82 FR 23895 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Section X of the ISE Fee Schedule
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 99 (May 24, 2017)
Federal Register Volume 82, Issue 99 (May 24, 2017)
| Page Range | 23895-23912 | |
| FR Document | 2017-10583 |
[Federal Register Volume 82, Number 99 (Wednesday, May 24, 2017)] [Notices] [Pages 23895-23912] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-10583] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80715; File No. SR-ISE-2017-45] Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Section X of the ISE Fee Schedule May 18, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 12, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ The Exchange originally filed the proposed rule change on May 3, 2017 under File No. SR-ISE-2017-40. The Exchange subsequently withdrew that filing on May 12, 2017 and filed this proposed rule change. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a fee schedule 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'') at Section X of the ISE Fee Schedule. The text of the proposed rule change is available on the Exchange's Web site at www.ise.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to adopt a fee schedule to establish the fees for Industry Members related to the CAT NMS Plan. 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,\4\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\5\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \6\ and Rule 608 of Regulation NMS thereunder,\7\ the CAT NMS Plan.\8\ 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,\9\ and approved by the Commission, as modified, on November 15, 2016.\10\ 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.\11\ 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'').\12\ 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.\13\ Accordingly, the Exchange 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. --------------------------------------------------------------------------- \4\ 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 Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21, 2017); Securities Exchange Act Release No. 80326 (March 29, 2017), 82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No. 80325 (March 29, 2017), 82 FR 16445 (April 4, 2017). \5\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Release No. 79902 (Jan. 30, 2017), 82 FR 9258 (February 3, 2017). \6\ 15 U.S.C. 78k-1. \7\ 17 CFR 242.608. \8\ 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. \9\ Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016). \10\ Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (``Approval Order''). \11\ The Plan also serves as the limited liability company agreement for the Company. \12\ Section 11.1(b) of the CAT NMS Plan. \13\ Id. --------------------------------------------------------------------------- [[Page 23896]] (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) \14\ --------------------------------------------------------------------------- \14\ 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 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. ISE will issue an information circular (``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'' \15\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \16\ --------------------------------------------------------------------------- \15\ Approval Order at 84796. \16\ 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.'' \17\ The Commission further noted the following: --------------------------------------------------------------------------- \17\ 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 [[Page 23897]] 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.\18\ --------------------------------------------------------------------------- \18\ 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.\19\ 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.\20\ 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.'' \21\ --------------------------------------------------------------------------- \19\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \20\ 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. \21\ 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 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.\22\ 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. --------------------------------------------------------------------------- \22\ 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.\23\ 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.\24\ 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.\25\ --------------------------------------------------------------------------- \23\ Approval Order at 85005. \24\ Id. \25\ 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)'' \26\ 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.\27\ 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.\28\ --------------------------------------------------------------------------- \26\ Id. at 84796. \27\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \28\ 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.\29\ 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.\30\ --------------------------------------------------------------------------- \29\ Section 11.2(c) of the CAT NMS Plan. \30\ 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.'' \31\ 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.'' \32\ --------------------------------------------------------------------------- \31\ Section 11.2(e) of the CAT NMS Plan. \32\ 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 [[Page 23898]] distributed to the Participants as profits.\33\ 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.'' \34\ 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.'' \35\ --------------------------------------------------------------------------- \33\ Id. at 84792. \34\ 26 U.S.C. 501(c)(6). \35\ 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. ISE 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 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 [[Page 23899]] 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 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] TN24MY17.000 [[Page 23900]] ------------------------------------------------------------------------ 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 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.\36\ 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.\37\ 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. --------------------------------------------------------------------------- \36\ 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 (March 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. \37\ 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.\38\ --------------------------------------------------------------------------- \38\ 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 [[Page 23901]] 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).'' \39\ --------------------------------------------------------------------------- \39\ 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.\40\ --------------------------------------------------------------------------- \40\ 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 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, [[Page 23902]] 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 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 ---------------------------------------------------------------------------------------------------------------- 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 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: [[Page 23903]] ---------------------------------------------------------------------------------------------------------------- Percentage of Options Percentage of Percentage of Options Execution Venue tier Execution Execution total recovery Venues Venue 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 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). [[Page 23904]] (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.\41\ --------------------------------------------------------------------------- \41\ 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 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. --------------------------------------------------------------------------- \42\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor................. Operational Costs...... $37,500,000 Non-Plan Processor............. Third Party Support 5,200,000 Costs. Operational Reserve.... \42\ 5,000,000 Insurance Costs........ 3,000,000 --------------- 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: \43\ --------------------------------------------------------------------------- \43\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. --------------------------------------------------------------------------- For Industry Members (other than Execution Venue ATSs): --------------------------------------------------------------------------- \44\ 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 \44\ ---------------------------------------------------------------------------------------------------------------- 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 [[Page 23905]] 9............................................................... 22 66 264 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for NMS Stocks and OTC Equity Securities: --------------------------------------------------------------------------- \45\ 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 \45\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $21,125 $63,375 $253,500 2............................................................... 12,940 38,820 155,280 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for Listed Options: --------------------------------------------------------------------------- \46\ 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). ---------------------------------------------------------------------------------------------------------------- Monthly CAT Quarterly CAT CAT fees paid Tier fee fee annually \46\ ---------------------------------------------------------------------------------------------------------------- 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. 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 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 recovery members 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 [[Page 23906]] Tier 7............................................... 285 Tier 8............................................... 328 Tier 9............................................... 735 ------------------ Total............................................ 1,631 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN24MY17.001 [[Page 23907]] Calculation of Annual Tier Fees for Equity Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated number of Equity Execution Venue tier Equity Execution Venues ------------------------------------------------------------------------ Tier 1.................................................. 13 Tier 2.................................................. 40 --------------- Total............................................... 53 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN24MY17.002 Calculation of Annual Tier Fees for Options Execution Venues (``EV'') ---------------------------------------------------------------------------------------------------------------- Percentage of Options Percentage of Percentage of Options Execution Venue tier Execution Execution total recovery Venues Venue Recovery ---------------------------------------------------------------------------------------------------------------- Tier 1.......................................................... 75.00 20.00 5.00 Tier 2.......................................................... 25.00 5.00 1.25 ----------------------------------------------- Total....................................................... 100 25 6.25 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Estimated Number of Options Execution Venue tier Options Execution Venues ------------------------------------------------------------------------ Tier 1.................................................. 11 Tier 2.................................................. 4 --------------- Total............................................... 