[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42715-42719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18163]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83878; File No. SR-CboeBZX-2018-061]


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

August 17, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 42716]]

notice is hereby given that on August 9, 2018, Cboe BZX Exchange, Inc. 
(the ``Exchange'' or ``BZX'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. The Exchange has designated the proposed rule change as one 
establishing or changing a member due, fee, or other charge imposed by 
the Exchange under Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-
4(f)(2) thereunder,\4\ which renders the proposed rule change effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend its fees schedule relating 
to the Options Regulatory Fee.
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts 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 proposed changes to its Fees 
Schedule for its equity options platform (``BZX Options'') to clarify 
how the Options Regulatory Fee (``ORF'') is assessed and collected.
Background
    By way of background, the ORF is assessed by the Exchange to each 
Member for options transactions cleared by the Member that are cleared 
by The Options Clearing Corporation (``OCC'') in the customer range 
(i.e., transactions that clear in a customer account at OCC) regardless 
of the exchange on which the transaction occurs. The ORF is designed to 
recover a material portion of the costs to the Exchange of the 
supervision and regulation of Member customer options business, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, as well as policy, rulemaking, 
interpretive and enforcement activities.\5\ 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.
---------------------------------------------------------------------------

    \5\ The Exchange notes that its regulatory responsibilities with 
respect to Member compliance with options sales practice rules have 
largely been allocated to FINRA under a 17d-2 agreement. The ORF is 
not designed to cover the cost of that options sales practice 
regulation. See Securities Exchange Act Release No. 76309 (October 
29, 2015), 80 FR 68361 (November 4, 2015).
---------------------------------------------------------------------------

    The Exchange monitors 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 monitors its regulatory costs and revenues at a minimum on a 
semi-annual basis. If the Exchange determines regulatory revenues 
exceed or are insufficient to cover a material portion of its 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Commission. The Exchange notifies Members of 
adjustments to the ORF via an exchange notice. The Exchange provides 
Members with such notice at least 30 calendar days prior to the 
effective date of the change.
    Under the Exchange's current process, the ORF is assessed to 
Members and collected indirectly from Members through their clearing 
firms by OCC on behalf of the Exchange. The following scenarios reflect 
how the ORF is assessed and collected (these apply regardless if the 
transaction is executed on the Exchange or on an away exchange):
    1. If a Member is the executing clearing firm on a transaction 
(``Executing Clearing Firm''), the ORF is assessed to and collected 
from that Member by OCC on behalf of the Exchange.
    2. If a Member is the Executing Clearing Firm and the transaction 
is ``given up'' to a different Member that clears the transaction 
(``Clearing Give-up''), the ORF is assessed to the Executing Clearing 
Firm (the ORF is the obligation of the Executing Clearing Firm). The 
ORF is collected from the Clearing Give-up.
    3. If the Executing Clearing Firm is a non-Member and the Clearing 
Give-up is a Member, the ORF is assessed to and collected from the 
Clearing Give-up.
    4. As of August 1, 2018, if a Member is the Executing Clearing Firm 
and a non-Member is the Clearing Give-up, the ORF will be assessed to 
the Executing Clearing Firm. The ORF is the obligation of the Executing 
Clearing Firm but will be collected from the non-Member Clearing Give-
up (for the reasons described below). The Exchange notes that this 
assessment is consistent with how ORF is assessed and collected on two 
of the Exchange's affiliated exchanges.\6\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 82164 (November 28, 
2017), 82 FR 231 (December 4, 2017) (SR-CBOE-2017-074) and 
Securities Exchange Act Release No. 82163 (November 28, 2017), 82 FR 
231 (December 4, 2017) (SR-C2-2017-031).
---------------------------------------------------------------------------

    5. No ORF is assessed if neither the Executing Clearing Firm nor 
the Clearing Give-Up are Members.
    The Exchange currently uses an OCC file that summarizes total 
trades cleared in the customer range by OCC number to determine the 
Executing Clearing Firm and the Clearing Give-up. As of August 1, 2018, 
the Exchange will use a different and more detailed OCC cleared trades 
file to determine the Executing Clearing Firm and the Clearing Give-
up.\7\
---------------------------------------------------------------------------

    \7\ The Exchange notes that in the case where a non-self-
clearing Member executes a transaction on the Exchange, the Member's 
guaranteeing Clearing Member is reflected as the Executing Clearing 
Firm in the OCC cleared trades file and the ORF is assessed to and 
collected from the Executing Clearing Firm.
---------------------------------------------------------------------------

    In each of scenarios 1 through 4 above, if the transaction is 
transferred pursuant to a Clearing Member Trade Assignment (``CMTA'') 
arrangement to another clearing firm who ultimately clears the 
transaction, the ORF is collected from the clearing firm that 
ultimately clears the transaction (which firm may be a non-Member), by 
OCC on behalf of the Exchange. No ORF is assessed if neither the 
Executing Clearing Firm nor the Clearing Give-Up are Members. Using 
CMTA transfer information provided by the OCC, the Exchange subtracts 
the ORF charge from the monthly ORF bill of the clearing firm that 
transfers the position and adds the charge to the monthly ORF bill of 
the clearing firm that receives the CMTA transfer (i.e., the ultimate 
clearing firm). This process is performed at the end of each month on 
each transfer in the OCC CMTA transfer file for that month.\8\
---------------------------------------------------------------------------

