Application of Topaz Exchange, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission, 46622-46643 [2013-18474]

Download as PDF 46622 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices information, or other information that is withheld from public disclosure will not be affected by this initiative. This initiative will be implemented by August 2013. Individuals may subscribe to receive DARR generated correspondence by entering the following URL into their web browser address bar: https://www.nrc.gov/publicinvolve/listserver.html, Or through NRC’s Web site, www.nrc.gov. as described below: 1. Go to the NRC’s public Web site (www.nrc.gov). 2. Click on the ‘‘Public Meetings and Involvement’’ tab. 3. On this page, under the heading ‘‘Information and Meeting Schedules to Help You Participate,’’ click on ‘‘Subscribe to Email Updates.’’ 4. On this page, scroll down to the Lyris Subscription Services. 5. Enter your email address. 6. You have the option to select ‘‘All Advanced Reactor Correspondence’’ or the individual designs. 7. Once you have selected the designs, click on the ‘‘Subscribe’’ button. Dated at Rockville, Maryland, this 22nd day of July 2013. For the Nuclear Regulatory Commission. Cameron S. Goodwin, Project Manager, Small Modular Reactor Licensing Branch 2, Division of Advanced Reactors and Rulemaking, Office of New Reactors. [FR Doc. 2013–18522 Filed 7–31–13; 8:45 am] BILLING CODE 7590–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70050; File No. 10–209] Application of Topaz Exchange, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission July 26, 2013. I. Introduction mstockstill on DSK4VPTVN1PROD with NOTICES On July 3, 2012, Topaz Exchange, LLC (‘‘Topaz Exchange’’ or ‘‘Exchange’’) submitted to the Securities and Exchange Commission (‘‘Commission’’) an Application for Registration as a National Securities Exchange (‘‘Form 1 Application’’) 1 under Section 6 of the Securities Exchange Act of 1934 1 On March 1, 2013, the Commission issued an order granting Topaz Exchange exemptive relief, subject to certain conditions, in connection with the filing of its Form 1 Application. See Securities Exchange Act Release No. 69011, 78 FR 14844 (March 7, 2013). Because Topaz Exchange’s Form 1 Application was incomplete without the exemptive relief, the date of filing of such application is March 1, 2013. Id. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 (‘‘Act’’).2 On December 19, 2012, Topaz Exchange submitted Amendment No. 1 to its Form 1 Application.3 On December 31, 2012, Topaz Exchange submitted Amendment No. 2 to its Form 1 Application.4 Notice of the Form 1 Application, as modified by Amendment Nos. 1 and 2, was published for comment in the Federal Register on March 7, 2013.5 The Commission received four comment letters regarding the Form 1 Application.6 Topaz Exchange submitted a detailed response to comments on July 11, 2013.7 On July 11, 2013, Topaz Exchange submitted Amendment No. 3 to the Form 1 Application.8 U.S.C. 78f. No. 1, among other things, includes changes to the Limited Liability Company Agreement of Topaz Exchange, LLC (‘‘Topaz Exchange LLC Agreement’’) and the Constitution of Topaz Exchange, LLC (‘‘Topaz Exchange Constitution’’) concerning board composition and size, the initial director election process, and the use of regulatory funds. Amendment No. 1 also includes revisions to proposed rules of Topaz Exchange to remove rules relating to complex orders; to respond to comments on the Form 1 application from Commission staff; and to reflect recent changes to comparable rules of International Securities Exchange, LLC (‘‘ISE’’). Amendment No. 1 further provides additional descriptions in the Form 1 Application regarding proposed allocation procedures, auction mechanisms, execution of qualified contingent crosses, and the interim and initial director election processes, and removes references to complex orders. 4 Amendment No. 2, among other things, provides updated information regarding the board of directors of ISE and the Corporate Governance Committee of ISE and includes information regarding Longitude S.A., a newly incorporated affiliate of Topaz Exchange, which information includes the Articles of Incorporation and financial information for Longitude S.A. Finally, Amendment No. 2 provides an updated organizational chart that reflects the affiliates of Topaz Exchange. 5 See Securities Exchange Act Release No. 69012 (March 1, 2013), 78 FR 14847 (‘‘Notice’’). 6 See Letter from Angelo Evangelou, Associate General Counsel, Chicago Board Options Exchange, Incorporated, to Elizabeth M. Murphy, Secretary, Commission, dated April 23, 2013 (‘‘CBOE Letter’’); Letter from Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated April 25, 2013 (‘‘NASDAQ Letter’’); Letter from Janet McGinness, EVP and Corporate Secretary, NYSE Euronext, General Counsel, NYSE Markets, to Elizabeth M. Murphy, Secretary, Commission, dated May 10, 2013 (‘‘NYSE Euronext Letter I’’); and Letter from Janet McGinness, EVP and Corporate Secretary, NYSE Euronext, General Counsel, NYSE Markets, to Elizabeth M. Murphy, Secretary, Commission, dated June 20, 2013 (‘‘NYSE Euronext Letter II’’). 7 See Letter from Michael Simon, General Counsel and Secretary, Topaz Exchange, to Elizabeth M. Murphy, Secretary, Commission, dated July 10, 2013 (‘‘Topaz Exchange Response Letter’’). 8 Amendment No. 3, among other things, includes changes to proposed Topaz Exchange rules to respond to concerns raised by the commenters and to reflect changes to comparable ISE rules since the filing of Amendment No. 1. The changes are discussed below in Section II.D. Amendment No. 3 also provides further descriptions or updates PO 00000 2 15 3 Amendment Frm 00058 Fmt 4703 Sfmt 4703 II. Discussion Under Sections 6(b) and 19(a) of the Act,9 the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and can comply, and can enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. As discussed in greater detail below, the Commission finds that Topaz Exchange’s application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of Topaz Exchange are consistent with Section 6 of the Act in that, among other things, they assure a fair representation of the exchange’s members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer; 10 and that they are designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, protect investors and the public interest and are not designed to permit unfair discrimination between customers, issuers, or broker-dealers.11 Finally, the Commission finds that Topaz Exchange’s proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.12 A. Overview of Ownership of Topaz Exchange Topaz Exchange is structured as a Delaware limited liability company information in the Form 1 Application. The changes proposed in Amendment No. 3 are not substantive, are consistent with the existing rules of other registered national securities exchanges, or are responsive to the concerns of the commenters and do not raise any new or novel regulatory issues. 9 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively. 10 See 15 U.S.C. 78f(b)(3). 11 See 15 U.S.C. 78f(b)(5). 12 See 15 U.S.C. 78f(b)(8). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES (‘‘LLC’’), and is a wholly-owned subsidiary of International Securities Exchange Holdings, Inc. (‘‘ISE Holdings’’).13 In December 2007, ISE Holdings became a direct, whollyowned subsidiary of various German companies and Swiss companies 14 through an intermediary holding company, U.S. Exchange Holdings, Inc. (‘‘U.S. Exchange Holdings’’).15 U.S. Exchange Holdings is wholly-owned by a German stock corporation, Eurex Frankfurt AG (‘‘Eurex Frankfurt’’). Eurex Frankfurt is a wholly-owned subsidiary of a Swiss stock corporation, Eurex Zurich AG (‘‘Eurex Zurich’’), which, in turn, was in 2007 jointly owned by ¨ Deutsche Borse and SWX Swiss Exchange AG (‘‘SWX’’) 16 (‘‘Eurex Acquisition’’). In 2012, SWX transferred its interest in Eurex Zurich to a Swiss ¨ subsidiary of Deutsche Borse (‘‘Deutsche ¨ Borse Acquisition’’), such that Eurex Zurich is now jointly owned by ¨ Deutsche Borse (together with Eurex Frankfurt, the ‘‘German companies’’) and EGD (together with Eurex Zurich, the ‘‘Swiss companies,’’ and the Swiss companies and the German companies are referred to collectively as the ‘‘NonU.S. Upstream Owners,’’ and collectively with U.S. Exchange Holdings, the ‘‘Upstream Owners’’). As ¨ Deutsche Borse holds a 100% direct ownership interest in EGD, it therefore holds a 100% indirect ownership interest in Eurex Zurich. 13 Following any Commission grant of registration to Topaz Exchange, ISE Holdings will be: (1) The sole holding company of two registered national securities exchanges, ISE and Topaz Exchange; and (2) the holder of a 31.54% ownership interest of a holding company, DE Holdings, that in turn owns two registered national securities exchanges, EDGX Exchange, Inc. (‘‘EDGX’’) and EDGA Exchange, Inc. (‘‘EDGA’’). See Exhibit C to Topaz Exchange Form 1 Application, Section R (‘‘Organizational Chart of ¨ Affiliates of Deutsche Borse AG’’). 14 See Organizational Chart of Affiliates of ¨ Deutsche Borse, Exhibit C. Section R. to Topaz Exchange Form 1 Application. 15 See Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 71979 (December 19, 2007) (File No. SR–ISE–2007–101) (order approving a transaction in which ISE Holdings became a wholly-owned indirect subsidiary of Eurex Frankfurt) (‘‘Eurex Acquisition Order’’). 16 At the time, SWX was owned by SWX Group AG (later became part of SIX Group AG), which in turn was owned by Verein SWX Swiss Exchange. In 2008, SWX changed its name to SIX. In 2012, SIX transferred its interest to Eurex Global Derivatives AG (‘‘EGD’’). See Securities Exchange Act Release No. 66834 (April 19, 2012), 77 FR 24752 (April 25, 2012) (File Nos. SR–EDGA–2012–08; SR–EDGX– 2012–07; and SR–ISE–2012–21) (order approving a transaction in which Eurex Frankfurt became a wholly-owned indirect subsidiary of Deutsche ¨ ¨ Borse) (‘‘Deutsche Borse Acquisition Order’’). VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 B. Governance of Topaz Exchange 1. Topaz Exchange Board of Directors The board of directors of Topaz Exchange (‘‘Topaz Exchange Board’’ or ‘‘Board’’) will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of Topaz Exchange as a self-regulatory organization (‘‘SRO’’).17 Topaz Exchange will be governed by a board of directors comprised of no fewer than 8, but no more than 16, directors.18 Specifically: • At least 50% of Topaz Exchange Board must be comprised of NonIndustry Directors; 19 • At least one of the Non-Industry Directors must be a Public Director; 20 • Topaz Exchange Board will include the President/Chief Executive Officer as a director; 21 and • At least 30% of Topaz Exchange Board must be officers, directors or partners of Topaz Exchange members, and must be elected by a plurality of holders of Exchange Rights (‘‘Industry Directors’’), of which at least one must be elected by a plurality of holders of Primary Market Maker (‘‘PMM’’) Exchange Rights, one must be elected by a plurality of holders of Competitive Market Maker (‘‘CMM’’) Exchange Rights, and one must be elected by a plurality of holders of Electronic Access Member (‘‘EAM’’) Exchange Rights, provided that the number of each type of Industry Director shall always be equal to one another.22 As part of the process to elect members of the Board, the Nominating Committee will nominate the proposed Industry Directors and the Corporate Governance Committee 23 or ISE 17 See Topaz Exchange Constitution, Article III, Section 3.1. 18 See Topaz Exchange Constitution, Article III, Section 3.2(a). 19 See Topaz Exchange Constitution, Article III, Section 3.2(b)(ii). In no event shall the number of Non-Industry Directors constitute less than the number of Industry Directors. ISE Holdings, Inc. may, in its sole discretion, elect one additional director who shall meet the requirements of NonIndustry Directors, except that such person was employed by Topaz Exchange at any time during the three-year period prior to his or her initial election. See Topaz Exchange Constitution, Article III, Section 3.2(b)(iv). This provision is similar to a provision in ISE’s Constitution and has been used in the past to place a former president/chief executive officer of ISE on its board of directors (‘‘ISE Board’’). 20 See Topaz Exchange Constitution, Article III, Section 3.2(b)(ii). 21 See Topaz Exchange Constitution, Article III, Section 3.2(b)(iii). 22 See Topaz Exchange Constitution, Article III, Section 3.2(b)(i). 23 See infra Section II.B.2. for a description of Topaz Exchange’s Nominating Committee and Corporate Governance Committee. PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 46623 Holdings will nominate the proposed Non-Industry Directors.24 A petition process will allow Topaz Exchange members to nominate alternative candidates for consideration as Industry Directors.25 At the first annual meeting and at each annual meeting thereafter, ISE Holdings will elect all of the members of the Topaz Exchange Board (except the Industry Directors which are elected by Topaz Exchange members 26), but it will be required to do so in compliance with the compositional requirements for the Board outlined in the Topaz Exchange Constitution. The Commission believes that the requirement in the Topaz Exchange Constitution that at least 30% of the directors be Industry Directors and the means by which they will be chosen by Topaz Exchange members 27 provide for the fair representation of members in the selection of directors and the administration of Topaz Exchange and therefore is consistent with Section 6(b)(3) of the Act.28 Section 6(b)(3) of the Act requires that ‘‘the rules of the exchange assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the 24 See, e.g., Topaz Exchange Constitution, Article III, Section 3.10(a)–(b). ISE Holdings, as the Sole LLC Member of Topaz Exchange, is permitted to petition the Corporate Governance Committee to propose alternative Non-Industry Directors and Public Directors. See Topaz Exchange Constitution, Article III, Section 3.10(b)(ii). 