82 FR 23325 - Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 97 (May 22, 2017)
Federal Register Volume 82, Issue 97 (May 22, 2017)
| Page Range | 23325-23343 | |
| FR Document | 2017-10296 |
[Federal Register Volume 82, Number 97 (Monday, May 22, 2017)] [Notices] [Pages 23325-23343] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10296] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80692; File No. SR-IEX-2017-16] Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Establish Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail May 16, 2017. Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on May 9, 2017, the Investors Exchange LLC (``SRO'', ``Exchange'' or ``IEX'') 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 self-regulatory organization.\4\ 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\ 15 U.S.C. 78a. \3\ 17 CFR 240.19b-4. \4\ The Exchange originally filed the proposed rule change on May 3, 2017 under File No. SR-IEX-2017-13. The Exchange subsequently withdrew that filing on May 9, 2017 and filed this proposed rule change. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act''),\5\ and Rule 19b-4 [[Page 23326]] thereunder,\6\ SRO is filing with the Commission a proposed rule change to adopt a fee schedule pursuant to Rule 15.110(a) to establish the fees for Industry Members related to the National Market System Plan Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\7\ The text of the proposed rule change is available at the Exchange's Web site at www.iextrading.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. --------------------------------------------------------------------------- \5\ 15 U.S.C. 78s(b)(1). \6\ 17 CFR 240.19b-4. \7\ Unless otherwise specified, capitalized terms used in this fee filing are defined as set forth herein, the CAT Compliance Rule Series or in the CAT NMS Plan. --------------------------------------------------------------------------- II. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization 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 statement [sic] may be examined at the places specified in Item IV below. The self-regulatory organization 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 Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\8\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\9\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \10\ and Rule 608 of Regulation NMS thereunder,\11\ the CAT NMS Plan.\12\ The Participants filed the Plan to comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan was published for comment in the Federal Register on May 17, 2016,\13\ and approved by the Commission, as modified, on November 15, 2016.\14\ The Plan is designed to create, implement and maintain a consolidated audit trail (``CAT'') that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single consolidated data source. The Plan accomplishes this by creating CAT NMS, LLC (the ``Company''), of which each Participant is a member, to operate the CAT.\15\ Under the CAT NMS Plan, the Operating Committee of the Company (``Operating Committee'') has discretion to establish funding for the Company to operate the CAT, including establishing fees that the Participants will pay, and establishing fees for Industry Members that will be implemented by the Participants (``CAT Fees'').\16\ The Participants are required to file with the SEC under Section 19(b) of the Exchange Act any such CAT Fees applicable to Industry Members that the Operating Committee approves.\17\ Accordingly, SRO submits this fee filing to propose the Consolidated Audit Trail Funding Fees, which will require Industry Members that are SRO members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \8\ ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). \9\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, 2017). \10\ 15 U.S.C. 78k-1. \11\ 17 CFR 242.608. \12\ See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated September 30, 2014; and Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. On December 24, 2015, the Participants submitted an amendment to the CAT NMS Plan. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015. \13\ Securities Exchange Act Rel. No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016). \14\ Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (``Approval Order''). \15\ The Plan also serves as the limited liability company agreement for the Company. \16\ Section 11.1(b) of the CAT NMS Plan. \17\ Id. --------------------------------------------------------------------------- (1) Executive Summary The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model. A detailed description of the CAT funding model and the CAT Fees follows this executive summary. (A) CAT Funding ModelCAT Costs. The CAT funding model is designed to establish CAT-specific fees to collectively recover the costs of building and operating the CAT from all CAT Reporters, including Industry Members and Participants. The overall CAT costs for the calculation of the CAT Fees in this fee filing are comprised of Plan Processor CAT costs and non-Plan Processor CAT costs incurred, and estimated to be incurred, from November 21, 2016 through November 21, 2017. (See Section 3(a)(2)(E) [sic] below \18\) --------------------------------------------------------------------------- \18\ The Commission notes that references to Sections 3(a)(2) and 3(a)(3) in this Executive Summary should be instead to Sections II.A.1.(2) and II.A.1.(3), respectively. --------------------------------------------------------------------------- Bifurcated Funding Model. The CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the CAT would be borne by (1) Participants and Industry Members that are Execution Venues for Eligible Securities through fixed tier fees based on market share, and (2) Industry Members (other than alternative trading systems (``ATSs'') that execute transactions in Eligible Securities (``Execution Venue ATSs'')) through fixed tier fees based on message traffic for Eligible Securities. (See Section 3(a)(2) [sic] below) Industry Member Fees. Each Industry Member (other than Execution Venue ATSs) will be placed into one of nine tiers of fixed fees, based on ``message traffic'' in Eligible Securities for a defined period (as discussed below). Prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months. After an Industry Member begins reporting to the CAT, ``message traffic'' will be calculated based on the Industry Member's Reportable Events reported to the CAT. Industry Members with lower levels of message traffic will pay a lower fee and Industry Members with higher levels of message traffic will pay a higher fee. (See Section 3(a)(2)(B) [sic] below) Execution Venue Fees. Each Equity Execution Venue will be placed in one of two tiers of fixed fees based on market share, and each Options [[Page 23327]] Execution Venue will be placed in one of two tiers of fixed fees based on market share. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. Equity Execution Venues with a larger market share will pay a larger CAT Fee than Equity Execution Venues with a smaller market share. Similarly, Options Execution Venues with a larger market share will pay a larger CAT Fee than Options Execution Venues with a smaller market share. (See Section 3(a)(2)(C) [sic] below) Cost Allocation. For the reasons discussed below, in designing the model, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. In addition, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. (See Section 3(a)(2)(D) [sic] below) Comparability of Fees. The CAT funding model requires that the CAT Fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members). (See Section 3(a)(2)(F) [sic] below) (B) CAT Fees for Industry Members Fee Schedule. The quarterly CAT Fees for each tier for Industry Members are set forth in the two fee schedules in the Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for Industry Members other than Equity ATSs. (See Section 3(a)(3)(B) [sic] below) Quarterly Invoices. Industry Members will be billed quarterly for CAT Fees, with the invoices payable within 30 days. The quarterly invoices will identify within which tier the Industry Member falls. (See Section 3(a)(3)(C) [sic] below) Centralized Payment. Each Industry Member will receive from the Company one invoice for its applicable CAT Fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Operating Committee. (See Section 3(a)(3)(C) [sic] below) Billing Commencement. Industry Members will begin to receive invoices for CAT Fees as promptly as possible following the establishment of a billing mechanism. SRO will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (See Section 3(a)(2)(G) [sic] below) (2) Description of the CAT Funding Model Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. As set forth in Article XI of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was ``reasonable'' \19\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \20\ --------------------------------------------------------------------------- \19\ Approval Order at 84796. \20\ Id. at 84794. --------------------------------------------------------------------------- More specifically, the Commission stated in approving the CAT NMS Plan that ``[t]he Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members.'' \21\ The Commission further noted the following: --------------------------------------------------------------------------- \21\ Id. at 84795. --------------------------------------------------------------------------- The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.\22\ --------------------------------------------------------------------------- \22\ Id. at 84794. Accordingly, the funding model imposes fees on both Participants and Industry Members. In addition, as discussed in Appendix C of the CAT NMS Plan, the Operating Committee considered the advantages and disadvantages of a variety of alternative funding and cost allocation models before selecting the proposed model.\23\ After analyzing the various alternatives, the Operating Committee determined that the proposed tiered, fixed fee funding model provides a variety of advantages in comparison to the alternatives. First, the fixed fee model, as opposed to a variable fee model, provides transparency, ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes.\24\ Additionally, a strictly variable or metered funding model based on message volume would be far more likely to affect market behavior and place an inappropriate burden on competition. Moreover, as the SEC noted in approving the CAT NMS Plan, ``[t]he Participants also have offered a reasonable basis for establishing a funding model based on broad tiers, in that it be may be easier to implement.'' \25\ --------------------------------------------------------------------------- \23\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \24\ In choosing a tiered fee structure, the SROs concluded that the variety of benefits offered by a tiered fee structure, discussed above, outweighed the fact that Industry Members in any particular tier would pay different rates per message traffic order event (e.g., an Industry Member with the largest amount of message traffic in one tier would pay a smaller amount per order event than an Industry Member in the same tier with the least amount of message traffic). Such variation is the natural result of a tiered fee structure. \25\ Approval Order at 84796. --------------------------------------------------------------------------- In addition, multiple reviews of current broker-dealer order and trading data submitted under existing reporting requirements showed a wide range in activity among broker-dealers, with a number of broker- dealers submitting fewer than 1,000 orders per month and other broker- dealers submitting millions and even billions of orders in the same period. Accordingly, the CAT NMS Plan [[Page 23328]] includes a tiered approach to fees. The tiered approach helps ensure that fees are equitably allocated among similarly situated CAT Reporters and furthers the goal of lessening the impact on smaller firms.\26\ The self-regulatory organizations considered several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. After analyzing the alternatives, it was concluded that the tiering should be based on the relative impact of CAT Reporters on the CAT System. --------------------------------------------------------------------------- \26\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. --------------------------------------------------------------------------- Accordingly, the CAT NMS Plan contemplates that costs will be allocated across the CAT Reporters on a tiered basis to allocate costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT.\27\ The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic or market share (as applicable) from CAT Reporters in each tier. Therefore, Industry Members generating the most message traffic will be in the higher tiers, and therefore be charged a higher fee. Industry Members with lower levels of message traffic will be in lower tiers and will be assessed a smaller fee for the CAT.\28\ Correspondingly, Execution Venues with the highest market share will be in the top tier, and therefore will be charged a higher fee. Execution Venues with a lower market share will be in the lower tier and will be assessed a smaller fee for the CAT.\29\ --------------------------------------------------------------------------- \27\ Approval Order at 85005. \28\ Id. \29\ Id. --------------------------------------------------------------------------- The Commission also noted in approving the CAT NMS Plan that ``[t]he Participants have offered a credible justification for using different criteria to charge Execution Venues (market share) and Industry Members (message traffic)'' \30\ in the CAT funding model. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT.\31\ Thus, the CAT NMS Plan provides that the fees payable by Industry Members (other than Execution Venue ATSs) will be based on the message traffic generated by such Industry Member.\32\ --------------------------------------------------------------------------- \30\ Id. at 84796. \31\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \32\ Section 11.3(b) of the CAT NMS Plan. --------------------------------------------------------------------------- The CAT NMS Plan provides that the Operating Committee will use different criteria to establish fees for Execution Venues and non- Execution Venues due to the fundamental differences between the two types of entities. In particular, the CAT NMS Plan provides that fees charged to CAT Reporters that are Execution Venues will be based on the level of market share and that costs charged to Industry Members (other than Execution Venue ATSs) will be based upon message traffic.\33\ Because most Participant message traffic consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. Accordingly, basing fees for Execution Venues on message traffic would not provide the same degree of differentiation among Execution Venues that it does among Industry Members (other than Execution Venue ATSs). In contrast, execution volume more accurately delineates the different levels of trading activity of Execution Venues.\34\ --------------------------------------------------------------------------- \33\ Section 11.2(c) of the CAT NMS Plan. \34\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- The CAT NMS Plan's funding model also is structured to avoid a ``reduction in market quality.'' \35\ The tiered, fixed fee funding model is designed to limit the disincentives to providing liquidity to the market. For example, the Participants expect that a firm that had a large volume of quotes would likely be categorized in one of the upper tiers, and would not be assessed a fee for this traffic directly as they would under a more directly metered model. In contrast, strictly variable or metered funding models based on message volume were far more likely to affect market behavior. In approving the CAT NMS Plan, the SEC stated that ``[t]he Participants also offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be . . . less likely to have an incremental deterrent effect on liquidity provision.'' \36\ --------------------------------------------------------------------------- \35\ Section 11.2(e) of the CAT NMS Plan. \36\ Approval Order at 84796. --------------------------------------------------------------------------- The CAT NMS Plan is structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members--the Participants. First, the Company will be operated on a ``break-even'' basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.\37\ To ensure that the Participants' operation of the CAT will not contribute to the funding of their other operations, Section 11.1(c) of the CAT NMS Plan specifically states that ``[a]ny surplus of the Company's revenues over its expenses shall be treated as an operational reserve to offset future fees.'' In addition, as set forth in Article VIII of the CAT NMS Plan, the Company ``intends to operate in a manner such that it qualifies as a `business league' within the meaning of Section 501(c)(6) of the [Internal Revenue] Code.'' To qualify as a business league, an organization must ``not [be] organized for profit and no part of the net earnings of [the organization can] inure[] to the benefit of any private shareholder or individual.'' \38\ As the SEC stated when approving the CAT NMS Plan, ``the Commission believes that the Company's application for Section 501(c)(6) business league status addresses issues raised by commenters about the Plan's proposed allocation of profit and loss by mitigating concerns that the Company's earnings could be used to benefit individual Participants.'' \39\ --------------------------------------------------------------------------- \37\ Id. at 84792. \38\ 26 U.S.C. 501(c)(6). \39\ Approval Order at 84793. --------------------------------------------------------------------------- Finally, by adopting a CAT-specific fee, the Participants will be fully transparent regarding the costs of the CAT. Charging a general regulatory fee, which would be used to cover CAT costs as well as other regulatory costs, would be less transparent than the selected approach of charging a fee designated to cover CAT costs only. A full description of the funding model is set forth below. This description includes the framework for the funding model as set forth in the CAT NMS Plan, as well as the details as to how the funding model will be applied in practice, including the number of fee tiers and the applicable fees for each tier. SRO notes that the complete funding model is described below, including those fees that are to be paid by the Participants. The proposed Consolidated Audit Trail Funding Fees, however, do not apply to the Participants; the proposed Consolidated Audit Trail Funding Fees only apply to Industry Members. The CAT fees for Participants will be imposed separately by the Operating Committee pursuant to the CAT NMS Plan. (A) Funding Principles Section 11.2 of the CAT NMS Plan sets forth the principles that the [[Page 23329]] Operating Committee applied in establishing the funding for the Company. The Operating Committee has considered these funding principles as well as the other funding requirements set forth in the CAT NMS Plan and in Rule 613 in developing the proposed funding model. The following are the funding principles in Section 11.2 of the CAT NMS Plan: To create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and other costs of the Company; To establish an allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company's resources and operations; To establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members' non-ATS activities are based upon message traffic; (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members); To provide for ease of billing and other administrative functions; To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and To build financial stability to support the Company as a going concern. (B) Industry Member Tiering Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers. The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering. In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing nine tiers results in the fairest allocation of fees, best distinguishing between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of nine tiers of fixed fees, based on ``message traffic'' for a defined period (as discussed below). A nine tier structure was selected to provide the widest range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (``OATS''), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that nine tiers would best group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden of Industry Members that have less CAT-related activity. Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the ``Industry Member Percentages''). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to allow the funding model to ensure that the total CAT fees collected recover the intended CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified tiers that would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the ``Industry Member Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic. The following chart illustrates the breakdown of nine Industry Member tiers across the monthly average of total equity and equity options orders, cancels and quotes in Q1 2016 and identifies relative gaps across varying levels of Industry Member message traffic as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of [[Page 23330]] Industry Member percentages in each tier by considering the grouping of firms with similar levels of message traffic and seeking to identify relative breakpoints in the message traffic between such groupings. In reviewing the chart and its corresponding table, note that while these distribution illustrations were referenced to help differentiate between Industry Member tiers, the proposed funding model is directly driven, not by fixed message traffic thresholds, but rather by fixed percentages of Industry Members across tiers to account for fluctuating levels of message traffic across time and to provide for the financial stability of the CAT by ensuring that the funding model will recover the required amounts regardless of changes in the number of Industry Members or the amount of message traffic. Actual messages in any tier will vary based on the actual traffic in a given measurement period, as well as the number of firms included in the measurement period. The Industry Member Percentages and Industry Member Recovery Allocation for each tier will remain fixed with each Industry Member's tier to be reassigned periodically, as described below in Section 3(a)(1)(H) [sic]. [GRAPHIC] [TIFF OMITTED] TN22MY17.008 ------------------------------------------------------------------------ Monthly average message traffic per industry Industry member tier member (orders, quotes and cancels) ------------------------------------------------------------------------ Tier 1............................................... >10,000,000,000 Tier 2............................................... >1,000,000,000 Tier 3............................................... >100,000,000 Tier 4............................................... >2,500,000 Tier 5............................................... >200,000 Tier 6............................................... >50,000 Tier 7............................................... >5,000 Tier 8............................................... >1,000 Tier 9............................................... <=1,000 ------------------------------------------------------------------------ Based on the above analysis, the Operating Committee approved the following Industry Member Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of industry Percentage of Industry member tier industry member total members recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 0.500 8.50 6.38 Tier 2.......................................................... 2.500 35.00 26.25 Tier 3.......................................................... 2.125 21.25 15.94 Tier 4.......................................................... 4.625 15.75 11.81 Tier 5.......................................................... 3.625 7.75 5.81 Tier 6.......................................................... 4.000 5.25 3.94 [[Page 23331]] Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- For the purposes of creating these tiers based on message traffic, the Operating Committee determined to define the term ``message traffic'' separately for the period before the commencement of CAT reporting and for the period after the start of CAT reporting. The different definition for message traffic is necessary as there will be no Reportable Events as defined in the Plan, prior to the commencement of CAT reporting. Accordingly, prior to the start of CAT reporting, ``message traffic'' will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.\40\ Prior to the start of CAT reporting, orders would be comprised of the total number of equity and equity options orders received and originated by a member of an exchange or FINRA over the previous three-month period, including principal orders, cancel/replace orders, market maker orders originated by a member of an exchange, and reserve (iceberg) orders as well as order routes and executions originated by a member of FINRA, and excluding order rejects and implied orders.\41\ In addition, prior to the start of CAT reporting, cancels would be comprised of the total number of equity and equity option cancels received and originated by a member of an exchange or FINRA over a three-month period, excluding order modifications (e.g., order updates, order splits, partial cancels). Furthermore, prior to the start of CAT reporting, quotes would be comprised of information readily available to the exchanges and FINRA, such as the total number of historical equity and equity options quotes received and originated by a member of an exchange or FINRA over the prior three-month period. --------------------------------------------------------------------------- \40\ The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (Mar. 7, 2016). This exemption applies to Options Market Maker quotes for CAT reporting purposes only. Therefore, notwithstanding the reporting exemption provided for Options Market Maker quotes, Options Market Maker quotes will be included in the calculation of total message traffic for Options Market Makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences. \41\ Consequently, firms that do not have ``message traffic'' reported to an exchange or OATS before they are reporting to the CAT would not be subject to a fee until they begin to report information to CAT. --------------------------------------------------------------------------- After an Industry Member begins reporting to the CAT, ``message traffic'' will be calculated based on the Industry Member's Reportable Events reported to the CAT as will be defined in the Technical Specifications.\42\ --------------------------------------------------------------------------- \42\ If an Industry Member (other than an Execution Venue ATS) has no orders, cancels or quotes prior to the commencement of CAT Reporting, or no Reportable Events after CAT reporting commences, then the Industry Member would not have a CAT fee obligation. --------------------------------------------------------------------------- The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting. (C) Execution Venue Tiering Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a Participant or an alternative trading system (``ATS'') (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).'' \43\ --------------------------------------------------------------------------- \43\ Although FINRA does not operate an execution venue, because it is a Participant, it is considered an ``Execution Venue'' under the Plan for purposes of determining fees. --------------------------------------------------------------------------- The Participants determined that ATSs should be included within the definition of Execution Venue. Given the similarity between the activity of exchanges and ATSs, both of which meet the definition of an ``exchange'' as set forth in the Exchange Act and the fact that the similar trading models would have similar anticipated burdens on the CAT, the Participants determined that ATSs should be treated in the same manner as the exchanges for the purposes of determining the level of fees associated with the CAT.\44\ --------------------------------------------------------------------------- \44\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. --------------------------------------------------------------------------- Given the differences between Execution Venues that trade NMS Stocks and/or OTC Equity Securities and Execution Venues that trade Listed Options, Section 11.3(a) addresses Execution Venues that trade NMS Stocks and/or OTC Equity Securities separately from Execution Venues that trade Listed Options. Equity and Options Execution Venues are treated separately for two reasons. First, the differing quoting behavior of Equity and Options Execution Venues makes comparison of activity between Execution Venues difficult. Second, Execution Venue tiers are calculated based on market share of share volume, and it is therefore difficult to compare market share between asset classes (i.e., equity shares versus options contracts). Discussed below is how the funding model treats the two types of Execution Venues. (I) NMS Stocks and OTC Equity Securities Section 11.3(a)(i) of the CAT NMS Plan states that each Execution Venue that (i) executes transactions or, (ii) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee [[Page 23332]] establishing at least two and not more than five tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association's market share. In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Equity Execution Venues and Option Execution Venues. In determining the Equity Execution Venue Tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Equity Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Equity Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's NMS Stocks and OTC Equity Securities market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to the non-Execution Venue Industry Members to determine the number of tiers for Equity Execution Venues. The Operating Committee determined to establish two tiers for Equity Execution Venues, rather than a larger number of tiers as established for non-Execution Venue Industry Members, because the two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the incorporation of additional Equity Execution Venue tiers would result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members. Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Equity Execution Venue Percentages''). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee looked at historical market share of share volume for execution venues. Equities Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (``Bats''). ATS market share of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trading [sic] reporting facility (``TRF'') market share of share volume was sourced from market statistics made publicly available by Bats. As indicated by FINRA, ATSs accounted for 37.80% of the share volume across the TRFs during the recent tiering period. A 37.80/62.20 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its TRF market share of share volume. Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share of share volume. In doing so, the Participants considered that, as previously noted, Execution Venues in many cases have similar levels of message traffic due to quoting activity, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue tiers to distinguish between Execution Venues. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ``Equity Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, due to the similar levels of impact on the CAT System across Execution Venues, there is less variation in CAT Fees between the highest and lowest of tiers for Execution Venues. Furthermore, by using percentages of Equity Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share. Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of equity Percentage of Percentage of Equity execution venue tier execution execution total recovery venues venue recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Equity Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Equity Execution Venue tiers, the proposed funding model is directly driven not by market share thresholds, but rather by fixed percentages of Equity Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Equity Execution Venues included in the [[Page 23333]] measurement period. The Equity Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Equity Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Equity market Equity execution venue tier share of share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (II) Listed Options Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue's Listed Options market share. For these purposes, market share will be calculated by contract volume. In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the Operating Committee approved a tiered fee structure for Options Execution Venues. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on system resources of different Options Execution Venues, and that establish comparable fees among the CAT Reporters with the most Reportable Events. Each Options Execution Venue will be placed into one of two tiers of fixed fees, based on the Execution Venue's Listed Options market share. In choosing two tiers, the Operating Committee performed an analysis similar to that discussed above with regard to Industry Members (other than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number of tiers as established for Industry Members (other than Execution Venue ATSs), because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Options Execution Venue Percentages''). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues. The percentage of costs recovered by each Options Execution Venue tier will be determined by predefined percentage allocations (the ``Options Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues. Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of options execution Percentage of Options execution venue tier execution venue total venues recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- The following table exhibits the relative separation of market share of share volume between Tier 1 and Tier 2 Options Execution Venues. In reviewing the table, note that while this division was referenced as a data point to help differentiate between Options Execution Venue tiers, the proposed funding model is directly driven, not by market share thresholds, but rather by fixed percentages of Options Execution Venues across tiers to account for fluctuating levels of market share across time. Actual market share in any tier will vary based on the actual market activity in a given measurement period, as well as the number of Options Execution Venues included in the measurement period. The Options Execution Venue Percentages and Equity Execution Venue Recovery Allocation for each tier will remain fixed with each Options Execution Venue tier to be reassigned periodically, as described below in Section 3(a)(1)(I) [sic]. ------------------------------------------------------------------------ Options market share Options execution venue tier of share volume (%) ------------------------------------------------------------------------ Tier 1.................................................. >=1 Tier 2.................................................. <1 ------------------------------------------------------------------------ (III) Market Share/Tier Assignments The Operating Committee determined that, prior to the start of CAT reporting, market share for Execution Venues would be sourced from publicly-available market data. Options and equity volumes for Participants will be sourced from market data made publicly available by Bats while Execution [[Page 23334]] Venue ATS volumes will be sourced from market data made publicly available by FINRA. Set forth in the Appendix are two charts, one listing the current Equity Execution Venues, each with its rank and tier, and one listing the current Options Execution Venues, each with its rank and tier. After the commencement of CAT reporting, market share for Execution Venues will be sourced from data reported to the CAT. Equity Execution Venue market share will be determined by calculating each Equity Execution Venue's proportion of the total volume of NMS Stock and OTC Equity shares reported by all Equity Execution Venues during the relevant time period. Similarly, market share for Options Execution Venues will be determined by calculating each Options Execution Venue's proportion of the total volume of Listed Options contracts reported by all Options Execution Venues during the relevant time period. The Operating Committee has determined to calculate fee tiers for Execution Venues every three months based on market share from the prior three months. Based on its analysis of historical data, the Operating Committee believes calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Execution Venues while still providing predictability in the tiering for Execution Venues. (D) Allocation of Costs In addition to the funding principles discussed above, including comparability of fees, Section 11.1(c) of the CAT NMS Plan also requires expenses to be fairly and reasonably shared among the Participants and Industry Members. Accordingly, in developing the proposed fee schedules pursuant to the funding model, the Operating Committee calculated how the CAT costs would be allocated between Industry Members and Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below. (I) Allocation Between Industry Members and Execution Venues In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovered from such Industry Members and Execution Venues. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75/25 division maintained the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members and/or exchange licenses). For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1, 2 and 3) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1). In addition, the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes. For example, when analyzing alternative allocations, other possible allocations led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa, and/or led to much higher fees for Industry Member complexes than Execution Venue complexes or vice versa. Furthermore, the allocation of total CAT costs recovered recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1,630 Industry Members versus 70 Execution Venues as of January 2017). (II) Allocation Between Equity Execution Venues and Options Execution Venues The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70/30, 67/33, 65/35, 50/50 and 25/75 split. Based on this analysis, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. The Operating Committee determined that a 75/25 division between Equity and Options Execution Venues maintained elasticity across the funding model as well the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues, and fees for the smaller Equity Execution Venues that are comparable to the smaller Options Execution Venues. