82 FR 25448 - Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats EDGA Exchange, Inc.
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 104 (June 1, 2017)
Federal Register Volume 82, Issue 104 (June 1, 2017)
| Page Range | 25448-25467 | |
| FR Document | 2017-11360 |
[Federal Register Volume 82, Number 104 (Thursday, June 1, 2017)] [Notices] [Pages 25448-25467] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-11360] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80784; File No. SR-BatsEDGA-2017-13] Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats EDGA Exchange, Inc. May 26, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on May 16, 2017, Bats EDGA Exchange, Inc. (the ``Exchange'' or ``EDGA'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange.\3\ The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ The Exchange originally filed the proposed rule change on May 5, 2017 under File No. SR-BatsEDGA-2017-11. The Exchange subsequently withdrew that filing on May 11, 2017 and filed this proposed rule change. \4\ 15 U.S.C. 78s(b)(3)(A)(ii). \5\ 17 CFR 240.19b-4(f)(2). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposed rule change 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'').\6\ --------------------------------------------------------------------------- \6\ Unless otherwise specified, capitalized terms used in this fee filing are defined as set forth herein, the CAT Compliance Rule Series or in the CAT NMS Plan. --------------------------------------------------------------------------- The text of the proposed rule change is available at the Exchange's Web site at www.bats.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. [[Page 25449]] (A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\7\ NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\8\ (collectively, the ``Participants'') filed with the Commission, pursuant to Section 11A of the Exchange Act \9\ and Rule 608 of Regulation NMS thereunder,\10\ the CAT NMS Plan.\11\ 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,\12\ and approved by the Commission, as modified, on November 15, 2016.\13\ 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.\14\ 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'').\15\ 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.\16\ Accordingly, Bats submits this fee filing to propose the Consolidated Audit Trail Funding Fees, which will require Industry Members that are Bats members to pay the CAT Fees determined by the Operating Committee. --------------------------------------------------------------------------- \7\ ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). \8\ National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, 2017). \9\ 15 U.S.C. 78k-1. \10\ 17 CFR 242.608. \11\ 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. \12\ Securities Exchange Act Rel. No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016). \13\ Securities Exchange Act Rel. No. 79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (``Approval Order''). \14\ The Plan also serves as the limited liability company agreement for the Company. \15\ Section 11.1(b) of the CAT NMS Plan. \16\ Id. --------------------------------------------------------------------------- (1) Executive Summary The following provides an executive summary of the CAT funding model approved by the Operating Committee, as well as Industry Members' rights and obligations related to the payment of CAT Fees calculated pursuant to the CAT funding model. A detailed description of the CAT funding model and the CAT Fees follows this executive summary. (A) CAT Funding ModelCAT Costs. The CAT funding model is designed to establish CAT-specific fees to collectively recover the costs of building and operating the CAT from all CAT Reporters, including Industry Members and Participants. The overall CAT costs for the calculation of the CAT Fees in this fee filing are comprised of Plan Processor CAT costs and non-Plan Processor CAT costs incurred, and estimated to be incurred, from November 21, 2016 through November 21, 2017. (See Section 3(a)(2)(E) [sic] below \17\) --------------------------------------------------------------------------- \17\ 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 [[Page 25450]] 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. Bats will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (See Section 3(a)(2)(G) [sic] below) (2) Description of the CAT Funding Model Article XI of the CAT NMS Plan requires the Operating Committee to approve the operating budget, including projected costs of developing and operating the CAT for the upcoming year. As set forth in Article XI of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are Execution Venues through fixed tier fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fixed tier fees based on message traffic. In its order approving the CAT NMS Plan, the Commission determined that the proposed funding model was ``reasonable'' \18\ and ``reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT.'' \19\ --------------------------------------------------------------------------- \18\ Approval Order at 84796. \19\ 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.'' \20\ The Commission further noted the following: --------------------------------------------------------------------------- \20\ Id. at 84795. The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants' funding authority to recover the Participants' costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and . . . the Exchange Act specifically permits the Participants to charge their members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.\21\ --------------------------------------------------------------------------- \21\ 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.\22\ 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.\23\ 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.'' \24\ --------------------------------------------------------------------------- \22\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85006. \23\ 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. \24\ 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.\25\ 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. --------------------------------------------------------------------------- \25\ 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.\26\ 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.\27\ Correspondingly, Execution Venues with the highest market share will be in the top tier, and therefore will be charged a higher fee. Execution [[Page 25451]] Venues with a lower market share will be in the lower tier and will be assessed a smaller fee for the CAT.\28\ --------------------------------------------------------------------------- \26\ Approval Order at 85005. \27\ Id. \28\ 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)'' \29\ 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.\30\ 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.\31\ --------------------------------------------------------------------------- \29\ Id. at 84796. \30\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order at 85005. \31\ 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.\32\ 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.\33\ --------------------------------------------------------------------------- \32\ Section 11.2(c) of the CAT NMS Plan. \33\ 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.'' \34\ 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.'' \35\ --------------------------------------------------------------------------- \34\ Section 11.2(e) of the CAT NMS Plan. \35\ Approval Order at 84796. --------------------------------------------------------------------------- The CAT NMS Plan is structured to avoid potential conflicts raised by the Operating Committee determining fees applicable to its own members--the Participants. First, the Company will be operated on a ``break-even'' basis, with fees imposed to cover costs and an appropriate reserve. Any surpluses will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.\36\ 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.'' \37\ 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.'' \38\ --------------------------------------------------------------------------- \36\ Id. at 84792. \37\ 26 U.S.C. 501(c)(6). \38\ 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. Bats 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); [[Page 25452]] To provide for ease of billing and other administrative functions; To avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and To build financial stability to support the Company as a going concern. (B) Industry Member Tiering Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees to be payable by Industry Members, based on message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers. The CAT NMS Plan clarifies that the fixed fees payable by Industry Members pursuant to Section 11.3(b) shall, in addition to any other applicable message traffic, include message traffic generated by: (i) An ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. In addition, the Industry Member fees will apply to Industry Members that act as routing broker-dealers for exchanges. The Industry Member fees will not be applicable, however, to an ATS that qualifies as an Execution Venue, as discussed in more detail in the section on Execution Venue tiering. In accordance with Section 11.3(b), the Operating Committee approved a tiered fee structure for Industry Members (other than Execution Venue ATSs) as described in this section. In determining the tiers, the Operating Committee considered the funding principles set forth in Section 11.2 of the CAT NMS Plan, seeking to create funding tiers that take into account the relative impact on CAT System resources of different Industry Members, and that establish comparable fees among the CAT Reporters with the most Reportable Events. The Operating Committee has determined that establishing nine tiers results in the fairest allocation of fees, best distinguishing between Industry Members with differing levels of message traffic. Thus, each such Industry Member will be placed into one of nine tiers of fixed fees, based on ``message traffic'' for a defined period (as discussed below). A nine tier structure was selected to provide the widest range of levels for tiering Industry Members such that Industry Members submitting significantly less message traffic to the CAT would be adequately differentiated from Industry Members submitting substantially more message traffic. The Operating Committee considered historical message traffic generated by Industry Members across all exchanges and as submitted to FINRA's Order Audit Trail System (``OATS''), and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee determined that nine tiers would best group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden of Industry Members that have less CAT-related activity. Each Industry Member (other than Execution Venue ATSs) will be ranked by message traffic and tiered by predefined Industry Member percentages (the ``Industry Member Percentages''). The Operating Committee determined to use predefined percentages rather than fixed volume thresholds to allow the funding model to ensure that the total CAT fees collected recover the intended CAT costs regardless of changes in the total level of message traffic. To determine the fixed percentage of Industry Members in each tier, the Operating Committee analyzed historical message traffic generated by Industry Members across all exchanges and as submitted to OATS, and considered the distribution of firms with similar levels of message traffic, grouping together firms with similar levels of message traffic. Based on this, the Operating Committee identified tiers that would group firms with similar levels of message traffic, charging those firms with higher impact on the CAT more, while lowering the burden on Industry Members that have less CAT-related activity. The percentage of costs recovered by each Industry Member tier will be determined by predefined percentage allocations (the ``Industry Member Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter message traffic on the CAT System as well as the distribution of total message volume across Industry Members while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Industry Members in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical message traffic upon which Industry Members had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to tiers with higher levels of message traffic while avoiding any inappropriate burden on competition. Furthermore, by using percentages of Industry Members and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Industry Members or the total level of message traffic. The following chart illustrates the breakdown of nine Industry Member tiers across the monthly average of total equity and equity options orders, cancels and quotes in Q1 2016 and identifies relative gaps across varying levels of Industry Member message traffic as well as message traffic thresholds between the largest of Industry Member message traffic gaps. The Operating Committee referenced similar distribution illustrations to determine the appropriate division of 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]. [[Page 25453]] [GRAPHIC] [TIFF OMITTED] TN01JN17.016 ------------------------------------------------------------------------ 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 [[Page 25454]] months.\39\ 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.\40\ 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. --------------------------------------------------------------------------- \39\ The SEC approved exemptive relief permitting Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as required by Rule 613 of Regulation NMS. See Securities Exchange Act Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 (Mar. 7, 2016). This exemption applies to Options Market Maker quotes for CAT reporting purposes only. Therefore, notwithstanding the reporting exemption provided for Options Market Maker quotes, Options Market Maker quotes will be included in the calculation of total message traffic for Options Market Makers for purposes of tiering under the CAT funding model both prior to CAT reporting and once CAT reporting commences. \40\ 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.\41\ --------------------------------------------------------------------------- \41\ If an Industry Member (other than an Execution Venue ATS) has no orders, cancels or quotes prior to the commencement of CAT Reporting, or no Reportable Events after CAT reporting commences, then the Industry Member would not have a CAT fee obligation. --------------------------------------------------------------------------- The Operating Committee has determined to calculate fee tiers every three months, on a calendar quarter basis, based on message traffic from the prior three months. Based on its analysis of historical data, the Operating Committee believes that calculating tiers based on three months of data will provide the best balance between reflecting changes in activity by Industry Members while still providing predictability in the tiering for Industry Members. Because fee tiers will be calculated based on message traffic from the prior three months, the Operating Committee will begin calculating message traffic based on an Industry Member's Reportable Events reported to the CAT once the Industry Member has been reporting to the CAT for three months. Prior to that, fee tiers will be calculated as discussed above with regard to the period prior to CAT reporting. (C) Execution Venue Tiering Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee is required to establish fixed fees payable by Execution Venues. Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a Participant or an alternative trading system (``ATS'') (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).'' \42\ --------------------------------------------------------------------------- \42\ 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.