25 See, e.g., Topaz Exchange Constitution, Article III, Section 3.10(a)(ii). Specifically, as proposed in Amendment No. 1, in addition to the Industry Director nominees named by the Nominating Committee, persons eligible to serve as such may be nominated for election to the Topaz Exchange Board by a petition, signed by the holders of not less than five percent (5%) of the outstanding Exchange Rights of the series entitled to elect such person if there are more than eighty (80) Exchange Rights in the series entitled to vote, ten percent (10%) of the outstanding rights of such series entitled to elect such person if there are between eighty (80) and forty (40) Exchange Rights in the series entitled to vote, and twenty-five percent (25%) of the outstanding Exchange Rights of such series entitled to elect such person if there are less than forty (40) Exchange Rights in the series entitled to vote. For purposes of determining whether a person has been nominated for election by petition by the requisite percentage, no Topaz Exchange member, alone or together with its affiliates, may account for more than 50% of the signatures of the holders of outstanding Exchange Rights of the series entitled to elect such person, and any such signatures by such Exchange Members, alone or together with its affiliates, in excess of such 50% limitation shall be disregarded. Id. This process is identical to the process in place at ISE. See ISE Constitution, Article III, Section 3.10(a)(ii). 26 See Topaz Exchange Constitution, Article III, Sections 3.2(b)(i) and (c). 27 Id. 28 15 U.S.C. 78f(b)(3). E:\FR\FM\01AUN1.SGM 01AUN1 46624 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices exchange, broker, or dealer.’’ As the Commission previously has noted, this statutory requirement helps to ensure that members have a voice in the exchange’s use of self-regulatory authority, and that the exchange is administered in a way that is equitable to all those persons who trade on its market or through its facilities.29 In addition, with respect to the requirement that the number of NonIndustry Directors, including at least one Public Director, will at all times be at least 50% of the Board, the Commission believes that the proposed composition of the Topaz Exchange Board satisfies the requirements of Section 6(b)(3) of the Act.30 mstockstill on DSK4VPTVN1PROD with NOTICES Interim Board After Topaz Exchange is granted registration by the Commission, but prior to commencing operations, ISE Holdings, as the sole shareholder of Topaz Exchange,31 will appoint an interim board of directors for Topaz Exchange that will serve only until the first annual meeting (‘‘Interim Topaz Exchange Board’’). The Interim Topaz Exchange Board will include the same individuals as the then-serving ISE Board and will consist of 15 directors: the President/Chief Executive Officer Director; 32 6 Industry Directors; and 8 Non-Industry Directors.33 Topaz Exchange represents that it anticipates that there will be a significant overlap between its membership and the membership of ISE.34 Topaz Exchange 29 See, e.g., Securities Exchange Act Release Nos. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131) (order granting the exchange registration of Nasdaq Stock Market, Inc.) (‘‘Nasdaq Order’’); and 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10–182) (order granting the exchange registration of BATS Exchange, Inc.) (‘‘BATS Order’’). See also Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (File No. SR– NYSE–2005–77) (‘‘NYSE/Archipelago Merger Approval Order’’). 30 15 U.S.C. 78f(b)(3). See also Securities Exchange Act Release No. 68341, p.8, (December 3, 2012), 77 FR 73065, 73067 (December 7, 2012) (File No. 10–207) (order granting the registration of Miami International Securities Exchange, LLC) (‘‘MIAX Order’’) and Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (‘‘Regulation ATS Release’’). 31 See infra Section II.C.1. for a discussion of the ownership of Topaz Exchange. 32 See Exhibit J to Topaz Exchange Form 1 Application. 33 See Exhibit J to Topaz Exchange Form 1 Application. See also Amendment No. 3. 34 See Exhibit L to Topaz Exchange Form 1 Application. Based on discussions with ISE members, Topaz Exchange represented that it currently expects that Topaz Exchange’s membership will consist substantially of current ISE members, including, but not limited to, those ISE members that have representatives serving as VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 further represents that it does not expect to receive a meaningful number of applications for membership from nonISE members during the tenure of the Interim Topaz Exchange Board.35 Thus, the 6 interim Industry Directors to be appointed to the Topaz Exchange Board likely will have been elected by Topaz Exchange members in their capacity as ISE members.36 These interim Industry Directors will serve until the first initial Topaz Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the Topaz Exchange Constitution and described above.37 Topaz Exchange will complete such process as promptly as possible and within 90 days after its application for registration as a national securities exchange is granted by the Commission.38 The Commission believes that the process for electing the interim Topaz Exchange Board, as proposed, is consistent with the requirements of the Act, including that the rules of the exchange assure fair representation of the exchange’s members in the selection of its directors and administration of its affairs.39 The Interim Topaz Exchange Board will be filled by current ISE Board members (which currently include Industry Directors who were elected by current ISE members) until the first annual meeting of Topaz Exchange. As noted above, Topaz Exchange represents that it anticipates that there will be significant overlap between the initial members of Topaz Exchange and the current members of ISE.40 Topaz Exchange further industry directors on the ISE Board. See Exhibit J to Topaz Exchange Form 1 Application. 35 See Exhibit J to Topaz Exchange Form 1 Application. 36 See id. 37 See Topaz Exchange Constitution, Article III, Sections 3.2(c) and 3.10; see also Exhibit J to Topaz Exchange Form 1 Application. 38 See Exhibit J to Topaz Exchange Form 1 Application. 39 See 15 U.S.C. 78f(b)(3). Topaz Exchange’s proposed timeline for the interim Topaz Exchange Board process comports with the interim board process recently approved by the Commission for the Boston Options Exchange (‘‘BOX’’) and Miami International Securities Exchange, LLC (‘‘MIAX’’). BOX, which previously operated as a facility of NASDAQ OMX BX, Inc., recently was granted registration as a national securities exchange. See Securities Exchange Act Release No. 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (File No. 10– 206) (‘‘BOX Order’’). NASDAQ OMX BX recently received approval for a new options market. See Securities Exchange Act Release No. 67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) (File No. SR– BX–2012–030) (‘‘BX Order’’). MIAX recently was granted registration as a national securities exchange. See MIAX Order, supra note 30. 40 Topaz Exchange will have a streamlined waivein process for existing ISE members to apply for membership on Topaz Exchange. See Topaz Exchange Rule 302(a). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 represents that it will complete the full nomination, petition, and voting process as set forth in the Topaz Exchange Constitution,41 as promptly as possible and within 90 days of when Topaz Exchange’s application for registration as a national securities exchange is granted.42 As noted above, as part of this process, members of Topaz Exchange will be able to petition for alternative candidates to be considered for Industry Director positions.43 This process will provide persons who are approved as members of Topaz Exchange after the effective date of this Order with the opportunity to participate in the selection of the Industry Directors within 90 days of when Topaz Exchange’s application for registration as a national securities exchange is granted. The Commission believes that the Interim Topaz Exchange Board process is designed to provide member representation sufficient to allow Topaz Exchange to commence operations for an interim period prior to going through the process to elect a new Board pursuant to the full nomination, petition, and voting process set forth in the Topaz Exchange Constitution. 2. Exchange Committees Topaz Exchange will have a number of Board committees,44 including an Executive Committee (consisting of six directors, including three Non-Industry Directors),45 a Finance and Audit Committee (consisting of between three and five directors, all of whom must be Non-Industry Directors),46 a Compensation Committee (consisting of between three and five directors, all of whom must be Non-Industry Directors),47 and a Corporate Governance Committee (consisting of at least three directors, all of whom must be Non-Industry Directors),48 and such other additional committees as may be approved by the Topaz Exchange Board.49 Topaz Exchange also will have a Nominating Committee, which will be a 41 See, e.g., Topaz Exchange Constitution, Article III, Section 3.10(a)–(b). 42 See Topaz Exchange Constitution, Article III, Sections 3.2(c) and 3.10. 43 See Topaz Exchange Constitution, Article III, Section 3.10(a)(ii). 44 See Topaz Exchange Constitution, Article V, Section 5.1(a). 45 See Topaz Exchange Constitution, Article V, Section 5.2. 46 See Topaz Exchange Constitution, Article V, Section 5.5. 47 See Topaz Exchange Constitution, Article V, Section 5.6. 48 See Topaz Exchange Constitution, Article V, Section 5.4. 49 See Topaz Exchange Constitution, Article V, Section 5.1(a). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices committee of Topaz Exchange and not a committee of the Board.50 The Nominating Committee will be composed of three industry representatives, and will be responsible for nominating candidates for Industry Director positions.51 As noted above, there will be a petition process by which members of Topaz Exchange can nominate their own nominees for the Industry Director positions.52 These nomination processes are consistent with processes that the Commission has approved for other exchanges.53 The Commission believes that Topaz Exchange’s proposed committees, which are similar to committees maintained by other exchanges,54 are designed to help enable Topaz Exchange to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.55 C. Regulation of Topaz Exchange When Topaz Exchange commences operations as a national securities exchange, Topaz Exchange will have all the attendant regulatory obligations under the Act. In particular, Topaz Exchange will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the Topaz Exchange and ISE Holdings governance documents are designed to facilitate the ability of Topaz Exchange and the Commission to fulfill their regulatory and oversight obligations under the Act. The discussion below summarizes some of these key provisions. mstockstill on DSK4VPTVN1PROD with NOTICES 1. Ownership Structure: Ownership and Voting Limitations As noted above in Section II.A, Topaz Exchange will be structured as a Delaware LLC and will be a whollyowned subsidiary of ISE Holdings 56 50 See Topaz Exchange Constitution, Article V, Section 5.3. 51 See id. The Interim Topaz Exchange Board shall appoint the initial members of the Nominating Committee in accordance with the qualifications prescribed in Section 5.3 of the Topaz Exchange Constitution. 52 See Topaz Exchange Constitution, Article III, Section 3.10(a)(ii). See also supra note 25 and accompanying text. 53 See, e.g., ISE Constitution, Articles III and V, Sections 3.10 and 5.3; MIAX By-laws Articles II and V, Sections 2.4 and 5.3. 54 See, e.g., MIAX Order, supra note 30, and BOX Order, supra note 39. 55 15 U.S.C. 78f(b)(1). 56 The Topaz Exchange LLC Agreement provides that ISE Holdings may not assign its interest in Topaz Exchange unless such assignment is subject to prior approval by the Commission pursuant to VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 following any Commission grant of registration to Topaz Exchange as a national securities exchange.57 ISE Holdings is owned by German companies and Swiss companies through an intermediary holding company, U.S. Exchange Holdings.58 ISE Holdings’ governing documents impose limits on any direct or indirect change in control of ISE Holdings, which are to be enforced through the creation of a statutory trust.59 First, ISE Holdings’ governing documents prohibit any Topaz Exchange member (alone or together with its Related Persons 60) from owning more than 20% of any class of Voting Shares of ISE Holdings.61 A second limit prohibits any other person (alone or together with its related persons) from owning more than 40% of any class of Voting Shares of ISE Holdings.62 A third limit prohibits any person (alone or together with its Related Persons) from voting or causing the voting of shares representing more than 20% of the voting power of the then outstanding Voting Shares of ISE Holdings.63 As described more fully below, if a person exceeds an ISE Holdings’ ownership or voting limit, a majority of the capital stock of ISE Holdings that has the right by its terms to vote in the election of the ISE Holdings board of directors (‘‘ISE Holdings Board’’) or on other matters (other than matters affecting the rights, preferences or privileges of the capital stock) automatically will be transferred to a Delaware statutory trust (‘‘Trust’’).64 Consistent with the governance structure of other exchanges, ISE Holdings’ Board may waive the 40% ownership limitation and the 20% voting restriction for persons other than Topaz Exchange members, subject to certain specified conditions,65 but such the rule filing procedure under Section 19 of the Act. See Topaz Exchange LLC Agreement, Section 7.1 (Assignments; Additional LLC Members). 57 See supra note 13 and accompanying text. 58 See supra note 14 and accompanying text. 59 See Article FOURTH, Section III.(c) of the Amended and Restated Certificate of Incorporation of International Securities Exchange Holdings, Inc. (‘‘ISE Holdings Certificate’’). See infra notes 72–74 and 110–114 and accompanying text for a discussion of the statutory trust. 