82 FR 37971 - Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend GEMX's Schedule of Fees With Respect to the Options Regulatory Fee

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 155 (August 14, 2017)

[Federal Register Volume 82, Number 155 (Monday, August 14, 2017)]
[Notices]
[Pages 37971-37973]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-17047]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81342; File No. SR-GEMX-2017-31]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend GEMX's 
Schedule of Fees With Respect to the Options Regulatory Fee

August 8, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 26, 2017, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to revise GEMX's Schedule of Fees to: (i) 
More closely reflect the manner in which GEMX assesses and collects its 
ORF; and (ii) remove rule text related to the timing when the Exchange 
may increase or decrease the amount of the ORF.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    GEMX initially filed to establish its ORF in 2013.\3\ At this time, 
the Exchange proposes to: (i) More closely reflect the manner in which 
GEMX assesses and collects its ORF; and (ii) remove rule text related 
to the timing when the Exchange may increase or decrease the amount of 
its ORF.
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    \3\ See Securities Exchange Act Release Nos. 70200 (August 14, 
2013), 74 FR 51242 (August 20, 2013) (SR-Topaz-2013-01) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to 
Establish the Schedule of Fees).
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    The Exchange supports a common approach for the assessment and 
collection of ORF among the various options exchanges that assess such 
a fee. Furthermore, the Exchange supports guidance from the Commission 
regarding regulatory cost structures to ensure equal knowledge and 
treatment among options markets assessing ORF.
Proposal 1--Reflect the Manner in Which GEMX Assesses and Collects Its 
ORF
    Currently, GEMX assesses an ORF of $0.0010 per contract side. This 
proposed rule change does not seek to amend the amount of the ORF. 
Currently, GEMX assesses its ORF for each customer option transaction 
that is either: (1) Executed by a member on GEMX; or (2) cleared by a 
GEMX member at The Options Clearing Corporation (``OCC'') in the 
customer range,\4\ even if the transaction was executed by a non-member 
of GEMX, regardless of the exchange on which the transaction occurs.\5\ 
If the OCC clearing member is a GEMX member, ORF is assessed and 
collected on all cleared customer contracts (after adjustment for CMTA 
\6\); and (2) if the OCC clearing member is not a GEMX member, ORF is 
collected only on the cleared customer contracts executed at GEMX, 
taking into account any CMTA instructions which may result in 
collecting the ORF from a non-member.
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    \4\ Members must record the appropriate account origin code on 
all orders at the time of entry in order. The Exchange represents 
that it has surveillances in place to verify that members mark 
orders with the correct account origin code.
    \5\ The Exchange uses reports from OCC when assessing and 
collecting the ORF.
    \6\ CMTA or Clearing Member Trade Assignment is a form of 
``give-up'' whereby the position will be assigned to a specific 
clearing firm at OCC.
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    By way of example, if Broker A, a GEMX member, routes a customer 
order to CBOE and the transaction executes on CBOE and clears in Broker 
A's OCC Clearing account, ORF will be collected by GEMX from Broker A's 
clearing account at OCC via direct debit. While this transaction was 
executed on a market other than GEMX, it was cleared by a GEMX member 
in the member's OCC clearing account in the customer range, therefore 
there is a regulatory nexus between GEMX and the transaction. If Broker 
A was not a GEMX member, then no ORF should be assessed and collected 
because there is no nexus; the transaction did not execute on GEMX nor 
was it cleared by a GEMX member.
    In the case where a member both executes a transaction and clears 
the transaction, the ORF is assessed to and collected from the member 
only. In the case where a member executes a transaction and a different 
member clears the transaction, the ORF is assessed to and collected 
from the member who clears the transaction and not the member who 
executes the transaction. In the case where a non-member executes a 
transaction at an away market and a member clears the transaction, the 
ORF is assessed to and collected from the member who clears the 
transaction. In the case where a member executes a transaction on GEMX 
and a non-member clears the transaction, the ORF is assessed to the 
member that executed the transaction and collected from the non-member 
who cleared the transaction. In the case where a member executes a 
transaction at an away market and a non-member clears the transaction, 
the ORF is not assessed to the member who executed the transaction or 
collected from the non-member who cleared the transaction because the 
Exchange does not have access to the data to make absolutely certain 
that ORF should apply. Further, the data does not allow the Exchange to 
identify the member executing the trade at an away market.
ORF Revenue and Monitoring of ORF
    The Exchange monitors the amount of revenue collected from the ORF 
to ensure that it, in combination with other regulatory fees and fines, 
does not exceed regulatory costs. In determining whether an expense is 
considered a regulatory cost, the Exchange reviews all costs and makes 
determinations if there is a nexus between the expense