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events. (E) Fee Levels The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.\45\ --------------------------------------------------------------------------- \45\ It is anticipated that CAT-related costs incurred prior to November 21, 2016 will be addressed via a separate fee filing. --------------------------------------------------------------------------- The Plan Processor costs relate to costs incurred by the Plan Processor and consist of the Plan Processor's current estimates of average yearly ongoing costs, including development cost, which total $37,500,000. This amount is based upon the fees due to the Plan Processor pursuant to the agreement with the Plan Processor. The non-Plan Processor estimated costs incurred and to be incurred by the Company through November 21, 2017 consist of three categories of costs. The first category of such costs are third party support costs, which include historic legal fees, consulting fees and audit fees from November 21, 2016 until the date of filing as well as estimated third party support costs for the rest of the year. These amount to an estimated $5,200,000. The second category of non-Plan Processor costs are estimated insurance costs for the year. Based on discussions with potential insurance providers, assuming $2-5 million insurance premium on $100 million in coverage, the Company has received an estimate of $3,000,000 for the annual cost. The final cost figures will be determined following receipt of final underwriter quotes. The third category [[Page 23335]] of non-Plan Processor costs is the operational reserve, which is comprised of three months of ongoing Plan Processor costs ($9,375,000), third party support costs ($1,300,000) and insurance costs ($750,000). The Operating Committee aims to accumulate the necessary funds for the establishment of the three-month operating reserve for the Company through the CAT Fees charged to CAT Reporters for the year. On an ongoing basis, the Operating Committee will account for any potential need for the replenishment of the operating reserve or other changes to total cost during its annual budgeting process. The following table summarizes the Plan Processor and non-Plan Processor cost components which comprise the total CAT costs of $50,700,000. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor.................... Operational Costs... $37,500,000 Non-Plan Processor................ Third Party Support 5,200,000 Costs. \46\ 5,000,000 Operational Reserve. 3,000,000 Insurance Costs..... --------------- Estimated Total............... .................... 50,700,000 ------------------------------------------------------------------------ Based on the estimated costs and the calculations for the funding model described above, the Operating Committee determined to impose the following fees: \47\ --------------------------------------------------------------------------- \46\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. \47\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. --------------------------------------------------------------------------- For Industry Members (other than Execution Venue ATSs): ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \48\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $33,668 $101,004 $404,016 2............................................................... 27,051 81,153 324,612 3............................................................... 19,239 57,717 230,868 4............................................................... 6,655 19,965 79,860 5............................................................... 4,163 12,489 49,956 6............................................................... 2,560 7,680 30,720 7............................................................... 501 1,503 6,012 8............................................................... 145 435 1,740 9............................................................... 22 66 264 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for NMS Stocks and OTC Equity Securities: --------------------------------------------------------------------------- \48\ This column represents the approximate total CAT Fees paid each year by each Industry Member (other than Execution Venue ATSs) (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \49\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $21,125 $63,375 $253,500 2............................................................... 12,940 38,820 155,280 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for Listed Options: --------------------------------------------------------------------------- \49\ This column represents the approximate total CAT Fees paid each year by each Execution Venue for NMS Stocks and OTC Equity Securities (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \50\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $19,205 $57,615 $230,460 2............................................................... 13,204 39,612 158,448 ---------------------------------------------------------------------------------------------------------------- As noted above, the fees set forth in the tables reflect the Operating Committee's decision to ensure comparable fees between Execution Venues and Industry Members. The fees of the top tiers for Industry Members (other than Execution Venue ATSs) are not identical to the top tier for Execution Venues, however, because the Operating Committee also determined that the fees for Execution Venue complexes should be comparable to those of Industry Member complexes. The difference in the fees reflects this decision to recognize affiliations. --------------------------------------------------------------------------- \50\ This column represents the approximate total CAT Fees paid each year by each Execution Venue for Listed Options (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months). --------------------------------------------------------------------------- The Operating Committee has calculated the schedule of effective fees for Industry Members (other than Execution Venue ATSs) and Execution Venues in the following manner. Note that the calculation of CAT Reporter [[Page 23336]] fees assumes 53 Equity Execution Venues, 15 Options Execution Venues and 1,631 Industry Members (other than Execution Venue ATSs) as of January 2017. Calculation of Annual Tier Fees for Industry Members (``IM'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of industry Percentage of Industry member tier industry member total members recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 0.500 8.50 6.38 Tier 2.......................................................... 2.500 35.00 26.25 Tier 3.......................................................... 2.125 21.25 15.94 Tier 4.......................................................... 4.625 15.75 11.81 Tier 5.......................................................... 3.625 7.75 5.81 Tier 6.......................................................... 4.000 5.25 3.94 Tier 7.......................................................... 17.500 4.50 3.38 Tier 8.......................................................... 20.125 1.50 1.13 Tier 9.......................................................... 45.000 0.50 0.38 ----------------------------------------------- Total....................................................... 100 100 75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Industry member tier of industry members ------------------------------------------------------------------------ Tier 1............................................... 8 Tier 2............................................... 41 Tier 3............................................... 35 Tier 4............................................... 75 Tier 5............................................... 59 Tier 6............................................... 65 Tier 7............................................... 285 Tier 8............................................... 328 Tier 9............................................... 735 ------------------ Total............................................ 1,631 ------------------------------------------------------------------------ [[Page 23337]] [GRAPHIC] [TIFF OMITTED] TN22MY17.009 Calculation of Annual Tier Fees for Equity Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of equity execution Percentage of Equity execution venue tier execution venue total venues recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 25.00 26.00 6.50 Tier 2.......................................................... 75.00 49.00 12.25 ----------------------------------------------- Total....................................................... 100 75 18.75 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number of Equity execution venue tier equity execution venues ------------------------------------------------------------------------ Tier 1.................................................. 13 Tier 2.................................................. 40 --------------- Total............................................... 53 ------------------------------------------------------------------------ [[Page 23338]] [GRAPHIC] [TIFF OMITTED] TN22MY17.010 Calculation of Annual Tier Fees for Options Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of options execution Percentage of Options execution venue tier execution venue total venues recovery recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number Options execution venue tier of options execution venues ------------------------------------------------------------------------ Tier 1.............................................. 11 Tier 2.............................................. 4 ------------------- Total........................................... 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN22MY17.011 Traceability of Total CAT Fees ---------------------------------------------------------------------------------------------------------------- Estimated Type Industry member tier number of CAT fees paid Total members annually recovery ---------------------------------------------------------------------------------------------------------------- Industry Members.................... Tier 1.................... 8 $404,016 $3,232,128 Tier 2.................... 41 324,612 13,309,092 Tier 3.................... 35 230,868 8,080,380 Tier 4.................... 75 79,860 5,989,500 Tier 5.................... 59 49,956 2,947,404 Tier 6.................... 65 30,720 1,996,800 Tier 7.................... 285 6,012 1,713,420 Tier 8.................... 328 1740 570,720 Tier 9.................... 735 264 194,040 ----------------------------------------------- Total........................... .......................... 1,631 .............. 38,033,484 Equity Execution Venues............. Tier 1.................... 13 253,500 3,295,500 Tier 2.................... 40 155,280 6,211,200 ----------------------------------------------- Total........................... .......................... 53 .............. 9,506,700 [[Page 23339]] Options Execution Venues............ Tier 1.................... 11 230,460 2,535,060 Tier 2.................... 4 158,448 633,792 ----------------------------------------------- Total........................... .......................... 15 .............. 3,168,852 ----------------------------------------------- Total....................... .......................... .............. .............. 50,709,036 ----------------------------------------------- Excess \51\............. .......................... .............. .............. 9,036 ---------------------------------------------------------------------------------------------------------------- (F) Comparability of Fees --------------------------------------------------------------------------- \51\ The amount in excess of the total CAT costs will contribute to the gradual accumulation of the target operating reserve of $11.425 million. --------------------------------------------------------------------------- The funding principles require a funding model in which the fees charged to the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venue and/or Industry Members). Accordingly, in creating the model, the Operating Committee sought to take account of the affiliations between or among CAT Reporters--that is, where affiliated entities may have multiple Industry Member and/or Execution Venue licenses, by maintaining relative comparability of fees among such affiliations with the most expected CAT-related activity. To do this, the Participants identified representative affiliations in the largest tier of both Execution Venues and Industry Members and compared the aggregate fees that would be paid by such firms. While the proposed fees for Tier 1 and Tier 2 Industry Members are relatively higher than those of Tier 1 and Tier 2 Execution Venues, Execution Venue complex fees are relatively higher than those of Industry Member complexes largely due to affiliations between Execution Venues. The tables set forth below describe the largest Execution Venue and Industry Member complexes and their associated fees: \52\ --------------------------------------------------------------------------- \52\ Note that the analysis of the complexes was performed on a best efforts basis, as all affiliations between the 1631 Industry Members may not be included. Execution Venue Complexes ---------------------------------------------------------------------------------------------------------------- Listing of equity Listing of options Total fees by Execution venue complex execution venue tiers execution venue tier EV complex ---------------------------------------------------------------------------------------------------------------- Execution Venue Complex 1............... Tier 1 (x2)...... Tier 1 (x4)...... $1,900,962 Tier 2 (x1)...... Tier 2 (x2)...... Execution Venue Complex 2............... Tier 1 (x2)...... Tier 1 (x2)...... 1,863,801 Tier 2 (x1)...... Execution Venue Complex 3............... Tier 1 (x2)...... Tier 1 (x2)...... 1,278,447 Tier 2 (x2)...... ---------------------------------------------------------------------------------------------------------------- Industry Member Complexes ---------------------------------------------------------------------------------------------------------------- Listing of industry member Total fees by Industry member complex tiers Listing of ATS tiers IM complex ---------------------------------------------------------------------------------------------------------------- Industry Member Complex 1............... Tier 1 (x2)...... Tier 2 (x1)...... $963,300 Industry Member Complex 2............... Tier 1 (x1)...... Tier 2 (x3)...... 949,674 Tier 4 (x1)...... Industry Member Complex 3............... Tier 1 (x1)...... Tier 2 (x1)...... 883,888 Tier 2 (x1)...... Industry Member Complex 4............... Tier 1 (x1)...... N/A....................... 808,472 Tier 2 (x1)...... Tier 4 (x1)...... Industry Member Complex 5............... Tier 2 (x1)...... Tier 2 (x1)...... 796,595 Tier 3 (x1)...... Tier 4 (x1)...... Tier 7 (x1)...... ---------------------------------------------------------------------------------------------------------------- (G) Billing Onset Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. For example, the Plan [[Page 23340]] Processor has required up-front payments to begin building the CAT. In addition, the Company continues to incur consultant and legal expenses on an on-going basis to implement the CAT. Accordingly, the Operating Committee determined that all CAT Reporters, including both Industry Members and Execution Venues (including Participants), would begin to be invoiced as promptly as possible following the establishment of a billing mechanism. SRO will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (H) Changes to Fee Levels and Tiers Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.'' With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and, to the extent that the total CAT costs increase, the fees would be adjusted upward.\53\ Furthermore, any surplus of the Company's revenues over its expenses is to be included within the operational reserve to offset future fees. The limitations on more frequent changes to the fee, however, are intended to provide budgeting certainty for the CAT Reporters and the Company.\54\ To the extent that the Operating Committee approves changes to the number of tiers in the funding model or the fees assigned to each tier, then SRO will file such changes with the SEC pursuant to Section 19(b) of the Exchange Act, and any such changes will become effective in accordance with the requirements of Section 19(b). --------------------------------------------------------------------------- \53\ The CAT Fees are designed to recover the costs associated with the CAT. Accordingly, CAT Fees would not be affected by increases or decreases in other non-CAT expenses incurred by the SROs, such as any changes in costs related to the retirement of existing regulatory systems, such as OATS. \54\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. --------------------------------------------------------------------------- (I) Initial and Periodic Tier Reassignments The Operating Committee has determined to calculate fee tiers every three months based on market share or message traffic, as applicable, from the prior three months. For the initial tier assignments, the Company will calculate the relevant tier for each CAT Reporter using the three months of data prior to the commencement date. As with the initial tier assignment, for the tri-monthly reassignments, the Company will calculate the relevant tier using the three months of data prior to the relevant tri-monthly date. SRO notes that any movement of CAT Reporters between tiers will not change the criteria for each tier or the fee amount corresponding to each tier. In performing the tri-monthly reassignments, SRO notes that the percentage of CAT Reporters in each assigned tier is relative. Therefore, a CAT Reporter's assigned tier will depend, not only on its own message traffic or market share, but it also will depend on the message traffic/market share across all CAT Reporters. For example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace. The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share of share volume. -------------------------------------------------------------------------------------------------------------------------------------------------------- Period A Period B -------------------------------------------------------------------------------------------------------------------------------------------------------- Market share Market share Options execution venue rank Tier Options execution venue rank Tier -------------------------------------------------------------------------------------------------------------------------------------------------------- Options Execution Venue A...................... 1 1 Options Execution Venue A............. 1 1 Options Execution Venue B...................... 2 1 Options Execution Venue B............. 2 1 Options Execution Venue C...................... 3 1 Options Execution Venue C............. 3 1 Options Execution Venue D...................... 4 1 Options Execution Venue D............. 4 1 Options Execution Venue E...................... 5 1 