[Federal Register Volume 87, Number 21 (Tuesday, February 1, 2022)]
[Notices]
[Pages 5541-5544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01972]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94064; File No. SR-NASDAQ-2022-007]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Reduce NOM's Options Regulatory Fee

January 26, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 20, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II, 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 amend The Nasdaq Options Market LLC's 
(``NOM'') Pricing Schedule at Options 7, Section 5 to reduce the NOM 
Options Regulatory Fee or ``ORF''.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on February 1, 
2022.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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 aspects of such 
statements.

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

1. Purpose
    NOM previously filed to waive its ORF from October 1, 2021 through 
January 31, 2022.\3\ The Waiver Filing provided that NOM would continue 
monitoring the amount of revenue collected from the ORF to determine if 
regulatory revenues would exceed regulatory costs when it recommenced 
assessing ORF on February 1, 2022. If so, the Exchange committed to 
adjust its ORF.\4\ At this time, after a review of its regulatory 
revenues and regulatory costs, the Exchange proposes to reduce the ORF 
from $0.0020 (the amount of the ORF prior to the waiver) to $0.0016 per 
contract side as of February 1, 2022, to ensure that revenue collected 
from the ORF, in combination with other regulatory fees and fines, does 
not exceed the Exchange's total regulatory costs.
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    \3\ See Securities Exchange Act Release No. 92600 (August 6, 
2021), 86 FR 44455 (August 12, 2021) (SR-NASDAQ-2021-057) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
NOM's Options Regulatory Fee) (``Waiver Filing'').
    \4\ Id at 44456.
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    The options industry continues to experience high options trading 
volumes and volatility. At this time, NOM believes that the options 
volume it experienced in the second half of 2021 is likely to persist 
into 2022. The anticipated options volume would impact NOM's ORF 
collection which, in turn, has caused NOM to propose reducing the ORF 
to ensure that revenue collected from the ORF, in combination with 
other regulatory fees and fines, would not exceed the Exchange's total 
regulatory costs.
Collection of ORF
    Upon recommencement of the ORF on February 1, 2022,\5\ NOM will 
assess its ORF for each customer option transaction that is either: (1) 
Executed by a Participant on NOM; or (2) cleared by a NOM Participant 
at The Options Clearing Corporation (``OCC'') in the customer range,\6\ 
even if the transaction was executed by a non-Participant of NOM, 
regardless of the exchange on which the transaction occurs.\7\ If the 
OCC clearing member is a NOM Participant, ORF will be assessed and 
collected on all cleared customer contracts (after adjustment for CMTA 
\8\); and (2) if the OCC clearing member is not a NOM Participant, ORF 
will be collected only on the cleared customer contracts executed at 
NOM, taking into account any CMTA instructions which may result in 
collecting the ORF from a non-member.\9\
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    \5\ Prior to the Waiver Filing, the Exchange similarly collected 
ORF as described herein.
    \6\ Participants must record the appropriate account origin code 
on all orders at the time of entry of the order. The Exchange 
represents that it has surveillances in place to verify that 
Participants mark orders with the correct account origin code.
    \7\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \8\ CMTA or Clearing Member Trade Assignment is a form of 
``give-up'' whereby the position will be assigned to a specific 
clearing firm at OCC.
    \9\ By way of example, if Broker A, a NOM Participant, routes a 
customer order to CBOE and the transaction executes on CBOE and 
clears in Broker A's OCC Clearing account, ORF will be collected by 
NOM from Broker A's clearing account at OCC via direct debit. While 
this transaction was executed on a market other than NOM, it was 
cleared by a NOM Participant in the member's OCC clearing account in 
the customer range, therefore there is a regulatory nexus between 
NOM and the transaction. If Broker A was not a NOM Participant, then 
no ORF should be assessed and collected because there is no nexus; 
the transaction did not execute on NOM nor was it cleared by a NOM 
Participant.
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    In the case where a Participant both executes a transaction and 
clears the transaction, the ORF will be assessed to and collected from 
that Participant. In the case where a Participant executes a 
transaction and a different member clears the transaction, the ORF will 
be assessed to and collected from the Participant who clears the 
transaction and not the Participant who executes the transaction. In 
the case where a non-member executes a transaction at an away market 
and a Participant clears the transaction, the ORF will be assessed to 
and collected from the Participant who clears the transaction. In the 
case where