15 ------------------------------------------------------------------------ [GRAPHIC] [TIFF OMITTED] TN24MY17.003 Traceability of Total CAT Fees [[Page 23908]] ---------------------------------------------------------------------------------------------------------------- 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 1,740 570,720 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 ---------------------------------------------------------------------------------------------------------------- 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 \47\................. .......................... .............. .............. 9,036 ---------------------------------------------------------------------------------------------------------------- (F) Comparability of Fees --------------------------------------------------------------------------- \47\ 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: \48\ --------------------------------------------------------------------------- \48\ 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)...... [[Page 23909]] 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 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. ISE will issue a 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.\49\ 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.\50\ 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 ISE 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). --------------------------------------------------------------------------- \49\ 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. \50\ 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. ISE 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, ISE 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. [[Page 23910]] -------------------------------------------------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------------------------------------------------- (3) Proposed CAT Fee Schedule ISE proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on ISE'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 900 (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 ISE 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 Quarterly Tier industry CAT fee members ------------------------------------------------------------------------ 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.\51\ 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: --------------------------------------------------------------------------- \51\ 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. [[Page 23911]] ------------------------------------------------------------------------ Percentage of Equity Quarterly Tier Execution CAT fee Venues ------------------------------------------------------------------------ 1............................................. 25.00 $63,375 2............................................. 75.00 38,820 ------------------------------------------------------------------------ (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. ISE will provide Industry Members with details regarding the manner of payment of CAT Fees by 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.\52\ --------------------------------------------------------------------------- \52\ 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, ISE 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 The Exchange believes that its proposal is consistent with Section 6(b) of the Act,\53\ in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,\54\ in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility, is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, and is 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. --------------------------------------------------------------------------- \53\ 15 U.S.C. 78f(b). \54\ 15 U.S.C. 78f(b)(4) and (5). --------------------------------------------------------------------------- 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. The Exchange 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. ISE 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 the Exchange 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.'' \55\ To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, ISE believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. --------------------------------------------------------------------------- \55\ Approval Order at 84697. --------------------------------------------------------------------------- ISE 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, ISE believes that the total level of the CAT Fees is reasonable. In addition, the Exchange 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, ISE 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 [[Page 23912]] 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 number of Equity and Options Execution Venues. Finally, ISE 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 \56\ requires that SRO rules not impose any burden on competition that is not necessary or appropriate. ISE 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. ISE notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist ISE 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. --------------------------------------------------------------------------- \56\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- Moreover, as previously described, ISE 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, the Exchange 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, ISE does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, ISE 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 No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.\57\ 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 (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. --------------------------------------------------------------------------- \57\ 15 U.S.C. 78s(b)(3)(A)(ii). --------------------------------------------------------------------------- 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-ISE-2017-45 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-ISE-2017-45. 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-ISE-2017-45, and should be submitted on or before June 14, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\58\ --------------------------------------------------------------------------- \58\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-10583 Filed 5-23-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23895
estimate of the burden of the proposed I. Self-Regulatory Organization’s Arca, Inc. and NYSE National, Inc.5
collection of information; (c) ways to Statement of the Terms of Substance of (collectively, the ‘‘Participants’’) filed
enhance the quality, utility, and clarity the Proposed Rule Change with the Commission, pursuant to
of the information collected; and (d) The Exchange proposes to adopt a fee Section 11A of the Exchange Act 6 and
ways to minimize the burden of the schedule to establish the fees for Rule 608 of Regulation NMS
collection of information on Industry Members related to the thereunder,7 the CAT NMS Plan.8 The
respondents, including through the use National Market System Plan Governing Participants filed the Plan to comply
of automated collection techniques or the Consolidated Audit Trail (the ‘‘CAT with Rule 613 of Regulation NMS under
other forms of information technology. NMS Plan’’ or ‘‘Plan’’) at Section X of the Exchange Act. The Plan was
Consideration will be given to the ISE Fee Schedule. published for comment in the Federal
comments and suggestions submitted in The text of the proposed rule change Register on May 17, 2016,9 and
writing within 60 days of this is available on the Exchange’s Web site approved by the Commission, as
publication. at www.ise.com, at the principal office modified, on November 15, 2016.10 The
An agency may not conduct or of the Exchange, and at the Plan is designed to create, implement
sponsor, and a person is not required to Commission’s Public Reference Room. and maintain a consolidated audit trail
respond to, a collection of information (‘‘CAT’’) that would capture customer
II. Self-Regulatory Organization’s
under the PRA unless it displays a and order event information for orders
Statement of the Purpose of, and
currently valid OMB control number. in NMS Securities and OTC Equity
Statutory Basis for, the Proposed Rule
Please direct your written comments Change Securities, across all markets, from the
to: Pamela Dyson, Director/Chief time of order inception through routing,
Information Officer, Securities and In its filing with the Commission, the cancellation, modification, or execution
Exchange Commission, c/o Remi Pavlik- Exchange included statements in a single consolidated data source.
Simon, 100 F Street NE., Washington, concerning the purpose of and basis for
The Plan accomplishes this by creating
DC 20549, or send an email to: PRA_ the proposed rule change and discussed
CAT NMS, LLC (the ‘‘Company’’), of
Mailbox@sec.gov. any comments it received on the
which each Participant is a member, to
proposed rule change. The text of these
Dated: May 19, 2017. statements may be examined at the operate the CAT.11 Under the CAT NMS
Eduardo A. Aleman, places specified in Item IV below. The Plan, the Operating Committee of the
Exchange has prepared summaries, set Company (‘‘Operating Committee’’) has
Assistant Secretary.
forth in sections A, B, and C below, of discretion to establish funding for the
[FR Doc. 2017–10618 Filed 5–23–17; 8:45 am]
the most significant aspects of such Company to operate the CAT, including
BILLING CODE 8011–01–P
statements. establishing fees that the Participants
will pay, and establishing fees for
A. Self-Regulatory Organization’s Industry Members that will be
SECURITIES AND EXCHANGE Statement of the Purpose of, and the implemented by the Participants (‘‘CAT
COMMISSION Statutory Basis for, the Proposed Rule Fees’’).12 The Participants are required
Change
to file with the SEC under Section 19(b)
[Release No. 34–80715; File No. SR–ISE– 1. Purpose of the Exchange Act any such CAT Fees
2017–45]
The purpose of the proposed rule applicable to Industry Members that the
Self-Regulatory Organizations; Nasdaq change is to adopt a fee schedule to Operating Committee approves.13
ISE, LLC; Notice of Filing and establish the fees for Industry Members Accordingly, the Exchange submits this
Immediate Effectiveness of Proposed related to the CAT NMS Plan. fee filing to propose the Consolidated
Rule Change To Adopt Section X of the Bats BYX Exchange, Inc., Bats BZX Audit Trail Funding Fees, which will
ISE Fee Schedule Exchange, Inc., Bats EDGA Exchange, require Industry Members that are SRO
Inc., Bats EDGX Exchange, Inc., BOX members to pay the CAT Fees
May 18, 2017. Options Exchange LLC, C2 Options determined by the Operating
Pursuant to Section 19(b)(1) of the Exchange, Incorporated, Chicago Board Committee.
Securities Exchange Act of 1934 (‘‘Act’’ Options Exchange, Incorporated,
or ‘‘Exchange Act’’),1 and Rule 19b–4 Chicago Stock Exchange, Inc., Financial 5 National Stock Exchange, Inc. has been renamed
Industry Regulatory Authority, Inc. NYSE National, Inc. See Securities Exchange Act
thereunder,2 notice is hereby given that Release No. 79902 (Jan. 30, 2017), 82 FR 9258
on May 12, 2017, Nasdaq ISE, LLC (‘‘FINRA’’), Investors’ Exchange LLC, (February 3, 2017).
(‘‘ISE’’ or ‘‘Exchange’’) filed with the Miami International Securities 6 15 U.S.C. 78k–1.
Securities and Exchange Commission Exchange, LLC, MIAX PEARL, LLC, 7 17 CFR 242.608.
(‘‘SEC’’ or ‘‘Commission’’) the proposed NASDAQ BX, Inc., Nasdaq GEMX, LLC, 8 See Letter from the Participants to Brent J.
Nasdaq ISE, LLC, Nasdaq MRX, LLC,4 Fields, Secretary, Commission, dated September 30,
rule change as described in Items I, II, 2014; and Letter from Participants to Brent J. Fields,
and III below, which Items have been NASDAQ PHLX LLC, The NASDAQ Secretary, Commission, dated February 27, 2015.
prepared by the Exchange.3 The Stock Market LLC, New York Stock On December 24, 2015, the Participants submitted
Commission is publishing this notice to Exchange LLC, NYSE MKT LLC, NYSE an amendment to the CAT NMS Plan. See Letter
from Participants to Brent J. Fields, Secretary,
solicit comments on the proposed rule
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Commission, dated December 23, 2015.
change from interested persons. 4 ISE Gemini, LLC, ISE Mercury, LLC and
9 Securities Exchange Act Release No. 77724
International Securities Exchange, LLC have been
(April 27, 2016), 81 FR 30614 (May 17, 2016).
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, 10 Securities Exchange Act Release No. 79318
1 15 U.S.C. 78s(b)(1). and Nasdaq ISE, LLC, respectively. See Securities
2 17 CFR 240.19b–4. Exchange Act Release No. 80248 (March 15, 2017), (November 15, 2016), 81 FR 84696 (November 23,
3 The Exchange originally filed the proposed rule 82 FR 14547 (March 21, 2017); Securities Exchange 2016) (‘‘Approval Order’’).