\43\ --------------------------------------------------------------------------- \43\ 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 [[Page 25455]] Industry Members, because the two tiers were sufficient to distinguish between the smaller number of Equity Execution Venues based on market share. Furthermore, the incorporation of additional Equity Execution Venue tiers would result in significantly higher fees for Tier 1 Equity Execution Venues and diminish comparability between Execution Venues and Industry Members. Each Equity Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Equity Execution Venue Percentages''). In determining the fixed percentage of Equity Execution Venues in each tier, the Operating Committee looked at historical market share of share volume for execution venues. Equities Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats Global Markets, Inc. (``Bats''). ATS market share of share volume was sourced from market statistics made publicly-available by FINRA. FINRA trading [sic] reporting facility (``TRF'') market share of share volume was sourced from market statistics made publicly available by Bats. As indicated by FINRA, ATSs accounted for 37.80% of the share volume across the TRFs during the recent tiering period. A 37.80/62.20 split was applied to the ATS and non-ATS breakdown of FINRA market share, with FINRA tiered based only on the non-ATS portion of its TRF market share of share volume. Based on this, the Operating Committee considered the distribution of Execution Venues, and grouped together Execution Venues with similar levels of market share of share volume. In doing so, the Participants considered that, as previously noted, Execution Venues in many cases have similar levels of message traffic due to quoting activity, and determined that it was simpler and more appropriate to have fewer, rather than more, Execution Venue tiers to distinguish between Execution Venues. The percentage of costs recovered by each Equity Execution Venue tier will be determined by predefined percentage allocations (the ``Equity Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Equity Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Accordingly, following the determination of the percentage of Execution Venues in each tier, the Operating Committee identified the percentage of total market volume for each tier based on the historical market share upon which Execution Venues had been initially ranked. Taking this into account along with the resulting percentage of total recovery, the percentage allocation of costs recovered for each tier were assigned, allocating higher percentages of recovery to the tier with a higher level of market share while avoiding any inappropriate burden on competition. Furthermore, due to the similar levels of impact on the CAT System across Execution Venues, there is less variation in CAT Fees between the highest and lowest of tiers for Execution Venues. Furthermore, by using percentages of Equity Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Equity Execution Venues or changes in market share. Based on this analysis, the Operating Committee approved the following Equity Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Equity Execution Percentage of Equity Execution Venue tier Execution Venue total 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 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 share of Equity Execution Venue tier 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 [[Page 25456]] than Execution Venue ATSs) to determine the number of tiers for Options Execution Venues. The Operating Committee determined to establish two tiers for Options Execution Venues, rather than a larger number of tiers as established for Industry Members (other than Execution Venue ATSs), because the two tiers were sufficient to distinguish between the smaller number of Options Execution Venues based on market share. Furthermore, due to the smaller number of Options Execution Venues, the incorporation of additional Options Execution Venue tiers would result in significantly higher fees for Tier 1 Options Execution Venues and reduce comparability between Execution Venues and Industry Members. Each Options Execution Venue will be ranked by market share and tiered by predefined Execution Venue percentages, (the ``Options Execution Venue Percentages''). To determine the fixed percentage of Options Execution Venues in each tier, the Operating Committee analyzed the historical and publicly available market share of Options Execution Venues to group Options Execution Venues with similar market shares across the tiers. Options Execution Venue market share of share volume were sourced from market statistics made publicly-available by Bats. The process for developing the Options Execution Venue Percentages was the same as discussed above with regard to Equity Execution Venues. The percentage of costs recovered by each Options Execution Venue tier will be determined by predefined percentage allocations (the ``Options Execution Venue Recovery Allocation''). In determining the fixed percentage allocation of costs recovered for each tier, the Operating Committee considered the impact of CAT Reporter market share activity on the CAT System as well as the distribution of total market volume across Options Execution Venues while seeking to maintain comparable fees among the largest CAT Reporters. Furthermore, by using percentages of Options Execution Venues and costs recovered per tier, the Operating Committee sought to include stability and elasticity within the funding model, allowing the funding model to respond to changes in either the total number of Options Execution Venues or changes in market share. The process for developing the Options Execution Venue Recovery Allocation was the same as discussed above with regard to Equity Execution Venues. Based on this analysis, the Operating Committee approved the following Options Execution Venue Percentages and Recovery Allocations: ---------------------------------------------------------------------------------------------------------------- Percentage of Percentage of Options Execution Percentage of Options Execution Venue tier Execution Venue total 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 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 of Options Execution Venue tier 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 [[Page 25457]] Execution Venues, and how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. These determinations are described below. (I) Allocation Between Industry Members and Execution Venues In determining the cost allocation between Industry Members (other than Execution Venue ATSs) and Execution Venues, the Operating Committee analyzed a range of possible splits for revenue recovered from such Industry Members and Execution Venues. Based on this analysis, the Operating Committee determined that 75 percent of total costs recovered would be allocated to Industry Members (other than Execution Venue ATSs) and 25 percent would be allocated to Execution Venues. The Operating Committee determined that this 75/25 division maintained the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members and/or exchange licenses). For example, the cost allocation establishes fees for the largest Industry Members (i.e., those Industry Members in Tiers 1, 2 and 3) that are comparable to the largest Equity Execution Venues and Options Execution Venues (i.e., those Execution Venues in Tier 1). In addition, the cost allocation establishes fees for Execution Venue complexes that are comparable to those of Industry Member complexes. For example, when analyzing alternative allocations, other possible allocations led to much higher fees for larger Industry Members than for larger Execution Venues or vice versa, and/or led to much higher fees for Industry Member complexes than Execution Venue complexes or vice versa. Furthermore, the allocation of total CAT costs recovered recognizes the difference in the number of CAT Reporters that are Industry Members versus CAT Reporters that are Execution Venues. Specifically, the cost allocation takes into consideration that there are approximately 25 times more Industry Members expected to report to the CAT than Execution Venues (e.g., an estimated 1,630 Industry Members versus 70 Execution Venues as of January 2017). (II) Allocation Between Equity Execution Venues and Options Execution Venues The Operating Committee also analyzed how the portion of CAT costs allocated to Execution Venues would be allocated between Equity Execution Venues and Options Execution Venues. In considering this allocation of costs, the Operating Committee analyzed a range of alternative splits for revenue recovered between Equity and Options Execution Venues, including a 70/30, 67/33, 65/35, 50/50 and 25/75 split. Based on this analysis, the Operating Committee determined to allocate 75 percent of Execution Venue costs recovered to Equity Execution Venues and 25 percent to Options Execution Venues. The Operating Committee determined that a 75/25 division between Equity and Options Execution Venues maintained elasticity across the funding model as well the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. For example, the allocation establishes fees for the larger Equity Execution Venues that are comparable to the larger Options Execution Venues, and fees for the smaller Equity Execution Venues that are comparable to the smaller Options Execution Venues. In addition to fee comparability between Equity Execution Venues and Options Execution Venues, the allocation also establishes equitability between larger (Tier 1) and smaller (Tier 2) Execution Venues based upon the level of market share. Furthermore, the allocation is intended to reflect the relative levels of current equity and options order events. (E) Fee Levels The Operating Committee determined to establish a CAT-specific fee to collectively recover the costs of building and operating the CAT. Accordingly, under the funding model, the sum of the CAT Fees is designed to recover the total cost of the CAT. The Operating Committee has determined overall CAT costs to be comprised of Plan Processor costs and non-Plan Processor costs, which are estimated to be $50,700,000 in total for the year beginning November 21, 2016.\44\ --------------------------------------------------------------------------- \44\ 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. ------------------------------------------------------------------------ Cost category Cost component Amount ------------------------------------------------------------------------ Plan Processor................. Operational Costs...... $37,500,000 Non-Plan Processor............. Third Party Support 5,200,000 Costs. Operational Reserve.... \45\ 5,000,000 Insurance Costs........ 3,000,000 --------------- [[Page 25458]] 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: \46\ --------------------------------------------------------------------------- \45\ This $5,000,000 represents the gradual accumulation of the funds for a target operating reserve of $11,425,000. \46\ Note that all monthly, quarterly and annual CAT Fees have been rounded to the nearest dollar. --------------------------------------------------------------------------- For Industry Members (other than Execution Venue ATSs): --------------------------------------------------------------------------- \47\ 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 \47\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $33,668 $101,004 $404,016 2............................................................... 27,051 81,153 324,612 3............................................................... 19,239 57,717 230,868 4............................................................... 6,655 19,965 79,860 5............................................................... 4,163 12,489 49,956 6............................................................... 2,560 7,680 30,720 7............................................................... 501 1,503 6,012 8............................................................... 145 435 1,740 9............................................................... 22 66 264 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for NMS Stocks and OTC Equity Securities: --------------------------------------------------------------------------- \48\ This column represents the approximate total CAT Fees paid each year by each 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 \48\ ---------------------------------------------------------------------------------------------------------------- 1............................................................... $21,125 $63,375 $253,500 2............................................................... 12,940 38,820 155,280 ---------------------------------------------------------------------------------------------------------------- For Execution Venues for Listed Options: --------------------------------------------------------------------------- \49\ This column represents the approximate total CAT Fees paid each year by each Execution Venue for 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 \49\ ---------------------------------------------------------------------------------------------------------------- 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 [[Page 25459]] 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 of Industry Member tier Industry Members ------------------------------------------------------------------------ Tier 1.................................................. 8 Tier 2.................................................. 41 Tier 3.................................................. 35 Tier 4.................................................. 75 Tier 5.................................................. 59 Tier 6.................................................. 65 Tier 7.................................................. 285 Tier 8.................................................. 328 Tier 9.................................................. 735 --------------- Total............................................... 1,631 ------------------------------------------------------------------------ BILLING CODE 8011-01-P [[Page 25460]] [GRAPHIC] [TIFF OMITTED] TN01JN17.017 BILLING CODE 8011-01-C [[Page 25461]] 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] TN01JN17.018 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 Options Execution Venue tier of Options Execution Venues ------------------------------------------------------------------------ Tier 1............................................... 11 Tier 2............................................... 4 ------------------ Total............................................ 15 ------------------------------------------------------------------------ [[Page 25462]] [GRAPHIC] [TIFF OMITTED] TN01JN17.019 Traceability of Total CAT Fees ---------------------------------------------------------------------------------------------------------------- Estimated Type Industry Member tier number of CAT fees paid Total recovery members annually ---------------------------------------------------------------------------------------------------------------- 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 \50\................. .......................... .............. .............. 9,036 ---------------------------------------------------------------------------------------------------------------- (F) Comparability of Fees --------------------------------------------------------------------------- \50\ 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: \51\ --------------------------------------------------------------------------- \51\ 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. [[Page 25463]] Execution Venue Complexes ---------------------------------------------------------------------------------------------------------------- Listing of Equity Listing of options Total fees by Execution Venue complex Execution Venue tiers Execution Venue tier EV complex ---------------------------------------------------------------------------------------------------------------- Execution Venue Complex 1............... Tier 1 (x2)...... Tier 1 (x4)...... $1,900,962 Tier 2 (x1)...... Tier 2 (x2)...... Execution Venue Complex 2............... Tier 1 (x2)...... Tier 1 (x2)...... 1,863,801 Tier 2 (x1)...... Execution Venue Complex 3............... Tier 1 (x2)...... Tier 1 (x2)...... 1,278,447 Tier 2 (x2)...... ---------------------------------------------------------------------------------------------------------------- Industry Member Complexes ---------------------------------------------------------------------------------------------------------------- Listing of Industry Member Total fees by Industry Member complex tiers Listing of ATS tiers IM complex ---------------------------------------------------------------------------------------------------------------- Industry Member Complex 1............... Tier 1 (x2)...... Tier 2 (x1)...... $963,300 Industry Member Complex 2............... Tier 1 (x1)...... Tier 2 (x3)...... 