Options Execution Venue E............. 5 1 Options Execution Venue F...................... 6 1 Options Execution Venue F............. 6 1 Options Execution Venue G...................... 7 1 Options Execution Venue I............. 7 1 Options Execution Venue H...................... 8 1 Options Execution Venue H............. 8 1 Options Execution Venue I...................... 9 1 Options Execution Venue G............. 9 1 Options Execution Venue J...................... 10 1 Options Execution Venue J............. 10 1 Options Execution Venue K...................... 11 1 Options Execution Venue L............. 11 1 Options Execution Venue L...................... 12 2 Options Execution Venue K............. 12 2 Options Execution Venue M...................... 13 2 Options Execution Venue N............. 13 2 Options Execution Venue N...................... 14 2 Options Execution Venue M............. 14 2 Options Execution Venue O...................... 15 2 Options Execution Venue O............. 15 2 -------------------------------------------------------------------------------------------------------------------------------------------------------- [[Page 23341]] (3) Proposed CAT Fee Schedule SRO proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on SRO's Industry Members. The proposed fee schedule has three sections, covering definitions, the fee schedule for CAT Fees, and the timing and manner of payments. Each of these sections is discussed in detail below. (A) Definitions Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,'' ``OTC Equity Security'', and ``Participant'' are defined as set forth in Rule 11.610 (Consolidated Audit Trail--Definitions). The proposed fee schedule imposes different fees on Equity ATSs and Industry Members that are not Equity ATSs. Accordingly, the proposed fee schedule defines the term ``Equity ATS.'' First, paragraph (a)(2) defines an ``ATS'' to mean an alternative trading system as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended, that operates pursuant to Rule 301 of Regulation ATS. This is the same definition of an ATS as set forth in Section 1.1 of the CAT NMS Plan in the definition of an ``Execution Venue.'' Then, paragraph (a)(4) defines an ``Equity ATS'' as an ATS that executes transactions in NMS Stocks and/or OTC Equity Securities. Paragraph (a)(3) of the proposed fee schedule defines the term ``CAT Fee'' to mean the Consolidated Audit Trail Funding Fee(s) to be paid by Industry Members as set forth in paragraph (b) in the proposed fee schedule. Finally, Paragraph (a)(6) defines an ``Execution Venue'' as a Participant or an ATS (excluding any such ATS that does not execute orders). This definition is the same substantive definition as set forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an ``Equity Execution Venue'' as an Execution Venue that trades NMS Stocks and/or OTC Equity Securities. (B) Fee Schedule SRO proposes to impose the CAT Fees applicable to its Industry Members through paragraph (b) of the proposed fee schedule. Paragraph (b)(1) of the proposed fee schedule sets forth the CAT Fees applicable to Industry Members other than Equity ATSs. Specifically, paragraph (b)(1) states that the Company will assign each Industry Member (other than an Equity ATS) to a fee tier once every quarter, where such tier assignment is calculated by ranking each Industry Member based on its total message traffic for the three months prior to the quarterly tier calculation day and assigning each Industry Member to a tier based on that ranking and predefined Industry Member percentages. The Industry Members with the highest total quarterly message traffic will be ranked in Tier 1, and the Industry Members with lowest quarterly message traffic will be ranked in Tier 9. Each quarter, each Industry Member (other than an Equity ATS) shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Industry Member for that quarter: ------------------------------------------------------------------------ Percentage of Tier industry Quarterly CAT members fee ------------------------------------------------------------------------ 1....................................... 0.500 $101,004 2....................................... 2.500 81,153 3....................................... 2.125 57,717 4....................................... 4.625 19,965 5....................................... 3.625 12,489 6....................................... 4.000 7,680 7....................................... 17.500 1,503 8....................................... 20.125 435 9....................................... 45.000 66 ------------------------------------------------------------------------ Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.\55\ These are the same fees that Participants that trade NMS Stocks and/or OTC Equity Securities will pay. Specifically, paragraph (b)(2) states that the Company will assign each Equity ATS to a fee tier once every quarter, where such tier assignment is calculated by ranking each Equity Execution Venue based on its total market share of NMS Stocks and OTC Equity Securities for the three months prior to the quarterly tier calculation day and assigning each Equity Execution Venue to a tier based on that ranking and predefined Equity Execution Venue percentages. The Equity Execution Venues with the higher total quarterly market share will be ranked in Tier 1, and the Equity Execution Venues with the lower quarterly market share will be ranked in Tier 2. Specifically, paragraph (b)(2) states that, each quarter, each Equity ATS shall pay the following CAT Fee corresponding to the tier assigned by the Company for such Equity ATS for that quarter: --------------------------------------------------------------------------- \55\ Note that no fee schedule is provided for Execution Venue ATSs that execute transactions in Listed Options, as no such Execution Venue ATSs currently exist due trading restrictions related to Listed Options. ------------------------------------------------------------------------ Percentage of equity Quarterly CAT Tier execution fee venues ------------------------------------------------------------------------ 1....................................... 25.00 $63,375 2....................................... 75.00 38,820 ------------------------------------------------------------------------ [[Page 23342]] (C) Timing and Manner of Payment Section 11.4 of the CAT NMS Plan states that the Operating Committee shall establish a system for the collection of fees authorized under the CAT NMS Plan. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. To implement the payment process to be adopted by the Operating Committee, paragraph (c)(1) of the proposed fee schedule states that the Company will provide each Industry Member with one invoice each quarter for its CAT Fees as determined pursuant to paragraph (b) of the proposed fee schedule, regardless of whether the Industry Member is a member of multiple self-regulatory organizations. Paragraph (c)(1) further states that each Industry Member will pay its CAT Fees to the Company via the centralized system for the collection of CAT Fees established by the Company in the manner prescribed by the Company. SRO will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular. Although the exact fee collection system and processes for CAT fees has not yet been established, all CAT fees will be billed and collected centrally through the Company, via the Plan Processor or otherwise. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.\56\ --------------------------------------------------------------------------- \56\ Section 11.4 of the CAT NMS Plan. --------------------------------------------------------------------------- Section 11.4 of the CAT NMS Plan also states that Participants shall require each Industry Member to pay all applicable authorized CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). Section 11.4 further states that, if an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan, SRO proposed to adopt paragraph (c)(2) of the proposed fee schedule. Paragraph (c)(2) of the proposed fee schedule states that each Industry Member shall pay CAT Fees within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (i) The Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. 2. Statutory Basis SRO believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,\57\ which require, among other things, that the SRO rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest, and not designed to permit unfair discrimination between customers, issuers, brokers and dealer [sic], and Section 6(b)(4) of the Act,\58\ which requires that SRO rules provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using its facilities. As discussed above, the SEC approved the bifurcated, tiered, fixed fee funding model in the CAT NMS Plan, finding it was reasonable and that it equitably allocated fees among Participants and Industry Members. SRO believes that the proposed tiered fees adopted pursuant to the funding model approved by the SEC in the CAT NMS Plan are reasonable, equitably allocated and not unfairly discriminatory. --------------------------------------------------------------------------- \57\ 15 U.S.C. 78f(b)(5). \58\ 15 U.S.C. 78f(b)(4). --------------------------------------------------------------------------- SRO believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist SRO and its Industry Members in meeting regulatory obligations pursuant to the Plan. In approving the Plan, the SEC noted that the Plan ``is necessary and appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act.'' \59\ To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, SRO believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. --------------------------------------------------------------------------- \59\ Approval Order at 84697. --------------------------------------------------------------------------- SRO believes that the proposed tiered fees are reasonable. First, the total CAT Fees to be collected would be directly associated with the costs of establishing and maintaining the CAT, where such costs include Plan Processor costs and costs related to insurance, third party services and the operational reserve. The CAT Fees would not cover Participant services unrelated to the CAT. In addition, any surplus CAT Fees cannot be distributed to the individual Participants; such surpluses must be used as a reserve to offset future fees. Given the direct relationship between the fees and the CAT costs, SRO believes that the total level of the CAT Fees is reasonable. In addition, SRO believes that the proposed CAT Fees are reasonably designed to allocate the total costs of the CAT equitably between and among the Participants and Industry Members, and are therefore not unfairly discriminatory. As discussed in detail above, the proposed tiered fees impose comparable fees on similarly situated CAT Reporters. For example, those with a larger impact on the CAT (measured via message traffic or market share) pay higher fees, whereas CAT Reporters with a smaller impact pay lower fees. Correspondingly, the tiered structure lessens the impact on smaller CAT Reporters by imposing smaller fees on those CAT Reporters with less market share or message traffic. In addition, the funding model takes into consideration affiliations between CAT Reporters, imposing comparable fees on such affiliated entities. Moreover, SRO believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75/25 division between Industry Members and Execution Venues maintains the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members or exchange licenses). Similarly, the 75/25 division between Equity and Options Execution Venues maintains elasticity across the funding model as well as the greatest level of fee equitability and comparability based on the current [[Page 23343]] number of Equity and Options Execution Venues. Finally, SRO believes that the proposed fees are reasonable because they would provide ease of calculation, ease of billing and other administrative functions, and predictability of a fixed fee. Such factors are crucial to estimating a reliable revenue stream for the Company and for permitting CAT Reporters to reasonably predict their payment obligations for budgeting purposes. B. Self-Regulatory Organization's Statement on Burden on Competition Section 6(b)(8) of the Act \60\ require [sic] that SRO rules not impose any burden on competition that is not necessary or appropriate. SRO does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. SRO notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist SRO in meeting its regulatory obligations pursuant to the Plan. Similarly, all national securities exchanges and FINRA are proposing this proposed fee schedule to implement the requirements of the CAT NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA. --------------------------------------------------------------------------- \60\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- Moreover, as previously described, SRO believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and market share to the CAT Reporter's size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, SRO does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, SRO does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, SRO believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. 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)(ii) \61\ of the Act. --------------------------------------------------------------------------- \61\ 15 U.S.C. 78s(b)(3)(A)(ii). --------------------------------------------------------------------------- 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. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) \62\ of the Act to determine whether the proposed rule change should be approved or disapproved. --------------------------------------------------------------------------- \62\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- 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 Number SR-IEX-2017-16 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-IEX-2017-16. 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 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-IEX-2017-16, and should be submitted on or before June 12, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\63\ --------------------------------------------------------------------------- \63\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10296 Filed 5-19-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23325
operative for 30 days from the date on change to be operative on the date of 10:00 a.m. and 3:00 p.m. Copies of the
which it was filed, or such shorter time filing.17 filing also will be available for
as the Commission may designate, it has At any time within 60 days of the inspection and copying at the principal
become effective pursuant to section filing of the proposed rule change, the office of the Exchange. All comments
19(b)(3)(A) of the Act 13 and Rule 19b– Commission summarily may received will be posted without change;
4(f)(6) thereunder.14 temporarily suspend such rule change if the Commission does not edit personal
A proposed rule change filed under it appears to the Commission that such identifying information from
Rule 19(b)–4(f)(6) normally does not action is necessary or appropriate in the submissions. You should submit only
become operative prior to 30 days after public interest, for the protection of information that you wish to make
the date of the filing. However, pursuant investors, or otherwise in furtherance of available publicly. All submissions
to Rule 19b–4(f)(6)(iii), the Commission the purposes of the Act. If the should refer to File Number SR–
may designate a shorter time if such Commission takes such action, the BatsEDGA–2017–10 and should be
action is consistent with the protection Commission shall institute proceedings submitted on or before June 12, 2017.
of investors and the public interest. The to determine whether the proposed rule
For the Commission, by the Division of
Exchange has filed the proposed rule should be approved or disapproved. Trading and Markets, pursuant to delegated
change for immediate effectiveness and authority.18
IV. Solicitation of Comments
has requested that the Commission Eduardo A. Aleman,
waive the requirement that the proposed Interested persons are invited to
submit written data, views, and Assistant Secretary.
rule change not become operative for 30
days after the date of the filing so that arguments concerning the foregoing, [FR Doc. 2017–10308 Filed 5–19–17; 8:45 am]
it may become operative on the date of including whether the proposed rule BILLING CODE 8011–01–P
filing. change is consistent with the Act.
The Exchange notes that the proposed Comments may be submitted by any of
rule change is intended to mitigate the following methods: SECURITIES AND EXCHANGE
confidentiality concerns raised in COMMISSION
Electronic Comments
connection with section VII(A) of the
Plan, which provides that the data made • Use the Commission’s Internet [Release No. 34–80692; File No. SR–IEX–
comment form (http://www.sec.gov/ 2017–16]
publicly available will not identify the
Trading Center that generated the data. rules/sro.shtml); or
• Send an email to rule-comments@ Self-Regulatory Organizations:
The Exchange states that the additional Investors Exchange LLC; Notice of
time would allow consideration of a sec.gov. Please include File Number SR–
BatsEDGA–2017–10 on the subject line. Filing and Immediate Effectiveness of
methodology to mitigate concerns Proposed Rule Change To Establish
related to the publication of Appendix Paper Comments Fees for Industry Members Related to
B data.15
The Commission believes that • Send paper comments in triplicate the National Market System Plan
to Secretary, Securities and Exchange Governing the Consolidated Audit Trail
waiving the 30-day operative delay is
consistent with the protection of Commission, 100 F Street NE., May 16, 2017.
investors and the public interest Washington, DC 20549–1090.
Pursuant to Section 19(b)(1) 1 of the
because it will synchronize the timing All submissions should refer to File Securities Exchange Act of 1934 (the
for publication of Appendix B data for Number SR–BatsEDGA–2017–10. This ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
all Participants, which should enhance file number should be included on the notice is hereby given that, on May 9,
the consistency and usefulness of the subject line if email is used. To help the 2017, the Investors Exchange LLC
data.16 Therefore, the Commission Commission process and review your (‘‘SRO’’, ‘‘Exchange’’ or ‘‘IEX’’) filed
hereby waives the 30-day operative comments more efficiently, please use
with the Securities and Exchange
delay and designates the proposed rule only one method. The Commission will
Commission (the ‘‘Commission’’) the
post all comments on the Commission’s
proposed rule change as described in
13 15 U.S.C. 78s(b)(3)(A). Internet Web site (http://www.sec.gov/
Items I, II and III below, which Items
14 17 CFR 240.19b–4(f)(6). rules/sro.shtml). Copies of the
have been prepared by the self-
15 The Commission recently approved a FINRA submission, all subsequent
proposal to implement an aggregated, anonymous
regulatory organization.4 The
amendments, all written statements
grouped masking methodology for the publication Commission is publishing this notice to
with respect to the proposed rule
of Appendix B data related to OTC trading activity. solicit comments on the proposed rule
See Securities Exchange Release No. 80551, (April change that are filed with the
change from interested persons.