11 The Plan also serves as the limited liability
change on May 3, 2017 under File No. SR–ISE– Act Release No. 80326 (March 29, 2017), 82 FR
2017–40. The Exchange subsequently withdrew that 16460 (April 4, 2017); and Securities Exchange Act company agreement for the Company.
12 Section 11.1(b) of the CAT NMS Plan.
filing on May 12, 2017 and filed this proposed rule Release No. 80325 (March 29, 2017), 82 FR 16445
change. (April 4, 2017). 13 Id.
VerDate Sep<11>2014 19:43 May 23, 2017 Jkt 241001 PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 E:\FR\FM\24MYN1.SGM 24MYN1](https://thefederalregister.org/doc/82_FR_23994/page/1.svg)
![23896 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
(1) Executive Summary • Execution Venue Fees. Each Equity within 30 days. The quarterly invoices
The following provides an executive Execution Venue will be placed in one will identify within which tier the
summary of the CAT funding model of two tiers of fixed fees based on Industry Member falls. (See Section
approved by the Operating Committee, market share, and each Options 3(a)(3)(C) [sic] below)
as well as Industry Members’ rights and Execution Venue will be placed in one • Centralized Payment. Each Industry
obligations related to the payment of of two tiers of fixed fees based on Member will receive from the Company
CAT Fees calculated pursuant to the market share. Equity Execution Venue one invoice for its applicable CAT Fees,
CAT funding model. A detailed market share will be determined by not separate invoices from each
description of the CAT funding model calculating each Equity Execution Participant of which it is a member. The
and the CAT Fees follows this executive Venue’s proportion of the total volume Industry Members will pay its CAT Fees
summary. of NMS Stock and OTC Equity shares to the Company via the centralized
reported by all Equity Execution Venues system for the collection of CAT Fees
(A) CAT Funding Model during the relevant time period. established by the Operating Committee.
• CAT Costs. The CAT funding model Similarly, market share for Options (See Section 3(a)(3)(C) [sic] below)
is designed to establish CAT-specific Execution Venues will be determined by • Billing Commencement. Industry
fees to collectively recover the costs of calculating each Options Execution Members will begin to receive invoices
building and operating the CAT from all Venue’s proportion of the total volume for CAT Fees as promptly as possible
CAT Reporters, including Industry of Listed Options contracts reported by following the establishment of a billing
Members and Participants. The overall all Options Execution Venues during mechanism. ISE will issue an
CAT costs for the calculation of the CAT the relevant time period. Equity information circular (‘‘Circular’’) to its
Fees in this fee filing are comprised of Execution Venues with a larger market members when the billing mechanism is
Plan Processor CAT costs and non-Plan share will pay a larger CAT Fee than established, specifying the date when
Processor CAT costs incurred, and Equity Execution Venues with a smaller such invoicing of Industry Members
estimated to be incurred, from market share. Similarly, Options will commence. (See Section 3(a)(2)(G)
November 21, 2016 through November Execution Venues with a larger market [sic] below)
21, 2017. (See Section 3(a)(2)(E) [sic] share will pay a larger CAT Fee than
Options Execution Venues with a (2) Description of the CAT Funding
below) 14 Model
• Bifurcated Funding Model. The smaller market share. (See Section
CAT NMS Plan requires a bifurcated 3(a)(2)(C) [sic] below) Article XI of the CAT NMS Plan
funding model, where costs associated • Cost Allocation. For the reasons requires the Operating Committee to
with building and operating the CAT discussed below, in designing the approve the operating budget, including
would be borne by (1) Participants and model, the Operating Committee projected costs of developing and
Industry Members that are Execution determined that 75 percent of total costs operating the CAT for the upcoming
Venues for Eligible Securities through recovered would be allocated to year. As set forth in Article XI of the
fixed tier fees based on market share, Industry Members (other than Execution CAT NMS Plan, the CAT NMS Plan
and (2) Industry Members (other than Venue ATSs) and 25 percent would be requires a bifurcated funding model,
alternative trading systems (‘‘ATSs’’) allocated to Execution Venues. In where costs associated with building
that execute transactions in Eligible addition, the Operating Committee and operating the Central Repository
Securities (‘‘Execution Venue ATSs’’)) determined to allocate 75 percent of would be borne by (1) Participants and
through fixed tier fees based on message Execution Venue costs recovered to Industry Members that are Execution
traffic for Eligible Securities. (See Equity Execution Venues and 25 percent Venues through fixed tier fees based on
Section 3(a)(2) [sic] below) to Options Execution Venues. (See market share, and (2) Industry Members
• Industry Member Fees. Each Section 3(a)(2)(D) [sic] below) (other than Execution Venue ATSs)
Industry Member (other than Execution • Comparability of Fees. The CAT through fixed tier fees based on message
Venue ATSs) will be placed into one of funding model requires that the CAT traffic. In its order approving the CAT
nine tiers of fixed fees, based on Fees charged to the CAT Reporters with NMS Plan, the Commission determined
‘‘message traffic’’ in Eligible Securities the most CAT-related activity (measured that the proposed funding model was
for a defined period (as discussed by market share and/or message traffic, ‘‘reasonable’’ 15 and ‘‘reflects a
below). Prior to the start of CAT as applicable) are generally comparable reasonable exercise of the Participants’
reporting, ‘‘message traffic’’ will be (where, for these comparability funding authority to recover the
comprised of historical equity and purposes, the tiered fee structure takes Participants’ costs related to the
equity options orders, cancels and into consideration affiliations between CAT.’’ 16
quotes provided by each exchange and or among CAT Reporters, whether More specifically, the Commission
FINRA over the previous three months. Execution Venues and/or Industry stated in approving the CAT NMS Plan
After an Industry Member begins Members). (See Section 3(a)(2)(F) [sic] that ‘‘[t]he Commission believes that the
reporting to the CAT, ‘‘message traffic’’ below) proposed funding model is reasonably
will be calculated based on the Industry (B) CAT Fees for Industry Members designed to allocate the costs of the CAT
Member’s Reportable Events reported to between the Participants and Industry
• Fee Schedule. The quarterly CAT Members.’’ 17 The Commission further
the CAT. Industry Members with lower Fees for each tier for Industry Members
levels of message traffic will pay a lower noted the following:
are set forth in the two fee schedules in
asabaliauskas on DSK3SPTVN1PROD with NOTICES
fee and Industry Members with higher the Consolidated Audit Trail Funding The Commission believes that the
levels of message traffic will pay a proposed funding model reflects a reasonable
Fees, one for Equity ATSs and one for exercise of the Participants’ funding
higher fee. (See Section 3(a)(2)(B) [sic] Industry Members other than Equity
below) authority to recover the Participants’ costs
ATSs. (See Section 3(a)(3)(B) [sic] related to the CAT. The CAT is a regulatory
14 The Commission notes that references to
below)
Sections 3(a)(2) and 3(a)(3) in this Executive
• Quarterly Invoices. Industry 15 Approval Order at 84796.
Summary should be instead to Sections II.A.1.(2) Members will be billed quarterly for 16 Id. at 84794.
and II.A.1.(3), respectively. CAT Fees, with the invoices payable 17 Id. at 84795.
