[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47902-47905]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19609]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67596; File No. SR-C2-2012-023]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to the Options Regulatory Fee
August 6, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 31, 2012, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to institute a new transaction-based
``Options Regulatory Fee''. The text of the proposed rule change is
available on the Exchange's Web site (http://www.c2exchange.com/Legal/
), at the Exchange's Office of the Secretary, and at the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
In order to offset more fully the cost of the Exchange's regulatory
programs, the Exchange proposes to adopt a transaction-based Options
Regulatory Fee (``ORF'') of $0.0015 per contract. The Exchange is
adopting an ORF due to substantial increases in resources devoted to
regulatory services, including the recent hiring of many new employees,
increased office space and regulatory systems enhancements. The
proposed fee would be operative on August 1, 2012.
The ORF would be assessed by the Exchange to each Permit Holder for
all options transactions executed or cleared by the Permit Holder that
are cleared by The Options Clearing Corporation (``OCC'') in the
customer range, i.e., transactions that clear in a customer account at
OCC, regardless of the marketplace of execution. In other words, the
Exchange would impose the ORF on all customer-range transactions
executed by a Permit Holder, even if the transactions do not take place
on the Exchange.\3\ The ORF would also be charged for transactions that
are not
[[Page 47903]]
executed by a Permit Holder but are ultimately cleared by a Permit
Holder. In the case where a Permit Holder executes a transaction and a
Permit Holder clears the transaction, the ORF would be assessed to the
Permit Holder who executed the transaction. In the case where a non-
Permit Holder executes a transaction and a Permit Holder clears the
transaction, the ORF would be assessed to the Permit Holder who clears
the transaction. The Exchange believes that its broad regulatory
responsibilities with respect to Permit Holders' activities supports
applying the ORF to transactions cleared but not executed by a Permit
Holder. The Exchange's regulatory responsibilities are the same
regardless of whether a Permit Holder executes a transaction or clears
a transaction executed on its behalf. The Exchange regularly reviews
all such activities, including performing surveillance for position
limit violations, manipulation, frontrunning, contrary exercise advice
violations and insider trading.\4\ These activities span across
multiple exchanges.
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\3\ Exchange rules require each Permit Holder to record the
appropriate account origin code on all orders at the time of entry
in order to allow the Exchange to properly prioritize and route
orders and assess transaction fees pursuant to the rules of the
Exchange and report resulting transactions to the OCC. C2 order
origin codes are defined in C2 Regulatory Circular RG10-4. The
Exchange represents that it has surveillances in place to verify
that Permit Holders mark orders with the correct account origin
code.
\4\ The Exchange also participates in The Options Regulatory
Surveillance Authority (``ORSA'') national market system plan and in
doing so shares information and coordinates with other exchanges
designed to detect the unlawful use of undisclosed material
information in the trading of securities options. ORSA is a national
market system comprised of several self-regulatory organizations
whose functions and objectives include the joint development,
administration, operation and maintenance of systems and facilities
utilized in the regulation, surveillance, investigation and
detection of the unlawful use of undisclosed material information in
the trading of securities options. The Exchange compensates ORSA for
the Exchange's portion of the cost to perform insider trading
surveillance on behalf of the Exchange. The ORF will cover the costs
associated with the Exchange's arrangement with ORSA.
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The ORF would be collected indirectly from Permit Holders through
their clearing firms by OCC on behalf of the Exchange. The Exchange
expects that Permit Holders will pass-through the ORF to their
customers in the same manner that firms pass-through to their customers
the fees charged by Self Regulatory Organizations (``SROs'') to help
the SROs meet their obligations under Section 31 of the Exchange Act.
The ORF is designed to recover a material portion of the costs to
the Exchange of the supervision and regulation of Permit Holder
customer options business, including performing routine surveillances,
investigations, as well as policy, rulemaking, interpretive and
enforcement activities. The Exchange believes that revenue generated
from the ORF, when combined with all of the Exchange's other regulatory
fees, will cover a material portion, but not all, of the Exchange's
regulatory costs.\5\ The Exchange notes that its regulatory
responsibilities with respect to Permit Holder compliance with options
sales practice rules have been allocated to FINRA under a 17d-2
agreement. The ORF is not designed to cover the cost of options sales
practice regulation.
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\5\ The Exchange collects other regulatory revenues from Firm
Designated Examining Authority Fees and Communication Review Fees.