949,674 Tier 4 (x1)...... Industry Member Complex 3............... Tier 1 (x1)...... Tier 2 (x1)...... 883,888 Tier 2 (x1)...... Industry Member Complex 4............... Tier 1 (x1)...... N/A.............. 808,472 Tier 2 (x1)...... Tier 4 (x1)...... Industry Member Complex 5............... Tier 2 (x1)...... Tier 2 (x1)...... 796,595 Tier 3 (x1)...... Tier 4 (x1)...... Tier 7 (x1)...... ---------------------------------------------------------------------------------------------------------------- (G) Billing Onset Under Section 11.1(c) of the CAT NMS Plan, to fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. The Company is currently incurring such development and implementation costs and will continue to do so prior to the commencement of CAT reporting and thereafter. For example, the Plan 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. Bats will issue a Regulatory Circular to its members when the billing mechanism is established, specifying the date when such invoicing of Industry Members will commence. (H) Changes to Fee Levels and Tiers Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.'' With such reviews, the Operating Committee will review the distribution of Industry Members and Execution Venues across tiers, and make any updates to the percentage of CAT Reporters allocated to each tier as may be necessary. In addition, the reviews will evaluate the estimated ongoing CAT costs and the level of the operating reserve. To the extent that the total CAT costs decrease, the fees would be adjusted downward, and, to the extent that the total CAT costs increase, the fees would be adjusted upward.\52\ 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.\53\ 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 Bats 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). --------------------------------------------------------------------------- \52\ 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. \53\ 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. Bats 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, Bats 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 [[Page 25464]] example, the percentage of Industry Members (other than Execution Venue ATSs) in each tier is relative such that such Industry Member's assigned tier will depend on message traffic generated across all CAT Reporters as well as the total number of CAT Reporters. The Operating Committee will inform CAT Reporters of their assigned tier every three months following the periodic tiering process, as the funding model will compare an individual CAT Reporter's activity to that of other CAT Reporters in the marketplace. The following demonstrates a tier reassignment. In accordance with the funding model, the top 75% of Options Execution Venues in market share are categorized as Tier 1 while the bottom 25% of Options Execution Venues in market share are categorized as Tier 2. In the sample scenario below, Options Execution Venue L is initially categorized as a Tier 2 Options Execution Venue in Period A due to its market share. When market share is recalculated for Period B, the market share of Execution Venue L increases, and it is therefore subsequently reranked and reassigned to Tier 1 in Period B. Correspondingly, Options Execution Venue K, initially a Tier 1 Options Execution Venue in Period A, is reassigned to Tier 2 in Period B due to decreases in its market share of share volume. -------------------------------------------------------------------------------------------------------------------------------------------------------- Period A Period B -------------------------------------------------------------------------------------------------------------------------------------------------------- Market share Market share Options Execution Venue rank Tier Options Execution Venue rank Tier -------------------------------------------------------------------------------------------------------------------------------------------------------- Options Execution Venue A...................... 1 1 Options Execution Venue A............. 1 1 Options Execution Venue B...................... 2 1 Options Execution Venue B............. 2 1 Options Execution Venue C...................... 3 1 Options Execution Venue C............. 3 1 Options Execution Venue D...................... 4 1 Options Execution Venue D............. 4 1 Options Execution Venue E...................... 5 1 Options Execution Venue E............. 5 1 Options Execution Venue F...................... 6 1 Options Execution Venue F............. 6 1 Options Execution Venue G...................... 7 1 Options Execution Venue I............. 7 1 Options Execution Venue H...................... 8 1 Options Execution Venue H............. 8 1 Options Execution Venue I...................... 9 1 Options Execution Venue G............. 9 1 Options Execution Venue J...................... 10 1 Options Execution Venue J............. 10 1 Options Execution Venue K...................... 11 1 Options Execution Venue L............. 11 1 Options Execution Venue L...................... 12 2 Options Execution Venue K............. 12 2 Options Execution Venue M...................... 13 2 Options Execution Venue N............. 13 2 Options Execution Venue N...................... 14 2 Options Execution Venue M............. 14 2 Options Execution Venue O...................... 15 2 Options Execution Venue O............. 15 2 -------------------------------------------------------------------------------------------------------------------------------------------------------- (3) Proposed CAT Fee Schedule Bats proposes the Consolidated Audit Trail Funding Fees to implement the CAT Fees determined by the Operating Committee on SRO's Industry Members. The proposed fee schedule has three sections, covering definitions, the fee schedule for CAT Fees, and the timing and manner of payments. Each of these sections is discussed in detail below. (A) Definitions Paragraph (a) of the proposed fee schedule sets forth the definitions for the proposed fee schedule. Paragraph (a)(1) states that, for purposes of the Consolidated Audit Trail Funding Fees, the terms ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,'' ``OTC Equity Security'', and ``Participant'' are defined as set forth in Rule 4.5 (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 Bats 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: [[Page 25465]] ------------------------------------------------------------------------ Percentage of Tier Industry Quarterly CAT Members fee ------------------------------------------------------------------------ 1....................................... 0.500 $101,004 2....................................... 2.500 81,153 3....................................... 2.125 57,717 4....................................... 4.625 19,965 5....................................... 3.625 12,489 6....................................... 4.000 7,680 7....................................... 17.500 1,503 8....................................... 20.125 435 9....................................... 45.000 66 ------------------------------------------------------------------------ Paragraph (b)(2) of the proposed fee schedule sets forth the CAT Fees applicable to Equity ATSs.\54\ 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: --------------------------------------------------------------------------- \54\ Note that no fee schedule is provided for Execution Venue ATSs that execute transactions in Listed Options, as no such Execution Venue ATSs currently exist due trading restrictions related to Listed Options. ------------------------------------------------------------------------ Percentage of Equity Quarterly CAT Tier Execution fee Venues ------------------------------------------------------------------------ 1....................................... 25.00 $63,375 2....................................... 75.00 38,820 ------------------------------------------------------------------------ (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. Bats will provide Industry Members with details regarding the manner of payment of CAT Fees by Regulatory Circular. Although the exact fee collection system and processes for CAT fees has not yet been established, all CAT fees will be billed and collected centrally through the Company, via the Plan Processor or otherwise. Although each Participant will adopt its own fee schedule regarding CAT Fees, no CAT Fees or portion thereof will be collected by the individual Participants. Each Industry Member will receive from the Company one invoice for its applicable CAT fees, not separate invoices from each Participant of which it is a member. The Industry Members will pay the CAT Fees to the Company via the centralized system for the collection of CAT fees established by the Company.\55\ --------------------------------------------------------------------------- \55\ 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, Bats proposes 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 Bats believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,\56\ which require, among other things, that the SRO rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to [[Page 25466]] protect investors and the public interest, and not designed to permit unfair discrimination between customers, issuers, brokers and dealers, and Section 6(b)(4) of the Act,\57\ which requires that SRO rules provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using its facilities. As discussed above, the SEC approved the bifurcated, tiered, fixed fee funding model in the CAT NMS Plan, finding it was reasonable and that it equitably allocated fees among Participants and Industry Members. Bats 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. --------------------------------------------------------------------------- \56\ 15 U.S.C. 78f(b)(5). \57\ 15 U.S.C. 78f(b)(4). --------------------------------------------------------------------------- Bats 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 Bats 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.'' \58\ To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, Bats believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. --------------------------------------------------------------------------- \58\ Approval Order at 84697. --------------------------------------------------------------------------- Bats 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, Bats believes that the total level of the CAT Fees is reasonable. In addition, Bats 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, Bats believes that the division of the total CAT costs between Industry Members and Execution Venues, and the division of the Execution Venue portion of total costs between Equity and Options Execution Venues, is reasonably designed to allocate CAT costs among CAT Reporters. The 75/25 division between Industry Members and Execution Venues maintains the greatest level of comparability across the funding model, keeping in view that comparability should consider affiliations among or between CAT Reporters (e.g., firms with multiple Industry Members or exchange licenses). Similarly, the 75/25 division between Equity and Options Execution Venues maintains elasticity across the funding model as well as the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues. Finally, Bats 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 \59\ require that SRO rules not impose any burden on competition that is not necessary or appropriate. Bats 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. Bats notes that the proposed rule change implements provisions of the CAT NMS Plan approved by the Commission, and is designed to assist Bats 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. --------------------------------------------------------------------------- \59\ 15 U.S.C. 78f(b)(8). --------------------------------------------------------------------------- Moreover, as previously described, Bats 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, Bats 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, Bats does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, Bats believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) [[Page 25467]] of the Act \60\ and paragraph (f) of Rule 19b-4 thereunder.\61\ At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \60\ 15 U.S.C. 78s(b)(3)(A). \61\ 17 CFR 240.19b-4(f). --------------------------------------------------------------------------- IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal 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-BatsEDGA-2017-13 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-BatsEDGA-2017-13. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing will also 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-BatsEDGA-2017-13 and should be submitted on or before June 22, 2017. --------------------------------------------------------------------------- \62\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\62\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-11360 Filed 5-31-17; 8:45 am] BILLING CODE 8011-01-P
![25448 Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices
exempt any person, security, or Commission action on the proposed rule ‘‘Act’’),1 and Rule 19b–4 thereunder,2
transaction, or any class or classes of change.4 On February 1, 2017, the notice is hereby given that on May 16,
persons, securities, or transactions, from Division of Trading and Markets, for the 2017, Bats EDGA Exchange, Inc. (the
any provision of section 12(d)(1) if the Commission pursuant to delegated ‘‘Exchange’’ or ‘‘EDGA’’) filed with the
exemption is consistent with the public authority, instituted proceedings to Securities and Exchange Commission
interest and the protection of investors. determine whether to approve or (‘‘Commission’’) the proposed rule
Section 17(b) of the Act authorizes the disapprove the proposed rule change.5 change as described in Items I, II and III
Commission to grant an order On April 20, 2017, NYSE Arca below, which Items have been prepared
permitting a transaction otherwise submitted Amendment No. 3 to the by the Exchange.3 The Exchange has
prohibited by section 17(a) if it finds proposed rule change, which replaced
designated the proposed rule change as
that (a) the terms of the proposed and superseded the proposed rule
one establishing or changing a member
transaction are fair and reasonable and change as modified by previous
do not involve overreaching on the part amendments.6 No comments on the due, fee, or other charge imposed by the
of any person concerned; (b) the proposed rule change were received. On Exchange under Section 19(b)(3)(A)(ii)
proposed transaction is consistent with May 2, 2017, the Division of Trading of the Act 4 and Rule 19b–4(f)(2)
the policies of each registered and Markets, for the Commission thereunder,5 which renders the
investment company involved; and (c) pursuant to delegated authority,7 proposed rule change effective upon
the proposed transaction is consistent approved the proposed rule change, as filing with the Commission. The
with the general purposes of the Act. modified by Amendment No. 3.8 Commission is publishing this notice to
For the Commission, by the Division of Pursuant to Commission Rule of solicit comments on the proposed rule
Investment Management, under delegated Practice 431,9 the Commission is change from interested persons.
authority. reviewing the delegated action, and the
May 2, 2017 order is stayed. I. Self-Regulatory Organization’s
Eduardo A. Aleman,
Accordingly, it is ordered, pursuant to Statement of the Terms of Substance of
Assistant Secretary. the Proposed Rule Change
Commission Rule of Practice 431, that
[FR Doc. 2017–11243 Filed 5–31–17; 8:45 am]
by June 15, 2017, any party or other
BILLING CODE 8011–01–P The Exchange filed a proposed rule
person may file any additional
statement. change to establish the fees for Industry
It is further ordered that the May 2, Members related to the National Market
SECURITIES AND EXCHANGE System Plan Governing the
2017 order approving the proposed rule
COMMISSION Consolidated Audit Trail (the ‘‘CAT
change, as modified by Amendment No.