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23897
facility jointly owned by the Participants and and even billions of orders in the same The CAT NMS Plan provides that the
. . . the Exchange Act specifically permits period. Accordingly, the CAT NMS Plan Operating Committee will use different
the Participants to charge their members fees includes a tiered approach to fees. The criteria to establish fees for Execution
to fund their self-regulatory obligations. The
tiered approach helps ensure that fees Venues and non-Execution Venues due
Commission further believes that the
proposed funding model is designed to are equitably allocated among similarly to the fundamental differences between
impose fees reasonably related to the situated CAT Reporters and furthers the the two types of entities. In particular,
Participants’ self-regulatory obligations goal of lessening the impact on smaller the CAT NMS Plan provides that fees
because the fees would be directly associated firms.22 The self-regulatory charged to CAT Reporters that are
with the costs of establishing and organizations considered several Execution Venues will be based on the
maintaining the CAT, and not unrelated SRO approaches to developing a tiered level of market share and that costs
services.18 model, including defining fee tiers charged to Industry Members (other
Accordingly, the funding model based on such factors as size of firm, than Execution Venue ATSs) will be
imposes fees on both Participants and message traffic or trading dollar volume. based upon message traffic.29 Because
Industry Members. After analyzing the alternatives, it was most Participant message traffic consists
In addition, as discussed in Appendix concluded that the tiering should be of quotations, and Participants usually
C of the CAT NMS Plan, the Operating based on the relative impact of CAT disseminate quotations in all
Committee considered the advantages Reporters on the CAT System. instruments they trade, regardless of
and disadvantages of a variety of Accordingly, the CAT NMS Plan execution volume, Execution Venues
alternative funding and cost allocation contemplates that costs will be allocated that are Participants generally
models before selecting the proposed across the CAT Reporters on a tiered disseminate similar amounts of message
model.19 After analyzing the various basis to allocate costs to those CAT traffic. Accordingly, basing fees for
alternatives, the Operating Committee Reporters that contribute more to the Execution Venues on message traffic
determined that the proposed tiered, costs of creating, implementing and would not provide the same degree of
fixed fee funding model provides a maintaining the CAT.23 The fees to be differentiation among Execution Venues
variety of advantages in comparison to assessed at each tier are calculated so as that it does among Industry Members
the alternatives. First, the fixed fee to recoup a proportion of costs (other than Execution Venue ATSs). In
model, as opposed to a variable fee appropriate to the message traffic or contrast, execution volume more
model, provides transparency, ease of market share (as applicable) from CAT accurately delineates the different levels
calculation, ease of billing and other Reporters in each tier. Therefore, of trading activity of Execution
administrative functions, and Industry Members generating the most Venues.30
predictability of a fixed fee. Such factors message traffic will be in the higher The CAT NMS Plan’s funding model
are crucial to estimating a reliable tiers, and therefore be charged a higher also is structured to avoid a ‘‘reduction
revenue stream for the Company and for fee. Industry Members with lower levels in market quality.’’ 31 The tiered, fixed
permitting CAT Reporters to reasonably of message traffic will be in lower tiers fee funding model is designed to limit
predict their payment obligations for and will be assessed a smaller fee for the the disincentives to providing liquidity
budgeting purposes.20 Additionally, a CAT.24 Correspondingly, Execution to the market. For example, the
strictly variable or metered funding Venues with the highest market share Participants expect that a firm that had
model based on message volume would will be in the top tier, and therefore will a large volume of quotes would likely be
be far more likely to affect market be charged a higher fee. Execution categorized in one of the upper tiers,
behavior and place an inappropriate Venues with a lower market share will and would not be assessed a fee for this
burden on competition. Moreover, as be in the lower tier and will be assessed traffic directly as they would under a
the SEC noted in approving the CAT a smaller fee for the CAT.25 more directly metered model. In
NMS Plan, ‘‘[t]he Participants also have The Commission also noted in contrast, strictly variable or metered
offered a reasonable basis for approving the CAT NMS Plan that funding models based on message
establishing a funding model based on ‘‘[t]he Participants have offered a volume were far more likely to affect
broad tiers, in that it be may be easier credible justification for using different market behavior. In approving the CAT
to implement.’’ 21 criteria to charge Execution Venues NMS Plan, the SEC stated that ‘‘[t]he
In addition, multiple reviews of (market share) and Industry Members Participants also offered a reasonable
current broker-dealer order and trading (message traffic)’’ 26 in the CAT funding basis for establishing a funding model
data submitted under existing reporting model. While there are multiple factors
based on broad tiers, in that it may be
requirements showed a wide range in that contribute to the cost of building,
. . . less likely to have an incremental
activity among broker-dealers, with a maintaining and using the CAT,
deterrent effect on liquidity
number of broker-dealers submitting processing and storage of incoming
provision.’’ 32
fewer than 1,000 orders per month and message traffic is one of the most The CAT NMS Plan is structured to
other broker-dealers submitting millions significant cost drivers for the CAT.27 avoid potential conflicts raised by the
Thus, the CAT NMS Plan provides that Operating Committee determining fees
18 Id. at 84794.
the fees payable by Industry Members applicable to its own members—the
19 Section B.7, Appendix C of the CAT NMS Plan, (other than Execution Venue ATSs) will
Participants. First, the Company will be
Approval Order at 85006. be based on the message traffic
operated on a ‘‘break-even’’ basis, with
20 In choosing a tiered fee structure, the SROs generated by such Industry Member.28
concluded that the variety of benefits offered by a fees imposed to cover costs and an
asabaliauskas on DSK3SPTVN1PROD with NOTICES
tiered fee structure, discussed above, outweighed 22 Section B.7, Appendix C of the CAT NMS Plan,
appropriate reserve. Any surpluses will
the fact that Industry Members in any particular tier Approval Order at 85006. be treated as an operational reserve to
would pay different rates per message traffic order 23 Approval Order at 85005. offset future fees and will not be
event (e.g., an Industry Member with the largest 24 Id.
amount of message traffic in one tier would pay a
25 Id. 29 Section11.2(c) of the CAT NMS Plan.
smaller amount per order event than an Industry
26 Id. at 84796. 30 SectionB.7, Appendix C of the CAT NMS Plan,
Member in the same tier with the least amount of
message traffic). Such variation is the natural result 27 Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005.
of a tiered fee structure. Approval Order at 85005. 31 Section 11.2(e) of the CAT NMS Plan.
21 Approval Order at 84796. 28 Section 11.3(b) of the CAT NMS Plan. 32 Approval Order at 84796.
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![23898 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
distributed to the Participants as (A) Funding Principles message traffic, include message traffic
profits.33 To ensure that the Section 11.2 of the CAT NMS Plan generated by: (i) An ATS that does not
Participants’ operation of the CAT will sets forth the principles that the execute orders that is sponsored by such
not contribute to the funding of their Operating Committee applied in Industry Member; and (ii) routing orders
other operations, Section 11.1(c) of the establishing the funding for the to and from any ATS sponsored by such
CAT NMS Plan specifically states that Company. The Operating Committee has Industry Member. In addition, the
‘‘[a]ny surplus of the Company’s considered these funding principles as Industry Member fees will apply to
revenues over its expenses shall be Industry Members that act as routing
well as the other funding requirements
treated as an operational reserve to broker-dealers for exchanges. The
set forth in the CAT NMS Plan and in
offset future fees.’’ In addition, as set Industry Member fees will not be
Rule 613 in developing the proposed
forth in Article VIII of the CAT NMS applicable, however, to an ATS that
funding model. The following are the
Plan, the Company ‘‘intends to operate qualifies as an Execution Venue, as
funding principles in Section 11.2 of the
discussed in more detail in the section
in a manner such that it qualifies as a CAT NMS Plan:
on Execution Venue tiering.