28, 2017), 82 FR 20948 (May 4, 2017). See also Commission, and all written
Letter from David S. Shillman, Associate Director, communications relating to the I. Self-Regulatory Organization’s
Division of Trading and Markets, Commission, to Statement of the Terms of Substance of
Marcia E. Asquith, Executive Vice President FINRA,
proposed rule change between the
dated April 28, 2017. Commission and any person, other than the Proposed Rule Change
16 The Commission recently granted exemptive those that may be withheld from the Pursuant to Section 19(b)(1) of the
relief to the Participants delay the publication of public in accordance with the Securities Exchange Act of 1934
their Appendix B data until August 31, 2017. See provisions of 5 U.S.C. 552, will be
Letter from David S. Shillman, Associate Director, (‘‘Exchange Act’’),5 and Rule 19b–4
Division of Trading and Markets, Commission, to available for Web site viewing and
Jennifer Piorko Mitchell, Vice President and Deputy printing in the Commission’s Public 18 17 CFR 200.30–3(a)(12).
Corporate Secretary, FINRA, dated April 28, 2017. Reference Room, 100 F Street NE.,
mstockstill on DSK30JT082PROD with NOTICES
1 15 U.S.C. 78s(b)(1).
The Commission notes that other Participants have Washington, DC 20549 on official 2 15 U.S.C. 78a.
submitted proposed rule changes to delay the
publication of Appendix B data until August 31, business days between the hours of 3 17 CFR 240.19b–4.
4 The Exchange originally filed the proposed rule
2017. See e.g., SR–BatsBZX–2017–31; BatsBYX–
2017–10; BatsEDGX–2017–19; SR–BX–2017–022; 17 For purposes only of waiving the operative change on May 3, 2017 under File No. SR–IEX–
SR–CHX–2017–07; SR–FINRA–2017–010; SR–IEX– delay for this proposal, the Commission has 2017–13. The Exchange subsequently withdrew that
2017–12; SR–NASDAQ–2017–044; SR–Phlx–2017– considered the proposed rule’s impact on filing on May 9, 2017 and filed this proposed rule
33; SR–NYSE–2017–19; SR–NYSEArca–2017–49; efficiency, competition, and capital formation. See change.
SR–NYSEMKT–2017–24. 15 U.S.C. 78c(f). 5 15 U.S.C. 78s(b)(1).
VerDate Sep<11>2014 23:17 May 19, 2017 Jkt 241001 PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 E:\FR\FM\22MYN1.SGM 22MYN1](https://thefederalregister.org/doc/82_FR_23422/page/1.svg)
![23326 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
thereunder,6 SRO is filing with the (collectively, the ‘‘Participants’’) filed as well as Industry Members’ rights and
Commission a proposed rule change to with the Commission, pursuant to obligations related to the payment of
adopt a fee schedule pursuant to Rule Section 11A of the Exchange Act 10 and CAT Fees calculated pursuant to the
15.110(a) to establish the fees for Rule 608 of Regulation NMS CAT funding model. A detailed
Industry Members related to the thereunder,11 the CAT NMS Plan.12 The description of the CAT funding model
National Market System Plan Governing Participants filed the Plan to comply and the CAT Fees follows this executive
the Consolidated Audit Trail (the ‘‘CAT with Rule 613 of Regulation NMS under summary.
NMS Plan’’ or ‘‘Plan’’).7 The text of the the Exchange Act. The Plan was
proposed rule change is available at the published for comment in the Federal (A) CAT Funding Model
Exchange’s Web site at Register on May 17, 2016,13 and • CAT Costs. The CAT funding model
www.iextrading.com, at the principal approved by the Commission, as is designed to establish CAT-specific
office of the Exchange, and at the modified, on November 15, 2016.14 The fees to collectively recover the costs of
Commission’s Public Reference Room. Plan is designed to create, implement building and operating the CAT from all
and maintain a consolidated audit trail CAT Reporters, including Industry
II. Self-Regulatory Organization’s
(‘‘CAT’’) that would capture customer Members and Participants. The overall
Statement of the Purpose of, and the
and order event information for orders CAT costs for the calculation of the CAT
Statutory Basis for, the Proposed Rule in NMS Securities and OTC Equity Fees in this fee filing are comprised of
Change Securities, across all markets, from the Plan Processor CAT costs and non-Plan
In its filing with the Commission, the time of order inception through routing, Processor CAT costs incurred, and
self-regulatory organization included cancellation, modification, or execution estimated to be incurred, from
statements concerning the purpose of in a single consolidated data source. November 21, 2016 through November
and basis for the proposed rule change The Plan accomplishes this by creating 21, 2017. (See Section 3(a)(2)(E) [sic]
and discussed any comments it received CAT NMS, LLC (the ‘‘Company’’), of below 18)
on the proposed rule change. The text which each Participant is a member, to • Bifurcated Funding Model. The
of these statement [sic] may be operate the CAT.15 Under the CAT NMS CAT NMS Plan requires a bifurcated
examined at the places specified in Item Plan, the Operating Committee of the funding model, where costs associated
IV below. The self-regulatory Company (‘‘Operating Committee’’) has with building and operating the CAT
organization has prepared summaries, discretion to establish funding for the would be borne by (1) Participants and
set forth in Sections A, B, and C below, Company to operate the CAT, including Industry Members that are Execution
of the most significant aspects of such establishing fees that the Participants Venues for Eligible Securities through
statements. will pay, and establishing fees for fixed tier fees based on market share,
Industry Members that will be and (2) Industry Members (other than
A. Self-Regulatory Organization’s
implemented by the Participants (‘‘CAT alternative trading systems (‘‘ATSs’’)
Statement of the Purpose of, and the
Fees’’).16 The Participants are required that execute transactions in Eligible
Statutory Basis for, the Proposed Rule
to file with the SEC under Section 19(b) Securities (‘‘Execution Venue ATSs’’))
Change
of the Exchange Act any such CAT Fees through fixed tier fees based on message
1. Purpose applicable to Industry Members that the traffic for Eligible Securities. (See
Bats BYX Exchange, Inc., Bats BZX Operating Committee approves.17 Section 3(a)(2) [sic] below)
Exchange, Inc., Bats EDGA Exchange, Accordingly, SRO submits this fee filing • Industry Member Fees. Each
Inc., Bats EDGX Exchange, Inc., BOX to propose the Consolidated Audit Trail Industry Member (other than Execution
Options Exchange LLC, C2 Options Funding Fees, which will require Venue ATSs) will be placed into one of
Exchange, Incorporated, Chicago Board Industry Members that are SRO nine tiers of fixed fees, based on
Options Exchange, Incorporated, members to pay the CAT Fees ‘‘message traffic’’ in Eligible Securities
Chicago Stock Exchange, Inc., Financial determined by the Operating for a defined period (as discussed
Industry Regulatory Authority, Inc. Committee. below). Prior to the start of CAT
(‘‘FINRA’’), Investors’ Exchange LLC, (1) Executive Summary reporting, ‘‘message traffic’’ will be
Miami International Securities comprised of historical equity and
The following provides an executive equity options orders, cancels and
Exchange, LLC, MIAX PEARL, LLC,
summary of the CAT funding model quotes provided by each exchange and
NASDAQ BX, Inc., Nasdaq GEMX, LLC,
approved by the Operating Committee, FINRA over the previous three months.
Nasdaq ISE, LLC, Nasdaq MRX, LLC,8
NASDAQ PHLX LLC, The NASDAQ After an Industry Member begins
Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3,
Stock Market LLC, New York Stock 2017). reporting to the CAT, ‘‘message traffic’’
Exchange LLC, NYSE MKT LLC, NYSE 10 15 U.S.C. 78k–1. will be calculated based on the Industry
Arca, Inc. and NYSE National, Inc.9 11 17 CFR 242.608. Member’s Reportable Events reported to
12 See Letter from the Participants to Brent J. the CAT. Industry Members with lower
6 17 CFR 240.19b–4. Fields, Secretary, Commission, dated September 30, levels of message traffic will pay a lower
2014; and Letter from Participants to Brent J. Fields,
7 Unless otherwise specified, capitalized terms
Secretary, Commission, dated February 27, 2015.
fee and Industry Members with higher
used in this fee filing are defined as set forth herein, levels of message traffic will pay a
the CAT Compliance Rule Series or in the CAT On December 24, 2015, the Participants submitted
NMS Plan. an amendment to the CAT NMS Plan. See Letter higher fee. (See Section 3(a)(2)(B) [sic]
8 ISE Gemini, LLC, ISE Mercury, LLC and from Participants to Brent J. Fields, Secretary, below)
Commission, dated December 23, 2015.
International Securities Exchange, LLC have been • Execution Venue Fees. Each Equity
mstockstill on DSK30JT082PROD with NOTICES
13 Securities Exchange Act Rel. No. 77724 (Apr.
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, Execution Venue will be placed in one
and Nasdaq ISE, LLC, respectively. See Securities 27, 2016), 81 FR 30614 (May 17, 2016).
Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR
14 Securities Exchange Act Rel. No. 79318 (Nov. of two tiers of fixed fees based on
14547 (Mar. 21, 2017); Securities Exchange Act Rel. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘Approval market share, and each Options
No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, Order’’).
15 The Plan also serves as the limited liability
2017); and Securities Exchange Act Rel. No. 80325 18 The Commission notes that references to
(Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). company agreement for the Company. Sections 3(a)(2) and 3(a)(3) in this Executive
9 National Stock Exchange, Inc. has been renamed 16 Section 11.1(b) of the CAT NMS Plan.
Summary should be instead to Sections II.A.1.(2)
NYSE National, Inc. See Securities Exchange Act 17 Id. and II.A.1.(3), respectively.
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23327
Execution Venue will be placed in one • Centralized Payment. Each Industry obligations. The Commission further
of two tiers of fixed fees based on Member will receive from the Company believes that the proposed funding
market share. Equity Execution Venue one invoice for its applicable CAT Fees, model is designed to impose fees
market share will be determined by not separate invoices from each reasonably related to the Participants’
calculating each Equity Execution Participant of which it is a member. The self-regulatory obligations because the
Venue’s proportion of the total volume Industry Members will pay its CAT Fees fees would be directly associated with
of NMS Stock and OTC Equity shares to the Company via the centralized the costs of establishing and
reported by all Equity Execution Venues system for the collection of CAT Fees maintaining the CAT, and not unrelated
during the relevant time period. established by the Operating Committee. SRO services.22
Similarly, market share for Options (See Section 3(a)(3)(C) [sic] below) Accordingly, the funding model
Execution Venues will be determined by • Billing Commencement. Industry imposes fees on both Participants and
calculating each Options Execution Members will begin to receive invoices Industry Members.
Venue’s proportion of the total volume for CAT Fees as promptly as possible In addition, as discussed in Appendix
of Listed Options contracts reported by following the establishment of a billing C of the CAT NMS Plan, the Operating
all Options Execution Venues during mechanism. SRO will issue a Regulatory Committee considered the advantages
the relevant time period. Equity Circular to its members when the billing and disadvantages of a variety of
Execution Venues with a larger market mechanism is established, specifying alternative funding and cost allocation
share will pay a larger CAT Fee than the date when such invoicing of models before selecting the proposed
Equity Execution Venues with a smaller Industry Members will commence. (See model.23 After analyzing the various
market share. Similarly, Options Section 3(a)(2)(G) [sic] below) alternatives, the Operating Committee
Execution Venues with a larger market determined that the proposed tiered,
(2) Description of the CAT Funding
share will pay a larger CAT Fee than fixed fee funding model provides a
Model
Options Execution Venues with a variety of advantages in comparison to
smaller market share. (See Section Article XI of the CAT NMS Plan the alternatives. First, the fixed fee
3(a)(2)(C) [sic] below) requires the Operating Committee to model, as opposed to a variable fee
• Cost Allocation. For the reasons approve the operating budget, including model, provides transparency, ease of
discussed below, in designing the projected costs of developing and calculation, ease of billing and other
model, the Operating Committee operating the CAT for the upcoming administrative functions, and
determined that 75 percent of total costs year. As set forth in Article XI of the predictability of a fixed fee. Such factors
recovered would be allocated to CAT NMS Plan, the CAT NMS Plan are crucial to estimating a reliable
Industry Members (other than Execution requires a bifurcated funding model, revenue stream for the Company and for
Venue ATSs) and 25 percent would be where costs associated with building permitting CAT Reporters to reasonably
allocated to Execution Venues. In and operating the Central Repository predict their payment obligations for
addition, the Operating Committee would be borne by (1) Participants and budgeting purposes.24 Additionally, a
determined to allocate 75 percent of Industry Members that are Execution strictly variable or metered funding
Execution Venue costs recovered to Venues through fixed tier fees based on model based on message volume would
Equity Execution Venues and 25 percent market share, and (2) Industry Members be far more likely to affect market
to Options Execution Venues. (See (other than Execution Venue ATSs) behavior and place an inappropriate
Section 3(a)(2)(D) [sic] below) through fixed tier fees based on message burden on competition. Moreover, as
• Comparability of Fees. The CAT traffic. In its order approving the CAT the SEC noted in approving the CAT
funding model requires that the CAT NMS Plan, the Commission determined NMS Plan, ‘‘[t]he Participants also have
Fees charged to the CAT Reporters with that the proposed funding model was offered a reasonable basis for
the most CAT-related activity (measured ‘‘reasonable’’ 19 and ‘‘reflects a establishing a funding model based on
by market share and/or message traffic, reasonable exercise of the Participants’ broad tiers, in that it be may be easier
as applicable) are generally comparable funding authority to recover the to implement.’’ 25
(where, for these comparability Participants’ costs related to the In addition, multiple reviews of
purposes, the tiered fee structure takes CAT.’’ 20 current broker-dealer order and trading
into consideration affiliations between More specifically, the Commission data submitted under existing reporting
or among CAT Reporters, whether stated in approving the CAT NMS Plan requirements showed a wide range in
Execution Venues and/or Industry that ‘‘[t]he Commission believes that the activity among broker-dealers, with a
Members). (See Section 3(a)(2)(F) [sic] proposed funding model is reasonably number of broker-dealers submitting
below) designed to allocate the costs of the CAT fewer than 1,000 orders per month and
(B) CAT Fees for Industry Members between the Participants and Industry other broker-dealers submitting millions
Members.’’ 21 The Commission further and even billions of orders in the same
• Fee Schedule. The quarterly CAT noted the following: period. Accordingly, the CAT NMS Plan
Fees for each tier for Industry Members The Commission believes that the
are set forth in the two fee schedules in proposed funding model reflects a 22 Id. at 84794.
the Consolidated Audit Trail Funding reasonable exercise of the Participants’ 23 Section B.7, Appendix C of the CAT NMS Plan,
Fees, one for Equity ATSs and one for funding authority to recover the Approval Order at 85006.