[Release No. 80770] 3 (SR–NYSEArca–2016–120) shall NMS Plan’’ or ‘‘Plan’’).6
remain stayed pending further order of The text of the proposed rule change
In the Matter of the NYSE Arca, Inc.; for the Commission. is available at the Exchange’s Web site
an Order Granting the Approval of
By the Commission. at www.bats.com, at the principal office
Proposed Rule Change To List and
Brent J. Fields, of the Exchange, and at the
Trade Shares of the ForceShares Daily
4X US Market Futures Long Fund and Secretary. Commission’s Public Reference Room.
ForceShares Daily 4X US Market [FR Doc. 2017–11245 Filed 5–31–17; 8:45 am]
II. Self-Regulatory Organization’s
Futures Short Fund Under BILLING CODE 8011–01–P
Statement of the Purpose of, and
Commentary .02 to NYSE Arca Equities Statutory Basis for, the Proposed Rule
Rule 8.200; Order Scheduling Filing of Change
Statements on Review SECURITIES AND EXCHANGE
COMMISSION In its filing with the Commission, the
May 25, 2017.
[Release No. 34–80784; File No. SR– Exchange included statements
On October 17, 2016, NYSE Arca, Inc. BatsEDGA–2017–13] concerning the purpose of and basis for
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
the proposed rule change and discussed
with the Securities and Exchange Self-Regulatory Organizations; Bats
Commission (‘‘Commission’’), pursuant any comments it received on the
EDGA Exchange, Inc.; Notice of Filing
to Section 19(b)(1) of the Securities proposed rule change. The text of these
and Immediate Effectiveness of a
Exchange Act of 1934 1 and Rule 19b– statements may be examined at the
Proposed Rule Change Related to Fees
4 thereunder,2 a proposed rule change for Use on Bats EDGA Exchange, Inc. places specified in Item IV below. The
to list and trade shares of the Exchange has prepared summaries, set
ForceShares Daily 4X US Market May 26, 2017. forth in Sections A, B, and C below, of
Futures Long Fund and ForceShares Pursuant to Section 19(b)(1) of the the most significant parts of such
Daily 4X US Market Futures Short Fund Securities Exchange Act of 1934 (the statements.
under Commentary .02 to NYSE Arca
4 See Securities Exchange Act Release No. 79550
Equities Rule 8.200. On November 4, (Dec. 14, 2016), 81 FR 92892 (Dec. 20, 2016). 1 15 U.S.C. 78s(b)(1).
2016, the proposal was published for 5 See Securities Exchange Act Release No. 79914 2 17 CFR 240.19b–4.
comment in the Federal Register.3 On (Feb. 1, 2017), 82 FR 9625 (Feb. 7, 2017). 3 The Exchange originally filed the proposed rule
December 14, 2016, the Division of 6 Amendment No. 3 replaced and superseded the
change on May 5, 2017 under File No. SR–
Trading and Markets, for the proposed rule change as modified by Amendment BatsEDGA–2017–11. The Exchange subsequently
mstockstill on DSK30JT082PROD with NOTICES
No. 2. Amendment No. 2 had previously replaced
Commission pursuant to delegated and superseded the proposed rule change as
withdrew that filing on May 11, 2017 and filed this
authority, extended the time period for proposed rule change.
modified by Amendment No. 1. Amendment No. 1 4 15 U.S.C. 78s(b)(3)(A)(ii).
replaced and superseded the original filing in its
5 17 CFR 240.19b–4(f)(2).
1 15 U.S.C. 78s(b)(1). entirety.
2 17 7 17 CFR 200.30–3(a)(12). 6 Unless otherwise specified, capitalized terms
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79201 8 See Securities Exchange Act Release No. 80579 used in this fee filing are defined as set forth herein,
(Oct. 31, 2016), 81 FR 76977 (Nov. 4, 2016) (SR– (May 2, 2017), 82 FR 21443 (May 8, 2017). the CAT Compliance Rule Series or in the CAT
NYSEArca–2016–120). 9 17 CFR 201.431. NMS Plan.
VerDate Sep<11>2014 18:32 May 31, 2017 Jkt 241001 PO 00000 Frm 00225 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1](https://thefederalregister.org/doc/82_FR_25552/page/1.svg)
![Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices 25449
(A) Self-Regulatory Organization’s CAT NMS, LLC (the ‘‘Company’’), of that execute transactions in Eligible
Statement of the Purpose of, and which each Participant is a member, to Securities (‘‘Execution Venue ATSs’’))
Statutory Basis for, the Proposed Rule operate the CAT.14 Under the CAT NMS through fixed tier fees based on message
Change Plan, the Operating Committee of the traffic for Eligible Securities. (See
Company (‘‘Operating Committee’’) has Section 3(a)(2) [sic] below)
1. Purpose
discretion to establish funding for the • Industry Member Fees. Each
Bats BYX Exchange, Inc., Bats BZX Company to operate the CAT, including Industry Member (other than Execution
Exchange, Inc., Bats EDGA Exchange, establishing fees that the Participants Venue ATSs) will be placed into one of
Inc., Bats EDGX Exchange, Inc., BOX will pay, and establishing fees for nine tiers of fixed fees, based on
Options Exchange LLC, C2 Options Industry Members that will be ‘‘message traffic’’ in Eligible Securities
Exchange, Incorporated, Chicago Board implemented by the Participants (‘‘CAT for a defined period (as discussed
Options Exchange, Incorporated, Fees’’).15 The Participants are required below). Prior to the start of CAT
Chicago Stock Exchange, Inc., Financial to file with the SEC under Section 19(b) reporting, ‘‘message traffic’’ will be
Industry Regulatory Authority, Inc. of the Exchange Act any such CAT Fees comprised of historical equity and
(‘‘FINRA’’), Investors’ Exchange LLC, applicable to Industry Members that the equity options orders, cancels and
Miami International Securities Operating Committee approves.16 quotes provided by each exchange and
Exchange, LLC, MIAX PEARL, LLC, Accordingly, Bats submits this fee filing FINRA over the previous three months.
NASDAQ BX, Inc., Nasdaq GEMX, LLC, to propose the Consolidated Audit Trail After an Industry Member begins
Nasdaq ISE, LLC, Nasdaq MRX, LLC,7 Funding Fees, which will require reporting to the CAT, ‘‘message traffic’’
NASDAQ PHLX LLC, The NASDAQ Industry Members that are Bats will be calculated based on the Industry
Stock Market LLC, New York Stock members to pay the CAT Fees Member’s Reportable Events reported to
Exchange LLC, NYSE MKT LLC, NYSE determined by the Operating the CAT. Industry Members with lower
Arca, Inc. and NYSE National, Inc.8 Committee. levels of message traffic will pay a lower
(collectively, the ‘‘Participants’’) filed
(1) Executive Summary fee and Industry Members with higher
with the Commission, pursuant to
levels of message traffic will pay a
Section 11A of the Exchange Act 9 and The following provides an executive higher fee. (See Section 3(a)(2)(B) [sic]
Rule 608 of Regulation NMS summary of the CAT funding model below)
thereunder,10 the CAT NMS Plan.11 The approved by the Operating Committee,
Participants filed the Plan to comply • Execution Venue Fees. Each Equity
as well as Industry Members’ rights and
with Rule 613 of Regulation NMS under Execution Venue will be placed in one
obligations related to the payment of
the Exchange Act. The Plan was of two tiers of fixed fees based on
CAT Fees calculated pursuant to the
published for comment in the Federal market share, and each Options
CAT funding model. A detailed
Register on May 17, 2016,12 and Execution Venue will be placed in one
description of the CAT funding model
approved by the Commission, as of two tiers of fixed fees based on
and the CAT Fees follows this executive
modified, on November 15, 2016.13 The market share. Equity Execution Venue
summary.
Plan is designed to create, implement market share will be determined by
and maintain a consolidated audit trail (A) CAT Funding Model calculating each Equity Execution
(‘‘CAT’’) that would capture customer • CAT Costs. The CAT funding model Venue’s proportion of the total volume
and order event information for orders is designed to establish CAT-specific of NMS Stock and OTC Equity shares
in NMS Securities and OTC Equity fees to collectively recover the costs of reported by all Equity Execution Venues
Securities, across all markets, from the building and operating the CAT from all during the relevant time period.
time of order inception through routing, CAT Reporters, including Industry Similarly, market share for Options
cancellation, modification, or execution Members and Participants. The overall Execution Venues will be determined by
in a single consolidated data source. CAT costs for the calculation of the CAT calculating each Options Execution
The Plan accomplishes this by creating Fees in this fee filing are comprised of Venue’s proportion of the total volume
Plan Processor CAT costs and non-Plan of Listed Options contracts reported by
7 ISE Gemini, LLC, ISE Mercury, LLC and
Processor CAT costs incurred, and all Options Execution Venues during
International Securities Exchange, LLC have been estimated to be incurred, from the relevant time period. Equity
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, Execution Venues with a larger market
and Nasdaq ISE, LLC, respectively. See Securities November 21, 2016 through November
Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 FR 21, 2017. (See Section 3(a)(2)(E) [sic] share will pay a larger CAT Fee than
14547 (Mar. 21, 2017); Securities Exchange Act Rel. below 17) Equity Execution Venues with a smaller
No. 80326 (Mar. 29, 2017), 82 FR 16460 (Apr. 4,
2017); and Securities Exchange Act Rel. No. 80325
• Bifurcated Funding Model. The market share. Similarly, Options
(Mar. 29, 2017), 82 FR 16445 (Apr. 4, 2017). CAT NMS Plan requires a bifurcated Execution Venues with a larger market
8 National Stock Exchange, Inc. has been renamed funding model, where costs associated share will pay a larger CAT Fee than
NYSE National, Inc. See Securities Exchange Act with building and operating the CAT Options Execution Venues with a
Rel. No. 79902 (Jan. 30, 2017), 82 FR 9258 (Feb. 3, would be borne by (1) Participants and smaller market share. (See Section
2017). 3(a)(2)(C) [sic] below)
9 15 U.S.C. 78k–1. Industry Members that are Execution
10 17 CFR 242.608. Venues for Eligible Securities through • Cost Allocation. For the reasons
11 See Letter from the Participants to Brent J. fixed tier fees based on market share, discussed below, in designing the
Fields, Secretary, Commission, dated September 30, and (2) Industry Members (other than model, the Operating Committee
2014; and Letter from Participants to Brent J. Fields, alternative trading systems (‘‘ATSs’’) determined that 75 percent of total costs
Secretary, Commission, dated February 27, 2015. recovered would be allocated to
mstockstill on DSK30JT082PROD with NOTICES
On December 24, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter
14 The Plan also serves as the limited liability Industry Members (other than Execution
from Participants to Brent J. Fields, Secretary, company agreement for the Company. Venue ATSs) and 25 percent would be