‘business league’ within the meaning of • To create transparent, predictable In accordance with Section 11.3(b),
Section 501(c)(6) of the [Internal revenue streams for the Company that the Operating Committee approved a
Revenue] Code.’’ To qualify as a are aligned with the anticipated costs to tiered fee structure for Industry
business league, an organization must build, operate and administer the CAT Members (other than Execution Venue
‘‘not [be] organized for profit and no and other costs of the Company; ATSs) as described in this section. In
part of the net earnings of [the • To establish an allocation of the determining the tiers, the Operating
organization can] inure[ ] to the benefit Company’s related costs among Committee considered the funding
of any private shareholder or Participants and Industry Members that principles set forth in Section 11.2 of
individual.’’ 34 As the SEC stated when is consistent with the Exchange Act, the CAT NMS Plan, seeking to create
approving the CAT NMS Plan, ‘‘the taking into account the timeline for funding tiers that take into account the
Commission believes that the implementation of the CAT and relative impact on CAT System
Company’s application for Section distinctions in the securities trading resources of different Industry Members,
501(c)(6) business league status operations of Participants and Industry and that establish comparable fees
addresses issues raised by commenters Members and their relative impact upon among the CAT Reporters with the most
the Company’s resources and Reportable Events. The Operating
about the Plan’s proposed allocation of
operations; Committee has determined that
profit and loss by mitigating concerns
• To establish a tiered fee structure in establishing nine tiers results in the
that the Company’s earnings could be
which the fees charged to: (i) CAT fairest allocation of fees, best
used to benefit individual Reporters that are Execution Venues,
Participants.’’ 35 distinguishing between Industry
including ATSs, are based upon the Members with differing levels of
Finally, by adopting a CAT-specific level of market share; (ii) Industry message traffic. Thus, each such
fee, the Participants will be fully Members’ non-ATS activities are based Industry Member will be placed into
transparent regarding the costs of the upon message traffic; (iii) the CAT one of nine tiers of fixed fees, based on
CAT. Charging a general regulatory fee, Reporters with the most CAT-related ‘‘message traffic’’ for a defined period
which would be used to cover CAT activity (measured by market share and/ (as discussed below). A nine tier
costs as well as other regulatory costs, or message traffic, as applicable) are structure was selected to provide the
would be less transparent than the generally comparable (where, for these widest range of levels for tiering
selected approach of charging a fee comparability purposes, the tiered fee Industry Members such that Industry
designated to cover CAT costs only. structure takes into consideration Members submitting significantly less
affiliations between or among CAT message traffic to the CAT would be
A full description of the funding
Reporters, whether Execution Venue adequately differentiated from Industry
model is set forth below. This
and/or Industry Members); Members submitting substantially more
description includes the framework for
• To provide for ease of billing and message traffic. The Operating
the funding model as set forth in the other administrative functions; Committee considered historical
CAT NMS Plan, as well as the details as • To avoid any disincentives such as message traffic generated by Industry
to how the funding model will be placing an inappropriate burden on Members across all exchanges and as
applied in practice, including the competition and a reduction in market submitted to FINRA’s Order Audit Trail
number of fee tiers and the applicable quality; and System (‘‘OATS’’), and considered the
fees for each tier. ISE notes that the • To build financial stability to distribution of firms with similar levels
complete funding model is described support the Company as a going of message traffic, grouping together
below, including those fees that are to concern. firms with similar levels of message
be paid by the Participants. The traffic. Based on this, the Operating
proposed Consolidated Audit Trail (B) Industry Member Tiering
Committee determined that nine tiers
Funding Fees, however, do not apply to Under Section 11.3(b) of the CAT would best group firms with similar
the Participants; the proposed NMS Plan, the Operating Committee is levels of message traffic, charging those
Consolidated Audit Trail Funding Fees required to establish fixed fees to be firms with higher impact on the CAT
only apply to Industry Members. The payable by Industry Members, based on
asabaliauskas on DSK3SPTVN1PROD with NOTICES
more, while lowering the burden of
CAT fees for Participants will be message traffic generated by such Industry Members that have less CAT-
imposed separately by the Operating Industry Member, with the Operating related activity.
Committee pursuant to the CAT NMS Committee establishing at least five and Each Industry Member (other than
Plan. no more than nine tiers. Execution Venue ATSs) will be ranked
The CAT NMS Plan clarifies that the by message traffic and tiered by
33 Id.
at 84792. fixed fees payable by Industry Members predefined Industry Member
34 26U.S.C. 501(c)(6). pursuant to Section 11.3(b) shall, in percentages (the ‘‘Industry Member
35 Approval Order at 84793. addition to any other applicable Percentages’’). The Operating
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![23900 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
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 following Industry Member Percentages
Operating Committee approved the and Recovery Allocations:
Percentage
Percentage Percentage
of industry
Industry member tier of industry of total
member
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
For the purposes of creating these reporting, orders would be comprised of by a member of an exchange or FINRA
tiers based on message traffic, the the total number of equity and equity over the prior three-month period.
Operating Committee determined to options orders received and originated After an Industry Member begins
define the term ‘‘message traffic’’ by a member of an exchange or FINRA reporting to the CAT, ‘‘message traffic’’
separately for the period before the over the previous three-month period, will be calculated based on the Industry
commencement of CAT reporting and including principal orders, cancel/ Member’s Reportable Events reported to
for the period after the start of CAT replace orders, market maker orders the CAT as will be defined in the
reporting. The different definition for originated by a member of an exchange, Technical Specifications.38
message traffic is necessary as there will The Operating Committee has
and reserve (iceberg) orders as well as determined to calculate fee tiers every
be no Reportable Events as defined in
order routes and executions originated three months, on a calendar quarter
the Plan, prior to the commencement of
by a member of FINRA, and excluding basis, based on message traffic from the
CAT reporting. Accordingly, prior to the
start of CAT reporting, ‘‘message traffic’’ order rejects and implied orders.37 In prior three months. Based on its
will be comprised of historical equity addition, prior to the start of CAT analysis of historical data, the Operating
and equity options orders, cancels and reporting, cancels would be comprised Committee believes that calculating tiers
quotes provided by each exchange and of the total number of equity and equity based on three months of data will
FINRA over the previous three option cancels received and originated provide the best balance between
months.36 Prior to the start of CAT by a member of an exchange or FINRA reflecting changes in activity by
over a three-month period, excluding Industry Members while still providing
36 The SEC approved exemptive relief permitting order modifications (e.g., order updates, predictability in the tiering for Industry
Options Market Maker quotes to be reported to the order splits, partial cancels). Members. Because fee tiers will be
Central Repository by the relevant Options calculated based on message traffic from
Exchange in lieu of requiring that such reporting be Furthermore, prior to the start of CAT
done by both the Options Exchange and the Options reporting, quotes would be comprised of the prior three months, the Operating
Market Maker, as required by Rule 613 of information readily available to the Committee will begin calculating
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Regulation NMS. See Securities Exchange Act
exchanges and FINRA, such as the total message traffic based on an Industry
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 Member’s Reportable Events reported to
(March 7, 2016). This exemption applies to Options number of historical equity and equity
Market Maker quotes for CAT reporting purposes options quotes received and originated the CAT once the Industry Member has
only. Therefore, notwithstanding the reporting
exemption provided for Options Market Maker 38 If an Industry Member (other than an Execution
37 Consequently, firms that do not have ‘‘message
quotes, Options Market Maker quotes will be Venue ATS) has no orders, cancels or quotes prior
included in the calculation of total message traffic traffic’’ reported to an exchange or OATS before to the commencement of CAT Reporting, or no
for Options Market Makers for purposes of tiering they are reporting to the CAT would not be subject Reportable Events after CAT reporting commences,
under the CAT funding model both prior to CAT to a fee until they begin to report information to then the Industry Member would not have a CAT
reporting and once CAT reporting commences. CAT. fee obligation.
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23901
been reporting to the CAT for three members to its trade reporting facility or Execution Venues and Industry
months. Prior to that, fee tiers will be facilities for reporting transactions Members.
