. 
equity rights program); Securities Exchange Act Release No. 64742 
(June 24, 2011), 76 FR 38436 (June 30, 2011) (SR-NYSEAmex-2011-018) 
(Order Approving NYSE Amex LLC (now NYSE MKT LLC) options facility, 
including a volume-based equity plan); Securities Exchange Act 
Release No. 69200 (March 21, 2013), 78 FR 18657 (March 27, 2013) 
(SR-CBOE-2013-031) (Notice of Filing and Immediate Effectiveness of 
CBOE Stock Exchange, LLC equity rights program); and Securities 
Exchange Act Release No. 70498 (September 25, 2013), 78 FR 60348 
(October 1, 2013) (SR-MIAX-2013-043) (Notice of Filing and Immediate 
Effectiveness of Miami International Securities Exchange, LLC equity 
rights program).
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    As discussed above, the acquisition of Class C Units, and any right 
related to such ownership, in connection with the Program is contingent 
upon Commission approval of the company governance proposed rule change 
by July 1, 2016, after which a Subscriber may terminate its 
participation in the Program. This contingency will be a known risk to 
Subscribers: The Subscription Agreement, which all Subscribers must 
sign by January 12, 2015, will disclose that the purchase of Class C 
Units is contingent upon, among other things, Commission approval of 
the Program. In addition, the Membership Agreement, which all 
Subscribers must sign by January 12, 2015, will disclose that BOX will 
begin measuring order flow volume for the Program on January 12, 2015. 
Accordingly, Subscribers will be aware that they may send order flow to 
BOX in connection with the Program in advance of Commission approval, 
and that there is a risk that the Program is not approved by the 
Commission and that they never receive the Class C Units or the rights 
associated therewith.
    In addition, the Exchange has taken steps to minimize the risk that 
the Program does not become fully operational and the related costs 
imposed on Subscribers if such risk is realized. For example, all 
internal approvals and consents required to operate the Program, 
including approval by the Holdings board of directors of the 
Subscription Agreement, Membership Agreement and amendments to the 
Restated LLC Agreement, will be obtained in advance of commencement of 
the Program. Besides Commission approval, there will be no other 
governmental or regulatory approval required to operate the Program. 
Also, regardless of if and when Commission approval is obtained, 
Subscribers will continue to be required to pay fees in accordance with 
the same published Exchange Fee Schedule to which all Participants are 
subject. In addition, Subscribers are not guaranteed distributions; any 
distribution to holders of Holdings equity (including Class C Members) 
is contingent upon, among other things, the profitability of Holdings, 
and nothing in the Subscription Agreement or Members Agreement 
guarantees the payment of any distributions to Subscribers.

[[Page 4615]]