[[Page 5542]]

a Participant executes a transaction on NOM and a non-member clears the 
transaction, the ORF will be assessed to the Participant that executed 
the transaction on NOM and collected from the non-member who cleared 
the transaction. In the case where a Participant executes a transaction 
at an away market and a non-member clears the transaction, the ORF will 
not be assessed to the Participant who executed the transaction or 
collected from the non-member who cleared the transaction because the 
Exchange does not have access to the data to make absolutely certain 
that ORF should apply. Further, the data does not allow the Exchange to 
identify the Participant executing the trade at an away market.
ORF Revenue and Monitoring of ORF
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a regulatory cost, the Exchange reviews all costs and makes 
determinations if there is a nexus between the expense and a regulatory 
function. The Exchange notes that fines collected by the Exchange in 
connection with a disciplinary matter offset ORF.
    Revenue generated from ORF, when combined with all of the 
Exchange's other regulatory fees and fines, is designed to recover a 
material portion of the regulatory costs to the Exchange of the 
supervision and regulation of Participant customer options business 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. Regulatory costs include 
direct regulatory expenses and certain indirect expenses in support of 
the regulatory function. The direct expenses include in-house and 
third-party service provider costs to support the day-to-day regulatory 
work such as surveillances, investigations and examinations. The 
indirect expenses include support from such areas as Office of the 
General Counsel, technology, and internal audit. Indirect expenses were 
approximately 38% of the total regulatory costs for 2021. Thus, direct 
expenses were approximately 62% of total regulatory costs for 2021.\10\
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    \10\ The Exchange will set a 2022 Regulatory Budget in the first 
quarter of 2022.
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    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its members, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities.
Proposal
    Based on the Exchange's most recent review, the Exchange is 
proposing to reduce the amount of ORF that will be collected by the 
Exchange from $0.0020 per contract side to $0.0016 per contract side. 
The Exchange issued an Options Trader Alert on December 31, 2021 
indicating the proposed rate change for February 1, 2022.\11\
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    \11\ See Options Trader Alert 2021-63.
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    The proposed reduction is based on a sustained high level of 
options volume in 2021. The below table displays average daily volume 
for 2021.\12\
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    \12\ The OCC data from December 2021 numbers reflect only 13 
trading days as this information is through December 17, 2021. 
Volume data in the table represents numbers of contracts; each 
contract has two sides.
[GRAPHIC] [TIFF OMITTED] TN01FE22.002

    To date, fourth quarter options average daily volume in 2021 has 
been higher than options average daily volume in any of the prior three 
quarters of 2021. With respect to customer options volume across the 
industry, total customer options contract average daily volume, to 
date, in 2021 is 36,565,398 as compared to total customer options 
contract average daily volume in 2020 which was 27,002,511.\13\
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    \13\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
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    There can be no assurance that the Exchange's costs for 2022 will 
not differ materially from these expectations and prior practice, nor 
can the Exchange predict with certainty whether options volume will 
remain at the current level going forward. The Exchange notes however, 
that when combined with regulatory fees and fines, the revenue that may 
be generated utilizing an ORF rate of $0.0020 per contract side may 
result in revenue which exceeds the Exchange's estimated regulatory 
costs for 2022 if options volume persists. In 2021, options volume 
remained high, due in large part to the extreme volatility in the 
marketplace as a result of the COVID-19 pandemic. The Exchange 
therefore proposes to reduce its ORF to $0.0016 per contract side to 
ensure that revenue does not exceed the Exchange's estimated regulatory 
costs in 2022. Particularly, the Exchange believes that reducing the 
ORF when combined with all of the Exchange's other regulatory fees and 
fines, would allow the Exchange to continue covering a material portion 
of its regulatory costs, while lessening the potential for generating 
excess revenue that may otherwise occur using the rate of $0.0020 per 
contract side.\14\
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    \14\ The Exchange notes that its regulatory responsibilities 
with respect to Participants compliance with options sales practice 
rules have largely been allocated to FINRA under a 17d-2 agreement. 
The ORF is not designed to cover the cost of that options sales 
practice regulation.