15 Section 11.1(b) of the CAT NMS Plan.
Commission, dated December 23, 2015. allocated to Execution Venues. In
12 Securities Exchange Act Rel. No. 77724 (Apr. 16 Id.
addition, the Operating Committee
27, 2016), 81 FR 30614 (May 17, 2016). 17 The Commission notes that references to
13 Securities Exchange Act Rel. No. 79318 (Nov. Sections 3(a)(2) and 3(a)(3) in this Executive
determined to allocate 75 percent of
15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘Approval Summary should be instead to Sections II.A.1.(2) Execution Venue costs recovered to
Order’’). and II.A.1.(3), respectively. Equity Execution Venues and 25 percent
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![25450 Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices
to Options Execution Venues. (See (other than Execution Venue ATSs) strictly variable or metered funding
Section 3(a)(2)(D) [sic] below) through fixed tier fees based on message model based on message volume would
• Comparability of Fees. The CAT traffic. In its order approving the CAT be far more likely to affect market
funding model requires that the CAT NMS Plan, the Commission determined behavior and place an inappropriate
Fees charged to the CAT Reporters with that the proposed funding model was burden on competition. Moreover, as
the most CAT-related activity (measured ‘‘reasonable’’ 18 and ‘‘reflects a the SEC noted in approving the CAT
by market share and/or message traffic, reasonable exercise of the Participants’ NMS Plan, ‘‘[t]he Participants also have
as applicable) are generally comparable funding authority to recover the offered a reasonable basis for
(where, for these comparability Participants’ costs related to the establishing a funding model based on
purposes, the tiered fee structure takes CAT.’’ 19 broad tiers, in that it be may be easier
into consideration affiliations between More specifically, the Commission to implement.’’ 24
or among CAT Reporters, whether stated in approving the CAT NMS Plan In addition, multiple reviews of
Execution Venues and/or Industry that ‘‘[t]he Commission believes that the current broker-dealer order and trading
Members). (See Section 3(a)(2)(F) [sic] proposed funding model is reasonably data submitted under existing reporting
below) designed to allocate the costs of the CAT requirements showed a wide range in
between the Participants and Industry activity among broker-dealers, with a
(B) CAT Fees for Industry Members
Members.’’ 20 The Commission further number of broker-dealers submitting
• Fee Schedule. The quarterly CAT noted the following: fewer than 1,000 orders per month and
Fees for each tier for Industry Members other broker-dealers submitting millions
The Commission believes that the
are set forth in the two fee schedules in proposed funding model reflects a reasonable and even billions of orders in the same
the Consolidated Audit Trail Funding exercise of the Participants’ funding period. Accordingly, the CAT NMS Plan
Fees, one for Equity ATSs and one for authority to recover the Participants’ costs includes a tiered approach to fees. The
Industry Members other than Equity related to the CAT. The CAT is a regulatory tiered approach helps ensure that fees
ATSs. (See Section 3(a)(3)(B) [sic] facility jointly owned by the Participants and are equitably allocated among similarly
below) . . . the Exchange Act specifically permits situated CAT Reporters and furthers the
• Quarterly Invoices. Industry the Participants to charge their members fees goal of lessening the impact on smaller
Members will be billed quarterly for to fund their self-regulatory obligations. The
firms.25 The self-regulatory
Commission further believes that the
CAT Fees, with the invoices payable organizations considered several
proposed funding model is designed to
within 30 days. The quarterly invoices impose fees reasonably related to the approaches to developing a tiered
will identify within which tier the Participants’ self-regulatory obligations model, including defining fee tiers
Industry Member falls. (See Section because the fees would be directly associated based on such factors as size of firm,
3(a)(3)(C) [sic] below) with the costs of establishing and message traffic or trading dollar volume.
• Centralized Payment. Each Industry maintaining the CAT, and not unrelated SRO After analyzing the alternatives, it was
Member will receive from the Company services.21 concluded that the tiering should be
one invoice for its applicable CAT Fees, Accordingly, the funding model based on the relative impact of CAT
not separate invoices from each imposes fees on both Participants and Reporters on the CAT System.
Participant of which it is a member. The Industry Members. Accordingly, the CAT NMS Plan
Industry Members will pay its CAT Fees In addition, as discussed in Appendix contemplates that costs will be allocated
to the Company via the centralized C of the CAT NMS Plan, the Operating across the CAT Reporters on a tiered
system for the collection of CAT Fees Committee considered the advantages basis to allocate costs to those CAT
established by the Operating Committee. and disadvantages of a variety of Reporters that contribute more to the
(See Section 3(a)(3)(C) [sic] below) alternative funding and cost allocation costs of creating, implementing and
• Billing Commencement. Industry models before selecting the proposed maintaining the CAT.26 The fees to be
Members will begin to receive invoices model.22 After analyzing the various assessed at each tier are calculated so as
for CAT Fees as promptly as possible alternatives, the Operating Committee to recoup a proportion of costs
following the establishment of a billing determined that the proposed tiered, appropriate to the message traffic or
mechanism. Bats will issue a Regulatory fixed fee funding model provides a market share (as applicable) from CAT
Circular to its members when the billing variety of advantages in comparison to Reporters in each tier. Therefore,
mechanism is established, specifying the alternatives. First, the fixed fee Industry Members generating the most
the date when such invoicing of model, as opposed to a variable fee message traffic will be in the higher
Industry Members will commence. (See model, provides transparency, ease of tiers, and therefore be charged a higher
Section 3(a)(2)(G) [sic] below) calculation, ease of billing and other fee. Industry Members with lower levels
administrative functions, and of message traffic will be in lower tiers
(2) Description of the CAT Funding
predictability of a fixed fee. Such factors and will be assessed a smaller fee for the
Model CAT.27 Correspondingly, Execution
are crucial to estimating a reliable
Article XI of the CAT NMS Plan revenue stream for the Company and for Venues with the highest market share
requires the Operating Committee to permitting CAT Reporters to reasonably will be in the top tier, and therefore will
approve the operating budget, including predict their payment obligations for be charged a higher fee. Execution
projected costs of developing and budgeting purposes.23 Additionally, a
operating the CAT for the upcoming would pay different rates per message traffic order
year. As set forth in Article XI of the 18 Approval
event (e.g., an Industry Member with the largest
Order at 84796. amount of message traffic in one tier would pay a
CAT NMS Plan, the CAT NMS Plan
mstockstill on DSK30JT082PROD with NOTICES
19 Id. at 84794.
smaller amount per order event than an Industry
requires a bifurcated funding model, 20 Id. at 84795. Member in the same tier with the least amount of
where costs associated with building 21 Id. at 84794. message traffic). Such variation is the natural result
and operating the Central Repository 22 Section B.7, Appendix C of the CAT NMS Plan, of a tiered fee structure.
24 Approval Order at 84796.
would be borne by (1) Participants and Approval Order at 85006.
23 In choosing a tiered fee structure, the SROs 25 Section B.7, Appendix C of the CAT NMS Plan,
Industry Members that are Execution concluded that the variety of benefits offered by a Approval Order at 85006.
Venues through fixed tier fees based on tiered fee structure, discussed above, outweighed 26 Approval Order at 85005.
market share, and (2) Industry Members the fact that Industry Members in any particular tier 27 Id.
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![Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices 25451
Venues with a lower market share will and would not be assessed a fee for this selected approach of charging a fee
be in the lower tier and will be assessed traffic directly as they would under a designated to cover CAT costs only.
a smaller fee for the CAT.28 more directly metered model. In A full description of the funding
The Commission also noted in contrast, strictly variable or metered model is set forth below. This
approving the CAT NMS Plan that funding models based on message description includes the framework for
‘‘[t]he Participants have offered a volume were far more likely to affect the funding model as set forth in the
credible justification for using different market behavior. In approving the CAT CAT NMS Plan, as well as the details as
criteria to charge Execution Venues NMS Plan, the SEC stated that ‘‘[t]he to how the funding model will be
(market share) and Industry Members Participants also offered a reasonable applied in practice, including the
(message traffic)’’ 29 in the CAT funding basis for establishing a funding model number of fee tiers and the applicable
model. While there are multiple factors based on broad tiers, in that it may be fees for each tier. Bats notes that the
that contribute to the cost of building, . . . less likely to have an incremental complete funding model is described
maintaining and using the CAT, deterrent effect on liquidity below, including those fees that are to
processing and storage of incoming provision.’’ 35 be paid by the Participants. The
message traffic is one of the most The CAT NMS Plan is structured to proposed Consolidated Audit Trail
significant cost drivers for the CAT.30 avoid potential conflicts raised by the Funding Fees, however, do not apply to
Thus, the CAT NMS Plan provides that Operating Committee determining fees the Participants; the proposed
the fees payable by Industry Members applicable to its own members—the Consolidated Audit Trail Funding Fees
(other than Execution Venue ATSs) will Participants. First, the Company will be
only apply to Industry Members. The
be based on the message traffic CAT fees for Participants will be
operated on a ‘‘break-even’’ basis, with
generated by such Industry Member.31 imposed separately by the Operating
fees imposed to cover costs and an
The CAT NMS Plan provides that the Committee pursuant to the CAT NMS
Operating Committee will use different appropriate reserve. Any surpluses will
Plan.
criteria to establish fees for Execution be treated as an operational reserve to
Venues and non-Execution Venues due offset future fees and will not be (A) Funding Principles
to the fundamental differences between distributed to the Participants as Section 11.2 of the CAT NMS Plan
the two types of entities. In particular, profits.36 To ensure that the sets forth the principles that the
the CAT NMS Plan provides that fees Participants’ operation of the CAT will Operating Committee applied in
charged to CAT Reporters that are not contribute to the funding of their establishing the funding for the
Execution Venues will be based on the other operations, Section 11.1(c) of the Company. The Operating Committee has
level of market share and that costs CAT NMS Plan specifically states that considered these funding principles as
charged to Industry Members (other ‘‘[a]ny surplus of the Company’s well as the other funding requirements
than Execution Venue ATSs) will be revenues over its expenses shall be set forth in the CAT NMS Plan and in
based upon message traffic.32 Because treated as an operational reserve to Rule 613 in developing the proposed
most Participant message traffic consists offset future fees.’’ In addition, as set funding model. The following are the
of quotations, and Participants usually forth in Article VIII of the CAT NMS funding principles in Section 11.2 of the
disseminate quotations in all Plan, the Company ‘‘intends to operate CAT NMS Plan:
instruments they trade, regardless of in a manner such that it qualifies as a • To create transparent, predictable
execution volume, Execution Venues ‘business league’ within the meaning of revenue streams for the Company that
that are Participants generally Section 501(c)(6) of the [Internal are aligned with the anticipated costs to
disseminate similar amounts of message Revenue] Code.’’ To qualify as a build, operate and administer the CAT
traffic. Accordingly, basing fees for business league, an organization must and other costs of the Company;
Execution Venues on message traffic ‘‘not [be] organized for profit and no • To establish an allocation of the
would not provide the same degree of part of the net earnings of [the Company’s related costs among
differentiation among Execution Venues organization can] inure[] to the benefit Participants and Industry Members that
that it does among Industry Members of any private shareholder or is consistent with the Exchange Act,
(other than Execution Venue ATSs). In individual.’’ 37 As the SEC stated when taking into account the timeline for
contrast, execution volume more approving the CAT NMS Plan, ‘‘the implementation of the CAT and
accurately delineates the different levels Commission believes that the distinctions in the securities trading
of trading activity of Execution Company’s application for Section operations of Participants and Industry
Venues.33 501(c)(6) business league status Members and their relative impact upon
The CAT NMS Plan’s funding model addresses issues raised by commenters the Company’s resources and
also is structured to avoid a ‘‘reduction about the Plan’s proposed allocation of operations;
in market quality.’’ 34 The tiered, fixed profit and loss by mitigating concerns • To establish a tiered fee structure in
fee funding model is designed to limit that the Company’s earnings could be which the fees charged to: (i) CAT
the disincentives to providing liquidity used to benefit individual Reporters that are Execution Venues,
to the market. For example, the Participants.’’ 38 including ATSs, are based upon the
Participants expect that a firm that had Finally, by adopting a CAT-specific level of market share; (ii) Industry
a large volume of quotes would likely be fee, the Participants will be fully Members’ non-ATS activities are based
categorized in one of the upper tiers, transparent regarding the costs of the upon message traffic; (iii) the CAT
CAT. Charging a general regulatory fee, Reporters with the most CAT-related
28 Id.
which would be used to cover CAT activity (measured by market share and/
mstockstill on DSK30JT082PROD with NOTICES
29 Id.
at 84796. costs as well as other regulatory costs, or message traffic, as applicable) are
30 SectionB.7, Appendix C of the CAT NMS Plan,
would be less transparent than the generally comparable (where, for these
Approval Order at 85005.