Industry Members other than Equity Participants’ costs related to the CAT. 24 In choosing a tiered fee structure, the SROs
ATSs. (See Section 3(a)(3)(B) [sic] concluded that the variety of benefits offered by a
The CAT is a regulatory facility jointly tiered fee structure, discussed above, outweighed
below)
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owned by the Participants and . . . the the fact that Industry Members in any particular tier
• Quarterly Invoices. Industry Exchange Act specifically permits the would pay different rates per message traffic order
Members will be billed quarterly for Participants to charge their members event (e.g., an Industry Member with the largest
CAT Fees, with the invoices payable fees to fund their self-regulatory amount of message traffic in one tier would pay a
within 30 days. The quarterly invoices smaller amount per order event than an Industry
Member in the same tier with the least amount of
will identify within which tier the 19 Approval Order at 84796. message traffic). Such variation is the natural result
Industry Member falls. (See Section 20 Id. at 84794. of a tiered fee structure.
3(a)(3)(C) [sic] below) 21 Id. at 84795. 25 Approval Order at 84796.
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![23328 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
includes a tiered approach to fees. The criteria to establish fees for Execution profits.37 To ensure that the
tiered approach helps ensure that fees Venues and non-Execution Venues due Participants’ operation of the CAT will
are equitably allocated among similarly to the fundamental differences between not contribute to the funding of their
situated CAT Reporters and furthers the the two types of entities. In particular, other operations, Section 11.1(c) of the
goal of lessening the impact on smaller the CAT NMS Plan provides that fees CAT NMS Plan specifically states that
firms.26 The self-regulatory charged to CAT Reporters that are ‘‘[a]ny surplus of the Company’s
organizations considered several Execution Venues will be based on the revenues over its expenses shall be
approaches to developing a tiered level of market share and that costs treated as an operational reserve to
model, including defining fee tiers charged to Industry Members (other offset future fees.’’ In addition, as set
based on such factors as size of firm, than Execution Venue ATSs) will be forth in Article VIII of the CAT NMS
message traffic or trading dollar volume. based upon message traffic.33 Because Plan, the Company ‘‘intends to operate
After analyzing the alternatives, it was most Participant message traffic consists in a manner such that it qualifies as a
concluded that the tiering should be of quotations, and Participants usually ‘business league’ within the meaning of
based on the relative impact of CAT disseminate quotations in all Section 501(c)(6) of the [Internal
Reporters on the CAT System. instruments they trade, regardless of Revenue] Code.’’ To qualify as a
Accordingly, the CAT NMS Plan execution volume, Execution Venues business league, an organization must
contemplates that costs will be allocated that are Participants generally ‘‘not [be] organized for profit and no
across the CAT Reporters on a tiered disseminate similar amounts of message part of the net earnings of [the
basis to allocate costs to those CAT traffic. Accordingly, basing fees for organization can] inure[] to the benefit
Reporters that contribute more to the Execution Venues on message traffic of any private shareholder or
costs of creating, implementing and would not provide the same degree of individual.’’ 38 As the SEC stated when
maintaining the CAT.27 The fees to be differentiation among Execution Venues approving the CAT NMS Plan, ‘‘the
assessed at each tier are calculated so as that it does among Industry Members Commission believes that the
to recoup a proportion of costs (other than Execution Venue ATSs). In Company’s application for Section
appropriate to the message traffic or contrast, execution volume more 501(c)(6) business league status
market share (as applicable) from CAT accurately delineates the different levels addresses issues raised by commenters
Reporters in each tier. Therefore, of trading activity of Execution about the Plan’s proposed allocation of
Industry Members generating the most Venues.34 profit and loss by mitigating concerns
message traffic will be in the higher that the Company’s earnings could be
tiers, and therefore be charged a higher The CAT NMS Plan’s funding model
used to benefit individual
fee. Industry Members with lower levels also is structured to avoid a ‘‘reduction
Participants.’’ 39
of message traffic will be in lower tiers in market quality.’’ 35 The tiered, fixed Finally, by adopting a CAT-specific
and will be assessed a smaller fee for the fee funding model is designed to limit fee, the Participants will be fully
CAT.28 Correspondingly, Execution the disincentives to providing liquidity transparent regarding the costs of the
Venues with the highest market share to the market. For example, the CAT. Charging a general regulatory fee,
will be in the top tier, and therefore will Participants expect that a firm that had which would be used to cover CAT
be charged a higher fee. Execution a large volume of quotes would likely be costs as well as other regulatory costs,
Venues with a lower market share will categorized in one of the upper tiers, would be less transparent than the
be in the lower tier and will be assessed and would not be assessed a fee for this selected approach of charging a fee
a smaller fee for the CAT.29 traffic directly as they would under a designated to cover CAT costs only.
The Commission also noted in more directly metered model. In A full description of the funding
approving the CAT NMS Plan that contrast, strictly variable or metered model is set forth below. This
‘‘[t]he Participants have offered a funding models based on message description includes the framework for
credible justification for using different volume were far more likely to affect the funding model as set forth in the
criteria to charge Execution Venues market behavior. In approving the CAT CAT NMS Plan, as well as the details as
(market share) and Industry Members NMS Plan, the SEC stated that ‘‘[t]he to how the funding model will be
(message traffic)’’ 30 in the CAT funding Participants also offered a reasonable applied in practice, including the
model. While there are multiple factors basis for establishing a funding model number of fee tiers and the applicable
that contribute to the cost of building, based on broad tiers, in that it may be fees for each tier. SRO notes that the
maintaining and using the CAT, . . . less likely to have an incremental complete funding model is described
processing and storage of incoming deterrent effect on liquidity below, including those fees that are to
message traffic is one of the most provision.’’ 36 be paid by the Participants. The
significant cost drivers for the CAT.31 The CAT NMS Plan is structured to proposed Consolidated Audit Trail
Thus, the CAT NMS Plan provides that avoid potential conflicts raised by the Funding Fees, however, do not apply to
the fees payable by Industry Members Operating Committee determining fees the Participants; the proposed
(other than Execution Venue ATSs) will applicable to its own members—the Consolidated Audit Trail Funding Fees
be based on the message traffic Participants. First, the Company will be only apply to Industry Members. The
generated by such Industry Member.32 operated on a ‘‘break-even’’ basis, with CAT fees for Participants will be
The CAT NMS Plan provides that the fees imposed to cover costs and an imposed separately by the Operating
Operating Committee will use different appropriate reserve. Any surpluses will Committee pursuant to the CAT NMS
26 Section B.7, Appendix C of the CAT NMS Plan,
be treated as an operational reserve to Plan.
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offset future fees and will not be
Approval Order at 85006. (A) Funding Principles
27 Approval Order at 85005. distributed to the Participants as
28 Id. Section 11.2 of the CAT NMS Plan
29 Id. 33 Section11.2(c) of the CAT NMS Plan. sets forth the principles that the
30 Id. at 84796. 34 SectionB.7, Appendix C of the CAT NMS Plan,
31 Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. 37 Id.
at 84792.
Approval Order at 85005. 35 Section 11.2(e) of the CAT NMS Plan. 38 26U.S.C. 501(c)(6).
32 Section 11.3(b) of the CAT NMS Plan. 36 Approval Order at 84796. 39 Approval Order at 84793.
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23331
Percentage
Percentage Percentage
of industry
Industry member tier of industry of total
member
members recovery
recovery
Tier 7 ............................................................................................................................................ 17.500 4.50 3.38
Tier 8 ............................................................................................................................................ 20.125 1.50 1.13
Tier 9 ............................................................................................................................................ 45.000 0.50 0.38
Total ...................................................................................................................................... 100 100 75
For the purposes of creating these reporting, quotes would be comprised of The Participants determined that
tiers based on message traffic, the information readily available to the ATSs should be included within the
Operating Committee determined to exchanges and FINRA, such as the total definition of Execution Venue. Given
define the term ‘‘message traffic’’ number of historical equity and equity the similarity between the activity of
separately for the period before the options quotes received and originated exchanges and ATSs, both of which
commencement of CAT reporting and by a member of an exchange or FINRA meet the definition of an ‘‘exchange’’ as
for the period after the start of CAT over the prior three-month period. set forth in the Exchange Act and the
reporting. The different definition for After an Industry Member begins fact that the similar trading models
message traffic is necessary as there will reporting to the CAT, ‘‘message traffic’’ would have similar anticipated burdens
be no Reportable Events as defined in will be calculated based on the Industry on the CAT, the Participants determined
the Plan, prior to the commencement of Member’s Reportable Events reported to that ATSs should be treated in the same
CAT reporting. Accordingly, prior to the the CAT as will be defined in the manner as the exchanges for the
start of CAT reporting, ‘‘message traffic’’ Technical Specifications.42 purposes of determining the level of fees
will be comprised of historical equity The Operating Committee has associated with the CAT.44
and equity options orders, cancels and determined to calculate fee tiers every Given the differences between
quotes provided by each exchange and three months, on a calendar quarter Execution Venues that trade NMS
FINRA over the previous three basis, based on message traffic from the Stocks and/or OTC Equity Securities
months.40 Prior to the start of CAT prior three months. Based on its and Execution Venues that trade Listed
reporting, orders would be comprised of analysis of historical data, the Operating Options, Section 11.3(a) addresses
the total number of equity and equity Committee believes that calculating tiers Execution Venues that trade NMS
options orders received and originated based on three months of data will Stocks and/or OTC Equity Securities
by a member of an exchange or FINRA provide the best balance between separately from Execution Venues that
over the previous three-month period, reflecting changes in activity by trade Listed Options. Equity and
including principal orders, cancel/ Industry Members while still providing Options Execution Venues are treated
replace orders, market maker orders predictability in the tiering for Industry separately for two reasons. First, the
originated by a member of an exchange, Members. Because fee tiers will be differing quoting behavior of Equity and
and reserve (iceberg) orders as well as calculated based on message traffic from Options Execution Venues makes
order routes and executions originated the prior three months, the Operating comparison of activity between
by a member of FINRA, and excluding Committee will begin calculating Execution Venues difficult. Second,
order rejects and implied orders.41 In message traffic based on an Industry Execution Venue tiers are calculated
addition, prior to the start of CAT Member’s Reportable Events reported to based on market share of share volume,
reporting, cancels would be comprised the CAT once the Industry Member has and it is therefore difficult to compare
of the total number of equity and equity been reporting to the CAT for three market share between asset classes (i.e.,
option cancels received and originated months. Prior to that, fee tiers will be equity shares versus options contracts).
by a member of an exchange or FINRA calculated as discussed above with Discussed below is how the funding
over a three-month period, excluding regard to the period prior to CAT model treats the two types of Execution
order modifications (e.g., order updates, reporting. Venues.
order splits, partial cancels).
(C) Execution Venue Tiering (I) NMS Stocks and OTC Equity
Furthermore, prior to the start of CAT
Under Section 11.3(a) of the CAT Securities
40 The SEC approved exemptive relief permitting NMS Plan, the Operating Committee is Section 11.3(a)(i) of the CAT NMS
Options Market Maker quotes to be reported to the required to establish fixed fees payable Plan states that each Execution Venue
Central Repository by the relevant Options by Execution Venues. Section 1.1 of the
Exchange in lieu of requiring that such reporting be that (i) executes transactions or, (ii) in
done by both the Options Exchange and the Options CAT NMS Plan defines an Execution the case of a national securities
Market Maker, as required by Rule 613 of Venue as ‘‘a Participant or an alternative association, has trades reported by its
Regulation NMS. See Securities Exchange Act trading system (‘‘ATS’’) (as defined in
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856
members to its trade reporting facility or
(Mar. 7, 2016). This exemption applies to Options
Rule 300 of Regulation ATS) that facilities for reporting transactions
Market Maker quotes for CAT reporting purposes operates pursuant to Rule 301 of effected otherwise than on an exchange,
only. Therefore, notwithstanding the reporting Regulation ATS (excluding any such in NMS Stocks or OTC Equity Securities
exemption provided for Options Market Maker ATS that does not execute orders).’’ 43
quotes, Options Market Maker quotes will be will pay a fixed fee depending on the
mstockstill on DSK30JT082PROD with NOTICES
included in the calculation of total message traffic market share of that Execution Venue in
42 If an Industry Member (other than an Execution
for Options Market Makers for purposes of tiering NMS Stocks and OTC Equity Securities,
under the CAT funding model both prior to CAT Venue ATS) has no orders, cancels or quotes prior
reporting and once CAT reporting commences. to the commencement of CAT Reporting, or no with the Operating Committee
41 Consequently, firms that do not have ‘‘message Reportable Events after CAT reporting commences,
traffic’’ reported to an exchange or OATS before then the Industry Member would not have a CAT an ‘‘Execution Venue’’ under the Plan for purposes
they are reporting to the CAT would not be subject fee obligation. of determining fees.
to a fee until they begin to report information to 43 Although FINRA does not operate an execution 44 Section B.7, Appendix C of the CAT NMS Plan,
CAT. venue, because it is a Participant, it is considered Approval Order at 85005.