Finally, the Subscription Agreement will set forth the right of each 
Subscriber to terminate the Subscription Agreement if the Commission 
does not approve the proposed company governance rule change by July 1, 
2016 or if the Subscriber's participation in the Program is legally 
prohibited before issuance of the Class C Units.\31\ Accordingly, the 
only potential ``cost'' to Subscribers if Commission approval is not 
obtained by July 1, 2016, would be that they would have sent order flow 
to BOX with the hope of receiving an equity interest and related 
rights, which they knew were not guaranteed.
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    \31\ In addition, as noted above, the Subscription Agreement 
will provide that, upon such termination, Holdings will promptly 
return the terminating Subscriber's initial cash payment.
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    The VPR Volume Commitment threshold was set based upon business 
determinations, including increasing diversity of Holdings' ownership 
and an analysis of current volume levels. The specific Contract 
Equivalent categories were defined and weighted in accordance with the 
Exchange's Fee Schedule, such that those categories that earn higher 
fees are weighted more heavily. The VPR Volume Commitment threshold and 
Contract Equivalent categories are intended to incentivize firms to 
increase the number of orders that are sent to BOX. Increasing the 
number of orders that are sent to BOX will in turn provide tighter and 
more liquid markets, and therefore attract more business as well.
    BOX intends to begin measuring order flow volume for the Program on 
January 12, 2015. The Exchange notified Participants of the Program by 
Regulatory Circular published on October 1, 2014. The Exchange will 
also post a copy of this rule filing on its Web site. Any Participant 
that is interested in participating in the Program may contact BOX for 
more information and legal documentation and will be required to enter 
into a nondisclosure agreement regarding this additional Program 
information.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\32\ Specifically, the Exchange believes that its proposed rule 
change is consistent with Section 6(b)(5) of the Act \33\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with the requirement in 
Section 6(b)(5) of the Act \34\ that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange also believes the proposed rule 
change is consistent with Section 6(b)(4) of the Act,\35\ which 
requires that exchange rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and other 
persons using its facilities.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ Id.
    \35\ 15 U.S.C. 78f(b)(4).
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    In particular, the proposed rule change is equitable and not 
unfairly discriminatory because all Participants may elect to 
participate (or elect to not participate) in the Program and earn 
vested VPRs on the same terms and conditions, assuming they satisfy the 
same eligibility criteria as described above. The eligibility criteria 
are objective; thus, all Participants have the same opportunity to 
satisfy them. Also, Holdings is offering VPRs, including Class C Units, 
to any Participant that requests designation to participate in the 
Program and otherwise satisfies the eligibility criteria to ensure that 
all Participants will have the opportunity to subscribe for VPRs and 
the associated Class C Units and thus participate in the Program if 
they so choose. In addition, VPRs will vest based on achievement of a 
predetermined VPR Volume Commitment threshold during each measurement 
period that will apply evenly to all Subscribers. Further, each 
Subscriber will have the right to terminate its Subscription Agreement 
if the Commission does not approve the proposed company governance rule 
change by July 1, 2016 or if the Subscriber's participation in the 
Program is legally prohibited before issuance of the Class C Units.\36\
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    \36\ In addition, as noted above, the Subscription Agreement 
will provide that, upon such termination, Holdings will promptly 
return the terminating Subscriber's initial cash payment.
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    The Exchange believes that the methodology used to calculate the 
VPR Volume Commitment threshold is fair, reasonable and not unfairly 
discriminatory because it is based on objective criteria that are 
designed to omit from the calculation functionality that is not 
available on the Exchange and types of transactions that are subject to 
little or no transaction fees. Specifically, as noted above, the VPR 
Volume Commitment calculation only includes Qualifying Contract 
Equivalents, which excludes the following Excluded Member Contracts:
     Excluded Industry Transactions, i.e., executed and cleared 
transactions:
    [cir] In a proprietary product traded on a U.S. equity options 
exchange other than the Exchange (and not traded on the Exchange);
    [cir] that are Strategic Transactions; \37\ or
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    \37\ See supra note 21 for a description of the types of 
``Strategic Transactions.''
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    [cir] that are otherwise agreed to be Excluded Industry 
Transactions by Holdings and holders of at least a majority of the 
outstanding Class C Units (including both vested and unvested Class C 
Units) in writing;
     Transactions that the Class C Member has notified Holdings 
shall not be credited to such Member for purposes of calculating the 
Member's actual order volume.
     Transactions determined to have been in violation of any 
applicable law, statute, regulation, rule, official directive or 
guideline (whether or not having the force of law) of any governmental 
authority with legal jurisdiction or of any self-regulatory 
organization with supervisory authority.
     Transactions with respect to which it is unlawful for the 
Class C Member to receive compensation.
    The Exchange believes excluding Strategic Transactions and 
transactions in proprietary products traded on a U.S. options exchange 
other than the Exchange is reasonable and not unfairly discriminatory 
because, at this time, these transactions generally are not executed on 
the Exchange, and thus do not contribute to the purpose behind the 
Program of incentivizing Participants to send order flow to BOX. The 
Exchange further believes it is reasonable and not unfairly 
discriminatory to exclude transactions determined to have been executed 
in violation of applicable law \38\ and transactions for which it is 
unlawful for the Subscriber to receive compensation, because the 
Exchange does not want to incent or reward the execution of unlawful 
transactions. The Program is designed to reward Subscribers for 
bringing orders to be executed on the Exchange; the distribution reward 
is primarily based on the profitability of Holdings, which is directly 
related to the fees earned by the Exchange. The foregoing