31 Section 11.3(b) of the CAT NMS Plan.
comparability purposes, the tiered fee
32 Section 11.2(c) of the CAT NMS Plan. 35 Approval Order at 84796. structure takes into consideration
33 Section B.7, Appendix C of the CAT NMS Plan, 36 Id.at 84792. affiliations between or among CAT
Approval Order at 85005. 37 26 U.S.C. 501(c)(6). Reporters, whether Execution Venue
34 Section 11.2(e) of the CAT NMS Plan. 38 Approval Order at 84793. and/or Industry Members);
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![25452 Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices
• To provide for ease of billing and message traffic to the CAT would be percentage of total market volume for
other administrative functions; adequately differentiated from Industry each tier based on the historical message
• To avoid any disincentives such as Members submitting substantially more traffic upon which Industry Members
placing an inappropriate burden on message traffic. The Operating had been initially ranked. Taking this
competition and a reduction in market Committee considered historical into account along with the resulting
quality; and message traffic generated by Industry percentage of total recovery, the
• To build financial stability to Members across all exchanges and as percentage allocation of costs recovered
support the Company as a going submitted to FINRA’s Order Audit Trail for each tier were assigned, allocating
concern. System (‘‘OATS’’), and considered the higher percentages of recovery to tiers
distribution of firms with similar levels with higher levels of message traffic
(B) Industry Member Tiering
of message traffic, grouping together while avoiding any inappropriate
Under Section 11.3(b) of the CAT firms with similar levels of message burden on competition. Furthermore, by
NMS Plan, the Operating Committee is traffic. Based on this, the Operating using percentages of Industry Members
required to establish fixed fees to be Committee determined that nine tiers and costs recovered per tier, the
payable by Industry Members, based on would best group firms with similar Operating Committee sought to include
message traffic generated by such levels of message traffic, charging those stability and elasticity within the
Industry Member, with the Operating firms with higher impact on the CAT funding model, allowing the funding
Committee establishing at least five and more, while lowering the burden of model to respond to changes in either
no more than nine tiers. Industry Members that have less CAT- the total number of Industry Members or
The CAT NMS Plan clarifies that the related activity. the total level of message traffic.
fixed fees payable by Industry Members Each Industry Member (other than
pursuant to Section 11.3(b) shall, in Execution Venue ATSs) will be ranked The following chart illustrates the
addition to any other applicable by message traffic and tiered by breakdown of nine Industry Member
message traffic, include message traffic predefined Industry Member tiers across the monthly average of total
generated by: (i) An ATS that does not percentages (the ‘‘Industry Member equity and equity options orders,
execute orders that is sponsored by such Percentages’’). The Operating cancels and quotes in Q1 2016 and
Industry Member; and (ii) routing orders Committee determined to use identifies relative gaps across varying
to and from any ATS sponsored by such predefined percentages rather than fixed levels of Industry Member message
Industry Member. In addition, the volume thresholds to allow the funding traffic as well as message traffic
Industry Member fees will apply to model to ensure that the total CAT fees thresholds between the largest of
Industry Members that act as routing collected recover the intended CAT Industry Member message traffic gaps.
broker-dealers for exchanges. The costs regardless of changes in the total The Operating Committee referenced
Industry Member fees will not be level of message traffic. To determine similar distribution illustrations to
applicable, however, to an ATS that the fixed percentage of Industry determine the appropriate division of
qualifies as an Execution Venue, as Members in each tier, the Operating Industry Member percentages in each
discussed in more detail in the section Committee analyzed historical message tier by considering the grouping of firms
on Execution Venue tiering. traffic generated by Industry Members with similar levels of message traffic
In accordance with Section 11.3(b), across all exchanges and as submitted to and seeking to identify relative
the Operating Committee approved a OATS, and considered the distribution breakpoints in the message traffic
tiered fee structure for Industry of firms with similar levels of message between such groupings. In reviewing
Members (other than Execution Venue traffic, grouping together firms with the chart and its corresponding table,
ATSs) as described in this section. In similar levels of message traffic. Based note that while these distribution
determining the tiers, the Operating on this, the Operating Committee illustrations were referenced to help
Committee considered the funding identified tiers that would group firms differentiate between Industry Member
principles set forth in Section 11.2 of with similar levels of message traffic, tiers, the proposed funding model is
the CAT NMS Plan, seeking to create charging those firms with higher impact directly driven, not by fixed message
funding tiers that take into account the on the CAT more, while lowering the traffic thresholds, but rather by fixed
relative impact on CAT System burden on Industry Members that have percentages of Industry Members across
resources of different Industry Members, less CAT-related activity. tiers to account for fluctuating levels of
and that establish comparable fees The percentage of costs recovered by message traffic across time and to
among the CAT Reporters with the most each Industry Member tier will be provide for the financial stability of the
Reportable Events. The Operating determined by predefined percentage CAT by ensuring that the funding model
Committee has determined that allocations (the ‘‘Industry Member will recover the required amounts
establishing nine tiers results in the Recovery Allocation’’). In determining regardless of changes in the number of
fairest allocation of fees, best the fixed percentage allocation of costs Industry Members or the amount of
distinguishing between Industry recovered for each tier, the Operating message traffic. Actual messages in any
Members with differing levels of Committee considered the impact of tier will vary based on the actual traffic
message traffic. Thus, each such CAT Reporter message traffic on the in a given measurement period, as well
Industry Member will be placed into CAT System as well as the distribution as the number of firms included in the
one of nine tiers of fixed fees, based on of total message volume across Industry measurement period. The Industry
‘‘message traffic’’ for a defined period Members while seeking to maintain Member Percentages and Industry
mstockstill on DSK30JT082PROD with NOTICES
(as discussed below). A nine tier comparable fees among the largest CAT Member Recovery Allocation for each
structure was selected to provide the Reporters. Accordingly, following the tier will remain fixed with each
widest range of levels for tiering determination of the percentage of Industry Member’s tier to be reassigned
Industry Members such that Industry Industry Members in each tier, the periodically, as described below in
Members submitting significantly less Operating Committee identified the Section 3(a)(1)(H) [sic].
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months.39 Prior to the start of CAT Industry Members while still providing model treats the two types of Execution
reporting, orders would be comprised of predictability in the tiering for Industry Venues.
the total number of equity and equity Members. Because fee tiers will be
(I) NMS Stocks and OTC Equity
options orders received and originated calculated based on message traffic from
Securities
by a member of an exchange or FINRA the prior three months, the Operating
over the previous three-month period, Committee will begin calculating Section 11.3(a)(i) of the CAT NMS
including principal orders, cancel/ message traffic based on an Industry Plan states that each Execution Venue
replace orders, market maker orders Member’s Reportable Events reported to that (i) executes transactions or, (ii) in
originated by a member of an exchange, the CAT once the Industry Member has the case of a national securities
and reserve (iceberg) orders as well as been reporting to the CAT for three association, has trades reported by its
order routes and executions originated months. Prior to that, fee tiers will be members to its trade reporting facility or
by a member of FINRA, and excluding calculated as discussed above with facilities for reporting transactions
order rejects and implied orders.40 In regard to the period prior to CAT effected otherwise than on an exchange,
addition, prior to the start of CAT reporting. in NMS Stocks or OTC Equity Securities
reporting, cancels would be comprised will pay a fixed fee depending on the
of the total number of equity and equity (C) Execution Venue Tiering market share of that Execution Venue in
option cancels received and originated Under Section 11.3(a) of the CAT NMS Stocks and OTC Equity Securities,
by a member of an exchange or FINRA NMS Plan, the Operating Committee is with the Operating Committee
over a three-month period, excluding required to establish fixed fees payable establishing at least two and not more
order modifications (e.g., order updates, by Execution Venues. Section 1.1 of the than five tiers of fixed fees, based on an
order splits, partial cancels). CAT NMS Plan defines an Execution Execution Venue’s NMS Stocks and
Furthermore, prior to the start of CAT Venue as ‘‘a Participant or an alternative OTC Equity Securities market share. For
reporting, quotes would be comprised of trading system (‘‘ATS’’) (as defined in these purposes, market share for
information readily available to the Rule 300 of Regulation ATS) that Execution Venues that execute
exchanges and FINRA, such as the total operates pursuant to Rule 301 of transactions will be calculated by share
number of historical equity and equity Regulation ATS (excluding any such volume, and market share for a national
options quotes received and originated ATS that does not execute orders).’’ 42 securities association that has trades
by a member of an exchange or FINRA The Participants determined that reported by its members to its trade
over the prior three-month period. ATSs should be included within the reporting facility or facilities for
After an Industry Member begins definition of Execution Venue. Given reporting transactions effected
reporting to the CAT, ‘‘message traffic’’ the similarity between the activity of otherwise than on an exchange in NMS
will be calculated based on the Industry Stocks or OTC Equity Securities will be
exchanges and ATSs, both of which
Member’s Reportable Events reported to calculated based on share volume of
meet the definition of an ‘‘exchange’’ as
the CAT as will be defined in the trades reported, provided, however, that
set forth in the Exchange Act and the
Technical Specifications.41 the share volume reported to such
fact that the similar trading models
The Operating Committee has national securities association by an
would have similar anticipated burdens
determined to calculate fee tiers every Execution Venue shall not be included
on the CAT, the Participants determined
three months, on a calendar quarter in the calculation of such national
that ATSs should be treated in the same
basis, based on message traffic from the security association’s market share.