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![23332 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
establishing at least two and not more Industry Members, because the two tiers fewer, rather than more, Execution
than five tiers of fixed fees, based on an were sufficient to distinguish between Venue tiers to distinguish between
Execution Venue’s NMS Stocks and the smaller number of Equity Execution Execution Venues.
OTC Equity Securities market share. For Venues based on market share. The percentage of costs recovered by
these purposes, market share for Furthermore, the incorporation of each Equity Execution Venue tier will
Execution Venues that execute additional Equity Execution Venue tiers be determined by predefined percentage
transactions will be calculated by share would result in significantly higher fees allocations (the ‘‘Equity Execution
volume, and market share for a national for Tier 1 Equity Execution Venues and Venue Recovery Allocation’’). In
securities association that has trades diminish comparability between determining the fixed percentage
reported by its members to its trade Execution Venues and Industry allocation of costs recovered for each
reporting facility or facilities for Members. tier, the Operating Committee
reporting transactions effected Each Equity Execution Venue will be considered the impact of CAT Reporter
otherwise than on an exchange in NMS ranked by market share and tiered by market share activity on the CAT
Stocks or OTC Equity Securities will be predefined Execution Venue System as well as the distribution of
calculated based on share volume of percentages, (the ‘‘Equity Execution total market volume across Equity
trades reported, provided, however, that Venue Percentages’’). In determining the Execution Venues while seeking to
the share volume reported to such fixed percentage of Equity Execution maintain comparable fees among the
national securities association by an Venues in each tier, the Operating largest CAT Reporters. Accordingly,
Execution Venue shall not be included Committee looked at historical market following the determination of the
in the calculation of such national share of share volume for execution percentage of Execution Venues in each
security association’s market share. venues. Equities Execution Venue tier, the Operating Committee identified
In accordance with Section 11.3(a)(i) market share of share volume were the percentage of total market volume
of the CAT NMS Plan, the Operating sourced from market statistics made for each tier based on the historical
Committee approved a tiered fee publicly-available by Bats Global market share upon which Execution
structure for Equity Execution Venues Markets, Inc. (‘‘Bats’’). ATS market Venues had been initially ranked.
and Option Execution Venues. In share of share volume was sourced from Taking this into account along with the
determining the Equity Execution market statistics made publicly- resulting percentage of total recovery,
Venue Tiers, the Operating Committee available by FINRA. FINRA trading [sic] the percentage allocation of costs
considered the funding principles set reporting facility (‘‘TRF’’) market share recovered for each tier were assigned,
forth in Section 11.2 of the CAT NMS of share volume was sourced from allocating higher percentages of
Plan, seeking to create funding tiers that market statistics made publicly recovery to the tier with a higher level
take into account the relative impact on available by Bats. As indicated by of market share while avoiding any
system resources of different Equity FINRA, ATSs accounted for 37.80% of inappropriate burden on competition.
Execution Venues, and that establish the share volume across the TRFs Furthermore, due to the similar levels of
comparable fees among the CAT during the recent tiering period. A impact on the CAT System across
Reporters with the most Reportable 37.80/62.20 split was applied to the Execution Venues, there is less variation
Events. Each Equity Execution Venue ATS and non-ATS breakdown of FINRA in CAT Fees between the highest and
will be placed into one of two tiers of market share, with FINRA tiered based lowest of tiers for Execution Venues.
fixed fees, based on the Execution only on the non-ATS portion of its TRF Furthermore, by using percentages of
Venue’s NMS Stocks and OTC Equity market share of share volume. Equity Execution Venues and costs
Securities market share. In choosing two Based on this, the Operating recovered per tier, the Operating
tiers, the Operating Committee Committee considered the distribution Committee sought to include stability
performed an analysis similar to that of Execution Venues, and grouped and elasticity within the funding model,
discussed above with regard to the non- together Execution Venues with similar allowing the funding model to respond
Execution Venue Industry Members to levels of market share of share volume. to changes in either the total number of
determine the number of tiers for Equity In doing so, the Participants considered Equity Execution Venues or changes in
Execution Venues. The Operating that, as previously noted, Execution market share.
Committee determined to establish two Venues in many cases have similar Based on this analysis, the Operating
tiers for Equity Execution Venues, rather levels of message traffic due to quoting Committee approved the following
than a larger number of tiers as activity, and determined that it was Equity Execution Venue Percentages
established for non-Execution Venue simpler and more appropriate to have and Recovery Allocations:
Percentage Percentage Percentage
of equity of execution
Equity execution venue tier of total
execution venue recovery
venues recovery
Tier 1 ............................................................................................................................................ 25.00 26.00 6.50
Tier 2 ............................................................................................................................................ 75.00 49.00 12.25
Total ...................................................................................................................................... 100 75 18.75
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The following table exhibits the to help differentiate between Equity fluctuating levels of market share across
relative separation of market share of Execution Venue tiers, the proposed time. Actual market share in any tier
share volume between Tier 1 and Tier funding model is directly driven not by will vary based on the actual market
2 Equity Execution Venues. In market share thresholds, but rather by activity in a given measurement period,
reviewing the table, note that while this fixed percentages of Equity Execution as well as the number of Equity
division was referenced as a data point Venues across tiers to account for Execution Venues included in the
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23333
measurement period. The Equity and that establish comparable fees Options Execution Venues with similar
Execution Venue Percentages and among the CAT Reporters with the most market shares across the tiers. Options
Equity Execution Venue Recovery Reportable Events. Each Options Execution Venue market share of share
Allocation for each tier will remain Execution Venue will be placed into one volume were sourced from market
fixed with each Equity Execution Venue of two tiers of fixed fees, based on the statistics made publicly-available by
tier to be reassigned periodically, as Execution Venue’s Listed Options Bats. The process for developing the
described below in Section 3(a)(1)(I) market share. In choosing two tiers, the Options Execution Venue Percentages
[sic]. Operating Committee performed an was the same as discussed above with
analysis similar to that discussed above regard to Equity Execution Venues.
Equity market with regard to Industry Members (other The percentage of costs recovered by
share of share
Equity execution venue tier volume than Execution Venue ATSs) to each Options Execution Venue tier will
(%) determine the number of tiers for be determined by predefined percentage
Options Execution Venues. The allocations (the ‘‘Options Execution
Tier 1 .................................... ≥1 Operating Committee determined to Venue Recovery Allocation’’). In
Tier 2 .................................... <1 establish two tiers for Options determining the fixed percentage
Execution Venues, rather than a larger allocation of costs recovered for each
(II) Listed Options number of tiers as established for tier, the Operating Committee
Section 11.3(a)(ii) of the CAT NMS Industry Members (other than Execution considered the impact of CAT Reporter
Plan states that each Execution Venue Venue ATSs), because the two tiers market share activity on the CAT
that executes transactions in Listed were sufficient to distinguish between System as well as the distribution of
Options will pay a fixed fee depending the smaller number of Options total market volume across Options
on the Listed Options market share of Execution Venues based on market Execution Venues while seeking to
that Execution Venue, with the share. Furthermore, due to the smaller maintain comparable fees among the
Operating Committee establishing at number of Options Execution Venues, largest CAT Reporters. Furthermore, by
least two and no more than five tiers of the incorporation of additional Options using percentages of Options Execution
fixed fees, based on an Execution Execution Venue tiers would result in Venues and costs recovered per tier, the
Venue’s Listed Options market share. significantly higher fees for Tier 1 Operating Committee sought to include
For these purposes, market share will be Options Execution Venues and reduce stability and elasticity within the
calculated by contract volume. comparability between Execution funding model, allowing the funding
In accordance with Section 11.3(a)(ii) Venues and Industry Members. model to respond to changes in either
of the CAT NMS Plan, the Operating Each Options Execution Venue will the total number of Options Execution
Committee approved a tiered fee be ranked by market share and tiered by Venues or changes in market share. The
structure for Options Execution Venues. predefined Execution Venue process for developing the Options
In determining the tiers, the Operating percentages, (the ‘‘Options Execution Execution Venue Recovery Allocation
Committee considered the funding Venue Percentages’’). To determine the was the same as discussed above with
principles set forth in Section 11.2 of fixed percentage of Options Execution regard to Equity Execution Venues.
the CAT NMS Plan, seeking to create Venues in each tier, the Operating Based on this analysis, the Operating
funding tiers that take into account the Committee analyzed the historical and Committee approved the following
relative impact on system resources of publicly available market share of Options Execution Venue Percentages
different Options Execution Venues, Options Execution Venues to group and Recovery Allocations:
Percentage Percentage Percentage
of options of execution
Options execution venue tier of total
execution venue recovery
venues recovery
Tier 1 ............................................................................................................................................ 75.00 20.00 5.00
Tier 2 ............................................................................................................................................ 25.00 5.00 1.25
Total ...................................................................................................................................... 100 25 6.25
The following table exhibits the Execution Venues included in the Options
relative separation of market share of measurement period. The Options market share
share volume between Tier 1 and Tier Execution Venue Percentages and Options execution venue tier of share
volume
2 Options Execution Venues. In Equity Execution Venue Recovery (%)
reviewing the table, note that while this Allocation for each tier will remain
division was referenced as a data point fixed with each Options Execution Tier 2 .................................... <1
to help differentiate between Options Venue tier to be reassigned periodically,
Execution Venue tiers, the proposed as described below in Section 3(a)(1)(I) (III) Market Share/Tier Assignments
funding model is directly driven, not by [sic].
market share thresholds, but rather by The Operating Committee determined
mstockstill on DSK30JT082PROD with NOTICES
fixed percentages of Options Execution Options that, prior to the start of CAT reporting,
Venues across tiers to account for market share market share for Execution Venues
fluctuating levels of market share across Options execution venue tier of share would be sourced from publicly-
volume available market data. Options and
time. Actual market share in any tier (%)
will vary based on the actual market equity volumes for Participants will be
activity in a given measurement period, Tier 1 .................................... ≥1 sourced from market data made publicly
as well as the number of Options available by Bats while Execution
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![23340 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
Processor has required up-front adjusted downward, and, to the extent assigned tier is relative. Therefore, a
payments to begin building the CAT. In that the total CAT costs increase, the CAT Reporter’s assigned tier will
addition, the Company continues to fees would be adjusted upward.53 depend, not only on its own message
incur consultant and legal expenses on Furthermore, any surplus of the traffic or market share, but it also will
an on-going basis to implement the Company’s revenues over its expenses is depend on the message traffic/market
CAT. Accordingly, the Operating to be included within the operational share across all CAT Reporters. For
Committee determined that all CAT reserve to offset future fees. The example, the percentage of Industry
Reporters, including both Industry limitations on more frequent changes to Members (other than Execution Venue
Members and Execution Venues the fee, however, are intended to ATSs) in each tier is relative such that
(including Participants), would begin to provide budgeting certainty for the CAT such Industry Member’s assigned tier
be invoiced as promptly as possible Reporters and the Company.54 To the will depend on message traffic
following the establishment of a billing extent that the Operating Committee generated across all CAT Reporters as
mechanism. SRO will issue a Regulatory approves changes to the number of tiers well as the total number of CAT
Circular to its members when the billing in the funding model or the fees Reporters. The Operating Committee
mechanism is established, specifying assigned to each tier, then SRO will file will inform CAT Reporters of their
the date when such invoicing of such changes with the SEC pursuant to assigned tier every three months
Industry Members will commence. Section 19(b) of the Exchange Act, and following the periodic tiering process,
any such changes will become effective as the funding model will compare an
(H) Changes to Fee Levels and Tiers
in accordance with the requirements of individual CAT Reporter’s activity to
Section 11.3(d) of the CAT NMS Plan Section 19(b). that of other CAT Reporters in the
states that ‘‘[t]he Operating Committee
(I) Initial and Periodic Tier marketplace.
shall review such fee schedule on at
least an annual basis and shall make any Reassignments The following demonstrates a tier
changes to such fee schedule that it The Operating Committee has reassignment. In accordance with the
deems appropriate. The Operating determined to calculate fee tiers every funding model, the top 75% of Options
Committee is authorized to review such three months based on market share or Execution Venues in market share are
fee schedule on a more regular basis, but message traffic, as applicable, from the categorized as Tier 1 while the bottom
shall not make any changes on more prior three months. For the initial tier 25% of Options Execution Venues in
than a semi-annual basis unless, assignments, the Company will market share are categorized as Tier 2.
pursuant to a Supermajority Vote, the calculate the relevant tier for each CAT In the sample scenario below, Options
Operating Committee concludes that Reporter using the three months of data Execution Venue L is initially
such change is necessary for the prior to the commencement date. As categorized as a Tier 2 Options
adequate funding of the Company.’’ with the initial tier assignment, for the Execution Venue in Period A due to its
With such reviews, the Operating tri-monthly reassignments, the market share. When market share is
Committee will review the distribution Company will calculate the relevant tier recalculated for Period B, the market
of Industry Members and Execution using the three months of data prior to share of Execution Venue L increases,
Venues across tiers, and make any the relevant tri-monthly date. SRO notes and it is therefore subsequently
updates to the percentage of CAT that any movement of CAT Reporters reranked and reassigned to Tier 1 in
Reporters allocated to each tier as may between tiers will not change the Period B. Correspondingly, Options
be necessary. In addition, the reviews criteria for each tier or the fee amount Execution Venue K, initially a Tier 1
will evaluate the estimated ongoing corresponding to each tier. Options Execution Venue in Period A,
CAT costs and the level of the operating In performing the tri-monthly is reassigned to Tier 2 in Period B due
reserve. To the extent that the total CAT reassignments, SRO notes that the to decreases in its market share of share
costs decrease, the fees would be percentage of CAT Reporters in each volume.