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[[Page 5543]]

    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed regulatory costs. If the 
Exchange determines regulatory revenues exceed regulatory costs, the 
Exchange will adjust the ORF by submitting a fee change filing to the 
Commission and notifying \15\ its Participants via an Options Trader 
Alert.\16\
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    \15\ The Exchange will provide Participants with such notice at 
least 30 calendar days prior to the effective date of the change.
    \16\ The Exchange notes that in connection with this proposal, 
it provided the Commission confidential details regarding the 
Exchange's projected regulatory revenue, including projected revenue 
from ORF, along with a projected regulatory expenses.
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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.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(4) of the Act,\18\ which provides that Exchange rules may provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members, and other persons using its facilities. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \19\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because 
customer transactions will be subject to a lower ORF fee than the rate 
that would otherwise be in effect on February 1, 2022. Moreover, the 
proposed reduction is necessary for the Exchange to avoid collecting 
revenue, in combination with other regulatory fees and fines, that 
would be in excess of its anticipated regulatory costs which is 
consistent with the Exchange's practices.
    The Exchange had designed the ORF to generate revenues that would 
be less than the amount of the Exchange's regulatory costs to ensure 
that it, in combination with its other regulatory fees and fines, does 
not exceed regulatory costs, which is consistent with the view of the 
Commission that regulatory fees be used for regulatory purposes and not 
to support the Exchange's business operations. As discussed above, 
however, after review of its regulatory costs and regulatory revenues, 
which includes revenues from ORF and other regulatory fees and fines, 
the Exchange determined that absent a reduction in ORF, it may collect 
revenue which would exceed its regulatory costs. Indeed, the Exchange 
notes that when taking into account the potential that recent options 
volume persists, it estimates the ORF may generate revenues that would 
cover more than the approximated Exchange's projected regulatory costs. 
As such, the Exchange believes it's reasonable and appropriate to 
reduce the ORF amount from $0.0020 to $0.0016 per contract side.
    The Exchange also believes the proposed fee change is equitable and 
not unfairly discriminatory in that it is charged to all Participants 
on all their transactions that clear in the customer range at OCC.\20\ 
The Exchange believes the ORF ensures fairness by assessing higher fees 
to those Participants that require more Exchange regulatory services 
based on the amount of customer options business they conduct. 
Regulating customer trading activity is much more labor intensive and 
requires greater expenditure of human and technical resources than 
regulating non-customer trading activity, which tends to be more 
automated and less labor-intensive. For example, there are costs 
associated with main office and branch office examinations (e.g., staff 
expenses), as well as investigations into customer complaints and the 
terminations of registered persons. As a result, the costs associated 
with administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Participant proprietary 
transactions) of its regulatory program. Moreover, the Exchange notes 
that it has broad regulatory responsibilities with respect to 
activities of its Participants, irrespective of where their 
transactions take place. Many of the Exchange's surveillance programs 
for customer trading activity may require the Exchange to look at 
activity across all markets, such as reviews related to position limit 
violations and manipulation. Indeed, the Exchange cannot effectively 
review for such conduct without looking at and evaluating activity 
regardless of where it transpires. In addition to its own surveillance 
programs, the Exchange also works with other SROs and exchanges on 
intermarket surveillance related issues. Through its participation in 
the Intermarket Surveillance Group (``ISG'') \21\ the Exchange shares 
information and coordinates inquiries and investigations with other 
exchanges designed to address potential intermarket manipulation and 
trading abuses. Accordingly, there is a strong nexus between the ORF 
and the Exchange's regulatory activities with respect to customer 
trading activity of its Participants.
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    \20\ If the OCC clearing member is a NOM Participant, ORF will 
be assessed and collected on all cleared customer contracts (after 
adjustment for CMTA); and (2) if the OCC clearing member is not a 
NOM Participant, ORF will be collected only on the cleared customer 
contracts executed at NOM, taking into account any CMTA instructions 
which may result in collecting the ORF from a non-member.
    \21\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were either solicited or received.

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

    The foregoing rule change is effective upon filing pursuant to 
Section

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19(b)(3)(A) \22\ of the Act and subparagraph (f)(2) of Rule 19b-4 \23\ 
thereunder, because it establishes a due, fee, or other charge imposed 
by the Exchange.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \24\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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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 [email protected]. Please include 
File No. SR-NASDAQ-2022-007 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-NASDAQ-2022-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-NASDAQ-2022-007, and should be submitted on 
or before February 22, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01972 Filed 1-31-22; 8:45 am]
BILLING CODE 8011-01-P