manner as the exchanges for the In accordance with Section 11.3(a)(i)
prior three months. Based on its
purposes of determining the level of fees of the CAT NMS Plan, the Operating
analysis of historical data, the Operating
associated with the CAT.43 Committee approved a tiered fee
Committee believes that calculating tiers
Given the differences between structure for Equity Execution Venues
based on three months of data will
Execution Venues that trade NMS and Option Execution Venues. In
provide the best balance between
Stocks and/or OTC Equity Securities determining the Equity Execution
reflecting changes in activity by
and Execution Venues that trade Listed Venue Tiers, the Operating Committee
39 The SEC approved exemptive relief permitting Options, Section 11.3(a) addresses considered the funding principles set
Options Market Maker quotes to be reported to the Execution Venues that trade NMS forth in Section 11.2 of the CAT NMS
Central Repository by the relevant Options Stocks and/or OTC Equity Securities Plan, seeking to create funding tiers that
Exchange in lieu of requiring that such reporting be separately from Execution Venues that
done by both the Options Exchange and the Options take into account the relative impact on
Market Maker, as required by Rule 613 of
trade Listed Options. Equity and system resources of different Equity
Regulation NMS. See Securities Exchange Act Options Execution Venues are treated Execution Venues, and that establish
Release No. 77265 (Mar. 1, 2017 [sic], 81 FR 11856 separately for two reasons. First, the comparable fees among the CAT
(Mar. 7, 2016). This exemption applies to Options differing quoting behavior of Equity and
Market Maker quotes for CAT reporting purposes
Reporters with the most Reportable
only. Therefore, notwithstanding the reporting
Options Execution Venues makes Events. Each Equity Execution Venue
exemption provided for Options Market Maker comparison of activity between will be placed into one of two tiers of
quotes, Options Market Maker quotes will be Execution Venues difficult. Second, fixed fees, based on the Execution
included in the calculation of total message traffic Execution Venue tiers are calculated
for Options Market Makers for purposes of tiering
Venue’s NMS Stocks and OTC Equity
under the CAT funding model both prior to CAT
based on market share of share volume, Securities market share. In choosing two
reporting and once CAT reporting commences. and it is therefore difficult to compare tiers, the Operating Committee
40 Consequently, firms that do not have ‘‘message market share between asset classes (i.e., performed an analysis similar to that
traffic’’ reported to an exchange or OATS before equity shares versus options contracts). discussed above with regard to the non-
mstockstill on DSK30JT082PROD with NOTICES
they are reporting to the CAT would not be subject Discussed below is how the funding
to a fee until they begin to report information to Execution Venue Industry Members to
CAT. determine the number of tiers for Equity
41 If an Industry Member (other than an Execution 42 Although FINRA does not operate an execution
Execution Venues. The Operating
Venue ATS) has no orders, cancels or quotes prior venue, because it is a Participant, it is considered Committee determined to establish two
to the commencement of CAT Reporting, or no an ‘‘Execution Venue’’ under the Plan for purposes
Reportable Events after CAT reporting commences, of determining fees. tiers for Equity Execution Venues, rather
then the Industry Member would not have a CAT 43 Section B.7, Appendix C of the CAT NMS Plan, than a larger number of tiers as
fee obligation. Approval Order at 85005. established for non-Execution Venue
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![Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices 25455
Industry Members, because the two tiers during the recent tiering period. A largest CAT Reporters. Accordingly,
were sufficient to distinguish between 37.80/62.20 split was applied to the following the determination of the
the smaller number of Equity Execution ATS and non-ATS breakdown of FINRA percentage of Execution Venues in each
Venues based on market share. market share, with FINRA tiered based tier, the Operating Committee identified
Furthermore, the incorporation of only on the non-ATS portion of its TRF the percentage of total market volume
additional Equity Execution Venue tiers market share of share volume. for each tier based on the historical
would result in significantly higher fees Based on this, the Operating market share upon which Execution
for Tier 1 Equity Execution Venues and Committee considered the distribution Venues had been initially ranked.
diminish comparability between of Execution Venues, and grouped Taking this into account along with the
Execution Venues and Industry together Execution Venues with similar resulting percentage of total recovery,
Members. levels of market share of share volume. the percentage allocation of costs
Each Equity Execution Venue will be In doing so, the Participants considered recovered for each tier were assigned,
ranked by market share and tiered by that, as previously noted, Execution allocating higher percentages of
predefined Execution Venue Venues in many cases have similar recovery to the tier with a higher level
percentages, (the ‘‘Equity Execution levels of message traffic due to quoting of market share while avoiding any
Venue Percentages’’). In determining the activity, and determined that it was inappropriate burden on competition.
fixed percentage of Equity Execution simpler and more appropriate to have Furthermore, due to the similar levels of
Venues in each tier, the Operating fewer, rather than more, Execution impact on the CAT System across
Committee looked at historical market Venue tiers to distinguish between Execution Venues, there is less variation
share of share volume for execution Execution Venues. in CAT Fees between the highest and
venues. Equities Execution Venue The percentage of costs recovered by lowest of tiers for Execution Venues.
market share of share volume were each Equity Execution Venue tier will Furthermore, by using percentages of
sourced from market statistics made be determined by predefined percentage Equity Execution Venues and costs
publicly-available by Bats Global allocations (the ‘‘Equity Execution recovered per tier, the Operating
Markets, Inc. (‘‘Bats’’). ATS market Venue Recovery Allocation’’). In Committee sought to include stability
share of share volume was sourced from determining the fixed percentage and elasticity within the funding model,
market statistics made publicly- allocation of costs recovered for each allowing the funding model to respond
available by FINRA. FINRA trading [sic] tier, the Operating Committee to changes in either the total number of
reporting facility (‘‘TRF’’) market share considered the impact of CAT Reporter Equity Execution Venues or changes in
of share volume was sourced from market share activity on the CAT market share.
market statistics made publicly System as well as the distribution of Based on this analysis, the Operating
available by Bats. As indicated by total market volume across Equity Committee approved the following
FINRA, ATSs accounted for 37.80% of Execution Venues while seeking to Equity Execution Venue Percentages
the share volume across the TRFs maintain comparable fees among the and Recovery Allocations:
Percentage of Percentage of
Equity Execution Percentage of
Equity Execution Venue tier Execution Venue total 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 tier to be reassigned periodically, as For these purposes, market share will be
relative separation of market share of described below in Section 3(a)(1)(I) calculated by contract volume.
share volume between Tier 1 and Tier [sic]. In accordance with Section 11.3(a)(ii)
2 Equity Execution Venues. In of the CAT NMS Plan, the Operating
reviewing the table, note that while this Equity market Committee approved a tiered fee
division was referenced as a data point share of
share volume structure for Options Execution Venues.
Equity Execution Venue tier
to help differentiate between Equity (%) In determining the tiers, the Operating
Execution Venue tiers, the proposed Committee considered the funding
funding model is directly driven not by Tier 1 .................................... ≥1 principles set forth in Section 11.2 of
market share thresholds, but rather by Tier 2 .................................... <1 the CAT NMS Plan, seeking to create
fixed percentages of Equity Execution funding tiers that take into account the
Venues across tiers to account for (II) Listed Options relative impact on system resources of
fluctuating levels of market share across different Options Execution Venues,
time. Actual market share in any tier Section 11.3(a)(ii) of the CAT NMS and that establish comparable fees
will vary based on the actual market Plan states that each Execution Venue among the CAT Reporters with the most
activity in a given measurement period, that executes transactions in Listed Reportable Events. Each Options
mstockstill on DSK30JT082PROD with NOTICES
as well as the number of Equity Options will pay a fixed fee depending Execution Venue will be placed into one
Execution Venues included in the on the Listed Options market share of of two tiers of fixed fees, based on the
measurement period. The Equity that Execution Venue, with the Execution Venue’s Listed Options
Execution Venue Percentages and Operating Committee establishing at market share. In choosing two tiers, the
Equity Execution Venue Recovery least two and no more than five tiers of Operating Committee performed an
Allocation for each tier will remain fixed fees, based on an Execution analysis similar to that discussed above
fixed with each Equity Execution Venue Venue’s Listed Options market share. with regard to Industry Members (other
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![25456 Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices
than Execution Venue ATSs) to Venue Percentages’’). To determine the market share activity on the CAT
determine the number of tiers for fixed percentage of Options Execution System as well as the distribution of
Options Execution Venues. The Venues in each tier, the Operating total market volume across Options
Operating Committee determined to Committee analyzed the historical and Execution Venues while seeking to
establish two tiers for Options publicly available market share of maintain comparable fees among the
Execution Venues, rather than a larger Options Execution Venues to group largest CAT Reporters. Furthermore, by
number of tiers as established for Options Execution Venues with similar using percentages of Options Execution
Industry Members (other than Execution market shares across the tiers. Options Venues and costs recovered per tier, the
Venue ATSs), because the two tiers Execution Venue market share of share Operating Committee sought to include
were sufficient to distinguish between volume were sourced from market
stability and elasticity within the
the smaller number of Options statistics made publicly-available by
funding model, allowing the funding
Execution Venues based on market Bats. The process for developing the
share. Furthermore, due to the smaller Options Execution Venue Percentages model to respond to changes in either
number of Options Execution Venues, was the same as discussed above with the total number of Options Execution
the incorporation of additional Options regard to Equity Execution Venues. Venues or changes in market share. The
Execution Venue tiers would result in The percentage of costs recovered by process for developing the Options
significantly higher fees for Tier 1 each Options Execution Venue tier will Execution Venue Recovery Allocation
Options Execution Venues and reduce be determined by predefined percentage was the same as discussed above with
comparability between Execution allocations (the ‘‘Options Execution regard to Equity Execution Venues.
Venues and Industry Members. Venue Recovery Allocation’’). In Based on this analysis, the Operating
Each Options Execution Venue will determining the fixed percentage Committee approved the following
be ranked by market share and tiered by allocation of costs recovered for each Options Execution Venue Percentages
predefined Execution Venue tier, the Operating Committee and Recovery Allocations:
percentages, (the ‘‘Options Execution considered the impact of CAT Reporter
Percentage of Percentage of
Options Execution Percentage of
Options Execution Venue tier Execution Venue total 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 during the relevant time period.
Options mar-
relative separation of market share of Similarly, market share for Options
ket
share volume between Tier 1 and Tier Options Execution Venue tier share of share
Execution Venues will be determined by
volume
calculating each Options Execution
2 Options Execution Venues. In (%)
reviewing the table, note that while this Venue’s proportion of the total volume
division was referenced as a data point Tier 2 .................................... <1 of Listed Options contracts reported by
to help differentiate between Options all Options Execution Venues during
Execution Venue tiers, the proposed (III) Market Share/Tier Assignments the relevant time period.
funding model is directly driven, not by The Operating Committee has
The Operating Committee determined determined to calculate fee tiers for
market share thresholds, but rather by that, prior to the start of CAT reporting,
fixed percentages of Options Execution Execution Venues every three months
market share for Execution Venues based on market share from the prior
Venues across tiers to account for would be sourced from publicly-
fluctuating levels of market share across three months. Based on its analysis of
available market data. Options and historical data, the Operating Committee
time. Actual market share in any tier equity volumes for Participants will be believes calculating tiers based on three
will vary based on the actual market sourced from market data made publicly months of data will provide the best
activity in a given measurement period, available by Bats while Execution balance between reflecting changes in
as well as the number of Options Venue ATS volumes will be sourced activity by Execution Venues while still
Execution Venues included in the from market data made publicly providing predictability in the tiering
measurement period. The Options available by FINRA. Set forth in the for Execution Venues.