[[Page 37972]]

and a regulatory function. The Exchange notes that fines collected by 
the Exchange in connection with a disciplinary manner offset ORF.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of its members, 
including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities.
    The Exchange believes that revenue generated from the ORF, when 
combined with all of the Exchange's other regulatory fees, will cover a 
material portion, but not all, of the Exchange's regulatory costs. The 
Exchange will continue to monitor the amount of revenue collected from 
the ORF to ensure that it, in combination with its other regulatory 
fees and fines, does not exceed regulatory costs. If the Exchange 
determines regulatory revenues exceed regulatory costs, the Exchange 
will adjust the ORF by submitting a fee change filing to the 
Commission.
    Finally, the Exchange notes that it is amending GEMX's Schedule of 
Fees to remove certain rule text and include new rule text to make 
clear the manner in which ORF is assessed and collected on GEMX.
Proposal 2--Semi-Annual Changes to ORF
    The Exchange's current ORF rule text provides that, ``The Exchange 
may only increase or decrease the Options Regulatory Fee semi-annually, 
and any such fee change will be effective on the first business day of 
February or August.'' The Exchange is proposing to eliminate the 
requirement that its ORF may be only increased or decreased semi-
annually because the Exchange believes it requires the flexibility to 
amend its ORF as needed to meet its regulatory requirements and adjust 
its ORF to account for the regulatory revenue that it receives and the 
costs that it incurs. While the Exchange is eliminating the requirement 
to adjust only semi-annually, it will continue to submit a rule 
proposal with the Commission for each modification to the ORF and 
notify participants via an Options Trader Alert of any proposed change 
in the amount of the fee at least thirty (30) calendar days prior to 
the effective date. The Exchange believes that the prior notification 
to market participants will provide guidance on the timing of any 
changes to the ORF and ensure market participants are prepared to 
configure their systems to properly account for the ORF.
    The Exchange also notes it now issues Options Trader Alerts instead 
of circulars to provide notification to members. The Exchange is 
amending the rule text to reflect this change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \7\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act \8\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using its facility and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes the proposed clarifications in the Fee 
Schedule to the ORF further the objectives of Section 6(b)(4) of the 
Act and are equitable and reasonable since they expressly describe the 
Exchange's existing practices regarding the manner in which the 
Exchange assesses and collects its ORF.
Proposal 1--Reflect the Manner in Which GEMX Assesses and Collects Its 
ORF
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by members and their associated 
persons under the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants (including non-
members) trading on the Exchange. The Exchange cannot effectively 
surveil for such conduct without looking at and evaluating activity 
across all options markets. Many of the Exchange's market surveillance 
programs require the Exchange to look at and evaluate activity across 
all options markets, such as surveillance for position limit 
violations, manipulation, front-running and contrary exercise advice 
violations/expiring exercise declarations. The Exchange, because it 
lacks access to information on the identity of the entering firm for 
executions that occur on away markets, believes it is appropriate to 
assess the ORF on its member's clearing activity, based on information 
the Exchange receives from OCC, including for away market activity. 
Among other reasons, doing so better and more accurately captures 
activity that occurs away from the Exchange over which the Exchange has 
a degree of regulatory responsibility. In so doing, the Exchange 
believes that assessing ORF on member clearing firms in certain 
instances equitably distributes the collection of ORF in a fair and 
reasonable manner. Also, the Exchange and the other options exchanges 
are required to populate a consolidated options audit trail (``COATS'') 
\9\ system in order to surveil a member's activities across 
markets.\10\
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    \9\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
    \10\ In addition to its own surveillance programs, the Exchange 
works with other SROs and exchanges on intermarket surveillance 
related issues. Through its participation in the Intermarket 
Surveillance Group (``ISG''), the Exchange shares information and 
coordinates inquiries and investigations with other exchanges 
designed to address potential intermarket manipulation and trading 
abuses. The Exchange's participation in ISG helps it to satisfy the 
requirement that it has coordinated surveillance with markets on 
which security futures are traded and markets on which any security 
underlying security futures are traded to detect manipulation and 
insider trading. See Section 6(h)(3)(I) of the Act. ISG is an 
industry organization formed in 1983 to coordinate intermarket 
surveillance among the SROs by co-operatively sharing regulatory 
information pursuant to a written agreement between the parties. The 
goal of the ISG's information sharing is to coordinate regulatory 
efforts to address potential intermarket trading abuses and 
manipulations.
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    The Exchange believes that assessing the ORF to each Exchange 
member for options transactions cleared by OCC in the customer range 
where the execution occurs on another exchange and is cleared by a GEMX 
member is an equitable allocation of reasonable dues, fees, and other 
charges among its members and issuers and other persons using its 
facilities. The ORF is collected by OCC on behalf of GEMX from Exchange 
clearing members for all customer transactions they clear or from non-
members for all customer transactions they clear that were executed on 
GEMX. The Exchange believes that this collection practice is reasonable 
and appropriate because higher fees are assessed to those members that 
require more Exchange regulatory services based on the amount of 
customer options business they conduct.
    Regulating customer trading activity is more labor intensive and 
requires greater expenditure of human and technical resources than 
regulating non-customer trading activity, which tends to be more 
automated and less labor intensive. As a result, the costs associated 
with administering the customer component of the Exchange's overall 
regulatory program are anticipated to be typically higher than the 
costs associated with administering the non-customer component of its