60 See ISE Holdings Certificate, Article FOURTH, Section III for the definition of ‘‘Related Persons.’’ 61 See id. for the definition of ‘‘Voting Shares.’’ 62 See ISE Holdings Certificate, Article FOURTH, Section III.(a)(i). 63 See ISE Holdings Certificate, Article FOURTH, Section III.(b). See also Second Amended and Restated Bylaws of ISE Holdings (‘‘ISE Holdings Bylaws’’), Article XI, Section 11.1(b). 64 See ISE Holdings Certificate, Article FOURTH, Section III.(c). See also infra notes 72–75 and accompanying text for a discussion of the Trust and the related Trust Agreement. 65 The ISE Holdings Certificate allows the ISE Holdings Board to waive the ISE Holdings PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 46625 waiver will not be effective unless approved by the Commission.66 The Topaz Exchange LLC Agreement and Topaz Exchange Constitution do not include change of control provisions that are similar to those in the ISE Holdings Certificate and ISE Holdings Bylaws. However, the Topaz Exchange LLC Agreement and the Topaz Exchange Constitution explicitly provide that ISE Holdings is the Sole LLC Member of Topaz Exchange.67 ISE Holdings is permitted under the Topaz Exchange LLC Agreement to assign all but not less than all of its interest in Topaz Exchange (and therefore no longer would be its sole owner), but the assignment of all of ISE Holdings’ interest in Topaz Exchange will be subject to the rule filing procedures under Section 19 of the Act.68 As detailed above, ISE Holdings is owned by various Upstream Owners, none of which have similar ownership ownership and voting limits pursuant to an amendment to the ISE Holdings Bylaws, provided that the ISE Holdings Board makes certain determinations. See ISE Holdings Certificate, Article FOURTH, Sections III.(a)(i)(A), III.(a)(i)(B) and III.(b)(i). Article XI of the ISE Holdings Bylaws was adopted in connection with the Eurex Acquisition (see supra note 15 and accompanying text), when ISE LLC was the sole national securities exchange controlled by ISE Holdings. See Eurex Acquisition Order, supra note 15. Article XI, Section 11.1(b) was subsequently amended to apply to any Controlled National Securities Exchange, which will include Topaz Exchange. 66 See ISE Holdings Certificate, Article FOURTH, Sections III.(a)(i)(A) and III.(b)(i). Article XI of the ISE Holdings Bylaws, which originally was adopted in connection with the Eurex Acquisition (see supra note 15 and accompanying text for a description of the Eurex Acquisition), waives the ISE Holdings ownership and voting limits to allow the Upstream Owners to own and vote all of the common stock of ISE Holdings. Article XI, Section 11.1(b) states that, in waiving the ISE Holdings ownership and voting limits to permit the Upstream Owners to own and vote the capital stock of ISE Holdings, the ISE Holdings Board has determined, with respect to each Upstream Owner, that: (i) Such waiver will not impair the ability of ISE Holdings and each ‘‘Controlled National Securities Exchange’’ (i.e., any national securities exchange or facility thereof controlled, directly or indirectly, by ISE Holdings, including ISE, EDGA, EDGX, and as a result of this Order, Topaz Exchange) to carry out their respective functions and responsibilities under the Act; (ii) such waiver is in the best interests of ISE Holdings, its stockholders, and each Controlled National Securities Exchange; (iii) such waiver will not impair the ability of the Commission to enforce the Act; (iv) neither the Upstream Owner nor any of its related persons is subject to a statutory disqualification (within the meaning of Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39)); and (v) neither the Upstream Owner nor any of its related persons is a member of such Controlled National Securities Exchange. 67 See Topaz Exchange LLC Agreement, Article II, Section 2.1 and Topaz Exchange Constitution Article I, Section 1.1 (both of which define ‘‘Sole LLC Member’’ to mean ISE Holdings, as the sole member of Topaz Exchange). 68 See 15 U.S.C. 78s; see also Topaz Exchange LLC Agreement, Article VII, Section 7.1 and Topaz Exchange Constitution, Article I, Section 1.1. E:\FR\FM\01AUN1.SGM 01AUN1 46626 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES and voting limits in their governing documents. To facilitate compliance with the ISE Holdings ownership and voting limits, the Upstream Owners have committed to take reasonable steps necessary to cause ISE Holdings to be in compliance with the ISE Holdings ownership and voting limits. These commitments are contained in the governing documents for U.S. Exchange Holdings 69 and in corporate resolutions for the non-U.S. Upstream Owners.70 69 For a U.S. Upstream Owner, the U.S. Exchange Holdings Certificate provides that, for so long as U.S. Exchange Holdings directly or indirectly controls a Controlled National Securities Exchange, U.S. Exchange Holdings will take reasonable steps necessary to cause ISE Holdings to be in compliance with the ISE Holdings’ ownership and voting limits. See U.S. Exchange Holdings Certificate, Article THIRTEENTH. 70 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Section (4)), Exhibit B to Topaz Exchange Form 1 Application. In its Form 1 Application, Topaz Exchange included these supplemental resolutions that each of the current Non-U.S. Upstream Owners of Topaz Exchange has adopted that, in part, incorporate provisions regarding the ownership and voting limits (‘‘Topaz Exchange Resolutions’’) in the same manner and to the same extent as prior corporate resolutions signed by the Non-U.S. Upstream Owners apply to ISE (‘‘2007 Resolutions’’). The Topaz Exchange Resolutions were signed by the Non-U.S. Upstream Owners and extend to Topaz Exchange the commitments that the then non-U.S. upstream owners made in the 2007 Resolutions with respect to ISE. For example, Topaz Exchange represented in Exhibit B to its Form 1 Application that Deutsche ¨ Borse AG Executive Board executed its corporate resolution on November 10, 2009. Since 2007, U.S. Exchange Holdings’ governing documents and the non-U.S. upstream owners’ 2007 Resolutions have been updated, where appropriate, to reflect changes in corporate structure and ownership as described herein. In 2010, to effect the registrations of EDGA and EDGX as national securities exchanges, and to maintain ISE Holdings’ ownership and voting limits, as well as the independence of the regulatory function of EDGA and EDGX, the U.S. Exchange Holdings governing documents and the 2007 Resolutions were supplemented by each of the then non-U.S. upstream owners through supplemental resolutions (‘‘DirectEdge Resolutions’’) that applied the commitments of the 2007 Resolutions to EDGA and EDGX, as affiliates of ISE, see supra note 13, in the same manner and to the same extent as the 2007 Resolutions applied to ISE and the U.S. Exchange Holdings governing documents were updated to apply prospectively to any other national securities exchange that ISE Holdings may control, either directly or indirectly, including, but not limited to, ISE, EDGA and EDGX. See Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10–194 and 10–196) (order granting the exchange registration of EDGA and EDGX) (‘‘DirectEdge Exchanges Order’’). The Commission also approved changes to U.S. Exchange Holdings’ and ISE Holdings’ governing documents to apply these governing documents to any prospective national securities exchange that U.S. Exchange Holdings or ISE Holdings, as applicable, directly or indirectly controlled. See Securities Exchange Act Release Nos. 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (‘‘ISE Holdings Order’’) and 61498 (February 4, 2010), 75 FR 7299 (February 18, 2010) (‘‘U.S. Exchange Holdings Order’’). In 2012, new resolutions were executed by EGD, a Swiss corporation, when it became a wholly- VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 Further, in connection with the Eurex Acquisition, ISE implemented the Trust pursuant to a Trust Agreement (‘‘2007 Trust Agreement’’) 71 among ISE Holdings, U.S. Exchange Holdings, trustees (‘‘Trustees’’), and a Delaware trustee, which agreement has been subsequently amended to take into account subsequent acquisitions, including the current transaction.72 The current agreement (‘‘2012 Trust Agreement’’) serves, in part, to effectuate the ownership and voting limits for ISE Holdings in the event that a person obtains an ownership or voting interest in excess of the limits established in the ISE Holdings Certificate without prior Commission approval. To accomplish that purpose, for as long as ISE Holdings controls, directly or indirectly, a national securities exchange, including Topaz Exchange, the Trust would accept, hold and dispose of Trust Shares 73 on the ¨ owned subsidiary of Deutsche Borse, and thus a Non-U.S. Upstream Owner of ISE, EDGA and ¨ EDGX. See Deutsche Borse Acquisition Order, supra note 16. 71 The term of the Trust is perpetual, provided that ISE Holdings directly or indirectly controls a national securities exchange or a facility thereof, which would include Topaz Exchange. 72 See Eurex Acquisition Order, supra note 15, at Section II.C., for a more detailed description of the Trust. By its terms, the 2007 Trust Agreement related solely to ISE Holdings’ ownership of ISE LLC, and not to any other national securities exchange that ISE Holdings might control, directly or indirectly. In 2010, the Commission approved proposed rule changes that revised the 2007 Trust Agreement to replace references to ISE with references to any Controlled National Securities Exchange (the 2007 Trust Agreement, as thereby amended, is referred to herein as the ‘‘2009 Trust Agreement’’). See ISE Holdings Order and U.S. Exchange Holdings Order, supra note 70; see also DirectEdge Exchanges Order, supra note 70; 2009 Trust Agreement, Articles I and II, Sections 1.1 and 2.6. Thus, the 2009 Trust Agreement will apply to Topaz Exchange upon the Commission’s granting its registration as a national securities exchange because it is controlled directly by ISE Holdings. Except for the expanded scope, the 2009 Trust Agreement was substantially similar to the 2007 Trust Agreement. In 2012, the Commission approved a proposed rule change that revised the 2009 Trust Agreement to replace references to a former owner, SIX, to the new owner, EGD (the 2009 Trust Agreement, as thereby amended, is referred to herein as the ‘‘2012 Trust Agreement’’). ¨ See Deutsche Borse Acquisition Order, supra note 16, for more detailed information on the addition of EGD as a Non-U.S. Upstream Owner of ISE, EDGA, and EDGX. Except for reflecting a new Upstream Owner of ISE Holdings, the 2012 Trust Agreement was substantially similar to the 2009 Trust Agreement. 73 Under the Trust, the term ‘‘Trust Shares’’ means either Excess Shares or Deposited Shares, or both, as the case may be. The term ‘‘Excess Shares’’ means that a person obtained an ownership or voting interest in ISE Holdings in excess of the ownership and voting limits pursuant to Article FOURTH of the ISE Holdings Certificate, for example, through ownership of one of the Non-U.S. Upstream Owners or U.S. Exchange Holdings, without obtaining the approval of the Commission. PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 terms and subject to the conditions set forth therein.74 Specifically, if any person’s ownership percentage exceeds the ownership limits or any person’s voting control percentage exceeds the voting limits without Commission approval, the Excess Shares will be transferred automatically to the Trust pursuant to the terms prescribed in the ISE Holdings Certificate.75 The Trust then would accept the Excess Shares and hold them for the benefit of the trust beneficiary, U.S. Exchange Holdings, who has the right to reacquire the Excess Shares either when a person no longer exceeds the ownership or voting limits or when such excess ownership percentage or voting control percentage is approved by the Commission in accordance with ISE Holdings Certificate.76 Although ISE Holdings is not independently responsible for regulation of Topaz Exchange, its activities with respect to the operation of Topaz Exchange must be consistent with, and must not interfere with, the self-regulatory obligations of Topaz Exchange.77 As described above, the provisions applicable to direct and indirect changes in control of ISE Holdings and Topaz Exchange, as well as the voting limitation, are designed to help prevent any owner of ISE Holdings from exercising undue influence or control over the operation of Topaz Exchange and to help assure that Topaz Exchange is able to effectively carry out its regulatory obligations under the Act. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the The term ‘‘Deposited Shares’’ means shares that are transferred to the Trust pursuant to the Trust’s exercise of the Call Option. Under the Trust, the term ‘‘Call Option’’ means the option granted by the Trust beneficiary to the Trust to call the Voting Shares as set forth in Section 4.2 therein. See infra Section II.C.2.b for further discussion of the Call Option. 74 See 2012 Trust Agreement, Article IV, Section 4.1; see also ISE Holdings Certificate, Article FOURTH, Section III.(c); Eurex Acquisition Order, supra note 15, at 72 FR 71982 n.37 and accompanying text. 75 See id. 76 See 2012 Trust Agreement, Article IV, Section 4.1(f). In addition, as discussed in Section II.C.2.b below, the Trust also may accept, hold and dispose of Trust Shares in connection with the Call Option. Section 4.2(h) of the 2012 Trust Agreement governs when the Trustees can transfer Deposited Shares in connection with the Call Option. Section 4.3(a) of the 2012 Trust Agreement further permits the Trustees, upon receipt of written instructions from the Trust Beneficiary, to sell Trust Shares to a person or persons whose ownership percentage or voting control percentage will not violate the ownership or voting limits. 77 See also infra Section II.C.2. (Regulatory Independence). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices exchange. As the Commission has noted in the past, however, a member’s interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.78 A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member’s conduct or diligently enforce the exchange’s rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of Topaz Exchange to effectively carry out its regulatory oversight responsibilities under the Act. The Commission believes that Topaz Exchange’s and ISE Holdings’ proposed ownership and voting limitation provisions, coupled with the provisions in U.S. Exchange Holdings’ governing documents, the Topaz Exchange Resolutions and the 2012 Trust Agreement described above,79 are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.80 In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or Topaz Exchange to effectively carry out their regulatory oversight responsibilities under the Act.81 2. Regulatory Independence and Oversight mstockstill on DSK4VPTVN1PROD with NOTICES a. ISE Holdings Although ISE Holdings itself will not itself carry out regulatory functions, its activities with respect to the operation of Topaz Exchange must be consistent 78 See, e.g., DirectEdge Exchanges Order, supra note 70, and BATS Order, supra note 29; see also MIAX Order, supra note 30. 79 See supra notes 69–70, and accompanying text. 80 15 U.S.C. 78f(b)(1). 81 In addition, the 2012 Trust Agreement, like the 2007 and 2009 Trust Agreements, is consistent with the provisions that other entities that directly or indirectly own or control a SRO have instituted and that have been approved by the Commission. See, e.g., Securities Exchange Act Release No. 55293 (February 14, 2007), 72 FR 8033 (February 22, 2007) (File No. SR–NYSE–2006–120) (order relating to the combination between NYSE Group, Inc. and Euronext N.V.). See also Eurex Acquisition Order, supra note 15, at 72 FR 71986 n.111. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 with, and not interfere with, the selfregulatory obligations of Topaz Exchange.82 In this regard, Topaz Exchange and ISE Holdings’ respective corporate documents include certain provisions that are designed to maintain the independence of the Topaz Exchange’s self-regulatory function.83 These provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration.84 Specifically: • The directors, officers, and employees of ISE Holdings must give due regard to the preservation of the independence of the self-regulatory function of Topaz Exchange and must not take actions that would interfere with the effectuation of decisions by the Topaz Exchange Board relating to its regulatory functions (including disciplinary matters) or that would adversely affect the ability of Topaz Exchange to carry out its responsibilities under the Act.85 • ISE Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and must cooperate with Topaz Exchange and the Commission pursuant to, and to the extent of, their respective regulatory authority. In addition, ISE Holdings’ officers, directors, and employees must comply with federal securities laws and the rules and regulations thereunder and agree to cooperate with Topaz Exchange and the Commission pursuant to their respective regulatory authority.86 82 See, e.g., BOX Order, supra note 39, and DirectEdge Exchanges Order, supra note 70. 83 See supra note 66, noting that the ISE Holdings Certificate and the ISE Holdings Bylaws were revised in 2010 to cover any Controlled National Securities Exchange, which would include Topaz Exchange. 84 See, e.g., BOX Order, supra note 39, and MIAX Order, supra note 30. 85 See ISE Holdings Bylaws, Article I, Section 1.5. Similarly, Article V, Section 5.1(b) of the Topaz Exchange LLC Agreement requires each Topaz Exchange Board director to take into consideration the effect that his or her actions would have on the ability of Topaz Exchange to carry out its responsibilities under the Act and on the ability of Topaz Exchange to engage in conduct that fosters and does not interfere with Topaz Exchange’s ability to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in securities or assist in the removal of impediments to or perfection of the mechanisms for a free and open market and a national market system; and in general to protect investors and the public interest. 86 See ISE Holdings Certificate, Article TENTH. ISE Holdings also shall take reasonable steps necessary to cause its agents to cooperate with Topaz Exchange and the Commission pursuant to their respective regulatory authority. ISE Holdings Certificate, Article THIRTEENTH. PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 46627 • ISE Holdings, and its officers, directors, employees, and agents are deemed to irrevocably submit to the jurisdiction of the U.S. federal courts, the Commission, and Topaz Exchange, for purposes of any suit, action, or proceeding pursuant to U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, Topaz Exchange’s activities.87 • All books and records of Topaz Exchange containing confidential information pertaining to the selfregulatory function of Topaz Exchange (including but not limited to confidential information regarding disciplinary matters, trading data, trading practices and audit information) shall be retained in confidence by Topaz Exchange and its officers, directors, employees and agents and will not be used by Topaz Exchange for any commercial purpose and shall not be made available to persons other than those officers, directors, employees and agents that have a reasonable need to know the contents thereof.88 • The books and records of Topaz Exchange and ISE Holdings must be maintained in the United States 89 and, to the extent they are related to the operation or administration of Topaz Exchange, ISE Holdings books and records will be subject at all times to inspection and copying by the Commission.90 • Furthermore, to the extent that they are related to the activities of Topaz Exchange, the books, records, premises, officers, directors, and employees of ISE Holdings will be deemed to be the books, records, premises, officers, directors, and employees of Topaz Exchange, for purposes of, and subject to oversight pursuant to, the Act.91 • ISE Holdings will take necessary steps to cause its officers, directors, and employees, prior to accepting a position as an officer, director, or employee (as 87 See ISE Holdings Bylaws, Article I, Section 1.4. Topaz Exchange LLC Agreement, Article VI, Section 4.1(b) and ISE Holdings Certificate, Article ELEVENTH. ISE Holdings LLC Agreement also provides that all books and records of Topaz Exchange reflecting confidential information pertaining to the self-regulatory function of Topaz Exchange will be subject to confidentiality restrictions. See ISE Holdings Certificate, Article ELEVENTH. The requirement to keep such information confidential shall not limit or impede the Commission’s ability to access and examine such information or limit or impede the ability of officers, directors, employees, or agents of ISE Holdings to disclose such information to the Commission. See id. 89 See Topaz Exchange LLC Agreement, Article IV, Section 4.1 and ISE Holdings Bylaws, Article I, Section 1.3. 90 See ISE Holdings Certificate, Article TWELFTH. 91 See id. 88 See E:\FR\FM\01AUN1.SGM 01AUN1 46628 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to Topaz Exchange.92 • ISE Holdings Certificate and ISE Holdings Bylaws require that, so long as ISE Holdings controls Topaz Exchange, any changes to those documents be submitted to the Topaz Exchange Board, and, if such change is required to be filed with, or filed with and approved by, the Commission before it may be effective pursuant to Section 19 of the Act and the rules thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.93 b. Upstream Owners Although the Upstream Owners will not carry out any regulatory functions, the activities of each of the Upstream Owners with respect to the operation of Topaz Exchange must be consistent with, and not interfere with, the selfregulatory obligations of Topaz Exchange. The 2007 Resolutions, as supplemented by the supplemental Resolutions for Topaz Exchange, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws include certain provisions that are designed to maintain the independence of the self-regulatory function of Topaz Exchange, enable Topaz Exchange to operate in a manner that complies with the U.S. federal securities laws, including the objectives and requirements of Sections 6(b) and 19(g) of the Act,94 and facilitate the ability of Topaz Exchange, and the Commission to fulfill their regulatory and oversight obligations under the Act. Specifically: • Each such Non-U.S. Upstream Owner and U.S. Exchange Holdings will comply with the U.S. federal securities laws and the rules and regulations thereunder and cooperate with the Commission and Topaz Exchange.95 Also, each board member, officer, and employee of the Non-U.S. Upstream Owners, and of U.S. Exchange Holdings, in discharging his or her responsibilities, must comply with the U.S. federal securities laws and the rules and regulations thereunder, and mstockstill on DSK4VPTVN1PROD with NOTICES 92 See ISE Holdings Bylaws, Article I, Section 1.6. ISE Holdings Certificate, Article FOURTEENTH; and ISE Holdings Bylaws, Article X; see also supra notes 67–68 and accompanying text discussing a similar provision for Topaz Exchange. 94 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g). 95 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Section (1) and Topaz Exchange Resolution Section (2)(a)); and U.S. Exchange Holdings Certificate, Article ELEVENTH. 93 See VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 must cooperate with the Commission and Topaz Exchange.96 • In discharging his or her responsibilities as a board member of a Non-U.S. Upstream Owner, or of U.S. Exchange Holdings, each such member must, to the fullest extent permitted by applicable law, take into consideration the effect that the actions of the Upstream Owner or U.S. Exchange Holdings, as applicable, will have on the ability of Topaz Exchange to carry out its responsibilities under the Act.97 In addition, each of the Non-U.S. Upstream Owners and U.S. Exchange Holdings, and their board members, officers, and employees, must give due regard to the preservation of the independence of the self-regulatory function of Topaz Exchange (or in the case of the Non-U.S. Upstream Owners, that they will take reasonable steps necessary to cause their officers and employees involved in the activities of Topaz Exchange to give due regard to preserving the independence of the selfregulatory functions of Topaz Exchange).98 • The Non-U.S. Upstream Owners (along with their respective board members, officers, and employees), and U.S. Exchange Holdings agree to keep confidential, to the fullest extent permitted by applicable law, all confidential information pertaining to the self-regulatory function of Topaz Exchange, including, but not limited to, confidential information regarding disciplinary matters, trading data, trading practices and audit information, contained in the books and records of Topaz Exchange and not use such information for any commercial purposes.99 96 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Sections (7)(a) and (8)(a) and Topaz Exchange Resolution Sections (2)(b) and (2)(c)); U.S. Exchange Holdings Certificate, Article TENTH. The Resolutions also provide that each Non-U.S. Upstream Owner will take reasonable steps necessary to cause each person who subsequently becomes a board member of the Non-U.S. Upstream Owner to agree in writing to certain matters included in the Resolutions. See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Section (7) and Topaz Exchange Resolution Section (2)(b)). 97 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Section (7)(f) and Topaz Exchange Resolution Section (2)(b)); and U.S. Exchange Holdings Certificate, Article TENTH. 98 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Sections (5), (7)(d), and (8)(d) and Topaz Exchange Resolution Section (2)); and U.S. Exchange Holdings Certificate, Article TWELFTH. 99 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Sections (6), (7)(e) and (8)(e) and Topaz Exchange Resolution Section (2)); and U.S. Exchange Holdings Certificate, Article FOURTEENTH. The Commission believes that any non-regulatory use of such information would be for a commercial PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 • The books and records of the NonU.S. Upstream Owners related to the activities of Topaz Exchange must at all times be made available for, and the books and records of U.S. Exchange Holdings must be subject at all times to, inspection and copying by the Commission and Topaz Exchange.100 • Books and records of U.S. Exchange Holdings related to the activities of Topaz Exchange will be maintained within the United States.101 • For so long as each of the Non-U.S. Upstream Owners or U.S. Exchange Holdings directly or indirectly controls Topaz Exchange, the books, records, officers, directors (or equivalent), and employees of each of the Non-U.S. Upstream Owners or of U.S. Exchange Holdings will be deemed to be the books, records, officers, directors, and employees of Topaz Exchange, as applicable.102 And, for so long as U.S. Exchange Holdings directly or indirectly controls Topaz Exchange, the premises of U.S. Exchange Holdings will be deemed to be the premises of Topaz Exchange.103 • To the extent involved in the activities of Topaz Exchange, each of the Non-U.S. Upstream Owners, its board members, officers, and employees, irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission for purposes of any suit, action or proceeding arising out of, or relating to, the activities of Topaz Exchange to the extent such board member, officer or employee are involved in the activities of Topaz Exchange.104 Likewise, U.S. Exchange Holdings, its officers, directors, and employees whose principal place of business and residence is outside of the United States, to the extent such director, officer, or employee is involved in the activities of Topaz Exchange, irrevocably submit to the purpose. See DirectEdge Exchanges Order, supra note 70, at 75 FR 13155 n.53. 100 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Section (3) and Topaz Exchange Resolution Section (2)(a)); and U.S. Exchange Holdings Certificate, Article FIFTEENTH. See infra Section II.C.2.c for a discussion of the 2009 Procedure through which the Swiss companies would make available their books and records relating to the activities of the Topaz Exchange. 