calculated as discussed above with effected otherwise than on an exchange, Each Equity Execution Venue will be
regard to the period prior to CAT in NMS Stocks or OTC Equity Securities ranked by market share and tiered by
reporting. will pay a fixed fee depending on the predefined Execution Venue
market share of that Execution Venue in percentages, (the ‘‘Equity Execution
(C) Execution Venue Tiering Venue Percentages’’). In determining the
NMS Stocks and OTC Equity Securities,
Under Section 11.3(a) of the CAT with the Operating Committee fixed percentage of Equity Execution
NMS Plan, the Operating Committee is establishing at least two and not more Venues in each tier, the Operating
required to establish fixed fees payable than five tiers of fixed fees, based on an Committee looked at historical market
by Execution Venues. Section 1.1 of the Execution Venue’s NMS Stocks and share of share volume for execution
CAT NMS Plan defines an Execution OTC Equity Securities market share. For venues. Equities Execution Venue
Venue as ‘‘a Participant or an alternative these purposes, market share for market share of share volume were
trading system (‘‘ATS’’) (as defined in Execution Venues that execute sourced from market statistics made
Rule 300 of Regulation ATS) that transactions will be calculated by share publicly-available by Bats Global
operates pursuant to Rule 301 of volume, and market share for a national Markets, Inc. (‘‘Bats’’). ATS market
Regulation ATS (excluding any such securities association that has trades share of share volume was sourced from
ATS that does not execute orders).’’ 39 reported by its members to its trade market statistics made publicly-
The Participants determined that reporting facility or facilities for available by FINRA. FINRA trading [sic]
ATSs should be included within the reporting transactions effected reporting facility (‘‘TRF’’) market share
definition of Execution Venue. Given otherwise than on an exchange in NMS of share volume was sourced from
the similarity between the activity of Stocks or OTC Equity Securities will be market statistics made publicly
exchanges and ATSs, both of which available by Bats. As indicated by
calculated based on share volume of
meet the definition of an ‘‘exchange’’ as FINRA, ATSs accounted for 37.80% of
trades reported, provided, however, that
set forth in the Exchange Act and the the share volume across the TRFs
the share volume reported to such
fact that the similar trading models during the recent tiering period. A
national securities association by an
would have similar anticipated burdens 37.80/62.20 split was applied to the
Execution Venue shall not be included
on the CAT, the Participants determined ATS and non-ATS breakdown of FINRA
in the calculation of such national
that ATSs should be treated in the same market share, with FINRA tiered based
security association’s market share.
manner as the exchanges for the only on the non-ATS portion of its TRF
purposes of determining the level of fees In accordance with Section 11.3(a)(i) market share of share volume.
associated with the CAT.40 of the CAT NMS Plan, the Operating Based on this, the Operating
Given the differences between Committee approved a tiered fee Committee considered the distribution
Execution Venues that trade NMS structure for Equity Execution Venues of Execution Venues, and grouped
Stocks and/or OTC Equity Securities and Option Execution Venues. In together Execution Venues with similar
and Execution Venues that trade Listed determining the Equity Execution levels of market share of share volume.
Options, Section 11.3(a) addresses Venue Tiers, the Operating Committee In doing so, the Participants considered
Execution Venues that trade NMS considered the funding principles set that, as previously noted, Execution
Stocks and/or OTC Equity Securities forth in Section 11.2 of the CAT NMS Venues in many cases have similar
separately from Execution Venues that Plan, seeking to create funding tiers that levels of message traffic due to quoting
trade Listed Options. Equity and take into account the relative impact on activity, and determined that it was
Options Execution Venues are treated system resources of different Equity simpler and more appropriate to have
separately for two reasons. First, the Execution Venues, and that establish fewer, rather than more, Execution
differing quoting behavior of Equity and comparable fees among the CAT Venue tiers to distinguish between
Options Execution Venues makes Reporters with the most Reportable Execution Venues.
comparison of activity between Events. Each Equity Execution Venue The percentage of costs recovered by
Execution Venues difficult. Second, will be placed into one of two tiers of each Equity Execution Venue tier will
Execution Venue tiers are calculated fixed fees, based on the Execution be determined by predefined percentage
based on market share of share volume, Venue’s NMS Stocks and OTC Equity allocations (the ‘‘Equity Execution
and it is therefore difficult to compare Securities market share. In choosing two Venue Recovery Allocation’’). In
market share between asset classes (i.e., tiers, the Operating Committee determining the fixed percentage
equity shares versus options contracts). performed an analysis similar to that allocation of costs recovered for each
Discussed below is how the funding discussed above with regard to the non- tier, the Operating Committee
model treats the two types of Execution Execution Venue Industry Members to considered the impact of CAT Reporter
Venues. determine the number of tiers for Equity market share activity on the CAT
Execution Venues. The Operating System as well as the distribution of
(I) NMS Stocks and OTC Equity Committee determined to establish two total market volume across Equity
Securities tiers for Equity Execution Venues, rather Execution Venues while seeking to
Section 11.3(a)(i) of the CAT NMS than a larger number of tiers as maintain comparable fees among the
Plan states that each Execution Venue established for non-Execution Venue largest CAT Reporters. Accordingly,
that (i) executes transactions or, (ii) in Industry Members, because the two tiers following the determination of the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
the case of a national securities were sufficient to distinguish between percentage of Execution Venues in each
association, has trades reported by its the smaller number of Equity Execution tier, the Operating Committee identified
Venues based on market share. the percentage of total market volume
39 Although FINRA does not operate an execution
Furthermore, the incorporation of for each tier based on the historical
venue, because it is a Participant, it is considered additional Equity Execution Venue tiers market share upon which Execution
an ‘‘Execution Venue’’ under the Plan for purposes
of determining fees. would result in significantly higher fees Venues had been initially ranked.
40 Section B.7, Appendix C of the CAT NMS Plan, for Tier 1 Equity Execution Venues and Taking this into account along with the
Approval Order at 85005. diminish comparability between resulting percentage of total recovery,
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![23902 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
the percentage allocation of costs Execution Venues, there is less variation allowing the funding model to respond
recovered for each tier were assigned, in CAT Fees between the highest and to changes in either the total number of
allocating higher percentages of lowest of tiers for Execution Venues. Equity Execution Venues or changes in
recovery to the tier with a higher level Furthermore, by using percentages of market share.
of market share while avoiding any Equity Execution Venues and costs Based on this analysis, the Operating
inappropriate burden on competition. recovered per tier, the Operating Committee approved the following
Furthermore, due to the similar levels of Committee sought to include stability Equity Execution Venue Percentages
impact on the CAT System across and elasticity within the funding model, 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
The following table exhibits the For these purposes, market share will be Venue Percentages’’). To determine the
relative separation of market share of calculated by contract volume. fixed percentage of Options Execution
share volume between Tier 1 and Tier In accordance with Section 11.3(a)(ii) Venues in each tier, the Operating
2 Equity Execution Venues. In of the CAT NMS Plan, the Operating Committee analyzed the historical and
reviewing the table, note that while this Committee approved a tiered fee publicly available market share of
division was referenced as a data point structure for Options Execution Venues. Options Execution Venues to group
to help differentiate between Equity In determining the tiers, the Operating Options Execution Venues with similar
Execution Venue tiers, the proposed Committee considered the funding market shares across the tiers. Options
funding model is directly driven not by principles set forth in Section 11.2 of Execution Venue market share of share
market share thresholds, but rather by the CAT NMS Plan, seeking to create volume were sourced from market
fixed percentages of Equity Execution funding tiers that take into account the statistics made publicly-available by
Venues across tiers to account for relative impact on system resources of Bats. The process for developing the
fluctuating levels of market share across different Options Execution Venues, Options Execution Venue Percentages
time. Actual market share in any tier and that establish comparable fees was the same as discussed above with
will vary based on the actual market among the CAT Reporters with the most regard to Equity Execution Venues.
activity in a given measurement period, Reportable Events. Each Options The percentage of costs recovered by
as well as the number of Equity Execution Venue will be placed into one
each Options Execution Venue tier will
of two tiers of fixed fees, based on the
Execution Venues included in the be determined by predefined percentage
Execution Venue’s Listed Options
measurement period. The Equity allocations (the ‘‘Options Execution
market share. In choosing two tiers, the
Execution Venue Percentages and Venue Recovery Allocation’’). In
Operating Committee performed an
Equity Execution Venue Recovery determining the fixed percentage
analysis similar to that discussed above
Allocation for each tier will remain allocation of costs recovered for each
with regard to Industry Members (other
fixed with each Equity Execution Venue tier, the Operating Committee
than Execution Venue ATSs) to
tier to be reassigned periodically, as considered the impact of CAT Reporter
determine the number of tiers for
described below in Section 3(a)(1)(I) market share activity on the CAT
Options Execution Venues. The
[sic]. Operating Committee determined to System as well as the distribution of
establish two tiers for Options total market volume across Options
Equity market Execution Venues, rather than a larger Execution Venues while seeking to
share of share maintain comparable fees among the
Equity Execution Venue tier number of tiers as established for
volume largest CAT Reporters. Furthermore, by
(%) Industry Members (other than Execution
Venue ATSs), because the two tiers using percentages of Options Execution
Tier 1 .................................... ≥1 were sufficient to distinguish between Venues and costs recovered per tier, the
Tier 2 .................................... <1 the smaller number of Options Operating Committee sought to include
Execution Venues based on market stability and elasticity within the
(II) Listed Options share. Furthermore, due to the smaller funding model, allowing the funding
number of Options Execution Venues, model to respond to changes in either
Section 11.3(a)(ii) of the CAT NMS the incorporation of additional Options the total number of Options Execution
Plan states that each Execution Venue Execution Venue tiers would result in Venues or changes in market share. The
that executes transactions in Listed significantly higher fees for Tier 1 process for developing the Options
Options will pay a fixed fee depending Options Execution Venues and reduce Execution Venue Recovery Allocation
was the same as discussed above with
asabaliauskas on DSK3SPTVN1PROD with NOTICES
on the Listed Options market share of comparability between Execution
that Execution Venue, with the Venues and Industry Members. regard to Equity Execution Venues.