See C2 Fees Schedule, Section 8.
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The Exchange would monitor the amount of revenue collected from the
ORF to ensure that it, in combination with its other regulatory fees
and fines, does not exceed the Exchange's total regulatory costs. The
Exchange expects to monitor regulatory costs and revenues at a minimum
on an annual basis. If the Exchange determines regulatory revenues
exceed regulatory costs, the Exchange would adjust the ORF by
submitting a fee change filing to the Commission. The Exchange would
notify Permit Holders of adjustments to the ORF via regulatory
circular.
The Exchange believes the proposed ORF is equitably allocated
because it would be charged to all Permit Holders on all their customer
options business. The Exchange believes the proposed ORF is reasonable
because it will raise revenue related to the amount of customer options
business conducted by Permit Holders, and thus the amount of Exchange
regulatory services those Permit Holders will require.
As a fully-electronic exchange without a trading floor, the amount
of resources required by the Exchange to regulate non-customer trading
activity is significantly less than the amount of resources the
Exchange must dedicate to regulate customer trading activity. This is
because regulating customer trading activity is much more labor
intensive and requires greater expenditure of human and technical
resources than regulating non-customer trading activity, which tends to
be more automated and less labor-intensive. As a result, the costs
associated with administering the customer component of the Exchange's
overall regulatory program are materially higher than the costs
associated with administering the non-customer component (e.g., Permit
Holder proprietary options transactions) of its regulatory program.\6\
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\6\ If the Exchange changes its method of funding regulation or
if circumstances otherwise change in the future, the Exchange may
decide to impose the ORF or a separate regulatory fee on Permit
Holder proprietary options transactions if the Exchange deems it
advisable.
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The Exchange believes it is reasonable and appropriate for the
Exchange to charge the ORF for options transactions regardless of the
exchange on which the transactions occur. The Exchange has a statutory
obligation to enforce compliance by Permit Holders and their associated
persons with the Exchange Act and the Rules of the Exchange and to
surveil for other manipulative conduct by market participants
(including non-Permit Holders) trading on the Exchange. The Exchange
cannot effectively surveil for such conduct without looking at and
evaluating activity across all options markets. Many of the Exchange's
market surveillance programs require the Exchange to look at and
evaluate activity across all options markets, such as surveillance for
position limit violations, manipulation, frontrunning and contrary
exercise advice violations/expiring exercise declarations.\7\ Also, the
Exchange and the other options exchanges are required to populate a
consolidated options audit trail (``COATS'') system in order to surveil
Permit Holder activities across markets.\8\
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\7\ The Exchange and other options SROs are parties to a 17d-2
agreement allocating among the SROs regulatory responsibilities
relating to compliance by the common members with rules for expiring
exercise declarations, position limits, OCC trade adjustments, and
Large Option Position Report reviews. See Securities Exchange Act
Release No. 63430 (December 3, 2010), 75 FR 76758 (December 9,
2010).
\8\ COATS effectively enhances intermarket options surveillance
by enabling the options exchanges to reconstruct the market promptly
to effectively surveil certain rules.
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In addition to its own surveillance programs, the Exchange works
with other SROs and exchanges on intermarket surveillance related
issues. Through its participation in the Intermarket Surveillance Group
(``ISG''),\9\ the Exchange shares information and coordinates inquiries
and investigations with other exchanges designed to address potential
intermarket manipulation and trading abuses. The Exchange's
participation in ISG helps it to satisfy the Exchange Act requirement
that it have coordinated surveillance with markets on which security
futures are traded and markets on which any security underlying
security futures are traded to detect manipulation and insider
trading.\10\
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\9\ ISG is an industry organization formed in 1983 to coordinate
intermarket surveillance among the SROs by cooperatively sharing
regulatory information pursuant to a written agreement between the
parties. The goal of the ISG's information sharing is to coordinate
regulatory efforts to address potential intermarket trading abuses
and manipulations.
\10\ See Exchange Act Section 6(h)(3)(I).
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The Exchange believes that charging the ORF across markets will
avoid having Permit Holders direct their trades to other markets in
order to avoid
[[Page 47904]]
the fee and to thereby avoid paying for their fair share of regulation.
If the ORF did not apply to activity across markets then Permit Holders
would send their orders to the least cost, least regulated exchange.