101 See U.S. Exchange Holdings Certificate, Article FIFTEENTH. 102 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Sections (3) and (8)(c) and Topaz Exchange Resolution Sections (2)(a) and (2)(c)); and U.S. Exchange Holdings Certificate, Article FIFTEENTH. 103 See U.S. Exchange Holdings Certificate, Article FIFTEENTH. 104 See, e.g., Form of German Parent Corporate Resolutions (2007 Resolution Sections (2), (7)(b), and (8)(b) and Topaz Exchange Resolution Section (2)). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES jurisdiction of the U.S. federal courts and the Commission for purposes of any suit, action or proceeding pursuant to the U.S. federal securities laws, and the rules or regulations thereunder, commended or initiated by the Commission arising out of, or relating to, the activities of Topaz Exchange.105 • The 2007 Resolutions, as supplemented by the Topaz Exchange Resolutions, and the U.S. Exchange Holdings Certificate and the U.S. Exchange Holdings Bylaws each require that any change to the applicable document (including any action by the Non-U.S. Upstream Owners that would have the effect of amending or repealing the Topaz Exchange Resolutions or the 2007 Resolutions) must be submitted to the Topaz Exchange Board.106 If such change must be filed with, or filed with and approved by, the Commission under Section 19 of the Act,107 and the rules thereunder, then such change shall not be effective until filed with, or filed with and approved by, the Commission.108 The 2012 Trust Agreement, in addition to enforcing the ownership and voting limits,109 also serves to effectuate compliance with the other commitments made under the Topaz Exchange Resolutions, which incorporate the 2007 Resolutions. To accomplish that purpose, the Trust would determine whether a Material Compliance Event 110 has occurred or is continuing. The Trust would determine whether the occurrence and continuation of a Material Compliance Event requires the exercise of the Call Option.111 The Trust holds a Call Option over the capital stock of ISE Holdings that may be 105 See U.S. Exchange Holdings Bylaws, Article VI, Section 16. 106 See, e.g., Form of German Parent Corporate Resolutions (Topaz Exchange Resolution Section (3)); U.S. Exchange Holdings Certificate, Article SIXTEENTH; and U.S. Exchange Holdings Bylaws, Article VI, Section 9. 107 15 U.S.C. 78s. 108 See, e.g., Form of German Parent Corporate Resolutions (Topaz Exchange Resolution Section (3)); U.S. Exchange Holdings Certificate, Article SIXTEENTH; and U.S. Exchange Holdings Bylaws, Article VI, Section 9. The requirement to submit changes to the Topaz Exchange Board endures for as long as U.S. Exchange Holdings directly or indirectly controls Topaz Exchange. See U.S. Exchange Holdings Bylaws, Article VI, Section 9. 109 See supra notes 61–63 and 73–76 and accompanying text for a discussion of the ownership and voting limits. 110 Under the 2012 Trust Agreement, a ‘‘Material Compliance Event’’ is any state of facts, development, event, circumstance, condition, occurrence, or effect that results in the failure of any of the Non-U.S. Upstream Owners to adhere to its respective commitments under the Resolutions adopted by the respective Non-U.S. Upstream Owners, in any material respect. See 2012 Trust Agreement, Article I, Section 1.1. 111 See supra note 73. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 exercised if a Material Compliance Event has occurred and continues to be in effect, and upon such exercise, the Trust Beneficiary 112 and ISE Holdings, as applicable, will take such actions as are necessary to transfer, or cause the transfer to the Trust of a majority of the Voting Shares then outstanding.113 The Trust will transfer Deposited Shares from the Trust back to the Trust Beneficiary, as provided in Section 4.2(h) therein, only if no Material Compliance Event is continuing or, notwithstanding its continuation, the Trustees determine that the retention of the Deposited Shares could not reasonably be expected to address the continuing Material Compliance Event, provided that the determination is filed with, or filed with and approved by, the Commission.114 The Commission believes that the provisions discussed above in Sections II.C.2.a. and b., which are designed to help maintain the independence of Topaz Exchange’s regulatory function and help facilitate the ability of Topaz Exchange to carry out its regulatory responsibilities and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.115 Whether Topaz Exchange operates in compliance with the Act, however, depends on how it and ISE Holdings in practice implement the governance and other provisions that are the subject of this Order.116 Further, Section 19(h)(1) of the Act 117 provides the Commission with the authority ‘‘to suspend for a period not 112 Under the Trust, the term ‘‘Trust Beneficiary’’ means U.S. Exchange Holdings. 113 See 2012 Trust Agreement, Article IV, Section 4.2. Specifically, if a Material Compliance Event occurs and continues to be in effect, the Trustees must take certain actions, including, after a specified cure period, the exercise of a Call Option for a transfer of the majority of capital stock of ISE Holdings that has the right by its terms to vote in the election of the ISE Holdings Board or on other matters. 114 See 2012 Trust Agreement, Article IV, Section 4.2. 115 15 U.S.C. 78f(b)(1). 116 The Commission has noted that it is reviewing the various standards and processes it uses to facilitate the registration of national securities exchanges and other entities required to register with the Commission and may issue a concept release designed to collect relevant information to evaluate aspects of these registration standards and processes, including the policy objectives of registration, and how best to achieve those policy objectives through registration and other means, and the relative benefits and costs of the various means available. See Securities Exchange Act Release No. 65543 (October 12, 2011), 76 FR 65784, 65786 fn. 13 (October 24, 2011). 117 See 15 U.S.C. 78s(h)(1). PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 46629 exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of [the Act], the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance’’ with any such provision by its members (including associated persons thereof).118 If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) 119 and 19(g)(1),120 these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act.121 Even in the absence of the provisions described above, under Section 20(a) of the Act,122 any person with a controlling interest in Topaz Exchange would be jointly and severally liable with and to the same extent that Topaz Exchange is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. In addition, Section 20(e) of the Act) 123 creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been ‘‘a cause of’’ a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation.124 These provisions are applicable to all entities controlling Topaz Exchange, including the Trust, ISE Holdings, U.S. Exchange Holdings, and the Non-U.S. Upstream Owners. c. Swiss Resolutions and Procedure With FINMA As discussed more fully in the Eurex Acquisition Order,125 Swiss law is designed to protect Swiss sovereignty concerns and prohibits the direct delivery of information from the Swiss 118 See id. 15 U.S.C. 78f(b)(1) 120 See 15 U.S.C. 78s(g)(1). 121 See 15 U.S.C. 78s(h)(1). 122 See 15 U.S.C. 78t(a). 123 See 15 U.S.C. 78t(e). 124 See 15 U.S.C. 78u-3(a). 125 See supra note 15. 119 See E:\FR\FM\01AUN1.SGM 01AUN1 46630 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES owners of Topaz Exchange to the Commission or Topaz Exchange with respect to the activities of Topaz Exchange. In light of the Swiss penal code,126 the Swiss companies agreed to make their books and records relating to the activities of ISE, EDGA and EDGX available for inspection and copying by the Commission through FINMA.127 The Swiss companies made the same agreement in connection with the Eurex Acquisition, and agreed to do so again with respect to the Topaz Exchange prior to the grant of registration to Topaz Exchange as a national securities exchange.128 In November 2009, the Commission and FINMA both approved and signed the Undertaking Relating to the Oversight of Affiliated Markets (‘‘2009 Undertaking’’) pursuant to which FINMA undertook to serve as a conduit for the delivery of information between the Commission and the Swiss owners of ISE Holdings (‘‘Procedure’’) 129 for any national 126 Art. 271 of the Swiss penal code, ‘‘Prohibited acts for a foreign state,’’ states, in part: ‘‘Whoever, without being authorized, performs acts for a foreign state on Swiss territory that are reserved to an authority or an official, whoever performs such acts for a foreign party or another foreign organization, whoever aids and abets such acts, shall be punished with imprisonment and, in serious cases, sentenced to the penitentiary.’’ 127 In 2007, the Swiss Federal Banking Commission (‘‘SFBC’’) (the predecessor to FINMA) undertook to serve as a conduit for the delivery of information between the Commission and the Swiss companies relating to the activities of ISE. On January 1, 2009, the SFBC, the Swiss Federal Office of Private Insurance and the Swiss Anti-Money Laundering Control Authority merged to form FINMA, a new consolidated financial regulator for Switzerland. In 2009, a new undertaking was expanded to cover EDGA and EDGX and any future U.S. exchanges controlled by ISE Holdings. The 2009 undertaking became effective after the Commission approved the Form 1 applications of EDGA and EDGX. See DirectEdge Exchanges Order, supra note 70. The 2009 undertaking covers all U.S. markets that currently are, or in the future may be, controlled by ISE Holdings. Accordingly, by its terms, the new undertaking from 2009 also would apply to the activities of Topaz Exchange upon its registration. See https://www.sec.gov/about/offices/ oia/oia_bilateral/switzerland_sfbc.pdf. 128 See supra note 15. The forms of these agreements are included as part of the Form 1 Application. Form of Swiss Parent Corporate Resolutions; see also Form of EGD Corporate Resolutions. Based on the representation of Topaz Exchange in the submission of its Form 1 Application to the Commission, the resolutions were signed by the respective Swiss companies prior to the grant of registration by the Commission. See Exhibit B to Topaz Exchange Form 1 Application and Amendment No. 3. 129 Where necessitated by Swiss law, the Procedure provides: (1) If the Commission makes a request to any of the Swiss Upstream Owners for information related to the activities of a U.S. Market, including books and records related to the activities of such U.S. Market, FINMA shall deliver to the Commission without delay any responsive information provided to FINMA by the Swiss Upstream Owners; (2) written requests for information, including books and records, related to the activities of a U.S. Market shall be made by the VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 securities exchange registered under Section 6 of the Act that ISE Holdings controls or would, in the future, control, directly or indirectly.130 Subject to the terms and conditions relating to the Procedure, coupled with the fact that under the Topaz Exchange LLC Agreement, all trading records of Topaz Exchange must be maintained in the United States,131 the Commission believes that the Procedure should not result in a level of access materially different from that agreed to by other entities that control U.S. national securities exchanges.132 3. Regulation of Topaz Exchange As a prerequisite to the Commission’s granting of an exchange’s application for registration, an exchange must be so organized and have the capacity to carry out the purposes of the Act.133 Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the Act and the rules and regulations thereunder and the rules of the exchange.134 The discussion below summarizes how Topaz Exchange proposes to structure and conduct its regulatory operations. Commission directly to the Swiss Upstream Owners, and FINMA would be copied on any such requests; and (3) a FINMA staff member shall participate in any oral exchanges between the Commission and any of the Swiss Upstream Owners. As used in the 2009 Undertaking, ‘‘U.S. Markets’’ means ISE, EDGX, EDGA, and any national securities exchange registered under Section 6 of the Act that ISE Holdings may, in the future, control, directly or indirectly. See 2009 Undertaking, paragraph 6. Notwithstanding this Procedure, the Swiss Upstream Owners remain fully responsible for meeting all of their obligations as owners of a U.S. securities exchange, to be set forth in binding corporate resolutions. 130 FINMA serves as a conduit for the delivery of information and for participation in oral exchanges between the Commission and the Swiss companies, and would serve in that capacity for Topaz Exchange. The 2009 Undertaking explicitly states that it covers changes in Swiss companies that become future direct or indirect owners of the U.S. Markets. Specifically, when SIX Swiss Exchange AG’s transferred its interest to the newly formed Swiss corporation, EGD, EGD was covered by the 2009 Undertaking. See supra note 16. 131 See Topaz Exchange LLC Agreement, ARTICLE IV, Section 4.1 (Books and Records). 132 See Eurex Acquisition Order, supra note 15, at 72 FR 71984 n.66 and accompanying text; see also DirectEdge Exchanges Order, supra note 70. If a Non-U.S. Upstream Owner fails to make its books and record relating to the operation of Topaz Exchange available to the Commission, the Commission could bring an action under, among other provisions, Section 17 of the Act, 15 U.S.C. 78q, and Rule 17a–1(b) thereunder, 17 CFR 240.17a–1(b), against Topaz Exchange pursuant to Section 19(h) of the Act, 15 U.S.C. 78s(h). 133 See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). 