Operating Committee establishing at Each Options Execution Venue will Based on this analysis, the Operating
least two and no more than five tiers of be ranked by market share and tiered by Committee approved the following
fixed fees, based on an Execution predefined Execution Venue Options Execution Venue Percentages
Venue’s Listed Options market share. percentages, (the ‘‘Options Execution and Recovery Allocations:
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23903
Percentage Percentage Percentage of
of Options of Execution
Options Execution Venue tier 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 After the commencement of CAT Execution Venue ATSs) and Execution
relative separation of market share of reporting, market share for Execution Venues, the Operating Committee
share volume between Tier 1 and Tier Venues will be sourced from data analyzed a range of possible splits for
2 Options Execution Venues. In reported to the CAT. Equity Execution revenue recovered from such Industry
reviewing the table, note that while this Venue market share will be determined Members and Execution Venues. Based
division was referenced as a data point by calculating each Equity Execution on this analysis, the Operating
to help differentiate between Options Venue’s proportion of the total volume Committee determined that 75 percent
Execution Venue tiers, the proposed of NMS Stock and OTC Equity shares of total costs recovered would be
funding model is directly driven, not by reported by all Equity Execution Venues allocated to Industry Members (other
market share thresholds, but rather by during the relevant time period. than Execution Venue ATSs) and 25
fixed percentages of Options Execution Similarly, market share for Options
percent would be allocated to Execution
Venues across tiers to account for Execution Venues will be determined by
calculating each Options Execution Venues. The Operating Committee
fluctuating levels of market share across determined that this 75/25 division
time. Actual market share in any tier Venue’s proportion of the total volume
of Listed Options contracts reported by maintained the greatest level of
will vary based on the actual market comparability across the funding model,
activity in a given measurement period, all Options Execution Venues during
the relevant time period. keeping in view that comparability
as well as the number of Options
The Operating Committee has should consider affiliations among or
Execution Venues included in the
determined to calculate fee tiers for between CAT Reporters (e.g., firms with
measurement period. The Options
Execution Venues every three months multiple Industry Members and/or
Execution Venue Percentages and
based on market share from the prior exchange licenses). For example, the
Equity Execution Venue Recovery
three months. Based on its analysis of cost allocation establishes fees for the
Allocation for each tier will remain
historical data, the Operating Committee largest Industry Members (i.e., those
fixed with each Options Execution
believes calculating tiers based on three Industry Members in Tiers 1, 2 and 3)
Venue tier to be reassigned periodically,
months of data will provide the best that are comparable to the largest Equity
as described below in Section 3(a)(1)(I)
balance between reflecting changes in Execution Venues and Options
[sic]. activity by Execution Venues while still Execution Venues (i.e., those Execution
providing predictability in the tiering Venues in Tier 1). In addition, the cost
Options
market for Execution Venues. allocation establishes fees for Execution
Options Execution Venue tier share of
(D) Allocation of Costs Venue complexes that are comparable to
share volume
In addition to the funding principles
(%) those of Industry Member complexes.
discussed above, including For example, when analyzing
Tier 1 .................................... ≥1 comparability of fees, Section 11.1(c) of alternative allocations, other possible
Tier 2 .................................... <1 the CAT NMS Plan also requires allocations led to much higher fees for
expenses to be fairly and reasonably larger Industry Members than for larger
(III) Market Share/Tier Assignments shared among the Participants and Execution Venues or vice versa, and/or
Industry Members. Accordingly, in led to much higher fees for Industry
The Operating Committee determined developing the proposed fee schedules Member complexes than Execution
that, prior to the start of CAT reporting, pursuant to the funding model, the Venue complexes or vice versa.
market share for Execution Venues Operating Committee calculated how
would be sourced from publicly- Furthermore, the allocation of total
the CAT costs would be allocated CAT costs recovered recognizes the
available market data. Options and between Industry Members and
equity volumes for Participants will be difference in the number of CAT
Execution Venues, and how the portion
sourced from market data made publicly of CAT costs allocated to Execution Reporters that are Industry Members
available by Bats while Execution versus CAT Reporters that are Execution
Venues would be allocated between
Venue ATS volumes will be sourced Equity Execution Venues and Options Venues. Specifically, the cost allocation
from market data made publicly Execution Venues. These takes into consideration that there are
available by FINRA. Set forth in the determinations are described below. approximately 25 times more Industry
Appendix are two charts, one listing the Members expected to report to the CAT
(I) Allocation Between Industry than Execution Venues (e.g., an
asabaliauskas on DSK3SPTVN1PROD with NOTICES
current Equity Execution Venues, each
with its rank and tier, and one listing Members and Execution Venues estimated 1,630 Industry Members
the current Options Execution Venues, In determining the cost allocation versus 70 Execution Venues as of
each with its rank and tier. between Industry Members (other than January 2017).
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![Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices 23909
INDUSTRY MEMBER COMPLEXES—Continued
Total fees by
Listing of industry member
Industry member complex Listing of ATS tiers IM
tiers complex
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 Committee will review the distribution criteria for each tier or the fee amount
Under Section 11.1(c) of the CAT of Industry Members and Execution corresponding to each tier.
NMS Plan, to fund the development and Venues across tiers, and make any In performing the tri-monthly
implementation of the CAT, the updates to the percentage of CAT reassignments, ISE notes that the
Company shall time the imposition and Reporters allocated to each tier as may percentage of CAT Reporters in each
collection of all fees on Participants and be necessary. In addition, the reviews assigned tier is relative. Therefore, a
Industry Members in a manner will evaluate the estimated ongoing CAT Reporter’s assigned tier will
reasonably related to the timing when CAT costs and the level of the operating depend, not only on its own message
the Company expects to incur such reserve. To the extent that the total CAT
traffic or market share, but it also will
development and implementation costs. costs decrease, the fees would be
depend on the message traffic/market
The Company is currently incurring adjusted downward, and, to the extent
share across all CAT Reporters. For
such development and implementation that the total CAT costs increase, the
example, the percentage of Industry
costs and will continue to do so prior fees would be adjusted upward.49
Members (other than Execution Venue
to the commencement of CAT reporting Furthermore, any surplus of the
ATSs) in each tier is relative such that
and thereafter. For example, the Plan Company’s revenues over its expenses is
such Industry Member’s assigned tier
Processor has required up-front to be included within the operational
will depend on message traffic
payments to begin building the CAT. In reserve to offset future fees. The
generated across all CAT Reporters as
addition, the Company continues to limitations on more frequent changes to
well as the total number of CAT
incur consultant and legal expenses on the fee, however, are intended to
Reporters. The Operating Committee
an on-going basis to implement the provide budgeting certainty for the CAT
will inform CAT Reporters of their
CAT. Accordingly, the Operating Reporters and the Company.50 To the
assigned tier every three months
Committee determined that all CAT extent that the Operating Committee
following the periodic tiering process,
Reporters, including both Industry approves changes to the number of tiers
as the funding model will compare an
Members and Execution Venues in the funding model or the fees
individual CAT Reporter’s activity to
(including Participants), would begin to assigned to each tier, then ISE will file
that of other CAT Reporters in the
be invoiced as promptly as possible such changes with the SEC pursuant to
marketplace.
following the establishment of a billing Section 19(b) of the Exchange Act, and
mechanism. ISE will issue a Circular to any such changes will become effective The following demonstrates a tier
its members when the billing in accordance with the requirements of reassignment. In accordance with the
mechanism is established, specifying Section 19(b). funding model, the top 75% of Options
the date when such invoicing of Execution Venues in market share are
(I) Initial and Periodic Tier categorized as Tier 1 while the bottom
Industry Members will commence. Reassignments 25% of Options Execution Venues in
(H) Changes to Fee Levels and Tiers The Operating Committee has market share are categorized as Tier 2.