Other exchanges could impose a similar fee on their member's activity,
including the activity of those members on C2. In addition to the ORF
that is currently in place at other exchanges,\11\ the Exchange notes
that there is established precedent for an SRO charging a fee across
markets, namely, FINRA's Trading Activity Fee.\12\ While the Exchange
does not have all the same regulatory responsibilities as FINRA, the
Exchange believes that, like the other exchanges that assess an ORF,
its broad regulatory responsibilities with respect to Permit Holders'
activities, irrespective of where their transactions take place,
supports a regulatory fee applicable to transactions on other markets.
Unlike FINRA's Trading Activity Fee, the ORF would apply only to a
Permit Holder's customer options transactions.
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\11\ The BOX Options Exchange, LLC (``BOX''), Chicago Board
Options Exchange, Incorporated (``CBOE''), the International
Securities Exchange, LLC (``ISE''), NYSE Arca, Inc. (``NYSEArca''),
NYSE MKT LLC (``NYSE MKT''), NASDAQ OMX PHLX, LLC (``Phlx'') and
NASDAQ Stock Market, LLC (``NASDAQ'') all charge ORFs.
\12\ See Securities Exchange Act Release No. 47946 (May 30,
2003), 68 FR 34021 (June 6, 2003).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\13\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act,\14\ which provides that Exchange rules may provide
for the equitable allocation of reasonable dues, fees, and other
charges among its Permit Holders and other persons using its
facilities.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(4).
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In particular, the Exchange believes the ORF is equitable and not
unfairly discriminatory because it is objectively allocated to Permit
Holders in that it would be charged to all Permit Holders on all their
transactions that clear as customer at the OCC. Moreover, the Exchange
believes the ORF ensures fairness by assessing higher fees to those
Permit Holders that require more Exchange regulatory services based on
the amount of customer options business they conduct. As a fully-
electronic exchange without a trading floor, the amount of resources
required by the Exchange to regulate non-customer trading activity is
significantly less than the amount of resources the Exchange must
dedicate to regulate customer trading activity. This is because
regulating customer trading activity is much more labor intensive and
requires greater expenditure of human and technical resources than
regulating non-customer trading activity, which tends to be more
automated and less labor-intensive. As a result, the costs associated
with administering the customer component of the Exchange's overall
regulatory program are materially higher than the costs associated with
administering the non-customer component (e.g., Permit Holder
proprietary options transactions) of its regulatory program.
The ORF seeks to recover the costs of supervising and regulating
Permit Holders including performing routine surveillances,
investigations, examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities. The Exchange's
regulatory responsibilities are the same regardless of whether a Permit
Holder executes a transaction or clears a transaction executed on its
behalf. The Exchange believes that this proposal is reasonable,
equitable and not unfairly discriminatory for the foregoing reasons and
also because this proposal would offset more fully the cost of the
Exchange's regulatory programs. The Exchange is adopting an ORF due to
substantial increases in resources devoted to regulatory services,
including the recent hiring of many new employees, increased office
space and regulatory systems enhancements.
The Commission has addressed the funding of an SRO's regulatory
operations in the Concept Release Concerning Self-Regulation \15\ and
the release on the Fair Administration and Governance of Self-
Regulatory Organizations.\16\ In the Concept Release, the Commission
states that: ``Given the inherent tension between an SRO's role as a
business and a regulator, there undoubtedly is a temptation for an SRO
to fund the business side of its operations at the expense of
regulation''.\17\ In order to address this potential conflict, the
Commission proposed in the Governance Release rules that would require
an SRO to direct monies collected from regulatory fees, fines, or
penalties exclusively to fund the regulatory operations and other
programs of the SRO related to its regulatory responsibilities.\18\ The
Exchange has designed the ORF to generate revenues that, when combined
with all of the Exchange's other regulatory fees, would recover a
material portion, but not all, of C2's regulatory costs, which is
consistent with the Commission's view that regulatory fees be used for
regulatory purposes and not to support the Exchange's business side.
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\15\ See Securities Exchange Act Release No. 50700 (November 18,
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
\16\ See Securities Exchange Act Release No. 50699 (November 18,
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
\17\ Concept Release at 71268.
\18\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition
C2 does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \19\ of the Act and paragraph (f) of Rule 19b-4 \20\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-C2-2012-023 on the subject line.
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Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-C2-2012-023. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-C2-2012-023 and should be
submitted by August 31, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19609 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P