134 See id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g). PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 a. Corporate Governance Committee and Finance and Audit Committee Topaz Exchange will have a Chief Regulatory Officer (‘‘CRO’’) with general responsibility for supervision of the regulatory operations of Topaz Exchange. The CRO will report to the Corporate Governance Committee135 and to the President/Chief Executive Officer, although the Topaz Exchange Board would retain the power to call the CRO to report directly to the Board as needed, and the CRO may call special meetings of the Board, as necessary.136 The Corporate Governance Committee will meet regularly with the CRO to review regulatory matters. The Corporate Governance Committee will monitor the regulatory program for sufficiency, effectiveness and independence, and will oversee trade practices and market surveillance, audits, examinations and other regulatory responsibilities with respect to members and the conduct of investigations. The Corporate Governance Committee also will supervise the CRO; will receive an annual report from the CRO assessing Topaz Exchange’s self-regulatory program for the Board; will recommend changes that would ensure fair and effective regulation; and will review regulatory proposals and advise the Board as to whether and how such changes may impact regulation. The Corporate Governance Committee will review annually the regulatory budget and specifically inquire into the adequacy of the resources available in the budget for regulatory activities. The Corporate Governance Committee will authorize unbudgeted expenditures for necessary regulatory expenses. In addition, the Finance and Audit Committee will provide oversight over the systems of internal controls established by management and the Board and the Exchange’s regulatory and compliance process.137 The Compensation Committee will set compensation for the CRO. The Corporate Governance Committee, in its sole discretion, will make hiring and termination decisions with respect to the CRO, in each case taking into consideration any recommendations made by the President/Chief Executive Officer. The Corporate Governance Committee will be informed about the 135 The Corporate Governance Committee will consist of at least three directors, all of whom must be Non-Industry Directors. See Topaz Exchange Constitution, Article V, Section 5.4. 136 See Exhibit L to Topaz Exchange Form 1 Application. 137 See Exhibit L to Topaz Exchange Form 1 Application. See also Amendment No. 3. E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices compensation of the CRO, including factors affecting changes thereto. mstockstill on DSK4VPTVN1PROD with NOTICES b. Regulatory Funding To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, Topaz Exchange represented that, prior to commencing operations as a national securities exchange, ISE Holdings will provide sufficient funding to Topaz Exchange for the exchange to carry out its responsibilities under the Act.138 Specifically, Topaz Exchange represented that ISE Holdings will make a cash contribution to Topaz Exchange of $5 million, in addition to previously provided ‘‘in-kind’’ contributions of legal, regulatory and infrastructurerelated services to Topaz Exchange139 Topaz Exchange represented in its Form 1 Application that the cash and in-kind contributions to Topaz Exchange will be adequate to operate Topaz Exchange, including its regulatory program.140 Further, Topaz Exchange, with ISE Holdings as its parent, will be affiliated with an existing exchange, ISE. Individuals currently employed by ISE have been providing, and will continue to provide, services to Topaz Exchange.141 Topaz Exchange represented in its Form 1 Application that there will be a written agreement between Topaz Exchange and ISE Holdings that requires ISE Holdings to provide adequate funding for Topaz Exchange’s operation, including the regulation of Topaz Exchange.142 This agreement further provides that ISE Holdings will reimburse Topaz Exchange for its costs and expenses to the extent Topaz Exchange’s assets are insufficient to meet its costs and expenses.143 Excess 138 See Exhibit I to Topaz Exchange Form 1 Application. 139 Other applicants for registration as a national securities exchange have noted in their Form 1 applications similar funding commitments and representations. BOX Exchange represented that, prior to launch, BOX Group LLC would allocate sufficient operational assets, including regulatory infrastructure and industry and regulatory memberships, along with a $1,000,000 loan to BOX Exchange. In MIAX, the exchange represented that Miami International Holdings, Inc. would allocate sufficient operational assets and make a capital contribution of not less than $2,000,000 into MIAX capital account prior to launching operations. See, e.g., MIAX Order, supra note 30. 140 See Exhibit I to Topaz Exchange Form 1 Application. 141 See id. 142 See Amendment No. 3. Both BOX and MIAX also represented in their Form 1 applications that there would be explicit agreements with their respective holding companies to provide adequate funding for the exchanges’ operations, including regulation. 143 See Exhibit I to Topaz Exchange Form 1 Application. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 funds, as solely determined by Topaz Exchange, will be remitted to ISE Holdings.144 Further, Topaz Exchange will receive all fees, including regulatory fees and trading fees, payable by Topaz Exchange’s members, as well as any funds received from any applicable market data fees and OPRA tape revenue.145 Regulatory funds, meaning the fees, fines or penalties derived from the regulatory operations of Topaz Exchange, will be used to fund the legal, regulatory and surveillance operations of Topaz Exchange.146 c. Rule 17d–2 Agreements; Regulatory Contracts with FINRA and ISE Section 19(g)(1) of the Act,147 among other things, requires every SRO registered as either a national securities exchange or national securities association to examine for, and enforce compliance by, its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO’s own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act.148 Rule 17d–2 of the Act149 permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members.150 id. id. 146 See id. See also Topaz Exchange LLC Agreement, Article III, Section 3.3. The Topaz Exchange LLC Agreement defines ‘‘Regulatory Funds’’ as fees, fines or penalties derived from the regulatory operations of the [Topaz Exchange], provided that such term shall not include revenues derived from listing fees, market data revenues, transaction revenues or any other aspect of the commercial operations of the [Topaz Exchange], even if a portion of such revenues are used to pay costs associated with the regulatory operations of the [Topaz Exchange]. Id. This definition is consistent with the rules of other SROs. See, e.g., MIAX LLC Agreement Section 16; and MIAX ByLaws Article IX, Section 9.4. 147 15 U.S.C. 78s(g)(1). 148 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively. 149 See Section 17(d)(1) of the Act and Rule 17d– 2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d–2. Section 17(d)(1) of the Act allows the Commission to relieve an SRO of certain responsibilities with respect to members of the SRO who are also members of another SRO. Specifically, Section 17(d)(1) allows the Commission to relieve an SRO of its responsibilities to: (i) Receive regulatory reports from such members; (ii) examine such members for compliance with the Act and the rules and regulations thereunder, and the rules of the SRO; or (iii) carry out other specified regulatory responsibilities with respect to such members. 150 17 CFR 240.17d–2. Section 19(g)(1) of the Act requires every SRO to examine its members and persons associated with its members and to enforce compliance with the federal securities laws and the SRO’s own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) of the Act. Section 17(d) was intended, in part, to eliminate unnecessary multiple examinations and regulatory PO 00000 46631 These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO’s rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO. Such regulatory duplication would add unnecessary expenses for common members and their SROs. A 17d–2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.151 Many SROs have entered into Rule 17d–2 agreements.152 Topaz Exchange has represented to the Commission that it will enter into the following allocation of regulatory responsibilities pursuant to Rule 17d–2 of the Act (‘‘17d–2 Plans’’),153 including the two existing multiparty plans applicable to options trading: • Multiparty 17d–2 Plan for the Allocation of Regulatory Responsibility for Options Sales Practice Matters;154 • Multiparty 17d–2 Plan for the Allocation of Regulatory Responsibility for Options Related Market Surveillance Matters;155 and 144 See 145 See Frm 00067 Fmt 4703 Sfmt 4703 duplication with respect to Common Members. See Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976) (‘‘Rule 17d–2 Adopting Release’’). 151 See id. 152 See, e.g., Securities Exchange Act Release Nos. 59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4–575) (Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’)/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 63752 (October 27, 2008) (File No. 4–569) (FINRA/ BATS Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4–536) (National Association of Securities Dealers, Inc. (‘‘NASD’’) (n/ k/a FINRA) and Chicago Board of Options Exchange, Inc. (‘‘CBOE’’) concerning the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4–529) (NASD/ISE) (‘‘ISE Bilateral 17d–2 Plan’’); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4–517) (NASD/The Nasdaq Stock Market LLC). 153 Rule 17d–2 under the Act permits SROs to propose joint plans for the allocation of regulatory responsibilities with respect to their common members (i.e., 17d–2 plans). 154 See Exhibit L to Topaz Exchange Form 1 Application. See also Securities Exchange Act Release No. 68363 (December 5, 2012), 77 FR 73711 (December 11, 2012) (File No. S7–966) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d–2 plan concerning options-related sales practice matters). 155 See Exhibit L to Topaz Exchange Form 1 Application. See also Securities Exchange Act Release No. 68362 (December 5, 2012), 77 FR 73719 (December 11, 2012) (File No. 4–551) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d–2 plan concerning options-related market surveillance). E:\FR\FM\01AUN1.SGM 01AUN1 46632 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES • Bilateral 17d–2 Plan with FINRA that would cover, among other things, general inspection, examination, and enforcement activity.156 If the Commission declares effective the amendments to the multilateral 17d–2 Plans and the new bilateral 17d– 2 Plan, another SRO (often FINRA) would assume certain regulatory responsibility for members of Topaz Exchange that are also members of the SRO that assumes the regulatory responsibilities. This regulatory structure would be consistent with that of other exchanges, including ISE.157 In addition, Topaz Exchange has entered into a third-party Regulatory Service Agreement (‘‘RSA’’) with FINRA.158 Under the RSA, FINRA 159 will carry out certain specified regulatory activities on behalf of Topaz Exchange. For example, FINRA, in its capacity as service provider to Topaz Exchange, will provide member operation services, including membership application review, conducting market surveillance investigation services, conducting routine and cause examination services, assisting Topaz Exchange with disciplinary proceedings pursuant to Topaz Exchange’s rules including conducting hearings, and providing dispute resolution services to Topaz Exchange members on behalf of Topaz Exchange. Topaz Exchange, however, will retain ultimate legal responsibility for the regulation of its members and market.160 This regulatory structure would be consistent with that of other exchanges.161 Topaz Exchange has also entered into a facilities management agreement (‘‘FMA’’) with ISE.162 Pursuant to the proposed FMA, ISE intends to provide to Topaz Exchange certain services, including, for example, business 156 See Exhibit L to Topaz Exchange Form 1 Application. See also ISE Bilateral 17d–2 Plan, supra note 152. 157 Amendments to the multilateral 17d–2 Plans and the new bilateral 17d–2 Plan are not before the Commission as part of this Order and, therefore, the Commission is not acting on them at this time. 158 See, e.g., Exhibit L to Topaz Exchange Form 1 Application. 159 FINRA executed a single RSA with both ISE and Topaz Exchange as signatories. The single RSA, however, has two separate statements of work. The first statement of work describes the specified regulatory activities that FINRA will carry out on behalf of ISE. The second statement of work describes the specified regulatory activities that FINRA will carry out on behalf of Topaz Exchange. 160 See Amendment No. 3. 161 For example, ISE, EDGA, EDGX and BATS have entered into 17d–2 Plans and RSAs with FINRA. 162 See, e.g., Exhibit L to Topaz Exchange Form 1 Application. The FMA with ISE provides, in part, for the provision of Commission and other regulatory compliance services. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 management services, facilities management services, IT services, fiscal services, as well as Commission and other regulatory compliance services and other legal services, such as surveillance programs, legal programs, systems and other operational services.163 Topaz Exchange, however, will retain ultimate legal responsibility for the regulation of its members and market. The Commission believes that it is consistent with the Act for Topaz Exchange to contract with other SROs to perform certain examination, enforcement, and disciplinary functions.164 These functions are fundamental elements of a regulatory program, and constitute core selfregulatory functions. The Commission believes that both FINRA, as a SRO that provides contractual services to other SROs, and ISE, as an SRO that currently operates an options exchange, should have the capacity to perform these functions for Topaz Exchange.165 However, Topaz Exchange, unless relieved by the Commission of its responsibility,166 bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on Topaz Exchange’s behalf. In performing these regulatory functions, however, the SRO retained to perform specified regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of Topaz Exchange to perform its regulatory functions.167 Accordingly, although 163 See Exhibit L of Topaz Exchange Form 1 Application; see also Amendment No. 3. 