    \8\ The Exchange notes that OCC provides the Exchange and other 
exchanges with information to assist in excluding CMTA transfers 
done to correct bona fide errors from the ORF calculation. 
Specifically, if a clearing firm gives up or CMTA transfers a 
position to the wrong clearing firm, the firm that caused the error 
will send an offsetting CMTA transfer to that firm and send a new 
CMTA transfer to the correct firm. The offsetting CMTA transfer is 
marked with a CMTA Transfer ORF Indicator which results in the 
original erroneous transfer being excluded from the ORF calculation.

---------------------------------------------------------------------------

[[Page 42717]]

Proposed Amendments to the Fees Schedule
    The Exchange proposes to amend its Fees Schedule in the following 
respects to clarify how the ORF is assessed and collected.
    First, the Exchange proposes to amend its Fees Schedule to clarify 
that the ORF is assessed by the Exchange to each Member for options 
transactions cleared by the Member (as opposed to ``all'' options 
transaction ``executed and cleared'' by the Member) that are cleared by 
OCC in the customer range regardless of the exchange on which the 
transaction occurs. Because the ORF is always assessed to a Clearing 
Member, the Exchange proposes to remove the words ``executed and, or 
simply'' from the Fee Schedule description of the ORF to clarify that 
the ORF is assessed for options transactions cleared by a Member.
    Second, the Exchange proposes to make explicit that the Exchange 
uses reports from OCC when assessing and collecting the ORF, as noted 
above.
    Third, the Exchange proposes to make clear in the Fees Schedule, 
that as of August 1, 2018, the ORF will be collected by OCC on behalf 
of the Exchange from the Clearing Member or non-Clearing Member that 
ultimately clears the transaction. While the ORF is an obligation of 
Members, due to industry request the ORF is collected from the clearing 
firm that ultimately clears the eligible trade, even if such firm is a 
not a Member. The Exchange, OCC and the industry agreed to this 
collection method in response to comments that by collecting the ORF in 
this manner Members and non-Members could more easily pass-through the 
ORF to their customers. As such, in scenario 4 above the ORF is 
collected from the non-Clearing Member that clears the transaction in 
order to facilitate the pass-through of the ORF to the end-customer. 
Likewise, collection of the ORF from the ultimate (CMTA) clearing firm 
facilitates the passing of the fee to the end-customer. In those cases 
where the ORF is collected from a non-Clearing Member, the Exchange 
(through OCC) collects the ORF as a convenience for the Member whose 
obligation it is to pay the fee to the Exchange.
    Fourth, the Exchange proposes to clarify its process for assessing 
the ORF on linkage transactions. An options order entered on the 
Exchange may be routed to and executed on another exchange pursuant to 
the Options Order Protection and Locked/Crossed Market Plan. The 
Exchange may engage a routing broker to provide routing services 
(``Routing Services'') to facilitate linkage transactions. A customer 
order routed by a routing broker for execution at another exchange 
results in a transaction on that exchange and an obligation of the 
routing broker to pay the options regulatory fee, if any, of that 
exchange. After receiving a fill on the away exchange, the routing 
broker trades against the original order entered on the Exchange and 
incurs the BZX Options ORF. Pursuant to its agreement with the routing 
broker, the Exchange reimburses the routing broker for any options 
regulatory fee assessed by the Exchange and by the away market on which 
the customer order was executed. As a result, only the original 
customer order executed on the Exchange is assessed the ORF. The 
Exchange proposes to amend its Fees Schedule to clarify that, with 
respect to linkage transactions, the Exchange reimburses its routing 
broker providing Routing Services for options regulatory fees it incurs 
in connection with the Routing Services it provides.
    Fifth, the Exchange proposes to change the method it uses to assess 
the ORF to better align with the Exchange's Fees Schedule. Currently, 
the Exchange assesses the ORF to a Member based on the OCC clearing 
number(s) that the Member registers with the Exchange. A Member may 
have additional OCC clearing numbers that are not registered with the 
Exchange because they are used by the Member to clear activity on other 
exchanges. If a Member uses a non-BZX Options registered OCC clearing 
number on a transaction and that clearing number is denoted as the 
Executing Clearing Firm or the Clearing Give-up, the ORF is not 
assessed to that transaction because the clearing number is not known 
to the Exchange. Such transactions are subject to the ORF under the 
Exchange's Fees Schedule because the Executing Clearing Firm or the 
Clearing Give-up was a Member. The ORF is assessed at the Member entity 
level, not at the OCC clearing number level. In order to conform its 
ORF billing practice to its Fees Schedule, the Exchange proposes to 
amend the Fees Schedule to require Members, pursuant to BZX Options 
Rule 24.1,\9\ to provide the Exchange with a complete list of its OCC 
clearing numbers. The Exchange would use the list provided solely for 
ORF billing purposes. Members would be required to keep such 
information up to date with the Exchange. The Exchange will issue an 
Exchange Notice to provide Members with notice of this change and a 
deadline for initial submission of its OCC clearing numbers list. The 
Exchange expects to implement this change for August 2018 ORF billing 
in order for the Exchange to provide Members with notice of this new 
requirement and time to comply.
---------------------------------------------------------------------------