[[Page 37973]]

regulatory program. The Exchange proposes assessing higher fees to 
those members that will require more Exchange regulatory services based 
on the amount of customer options business they conduct. Additionally, 
the dues and fees paid by members go into the general funds of the 
Exchange, a portion of which is used to help pay the costs of 
regulation. The Exchange has in place a regulatory structure to 
surveil, conduct examinations and monitor the marketplace for 
violations of Exchange Rules. The ORF assists the Exchange to fund the 
cost of this regulation of the marketplace.
Proposal 2--Semi-Annual Changes to ORF
    The Exchange believes that the proposed rule change to remove the 
limit to amend the ORF only semi-annually, with advance notice, is 
reasonable because the Exchange will continue to provide market 
participants with thirty (30) days advance notice of amending the 
amount of the ORF. Also, the Exchange is required to monitor the amount 
of revenue collected from the ORF to ensure that it, in combination 
with its other regulatory fees and fines, do not exceed regulatory 
costs. Therefore, the Exchange believes it is reasonable to remove the 
semi-annual limit to amend its ORF in order to permit the Exchange to 
make amendments to its ORF as necessary to comply with the Exchange's 
obligations. This proposed change would conform this rule with that of 
NASDAQ PHLX LLC (``Phlx''), The NASDAQ Options Market LLC (``NOM'') and 
NASDAQ BX, Inc. (``BX'').\11\
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    \11\ See Phlx's Pricing Schedule and NOM and BX Rules at Chapter 
XV, Sections 5.
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    The Exchange believes that the proposed rule change to remove the 
limit to amend the ORF only semi-annually, with advance notice, is 
equitable and not unfairly discriminatory because it will apply in the 
same manner to all members that are subject to the ORF. The Exchange 
has in place a regulatory structure to surveil for, conduct 
examinations and monitor the marketplace for violations of Exchange 
Rules. The ORF assists the Exchange to fund the cost of this regulation 
of the marketplace.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The ORF is not intended to have 
any impact on competition. Rather, it is designed to enable the 
Exchange to recover a material portion of the Exchange's cost related 
to its regulatory activities. The Exchange is obligated to ensure that 
the amount of regulatory revenue collected from the ORF, in combination 
with its other regulatory fees and fines, does not exceed regulatory 
costs.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\12\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is: (i) Necessary or appropriate in the public 
interest; (ii) for the protection of investors; or (iii) otherwise in 
furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-GEMX-2017-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-GEMX-2017-31. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-GEMX-2017-31, and should be 
submitted on or before September 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Eduardo A. Aleman,
Assistant Secretary.
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-17047 Filed 8-11-17; 8:45 am]
 BILLING CODE 8011-01-P