164 See, e.g., Regulation ATS Release, supra note 30. See also Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR-Amex-2004–32) (order approving rule that allowed Amex to contract with another SRO for regulatory services) (‘‘Amex Regulatory Services Approval Order’’); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004 and SR–NASDAQ–2007–080) (‘‘NOM Approval Order’’); Nasdaq Order, supra note 29; and BATS Order, supra note 29. 165 See, e.g., Amex Regulatory Services Approval Order, supra note 164; NOM Approval Order, supra note 164; and Nasdaq Order, supra note 29. The Commission notes that the RSA and FMA are not before the Commission and, therefore, the Commission is not acting on them. 166 See supra note 149. 167 For example, if failings by the SRO retained to perform regulatory functions have the effect of leaving an exchange in violation of any aspect of the exchange’s self-regulatory obligations, the exchange will bear direct liability for the violation, while the SRO retained to perform regulatory functions may bear liability for causing or aiding and abetting the violation. See, e.g., MIAX Order, supra note 30; BOX Order, supra note 39; and Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10–127) (order granting the exchange registration of ISE) (‘‘ISE Order’’). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 FINRA and ISE will not act on their own behalves under their respective SRO responsibilities in carrying out these regulatory services for Topaz Exchange, as the SROs retained to perform regulatory functions, FINRA and ISE may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by Topaz Exchange. As part of its FMA with ISE, Topaz Exchange proposes to use dual employees to staff its regulatory services program. In other words, current ISE employees will also serve in a similar capacity for Topaz Exchange under the FMA. Topaz Exchange represents that the FMA will contain an obligation on the part of Topaz Exchange and ISE to preserve the other party’s information and materials which are confidential, proprietary and/or trade secrets and prevent unauthorized use or disclosure to third parties.168 The Commission believes that the use of ISE employees by Topaz Exchange is appropriate, as the operations, rules, and management of ISE and Topaz Exchange will overlap to a considerable degree such that Topaz Exchange should benefit by leveraging the experience of current ISE staff. The Commission has approved such arrangements in a similar context.169 However, the Commission expects both ISE and Topaz Exchange to monitor the workload of their dual employees and supplement their staffs, if necessary, so that Topaz Exchange maintains sufficient personnel to allow it to carry out the purposes of the Act and enforce compliance with the rules of Topaz Exchange and the federal securities laws. D. Trading System 1. Access to Topaz Exchange Access to Topaz Exchange will be through the use of Exchange Rights.170 Through an application process, organizations will be approved to become members of Topaz Exchange 168 See Exhibit L to Topaz Exchange Form 1 Application; see also Amendment No. 3. 169 See, e.g., Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (File No. 10–191) (order granting registration to C2 Options Exchange) (‘‘C2 Order’’). 170 See Topaz Exchange Rule 300 Series. ‘‘Exchange Rights’’ means the PMM Rights, CMM Rights and EAM Rights collectively. See Topaz Exchange Rule 100(a)(17). PMM Rights, CMM Rights and EAM Rights have the meaning set forth in Article VI of Topaz Exchange LLC Agreement. See Topaz Exchange Rules 100(a)(12), 100(a)(15) and 100(a)(36). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES and to exercise trading rights.171 Exchange Rights will not convey any ownership rights, but will provide for voting rights for representation on the Topaz Exchange Board and will confer the ability to transact on Topaz Exchange.172 Exchange Rights may not be leased and are not transferable except in the event of a change in control of a member or corporate reorganization involving a member.173 There is no limit on the number of Exchange Rights issued by Topaz Exchange.174 Membership in Topaz Exchange will be open to any broker-dealer registered under Section 15(b) of the Act that meets the standards for membership set forth in the rules of Topaz Exchange.175 The Exchange’s denials from, and impositions of conditions upon, becoming or continuing to be a member may be appealed pursuant to rules governing hearing and review, described in Section II.E below.176 In addition to its regular membership application process, Topaz Exchange also will provide a process whereby a current member of ISE in good standing that is a registered broker-dealer can submit an abbreviated ‘‘waive-in’’ application to Topaz Exchange.177 This waive-in process is similar to arrangements in place at other exchanges.178 Topaz Exchange will have three classes of membership: (1) PMMs; (2) CMMs; and (3) EAMs.179 PMM and CMMs may seek appointment to become market makers in one or more options classes traded on the exchange.180 Topaz Exchange proposes to allow firms 171 The term ‘‘Member’’ means an organization that has been approved to exercise trading rights associated with Exchange Rights, and the term ‘‘Membership’’ refers to the trading privileges associated with Exchange Rights. See Topaz Exchange Rules 100(a)(23) and 100(a)(24). Under Topaz Exchange Rules 300 and 302(c), Topaz Exchange shall issue Memberships that confer the ability to transact on Topaz Exchange, although no rights shall be conferred upon a Member except those set forth in the Topaz Exchange LLC Agreement or Topaz Exchange Rules as amended from time to time. A Membership shall not convey any ownership interest in the Exchange. See Topaz Exchange Rules 300 and 302(c). 172 See Topaz Exchange Rules 300 and 302(c); see also Topaz Exchange LLC Agreement, Article VI, Sections 6.1 and 6.3. 173 See Topaz Exchange Rule 302(c). In such case, member status may be transferred to a qualified affiliate or successor upon written notice to Topaz Exchange. Id. 174 See Topaz Exchange Rule 300(a); see also Topaz Exchange LLC Agreement, Article VI, Section 6.1. 175 See Topaz Exchange Rule 301. 176 See Topaz Exchange Rule 1700 Series, which incorporates by reference ISE Rule 1700 Series. 177 See Topaz Exchange Rule 302(a). 178 See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1) (containing a similar expedited waive-in membership process for members of CBOE). 179 See Topaz Exchange Rule 301(c). 180 See Topaz Exchange Rule 800 Series. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 that register as market makers to receive special privileges or rights over nonmarket maker members, such as participation entitlements for PMMs, if they satisfy certain affirmative and negative market making obligations on the exchange.181 This is similar to arrangements in place at other exchanges, such as ISE.182 The Commission finds that Topaz Exchange’s proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act,183 which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof. Topaz Exchange’s proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges.184 The Commission notes that pursuant to Section 6(c) of the Act,185 an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, Topaz Exchange must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.186 In addition, Topaz Exchange also will allow non-members to access Topaz Exchange as ‘‘sponsored customers’’ of a Topaz Exchange member, subject to 181 See Topaz Exchange Rules 713, 802 and 803. See infra Section II.D.3.b. for further discussion of market maker privileges and obligations. 182 See, e.g., ISE Rules 713, 802 and 803 (containing similar rights and obligations for market makers on ISE). However, some of Topaz Exchange’s proposed access rules differ in some respects from the rules of ISE. For example, as a result of their differing membership structures, there is no limit on the number of PMMs that Topaz Exchange can approve for membership, whereas ISE can appoint only ten PMMs in total. There will still be only one PMM per options class on Topaz Exchange. There also will be no limit to the number of CMMs on Topaz Exchange, whereas ISE can appoint only 160 CMMs in total. EAM rights, however, will be unlimited on both ISE and Topaz Exchange. Topaz Exchange’s approach is consistent with the rules of other exchanges that have no limit on the number of exchange rights, or their functional equivalent, that may be issued by the exchange. See, e.g., C2 Order, supra note 169. 183 15 U.S.C. 78f(b)(2). 184 See, e.g., MIAX Rule 200 Series (‘‘Access’’). 185 15 U.S.C. 78f(c). 186 See, e.g., MIAX Order, supra note 30, at 77 FR 73074; BOX Order, supra note 39, at 77 FR 26337; BATS Order, supra note 29, at 73 FR 49502; and Nasdaq Order, supra note 29, at 71 FR 3555. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 46633 certain rules.187 The sponsoring member will be responsible for implementing policies and procedures to supervise and monitor the trading of its sponsored users to ensure compliance with all applicable federal securities laws and rules and Topaz Exchange rules.188 Topaz Exchange’s proposed sponsored access rules are similar to the rules of other exchanges that provide for sponsored access189 and are consistent with Rule 15c3–5 under the Act.190 2. Linkage Topaz Exchange intends to become a participant in the Plan Relating to Options Order Protection and Locked/ Crossed Markets or any successor plan (‘‘Linkage Plan’’).191 If admitted as a participant to the Linkage Plan, other plan participants will be able to send orders to Topaz Exchange in accordance with the terms of the plan as applied to Topaz Exchange. Topaz Exchange rules include relevant definitions; establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan; impose obligations on Topaz Exchange regarding how it must process incoming orders; establish a general standard that members and Topaz Exchange should avoid tradethroughs; establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges; and establish obligations with respect to locked and crossed markets. The Commission believes that Topaz Exchange has proposed rules that are designed to comply with the requirements of the Linkage Plan.192 Further, as provided below, before Topaz Exchange can commence operations as an exchange, it must 187 See Topaz Exchange Rule 706, Supplementary Material .01. 188 See Topaz Exchange Rule 706. See also 17 CFR 240.15c3–5. 189 See, e.g., ISE Rule 706; see also MIAX Rule 210. 190 17 CFR 240.15c3–5. 191 See Exhibit E to Topaz Exchange Form 1 Application, Section B (‘‘Non-Member Access’’) for a discussion of the Linkage Plan. See also Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4–546) (order approving the National Market System Plan Relating to Options Order Protection and Locked/ Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.). 192 See, e.g., Topaz Exchange Rules relating to Intermarket Linkage in Rule 1900 Series, which incorporates by reference ISE Rule 1900 Series. See also Amendment No. 3. E:\FR\FM\01AUN1.SGM 01AUN1 46634 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices become a participant in the Linkage Plan. 3. Market Makers a. Registration of Market Makers Members of Topaz Exchange may apply to become one of two types of market maker: PMMs or CMMs (collectively, ‘‘Market Makers’’). Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations.193 Each class of Market Maker will receive a specific level of benefits and privileges in exchange for a specific level of obligation that such Market Maker assumes to the Topaz Exchange market. To begin the process of registering as a PMM or CMM, a member will be required to file a written application with Topaz Exchange.194 In reviewing a member’s application for membership, Topaz Exchange will consider, among other things, the applicant’s market making ability.195 To qualify for registration as a Market Maker, a member of Topaz Exchange must meet the requirements established in Rule 15c3–1 under the Act 196 and the general requirements set forth in Topaz Exchange Rule 800 series, including the minimum financial requirements of Topaz Exchange Rule 809.197 All members who are approved to become Market Makers will be designated as specialists on Topaz Exchange for all purposes under the Act and rules thereunder.198 Topaz Exchange will not limit the number of qualifying entities that may become Market Makers.199 In addition, all ISE market makers in good standing will be eligible for an Exchange Right in the same membership category in which they operate on ISE to trade on Topaz Exchange.200 For example, a CMM in good standing on ISE will be eligible to become a CMM on Topaz Exchange, through the submission and approval of a Topaz mstockstill on DSK4VPTVN1PROD with NOTICES 193 Market Makers’ benefits and obligations are discussed in greater detail in the following section. 194 See Topaz Exchange Rule 800(b). 195 See id. The provision permitting Topaz Exchange to consider ‘‘such other factors as [it] deems appropriate’’ must be applied in a manner that is consistent with the Act, including provisions that prohibit an exchange from acting in an unfairly discriminatory manner. See 15 U.S.C. 78f(b)(5); see also MIAX Order, supra note 30, at 77 FR 73074 n.149. 196 17 CFR 240.15c3–1. 197 See Topaz Exchange Rule 800 Series. See also Topaz Exchange Rule 1300 Series relating to Net Capital Requirements, which incorporates by reference ISE Rule 1300 Series. 198 See Topaz Exchange Rule 800(a). 199 See Topaz Exchange Rule 300. See also Exhibit E to Topaz Exchange Form 1 Application, Section A (‘‘Introduction’’). 