Execution Venue Percentages and Appendix are two charts, one listing the
Equity Execution Venue Recovery current Equity Execution Venues, each (D) Allocation of Costs
Allocation for each tier will remain with its rank and tier, and one listing In addition to the funding principles
fixed with each Options Execution the current Options Execution Venues, discussed above, including
Venue tier to be reassigned periodically, each with its rank and tier. comparability of fees, Section 11.1(c) of
as described below in Section 3(a)(1)(I) After the commencement of CAT the CAT NMS Plan also requires
[sic]. reporting, market share for Execution expenses to be fairly and reasonably
mstockstill on DSK30JT082PROD with NOTICES
Venues will be sourced from data shared among the Participants and
Options mar- reported to the CAT. Equity Execution Industry Members. Accordingly, in
ket Venue market share will be determined developing the proposed fee schedules
Options Execution Venue tier share of share
volume by calculating each Equity Execution pursuant to the funding model, the
(%) Venue’s proportion of the total volume Operating Committee calculated how
of NMS Stock and OTC Equity shares the CAT costs would be allocated
Tier 1 .................................... ≥1 reported by all Equity Execution Venues between Industry Members and
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![Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices 25463
EXECUTION VENUE COMPLEXES
Listing of Equity Execution Listing of options Execution Total fees by
Execution Venue complex Venue tiers 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 Listing of ATS tiers
tiers IM complex
Industry Member Complex 1 .................................................... • Tier 1 (x2) ............................ • Tier 2 (x1) ............................ $963,300
Industry Member Complex 2 .................................................... • Tier 1 (x1) ............................ • Tier 2 (x3) ............................ 949,674
• Tier 4 (x1)
Industry Member Complex 3 .................................................... • Tier 1 (x1) ............................ • Tier 2 (x1) ............................ 883,888
• Tier 2 (x1)
Industry Member Complex 4 .................................................... • Tier 1 (x1) ............................ • N/A ..................................... 808,472
• Tier 2 (x1)
• Tier 4 (x1)
Industry Member Complex 5 .................................................... • Tier 2 (x1) ............................ • Tier 2 (x1) ............................ 796,595
• Tier 3 (x1)
• Tier 4 (x1)
• Tier 7 (x1)
(G) Billing Onset deems appropriate. The Operating extent that the Operating Committee
Under Section 11.1(c) of the CAT Committee is authorized to review such approves changes to the number of tiers
NMS Plan, to fund the development and fee schedule on a more regular basis, but in the funding model or the fees
implementation of the CAT, the shall not make any changes on more assigned to each tier, then Bats will file
Company shall time the imposition and than a semi-annual basis unless, such changes with the SEC pursuant to
collection of all fees on Participants and pursuant to a Supermajority Vote, the Section 19(b) of the Exchange Act, and
Industry Members in a manner Operating Committee concludes that any such changes will become effective
reasonably related to the timing when such change is necessary for the in accordance with the requirements of
the Company expects to incur such adequate funding of the Company.’’ Section 19(b).
development and implementation costs. With such reviews, the Operating
Committee will review the distribution (I) Initial and Periodic Tier
The Company is currently incurring Reassignments
such development and implementation of Industry Members and Execution
costs and will continue to do so prior Venues across tiers, and make any The Operating Committee has
to the commencement of CAT reporting updates to the percentage of CAT determined to calculate fee tiers every
and thereafter. For example, the Plan Reporters allocated to each tier as may three months based on market share or
Processor has required up-front be necessary. In addition, the reviews message traffic, as applicable, from the
payments to begin building the CAT. In will evaluate the estimated ongoing prior three months. For the initial tier
addition, the Company continues to CAT costs and the level of the operating assignments, the Company will
incur consultant and legal expenses on reserve. To the extent that the total CAT calculate the relevant tier for each CAT
an on-going basis to implement the costs decrease, the fees would be Reporter using the three months of data
CAT. Accordingly, the Operating adjusted downward, and, to the extent prior to the commencement date. As
Committee determined that all CAT that the total CAT costs increase, the with the initial tier assignment, for the
Reporters, including both Industry fees would be adjusted upward.52 tri-monthly reassignments, the
Members and Execution Venues Furthermore, any surplus of the Company will calculate the relevant tier
(including Participants), would begin to Company’s revenues over its expenses is using the three months of data prior to
be invoiced as promptly as possible to be included within the operational the relevant tri-monthly date. Bats notes
following the establishment of a billing reserve to offset future fees. The that any movement of CAT Reporters
mechanism. Bats will issue a Regulatory limitations on more frequent changes to between tiers will not change the
Circular to its members when the billing the fee, however, are intended to criteria for each tier or the fee amount
mechanism is established, specifying provide budgeting certainty for the CAT corresponding to each tier.
Reporters and the Company.53 To the In performing the tri-monthly
the date when such invoicing of
Industry Members will commence. reassignments, Bats notes that the
mstockstill on DSK30JT082PROD with NOTICES
52 The CAT Fees are designed to recover the costs
associated with the CAT. Accordingly, CAT Fees
percentage of CAT Reporters in each
(H) Changes to Fee Levels and Tiers assigned tier is relative. Therefore, a
would not be affected by increases or decreases in
Section 11.3(d) of the CAT NMS Plan other non-CAT expenses incurred by the SROs, CAT Reporter’s assigned tier will
states that ‘‘[t]he Operating Committee such as any changes in costs related to the depend, not only on its own message
retirement of existing regulatory systems, such as
shall review such fee schedule on at OATS. traffic or market share, but it also will
least an annual basis and shall make any 53 Section B.7, Appendix C of the CAT NMS Plan, depend on the message traffic/market
changes to such fee schedule that it Approval Order at 85006. share across all CAT Reporters. For
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![Federal Register / Vol. 82, No. 104 / Thursday, June 1, 2017 / Notices 25467
of the Act 60 and paragraph (f) of Rule submissions. You should submit only APPLICANTS: PIMCO Equity Series (the
19b–4 thereunder.61 At any time within information that you wish to make ‘‘Trust’’), a Delaware statutory trust that
60 days of the filing of the proposed rule available publicly. All submissions is registered under the Act as an open-
change, the Commission summarily may should refer to File Number SR– end management investment company
temporarily suspend such rule change if BatsEDGA–2017–13 and should be with multiple series, Pacific Investment
it appears to the Commission that such submitted on or before June 22, 2017. Management Company LLC (the ‘‘Initial
action is necessary or appropriate in the For the Commission, by the Division of Adviser’’), a Delaware limited liability
public interest, for the protection of Trading and Markets, pursuant to delegated company registered as an investment
investors, or otherwise in furtherance of authority.62 adviser under the Investment Advisers
the purposes of the Act. Eduardo A. Aleman, Act of 1940, and PIMCO Investments
Assistant Secretary. LLC (the ‘‘Distributor’’), a Delaware
IV. Solicitation of Comments limited liability company and broker-
[FR Doc. 2017–11360 Filed 5–31–17; 8:45 am]
Interested persons are invited to dealer registered under the Securities
BILLING CODE 8011–01–P
submit written data, views and Exchange Act of 1934 (‘‘Exchange
arguments concerning the foregoing, Act’’).1
including whether the proposal is SECURITIES AND EXCHANGE FILING DATES: The application was filed
consistent with the Act. Comments may COMMISSION on November 18, 2016 and amended on
be submitted by any of the following March 13, 2017, May 2, 2017 and May
methods: [Investment Company Act Release No. 25, 2017.
32661; 812–14715]
Electronic Comments HEARING OR NOTIFICATION OF HEARING: An
PIMCO Equity Series, et al. order granting the requested relief will
• Use the Commission’s Internet be issued unless the Commission orders
comment form (http://www.sec.gov/ May 25, 2017. a hearing. Interested persons may
rules/sro.shtml); or AGENCY: Securities and Exchange request a hearing by writing to the
• Send an email to rule-comments@ Commission (‘‘Commission’’). Commission’s Secretary and serving
sec.gov. Please include File Number SR– ACTION: Notice. applicants with a copy of the request,
BatsEDGA–2017–13 on the subject line. personally or by mail. Hearing requests
Notice of an application for an order should be received by the Commission
Paper Comments
under section 6(c) of the Investment by 5:30 p.m. on June 19, 2017, and
• Send paper comments in triplicate Company Act of 1940 (the ‘‘Act’’) for an
to Secretary, Securities and Exchange should be accompanied by proof of
exemption from sections 2(a)(32), service on applicants, in the form of an
Commission, 100 F Street NE., 5(a)(1), 22(d), and 22(e) of the Act and affidavit, or for lawyers, a certificate of
Washington, DC 20549–1090. rule 22c–1 under the Act, under
All submissions should refer to File service. Pursuant to rule 0–5 under the
sections 6(c) and 17(b) of the Act for an Act, hearing requests should state the
Number SR–BatsEDGA–2017–13. This exemption from sections 17(a)(1) and
file number should be included on the nature of the writer’s interest, any facts
17(a)(2) of the Act, and under section bearing upon the desirability of a
subject line if email is used. To help the 12(d)(1)(J) for an exemption from
Commission process and review your hearing on the matter, the reason for the
sections 12(d)(1)(A) and 12(d)(1)(B) of request, and the issues contested.
comments more efficiently, please use the Act. The requested order would Persons who wish to be notified of a
only one method. The Commission will permit (a) index-based series of certain hearing may request notification by
post all comments on the Commission’s open-end management investment writing to the Commission’s Secretary.
Internet Web site (http://www.sec.gov/ companies (‘‘Funds’’) to issue shares
rules/sro.shtml). Copies of the ADDRESSES: Secretary, Securities and
redeemable in large aggregations
submission, all subsequent (‘‘Creation Units’’); (b) secondary market Exchange Commission, 100 F Street NE.,
amendments, all written statements transactions in Fund shares to occur at Washington, DC 20549–1090;
with respect to the proposed rule negotiated market prices rather than at Applicants: Joshua D. Ratner, Esq.,
change that are filed with the net asset value (‘‘NAV’’); (c) certain Pacific Investment Management
Commission, and all written Funds to pay redemption proceeds, Company LLC, 650 Newport Center
communications relating to the under certain circumstances, more than Drive, Newport Beach, CA 92660 and
proposed rule change between the seven days after the tender of shares for Douglas P. Dick, Esq., Dechert LLP, 1900
Commission and any person, other than redemption; (d) certain affiliated K Street NW., Washington, DC 20006.
those that may be withheld from the persons of a Fund to deposit securities FOR FURTHER INFORMATION CONTACT:
public in accordance with the into, and receive securities from, the Barbara T. Heussler, Senior Counsel, at
provisions of 5 U.S.C. 552, will be Fund in connection with the purchase (202) 551–6990, or Robert H. Shapiro,
available for Web site viewing and and redemption of Creation Units; (e) Branch Chief, at (202) 551–6821
printing in the Commission’s Public certain registered management (Division of Investment Management,
Reference Room, 100 F Street NE., investment companies and unit Chief Counsel’s Office).
Washington, DC 20549, on official investment trusts outside of the same SUPPLEMENTARY INFORMATION: The
business days between the hours of group of investment companies as the following is a summary of the
10:00 a.m. and 3:00 p.m. Copies of such Funds (‘‘Funds of Funds’’) to acquire application. The complete application
filing will also be available for shares of the Funds; (f) certain Funds
1 The Initial Adviser has previously received
inspection and copying at the principal (‘‘Feeder Funds’’) to create and redeem
mstockstill on DSK30JT082PROD with NOTICES
exemptive relief from the Commission permitting it
office of the Exchange. All comments Creation Units in-kind in a master- to operate ETFs (defined below) that track fixed
received will be posted without change; feeder structure; and (g) certain Funds income securities indexes created by an unaffiliated
the Commission does not edit personal to issue shares in less than Creation index provider. See Pacific Investment Management
Unit size to investors participating in a Company LLC, et al., Investment Company Act
identifying information from Release Nos. 28723 (May 11, 2009) (notice) and
distribution reinvestment program. 28752 (Jun. 1, 2009) (order) (‘‘Existing Relief’’). No
60 15 U.S.C. 78s(b)(3)(A). Fund relying on the requested order will rely on the
61 17 CFR 240.19b–4(f). 62 17 CFR 200.30–3(a)(12). Existing Relief.
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Document Created: 2017-06-01 03:04:51
Document Modified: 2017-06-01 03:04:51
| 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 25448 |
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