[[Page 4616]]

transactions, in which no transaction fees are earned by the Exchange, 
do not contribute to the profitability of Holdings. Finally, the 
Exchange believes it is reasonable and not unfairly discriminatory to 
exclude transactions that the Subscriber has notified Holdings should 
not be credited to such Subscriber for purposes of calculating such 
Subscriber's actual order volume, and transactions otherwise agreed to 
be excluded by Holdings and holders of at least a majority of the 
outstanding Class C Units, because these exclusions permit flexibility 
in the Program to allow Subscribers to account for business 
arrangements with affiliates and third parties, including execution 
arrangements through other Subscribers in the Program, allow 
Subscribers to voice possible concerns and opinions, and allow 
Subscribers to modify the order types that can contribute to meeting 
the VPR Volume Commitment, either individually by and for the 
Subscriber itself, or by majority vote \39\ for all Subscribers.
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    \38\ The Exchange believes that including transactions executed 
in violation of applicable law, particularly, would not be 
consistent with the purposes of the Act.
    \39\ Because Class C Unit ownership will be subject to a 20% 
cap, no one Subscriber will be able to, by vote, require a 
transaction to be excluded for all Subscribers.
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    Further, the Exchange believes the definition of, and weight 
assigned to, each Contract Equivalent category is fair, reasonable and 
not unfairly discriminatory because each category is defined and 
weighted in accordance with the Exchange's Fee Schedule, so that those 
categories that earn higher fees are weighted more heavily.\40\ 
Although the different Contract Equivalent categories are weighted 
differently, the weighting is equitable, and strikes an appropriate 
balance based on the quantity of orders executed and the type of 
account. The Public Customer category is assigned the lowest weight 
(0.71) because these orders are charged the lowest fees by the 
Exchange, and the Exchange believes low customer transaction fees are 
reasonable, appropriate and consistent with the Act because it promotes 
the best interests of investors to have lower transaction costs for 
Public Customers and attract Public Customer order flow to BOX. The 
Market Maker category is assigned more weight (1.10) because these 
orders generate higher fees designed to be comparable to the fees that 
such accounts would be charged at competing venues. The Professional 
Customer and Broker/Dealer Firm categories are assigned the most weight 
(1.35) because these orders generate the highest fees for the Exchange 
and, again, are designed to be comparable to fees charged by competing 
options exchanges. By definition, a Professional Customer places more 
than 390 orders in listed options per day on average during a calendar 
month for its own beneficial account(s),\41\ and such level of trading 
activity generates higher operational costs for the Exchange. Broker/
Dealer Firms are engaged in the business of executing orders, and thus 
similarly generate high operational costs for the Exchange. Broker/
Dealer Firms are charged higher fees than Market Makers because Broker/
Dealer Firms do not have the obligations (such as maintaining active 
two-sided markets) that Market Makers have. Professional Customer and 
Broker/Dealer Firm orders are given equal weight, consistent with the 
Exchange's Fee Schedule, which charges these two account types equal 
fees. The Exchange believes it is equitable to assign different weights 
to each account type based on the fee generated by that account type, 
given that the Program distributions are based on revenues earned by 
the Exchange.
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    \40\ It is not uncommon for exchanges to treat certain market 
participants in a disparate manner, particularly in the Fee 
Schedule. For example, the Fee Schedules of the Chicago Board 
Options Exchange, Incorporated (``CBOE'') and the International 
Securities Exchange (``ISE''), among other exchanges, charge 
different fees based on the customer type, including Customer, 
Market Maker, Broker/Dealer and Professional. See CBOE Fees Schedule 
(Sept. 2, 2014), available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf and ISE Schedule of Fees (last 
updated Aug. 1, 2014), available at http://www.ise.com/fees.
    \41\ See Exchange Rule 100(a)(50), which defines the term 
``Professional.''
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    The Exchange believes the Program is equitable and reasonable 
because an increase in volume and liquidity will benefit all market 
participants by providing more trading opportunities and tighter 