Period A Period B
Market Options Market share
Options execution venue share Tier Tier
execution venue rank
rank
Options Execution Venue A ............. 1 1 Options Execution Venue A ............ 1 1
Options Execution Venue B ............. 2 1 Options Execution Venue B ............ 2 1
Options Execution Venue C ............. 3 1 Options Execution Venue C ............ 3 1
Options Execution Venue D ............. 4 1 Options Execution Venue D ............ 4 1
Options Execution Venue E ............. 5 1 Options Execution Venue E ............ 5 1
Options Execution Venue F .............. 6 1 Options Execution Venue F ............. 6 1
Options Execution Venue G ............. 7 1 Options Execution Venue I .............. 7 1
Options Execution Venue H ............. 8 1 Options Execution Venue H ............ 8 1
Options Execution Venue I ............... 9 1 Options Execution Venue G ............ 9 1
Options Execution Venue J .............. 10 1 Options Execution Venue J ............. 10 1
Options Execution Venue K ............. 11 1 Options Execution Venue L ............. 11 1
Options Execution Venue L .............. 12 2 Options Execution Venue K ............ 12 2
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Options Execution Venue M ............. 13 2 Options Execution Venue N ............ 13 2
Options Execution Venue N ............. 14 2 Options Execution Venue M ............ 14 2
Options Execution Venue O ............. 15 2 Options Execution Venue O ............ 15 2
53 The CAT Fees are designed to recover the costs such as any changes in costs related to the 54 Section B.7, Appendix C of the CAT NMS Plan,
associated with the CAT. Accordingly, CAT Fees retirement of existing regulatory systems, such as Approval Order at 85006.
would not be affected by increases or decreases in OATS.
other non-CAT expenses incurred by the SROs,
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![23342 Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices
(C) Timing and Manner of Payment SRO proposed to adopt paragraph (c)(2) Plan and applies specific requirements
Section 11.4 of the CAT NMS Plan of the proposed fee schedule. Paragraph to Industry Members, SRO believes that
states that the Operating Committee (c)(2) of the proposed fee schedule states this proposal furthers the objectives of
shall establish a system for the that each Industry Member shall pay the Plan, as identified by the SEC, and
collection of fees authorized under the CAT Fees within thirty days after is therefore consistent with the Act.
CAT NMS Plan. The Operating receipt of an invoice or other notice SRO believes that the proposed tiered
Committee may include such collection indicating payment is due (unless a fees are reasonable. First, the total CAT
responsibility as a function of the Plan longer payment period is otherwise Fees to be collected would be directly
Processor or another administrator. To indicated). If an Industry Member fails associated with the costs of establishing
implement the payment process to be to pay any such fee when due, such and maintaining the CAT, where such
Industry Member shall pay interest on costs include Plan Processor costs and
adopted by the Operating Committee,
the outstanding balance from such due costs related to insurance, third party
paragraph (c)(1) of the proposed fee
date until such fee is paid at a per services and the operational reserve.
schedule states that the Company will
annum rate equal to the lesser of: (i) The The CAT Fees would not cover
provide each Industry Member with one
Prime Rate plus 300 basis points; or (ii) Participant services unrelated to the
invoice each quarter for its CAT Fees as
the maximum rate permitted by CAT. In addition, any surplus CAT Fees
determined pursuant to paragraph (b) of
applicable law. cannot be distributed to the individual
the proposed fee schedule, regardless of
whether the Industry Member is a 2. Statutory Basis Participants; such surpluses must be
member of multiple self-regulatory used as a reserve to offset future fees.
SRO believes that the proposed rule Given the direct relationship between
organizations. Paragraph (c)(1) further change is consistent with the provisions
states that each Industry Member will the fees and the CAT costs, SRO
of Section 6(b)(5) of the Act,57 which believes that the total level of the CAT
pay its CAT Fees to the Company via require, among other things, that the
the centralized system for the collection Fees is reasonable.
SRO rules must be designed to prevent
of CAT Fees established by the In addition, SRO believes that the
fraudulent and manipulative acts and
Company in the manner prescribed by practices, to promote just and equitable proposed CAT Fees are reasonably
the Company. SRO will provide principles of trade, and, in general, to designed to allocate the total costs of the
Industry Members with details protect investors and the public interest, CAT equitably between and among the
regarding the manner of payment of and not designed to permit unfair Participants and Industry Members, and
CAT Fees by Regulatory Circular. discrimination between customers, are therefore not unfairly
Although the exact fee collection issuers, brokers and dealer [sic], and discriminatory. As discussed in detail
system and processes for CAT fees has Section 6(b)(4) of the Act,58 which above, the proposed tiered fees impose
not yet been established, all CAT fees requires that SRO rules provide for the comparable fees on similarly situated
will be billed and collected centrally equitable allocation of reasonable dues, CAT Reporters. For example, those with
through the Company, via the Plan fees, and other charges among members a larger impact on the CAT (measured
Processor or otherwise. Although each and issuers and other persons using its via message traffic or market share) pay
Participant will adopt its own fee facilities. As discussed above, the SEC higher fees, whereas CAT Reporters
schedule regarding CAT Fees, no CAT approved the bifurcated, tiered, fixed with a smaller impact pay lower fees.
Fees or portion thereof will be collected fee funding model in the CAT NMS Correspondingly, the tiered structure
by the individual Participants. Each Plan, finding it was reasonable and that lessens the impact on smaller CAT
Industry Member will receive from the it equitably allocated fees among Reporters by imposing smaller fees on
Company one invoice for its applicable Participants and Industry Members. those CAT Reporters with less market
CAT fees, not separate invoices from SRO believes that the proposed tiered share or message traffic. In addition, the
each Participant of which it is a fees adopted pursuant to the funding funding model takes into consideration
member. The Industry Members will model approved by the SEC in the CAT affiliations between CAT Reporters,
pay the CAT Fees to the Company via NMS Plan are reasonable, equitably imposing comparable fees on such
the centralized system for the collection allocated and not unfairly affiliated entities.
of CAT fees established by the discriminatory. Moreover, SRO believes that the
Company.56 SRO believes that this proposal is division of the total CAT costs between
Section 11.4 of the CAT NMS Plan consistent with the Act because it Industry Members and Execution
also states that Participants shall require implements, interprets or clarifies the Venues, and the division of the
each Industry Member to pay all provisions of the Plan, and is designed Execution Venue portion of total costs
applicable authorized CAT Fees within to assist SRO and its Industry Members between Equity and Options Execution
thirty days after receipt of an invoice or in meeting regulatory obligations Venues, is reasonably designed to
other notice indicating payment is due pursuant to the Plan. In approving the allocate CAT costs among CAT
(unless a longer payment period is Plan, the SEC noted that the Plan ‘‘is Reporters. The 75/25 division between
otherwise indicated). Section 11.4 necessary and appropriate in the public Industry Members and Execution
further states that, if an Industry interest, for the protection of investors Venues maintains the greatest level of
Member fails to pay any such fee when and the maintenance of fair and orderly comparability across the funding model,
due, such Industry Member shall pay markets, to remove impediments to, and keeping in view that comparability
interest on the outstanding balance from perfect the mechanism of a national should consider affiliations among or
such due date until such fee is paid at between CAT Reporters (e.g., firms with
mstockstill on DSK30JT082PROD with NOTICES
market system, or is otherwise in
a per annum rate equal to the lesser of: furtherance of the purposes of the multiple Industry Members or exchange
(i) The Prime Rate plus 300 basis points; Act.’’ 59 To the extent that this proposal licenses). Similarly, the 75/25 division
or (ii) the maximum rate permitted by implements, interprets or clarifies the between Equity and Options Execution
applicable law. Therefore, in accordance Venues maintains elasticity across the
with Section 11.4 of the CAT NMS Plan, 57 15U.S.C. 78f(b)(5). funding model as well as the greatest
58 15U.S.C. 78f(b)(4). level of fee equitability and
56 Section 11.4 of the CAT NMS Plan. 59 Approval Order at 84697. comparability based on the current
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![Federal Register / Vol. 82, No. 97 / Monday, May 22, 2017 / Notices 23343
number of Equity and Options addition, ATSs and exchanges will pay Paper Comments
Execution Venues. the same fees based on market share.
Finally, SRO believes that the Therefore, SRO does not believe that the • Send paper comments in triplicate
proposed fees are reasonable because fees will impose any burden on the to Secretary, Securities and Exchange
they would provide ease of calculation, competition between ATSs and Commission, 100 F Street NE.,
ease of billing and other administrative exchanges. Accordingly, SRO believes Washington, DC 20549–1090.
functions, and predictability of a fixed that the proposed fees will minimize the All submissions should refer to File
fee. Such factors are crucial to potential for adverse effects on
estimating a reliable revenue stream for Number SR–IEX–2017–16. This file
competition between CAT Reporters in number should be included on the
the Company and for permitting CAT the market.
Reporters to reasonably predict their subject line if email is used. To help the
Furthermore, the tiered, fixed fee Commission process and review your
payment obligations for budgeting funding model limits the disincentives
purposes. comments more efficiently, please use
to providing liquidity to the market. only one method. The Commission will
B. Self-Regulatory Organization’s Therefore, the proposed fees are post all comments on the Commission’s
Statement on Burden on Competition structured to limit burdens on
Internet Web site (http://www.sec.gov/
Section 6(b)(8) of the Act 60 require competitive quoting and other liquidity
rules/sro.shtml). Copies of the
[sic] that SRO rules not impose any provision in the market.
submission, all subsequent
burden on competition that is not C. Self-Regulatory Organization’s amendments, all written statements
necessary or appropriate. SRO does not Statement on Comments on the with respect to the proposed rule
believe that the proposed rule change Proposed Rule Change Received From change that are filed with the
will result in any burden on Members, Participants, or Others Commission, and all written
competition that is not necessary or communications relating to the
appropriate in furtherance of the Written comments were neither
solicited nor received. proposed rule change between the
purposes of the Act. SRO notes that the
Commission and any person, other than
proposed rule change implements III. Date of Effectiveness of the
provisions of the CAT NMS Plan those that may be withheld from the
Proposed Rule Change and Timing for public in accordance with the
approved by the Commission, and is Commission Action
designed to assist SRO in meeting its provisions of 5 U.S.C. 552, will be
regulatory obligations pursuant to the The foregoing rule change has become available for Web site viewing and
Plan. Similarly, all national securities effective pursuant to Section printing in the Commission’s Public
exchanges and FINRA are proposing 19(b)(3)(A)(ii) 61 of the Act. Reference Room, 100 F Street NE.,
this proposed fee schedule to At any time within 60 days of the Washington, DC 20549, on official
implement the requirements of the CAT filing of the proposed rule change, the business days between the hours of
NMS Plan. Therefore, this is not a Commission summarily may 10:00 a.m. and 3:00 p.m. Copies of the
competitive fee filing and, therefore, it temporarily suspend such rule change if filing also will be available for
does not raise competition issues it appears to the Commission that such inspection and copying at the principal
between and among the exchanges and action is necessary or appropriate in the office of the Exchange. All comments
FINRA. public interest, for the protection of received will be posted without change;
Moreover, as previously described, investors, or otherwise in furtherance of the Commission does not edit personal
SRO believes that the proposed rule the purposes of the Act. If the identifying information from
change fairly and equitably allocates Commission takes such action, the submissions. You should submit only
costs among CAT Reporters. In Commission shall institute proceedings information that you wish to make
particular, the proposed fee schedule is
under Section 19(b)(2)(B) 62 of the Act to available publicly. All submissions
structured to impose comparable fees on
determine whether the proposed rule should refer to File Number SR–IEX–
similarly situated CAT Reporters, and
change should be approved or 2017–16, and should be submitted on or
lessen the impact on smaller CAT
disapproved. before June 12, 2017.
Reporters. CAT Reporters with similar
levels of CAT activity will pay similar IV. Solicitation of Comments For the Commission, by the Division of
fees. For example, Industry Members Trading and Markets, pursuant to delegated
(other than Execution Venue ATSs) with Interested persons are invited to authority.63
higher levels of message traffic will pay submit written data, views, and
Eduardo A. Aleman,
higher fees, and those with lower levels arguments concerning the foregoing,
including whether the proposed rule Assistant Secretary.
of message traffic will pay lower fees. [FR Doc. 2017–10296 Filed 5–19–17; 8:45 am]
Similarly, Execution Venue ATSs and change is consistent with the Act.
other Execution Venues with larger Comments may be submitted by any of BILLING CODE 8011–01–P
market share will pay higher fees, and the following methods:
those with lower levels of market share Electronic Comments
will pay lower fees. Therefore, given
that there is generally a relationship • Use the Commission’s Internet
between message traffic and market comment form (http://www.sec.gov/
share to the CAT Reporter’s size, smaller rules/sro.shtml); or
mstockstill on DSK30JT082PROD with NOTICES
CAT Reporters generally pay less than • Send an email to rule-
larger CAT Reporters. Accordingly, SRO comments@sec.gov. Please include File
does not believe that the CAT Fees Number SR–IEX–2017–16 on the subject
would have a disproportionate effect on line.
smaller or larger CAT Reporters. In
61 15 U.S.C. 78s(b)(3)(A)(ii).
60 15 U.S.C. 78f(b)(8). 62 15 U.S.C. 78s(b)(2)(B). 63 17 CFR 200.30–3(a)(12).
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Document Created: 2018-11-08 08:49:59
Document Modified: 2018-11-08 08:49:59
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 23325 |
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