Section 11.3(d) of the CAT NMS Plan determined to calculate fee tiers every In the sample scenario below, Options
states that ‘‘[t]he Operating Committee three months based on market share or Execution Venue L is initially
shall review such fee schedule on at message traffic, as applicable, from the categorized as a Tier 2 Options
least an annual basis and shall make any prior three months. For the initial tier Execution Venue in Period A due to its
changes to such fee schedule that it assignments, the Company will market share. When market share is
deems appropriate. The Operating calculate the relevant tier for each CAT recalculated for Period B, the market
Committee is authorized to review such Reporter using the three months of data share of Execution Venue L increases,
fee schedule on a more regular basis, but prior to the commencement date. As and it is therefore subsequently
shall not make any changes on more with the initial tier assignment, for the reranked and reassigned to Tier 1 in
than a semi-annual basis unless, tri-monthly reassignments, the Period B. Correspondingly, Options
pursuant to a Supermajority Vote, the Company will calculate the relevant tier Execution Venue K, initially a Tier 1
Operating Committee concludes that using the three months of data prior to Options Execution Venue in Period A,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
such change is necessary for the the relevant tri-monthly date. ISE notes is reassigned to Tier 2 in Period B due
adequate funding of the Company.’’ that any movement of CAT Reporters to decreases in its market share of share
With such reviews, the Operating between tiers will not change the volume.
49 The CAT Fees are designed to recover the costs such as any changes in costs related to the 50 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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![23912 Federal Register / Vol. 82, No. 99 / Wednesday, May 24, 2017 / Notices
between CAT Reporters (e.g., firms with between message traffic and market • Send an email to rule-comments@
multiple Industry Members or exchange share to the CAT Reporter’s size, smaller sec.gov. Please include File Number SR–
licenses). Similarly, the 75/25 division CAT Reporters generally pay less than ISE–2017–45 on the subject line.
between Equity and Options Execution larger CAT Reporters. Accordingly, the
Venues maintains elasticity across the Exchange does not believe that the CAT Paper Comments
funding model as well as the greatest Fees would have a disproportionate • Send paper comments in triplicate
level of fee equitability and effect on smaller or larger CAT to Secretary, Securities and Exchange
comparability based on the current Reporters. In addition, ATSs and
Commission, 100 F Street NE.,
number of Equity and Options exchanges will pay the same fees based
Execution Venues. Washington, DC 20549–1090.
on market share. Therefore, ISE does not
Finally, ISE believes that the believe that the fees will impose any All submissions should refer to File
proposed fees are reasonable because burden on the competition between Number SR–ISE–2017–45. This file
they would provide ease of calculation, ATSs and exchanges. Accordingly, ISE number should be included on the
ease of billing and other administrative believes that the proposed fees will subject line if email is used. To help the
functions, and predictability of a fixed minimize the potential for adverse Commission process and review your
fee. Such factors are crucial to effects on competition between CAT comments more efficiently, please use
estimating a reliable revenue stream for Reporters in the market. only one method. The Commission will
the Company and for permitting CAT
Furthermore, the tiered, fixed fee post all comments on the Commission’s
Reporters to reasonably predict their
payment obligations for budgeting funding model limits the disincentives Internet Web site (http://www.sec.gov/
purposes. to providing liquidity to the market. rules/sro.shtml). Copies of the
Therefore, the proposed fees are submission, all subsequent
B. Self-Regulatory Organization’s structured to limit burdens on amendments, all written statements
Statement on Burden on Competition competitive quoting and other liquidity with respect to the proposed rule
Section 6(b)(8) of the Act 56 requires provision in the market. change that are filed with the
that SRO rules not impose any burden C. Self-Regulatory Organization’s Commission, and all written
on competition that is not necessary or Statement on Comments on the communications relating to the
appropriate. ISE does not believe that Proposed Rule Change Received From proposed rule change between the
the proposed rule change will result in Members, Participants, or Others Commission and any person, other than
any burden on competition that is not those that may be withheld from the
necessary or appropriate in furtherance No written comments were either public in accordance with the
of the purposes of the Act. ISE notes solicited or received. provisions of 5 U.S.C. 552, will be
that the proposed rule change available for Web site viewing and
implements provisions of the CAT NMS III. Date of Effectiveness of the
Proposed Rule Change and Timing for printing in the Commission’s Public
Plan approved by the Commission, and
Commission Action Reference Room, 100 F Street NE.,
is designed to assist ISE in meeting its
regulatory obligations pursuant to the Washington, DC 20549, on official
The foregoing rule change has become business days between the hours of
Plan. Similarly, all national securities effective pursuant to Section
exchanges and FINRA are proposing 10:00 a.m. and 3:00 p.m. Copies of the
19(b)(3)(A)(ii) of the Act.57 At any time filing also will be available for
this proposed fee schedule to within 60 days of the filing of the
implement the requirements of the CAT inspection and copying at the principal
proposed rule change, the Commission
NMS Plan. Therefore, this is not a office of the Exchange. All comments
summarily may temporarily suspend
competitive fee filing and, therefore, it received will be posted without change;
such rule change if it appears to the
does not raise competition issues Commission that such action is (i) the Commission does not edit personal
between and among the exchanges and necessary or appropriate in the public identifying information from
FINRA. interest; (ii) for the protection of submissions. You should submit only
Moreover, as previously described, investors; or (iii) otherwise in information that you wish to make
ISE believes that the proposed rule furtherance of the purposes of the Act. available publicly. All submissions
change fairly and equitably allocates If the Commission takes such action, the should refer to File Number SR–ISE–
costs among CAT Reporters. In Commission shall institute proceedings 2017–45, and should be submitted on or
particular, the proposed fee schedule is to determine whether the proposed rule before June 14, 2017.
structured to impose comparable fees on should be approved or disapproved.
similarly situated CAT Reporters, and For the Commission, by the Division of
lessen the impact on smaller CAT IV. Solicitation of Comments Trading and Markets, pursuant to delegated
Reporters. CAT Reporters with similar authority.58
levels of CAT activity will pay similar Interested persons are invited to Eduardo A. Aleman,
fees. For example, Industry Members submit written data, views, and Assistant Secretary.
(other than Execution Venue ATSs) with arguments concerning the foregoing, [FR Doc. 2017–10583 Filed 5–23–17; 8:45 am]
higher levels of message traffic will pay including whether the proposed rule
BILLING CODE 8011–01–P
higher fees, and those with lower levels change is consistent with the Act.
of message traffic will pay lower fees. Comments may be submitted by any of
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Similarly, Execution Venue ATSs and the following methods:
other Execution Venues with larger Electronic Comments
market share will pay higher fees, and
those with lower levels of market share • Use the Commission’s Internet
will pay lower fees. Therefore, given comment form (http://www.sec.gov/
that there is generally a relationship rules/sro.shtml); or
56 15 U.S.C. 78f(b)(8). 57 15 U.S.C. 78s(b)(3)(A)(ii). 58 17 CFR 200.30–3(a)(12).
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Document Created: 2017-05-24 01:03:11
Document Modified: 2017-05-24 01:03:11
| 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 23895 |
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