spreads, even to those market participants that do not participate in 
the Program. Additionally, the Exchange believes the proposed rule 
change is consistent with the Act because, as described above, the 
Program is designed to bring greater volume and liquidity to the 
Exchange, which will benefit all market participants by providing 
tighter quoting and better prices, all of which perfects the mechanism 
for a free and open market and national market system.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will improve competition by providing market 
participants with an incentive to consider and utilize another market, 
BOX, when determining where to execute options contracts and post 
liquidity.
    The Exchange believes that the proposed change will increase both 
intermarket and intramarket competition by incenting Subscribers to 
direct their orders to the Exchange, which will enhance the quality of 
quoting and increase the volume of contracts traded there. 
Notwithstanding, Subscribers will be free to send orders to other 
markets, even if they have not met their VPR Volume Commitment for that 
measurement period; thus the proposed change should not impose a burden 
on competition among exchanges. To the extent that there is an 
additional competitive burden on non-Subscribers, the Exchange believes 
that this is appropriate because the Program should incent Participants 
to direct additional order flow to the Exchange and thus provide 
additional liquidity, which enhances the quality of BOX and increases 
the volume of options traded on BOX. To the extent that this purpose is 
achieved, all of the Exchange's Participants, even non-Subscribers, 
should benefit from the improved market liquidity. Enhanced market 
quality and increased transaction volume that results from the 
anticipated increase in order flow directed to the Exchange will 
benefit all market participants and improve competition on the 
Exchange.
    Given the robust competition for volume among options markets, many 
of which offer the same products, implementing a program to attract 
order flow like the one being proposed in this filing is consistent 
with the above-mentioned goals of the Act. This is especially true for 
the smaller options markets, such as BOX, which is competing for volume 
with much larger exchanges that dominate the options trading industry. 
BOX has a modest percentage of the average daily trading volume in 
options, so it is unlikely that the Program could cause any competitive 
harm to the options market or to market participants. Rather, the 
Program is an attempt by a small options market to attract order volume 
away from larger competitors by adopting an innovative pricing 
strategy, as evidenced by the VPR Volume Commitment threshold of the 
Program representing a fraction of 1% of the total national average 
daily volume of options contracts reported to OCC. The Exchange notes 
that, if the Program resulted in the expected increase in the average 
daily trading volume in options

[[Page 4617]]

executing on BOX, such increase will represent a large percentage 
increase for BOX but it will represent a minimal reduction in volume of 
its larger competitors in the industry. The Exchange believes that the 
Program will help further competition, because market participants will 
have yet another additional option in determining where to execute 
orders and post liquidity if they factor the benefits of the Program 
and BOX equity participation into the determination.
    Finally, the Program will increase the diversity of ownership of 
Holdings such that no one entity will have a majority ownership of 
Holdings. Upon the issuance of Class C Units to Subscribers, the 
ownership of Holdings will be distributed among more holders. If there 
is full participation in the Program, then the ownership of Holdings by 
current Unitholders will be diluted and no single Unitholder will have 
a majority ownership of Holdings.

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

    Pursuant to Section 19(b)(3)(A)(ii) of the Act and Rule 19b-4(f)(2) 
thereunder the proposed rule change is filed for immediate 
effectiveness inasmuch as it establishes or changes a due, fee, or 
other charge imposed by the Exchange.
    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily 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.

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-BOX-2015-03 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-BOX-2015-03. 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 
a.m. and 3 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-BOX-2015-03 and should be 
submitted on or before February 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01508 Filed 1-27-15; 8:45 am]
BILLING CODE 8011-01-P