    \9\ BZX Options Rule 24.1 provides that no Member shall refuse 
to make available to the Exchange such books, records or other 
information as may be called for under the Rules or as may be 
requested in connection with an investigation by the Exchange.
---------------------------------------------------------------------------

    The Exchange lastly proposes a couple of minor clean up changes to 
the Fees Schedule such as defining the ``OCC'' as ``The Options 
Clearing Corporation''.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Additionally, 
the Exchange believes the proposed rule change is consistent with 
Section 6(b)(4) of the Act,\12\ 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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes the proposed clarifications to the Fees 
Schedule with respect to how ORF is assessed and collected provides 
further transparency in the Fees Schedule and alleviates potential 
confusion. The alleviation of

[[Page 42718]]

confusion removes impediments to and perfects the mechanism of a free 
and open market and a national market system, and, in general, protects 
investors and the public interest.
    Additionally, the Exchange notes that the proposal to clarify that 
the ORF is assessed to Members for options transactions cleared by the 
Member (as opposed to executed and cleared) is appropriate and 
equitable because it adds clarity to the Fee Schedule by better and 
more accurately describing the application of the ORF. 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 its Members' activities 
supports applying the ORF to transactions cleared by a Member. The 
Exchange's regulatory responsibilities are the same regardless of 
whether a Member executes a transaction or clears a transaction 
executed on its behalf. The Exchange regularly reviews all such 
activity, including performing surveillance for position limit 
violations, manipulation, insider trading, front-running and contrary 
exercise advice violations. The Exchange believes the proposal is 
equitable and not unfairly discriminatory because it applies in the 
same manner to Members subject to 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 the Clearing Give-up.
    The Exchange believes the proposal to collect the ORF from non-
Members that ultimately clear the transaction is an equitable 
allocation of reasonable dues, fees, and other charges among its 
Members and other persons using its facilities. The Exchange notes that 
there is a material distinction between ``assessing'' the ORF and 
``collecting'' the ORF. The Exchange does not assess the ORF to non-
Members. The ORF is an obligation of Members. Once, however, the ORF is 
assessed to a Member for a particular transaction, the ORF may be 
collected from a Member or a non-Member, depending on how the 
transaction is cleared at OCC. If there was no change to the clearing 
number of the original transaction, the ORF would be collected from the 
Member. If there was a change to the clearing number 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 at the request of the 
industry for the ORF be collected from the clearing firm that 
ultimately clears the transaction in order to facilitate the passing of 
the fee to the end-customer.
    The Exchange believes that the proposal to clarify that the ORF is 
collected by OCC on behalf of the Exchange from the Clearing Member 
that ultimately clears the transaction also provides clarity in the Fee 
Schedule and is reasonable. As discussed, if the ORF is assessed to a 
Member for a particular transaction and there was no change to the 
clearing number of the original transaction, the ORF would be collected 
from the Member. If there was a change to the clearing number of the 
original transaction and another Member becomes the ultimate clearing 
firm for that transaction, then the ORF will be collected from the 
Member that ultimately cleared the transaction. Similarly, as noted 
above, if there is a change to the clearing number 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 it is reasonable, equitable and 
nondiscriminatory not to pass the ORF to a CMTA transferee when neither 
the CMTA transferor, transferee nor executing Clearing Firm is a Member 
because this would help ensure the ORF is not collected on any 
transactions that may not be subject to the ORF.
    The Exchange also believes it is reasonable, equitable and 
nondiscriminatory to reimburse its routing broker for any options 
regulatory fees the broker incurs in connection with Routing Services 
because this helps ensure the Exchange does not charge the ORF more 
than once to a single customer order.
    Lastly, the Exchange believes the minor clean-up change to define 
``OCC reduces confusion, thereby removing impediments to and perfecting 
the mechanism of a free and open market and a national market system, 
and, in general, protecting investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. This proposal does not create 
an unnecessary or inappropriate intra-market burden on competition 
because the ORF applies to all customer activity, thereby raising 
regulatory revenue to offset regulatory expenses. It also supplements 
the regulatory revenue derived from non-customer activity. This 
proposal does not create an unnecessary or inappropriate inter-market 
burden on competition because it is a regulatory fee that supports 
regulation in furtherance of the purposes of the Act. The Exchange is 
obligated to ensure that the amount of regulatory revenue collected 
from the ORF, in combination with its other regulatory fees and fines, 
does not exceed regulatory costs.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \13\ and paragraph (f) of Rule 19b-4 
thereunder.\14\ 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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File No. SR-CboeBZX-2018-061 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-CboeBZX-2018-061. 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

[[Page 42719]]

only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-CboeBZX-2018-061, and should be submitted 
on or before September 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18163 Filed 8-22-18; 8:45 am]
 BILLING CODE 8011-01-P