200 See Topaz Exchange Rule 302(a). VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 Exchange Waive-In Membership Application.201 Once approved, a Market Maker may seek appointment to make markets in one or more options classes traded on the Topaz Exchange.202 Topaz Exchange will provide non-ISE Members with at least sixty days advance written notice of the date upon which the Exchange will allocate options classes and appoint market makers in order to ensure that non-ISE Members have a reasonable opportunity to participate in those processes.203 A market participant must have completed a membership application to be eligible to participate in the appointment and allocation processes.204 Either the Topaz Exchange Board or a committee thereof 205 will appoint classes of options contracts traded on Topaz Exchange to Market Makers taking into consideration: (1) The financial resources available to the Market Maker; (2) the Market Maker’s experience and expertise in market making or options trading; and (3) the maintenance and enhancement of competition among Market Makers in each option class to which they are appointed.206 No appointment of a Market Maker will be without the Market Maker’s consent to such appointment, provided that refusal to accept an appointment may be deemed sufficient cause for termination or suspension of a market maker’s registration.207 Topaz Exchange will appoint a PMM to each options class traded on Topaz Exchange.208 Once appointed, Topaz Exchange will surveil a Market Maker’s activity for continued compliance with all applicable rules and requirements, which are discussed in more detail below.209 The Commission finds that Topaz Exchange’s proposed rules for the registration and appointment of Market Makers are consistent with the Act. In particular, Topaz Exchange’s rules provide an objective process by which a member could become a Market Maker on Topaz Exchange and provide for oversight by Topaz Exchange to monitor 201 See id. See also Exhibit F to Topaz Exchange Form 1 Application. 202 See Topaz Exchange Rule 802(a). 203 See Topaz Exchange Rule 302(b). 204 See Exhibit E to Topaz Exchange Form 1 Application, Section A (‘‘Introduction’’). 205 See Topaz Exchange Rule 802(a). Topaz Exchange Rule 1700 Series provides the process for hearings, review, and arbitration of claims by persons economically aggrieved by Topaz Exchange action, which would include denial of registration as a Market Maker. 206 See id. 207 See id. 208 See Topaz Exchange Rule 802(b). 209 See Topaz Exchange Rule 802(e). PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 for continued compliance by Market Makers with the terms of their application for such status. The Commission notes that Topaz Exchange’s proposed Market Maker registration and appointment requirements are similar to those of other options exchanges.210 b. Market Maker Obligations Pursuant to Topaz Exchange rules, Market Makers will be subject to a number of general obligations. In particular, the transactions of a Market Maker should constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market and a Marker Maker should not make bids or offers or enter into transactions that are inconsistent with such a course of dealings.211 A Market Maker has a continuous obligation to engage, to a reasonable degree under the existing circumstances, in dealings for his own account when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of and demand for a particular options contract, or a temporary distortion of the price relationships between options contracts of the same class.212 For all series of option classes which the Market Maker is appointed, the Market Maker is expected to: (1) Compete with other Market Makers to improve the market; (2) make markets that, absent changed market conditions, will be honored for the number of contracts entered into the Topaz Exchange’s system; (3) update market quotations in response to changed market conditions; (4) price options contracts fairly by, among other things, bidding and offering so as to create the prescribed bid/ask differentials.213 These provisions are similar to arrangements in place at other options exchanges.214 210 See, e.g., ISE Rules 800 and 801 and MIAX Rule 600 (registration); ISE Rule 802 and MIAX Rule 602 (appointment). 211 See Topaz Exchange Rule 803(a). 212 See Topaz Exchange Rule 803(b). 213 See Topaz Exchange Rule 803(b)(1)–(4). Specifically under Topaz Exchange Rule 803(b)(4), following the opening rotation, Market Makers must create differences of no more than $5 between the bid and offer. Prior to the opening rotation, spread differentials shall be no more than $.25 between the bid and offer for each options contract for which the bid is less than $2, no more than $.40 where the bid is at least $2 but does not exceed $5, no more than $.50 where the bid is more than $5 but does not exceed $10, no more than $.80 where the bid is more than $10 but does not exceed $20, and no more than $1 where the bid is $20 or greater, provided that the Topaz Exchange may establish differences other than the above for one or more options series. 214 See, e.g., ISE Rules 802 and 803 (containing similar rights and obligations for market makers on E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Further, Market Makers must maintain minimum net capital in accordance with Topaz Exchange rules, including the minimum financial requirement of Topaz Exchange Rule 809, in addition to the Act and rules and regulations thereunder.215 Market Makers also must maintain information barriers between their market making activity and Other Business Activities 216 that are reasonably designed to prevent the misuse of material, non-public corporate or market information in the possession of persons on one side of the barrier from influencing the conduct of persons on the other side of the barrier.217 Topaz Exchange’s rules governing Market Maker quoting obligations are tailored to the specific class of Market Maker (that is, PMM or CMM).218 Specifically, a PMM will be subject to the highest standard applicable on Topaz Exchange, as a PMM must enter continuous two-sided quotations and enter into any resulting transactions in all of the series listed on the Topaz Exchange of the options classes to which it is appointed on a daily basis.219 PMMs are also required to participate in the opening rotation.220 Although a CMM is not required to enter quotations in the options classes to which it is appointed, whenever a CMM does enter a quote in an options class to which it is appointed, the CMM must then provide continuous quotations in that class for 60% of the time the options class is open for trading on the Topaz Exchange.221 ISE). However, some of Topaz Exchange’s access rules differ in some respect from the rules of ISE. See also supra note 182. 215 See Topaz Exchange Rule 1300 Series, which incorporates by reference ISE Rule 1300 Series; see also Topaz Exchange Rule 809. 216 ‘‘Other Business Activities’’ means: (1) Conducting an investment or banking or public securities business; (2) making markets in the stocks underlying the options in which it makes markets; or (3) handling listed options orders as agent on behalf of Public Customers or broker-dealers; (4) conducting non-market making proprietary listed options trading activities. See Topaz Exchange Rule 810(a). 217 See Topaz Exchange Rule 810. 218 See Topaz Exchange Rule 804. 219 See Topaz Exchange Rule 804(e)(1); see also Topaz Exchange Rule 804(c). A PMM shall be deemed to have provided continuous quotes pursuant to paragraph (e)(1) of Rule 804 if it provides two-sided quotes for 90% of the time that an options class is open for trading on the Topaz Exchange. See Topaz Exchange Rule 804, Supplementary Material .01; see also Amendment No. 3. 220 See Topaz Exchange Rule 701(b)(1). See also Amendment No. 3. 221 See Topaz Exchange Rule 804(e)(2). A CMM must maintain continuous quotations for at least 90% of the time the options class for which it receives Preferenced Orders is open for trading on the Topaz Exchange. See Topaz Exchange Rule VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 Further, CMMs may be called upon by a Topaz Exchange official to submit a single quote or maintain continuous quotes in one or more series of options class to which the CMM is appointed whenever, in the judgment of such official, it is necessary to do so in the interest of fair and orderly markets.222 For purposes of meeting the continuous quoting obligations discussed herein, a Market Maker’s quote must meet the bid/ask differential requirements of Topaz Exchange Rule 803(b)(4).223 In options classes other than to which it is appointed, a Market Maker should not engage in transactions in an account in which it has an interest that are disproportionate in relation to, or in derogation of, the performance of its market making obligations as specified in the Topaz Exchange rules.224 Further, the total number of contracts executed during a quarter by a CMM in options classes to which it is not appointed may not exceed 25% of the total number of contracts traded by such CMMs in classes to which it is appointed and with respect to which it was quoting pursuant to Topaz Exchange Rule 804(e)(2).225 Similarly, the total number of contracts executed during a quarter by a PMM in options classes to which it is not appointed may not exceed 10% of the total number of contracts traded per each PMM membership.226 If Topaz Exchange finds any failure by a Market Maker to properly perform as a market maker, such Market Maker may be subject to suspension or termination.227 Topaz Exchange may suspend or terminate any appointment of a Market Maker under Topaz Exchange Rule 802 and may make additional appointments whenever, in Topaz Exchange’s judgment, the interests of a fair and orderly market are best served by such action.228 Market Makers receive certain benefits for carrying out their responsibilities.229 For example, a broker-dealer or other lender may extend ‘‘good faith’’ credit to a member of a national securities exchange or 804(e)(2)(iii); see also Topaz Exchange Rule 713, Supplementary Material .03 regarding Preferenced Orders. 222 See Topaz Exchange Rule 804(e)(2)(iv). 223 See Topaz Exchange Rule 804(e)(1)–(2). See also supra note 213. 224 See Topaz Exchange Rule 803(d). Among other things, a Market Maker should not effect purchases or sales on the Topaz Exchange except in a reasonable and orderly manner. See id. 225 See Topaz Exchange Rule 805(b)(2). 226 See Topaz Exchange Rule 805(b)(3). 227 See Topaz Exchange Rule 800. 228 See Topaz Exchange Rule 802(d). 229 See, e.g., MIAX Order, supra note 30 (discussing the benefits and obligations of market makers). PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 46635 registered broker-dealer to finance its activities as a market maker or specialist.230 PMMs are also entitled to certain participation entitlements.231 In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.232 The Commission believes that a market maker must be subject to sufficient and commensurate affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify favorable treatment.233 The Commission further believes that the rules of all U.S. options markets need not provide the same standards for market maker participation, so long as they impose affirmative obligations that are consistent with the Act.234 The Commission believes that Topaz Exchange’s Market Maker participation requirements impose appropriate affirmative obligations on Topaz Exchange’s Market Makers that are commensurate with the benefits afforded to such participants, as discussed above, and, accordingly, are consistent with the Act. The Commission believes that the specific levels of benefits conferred on the different classes of Market Makers (PMMs and CMMs) are appropriately balanced by the obligations imposed by Topaz Exchange’s rules. The Commission further believes that Topaz Exchange’s market maker requirements,235 which are identical to ISE’s rules236 and similar to other options exchanges’ rules,237 impose sufficient appropriate obligations that are consistent with the Act. Finally, the Commission believes that the Act does not mandate a particular market model for exchanges, and while Market Makers may become an important source of liquidity on Topaz Exchange, they will likely not be the only source as Topaz Exchange is designed to match buying and selling interest of all Topaz Exchange participants. 230 See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 240.15c3–1(a)(6) (capital requirements for market makers). 231 See Topaz Exchange Rule 713, Supplementary Material .01(b)–(c). See also infra notes 261–268 and accompanying text (describing the PMM participation entitlements). 232 15 U.S.C. 78k(a). 233 See MIAX Order, supra note 30, at 77 FR 73076; and BOX Order supra note 39; see also, e.g., C2 Order, supra note 169. 234 See id. 235 See Topaz Exchange Rule 803. 236 See, e.g., ISE Rule 800 Series. 237 See, e.g., MIAX Order, supra note 30, and BOX Order, supra note 39. E:\FR\FM\01AUN1.SGM 01AUN1 46636 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices 4. Order Display, Execution, and Priority mstockstill on DSK4VPTVN1PROD with NOTICES Topaz Exchange proposes to operate a fully automated electronic options trading platform to buy or sell securities with a continuous, automated matching function.238 Liquidity will be derived from Topaz Exchange members acting as principal or as agent electronically submitting quotes as well as market and various types of limit orders to buy or to sell.239 Non-members also may access Topaz Exchange pursuant to Topaz Exchange rules governing ‘‘sponsored access.’’ 240 All of these electronic submissions to Topaz Exchange will be from remote locations, as there will be no trading floor.241 Topaz Exchange’s Optimise system generally will automatically execute incoming orders.242 Non-opening trades will occur when a buy order/quote and a sell order/quote match on the Topaz Exchange’s order book.243 All options will be traded in decimals on Topaz Exchange and will be consistent with the Penny Pilot.244 All orders submitted to Topaz Exchange’s trading platform must have a designated price and size (limit orders) 245 or must be orders to buy or sell a stated amount of a security at the national best bid or offer when the order reaches Topaz Exchange (market 238 See Exhibit E to Topaz Exchange Form 1 Application. 239 See id. 240 See id. 241 See id. 242 See Topaz Exchange Rule 714. 243 See Exhibit E to Topaz Exchange Form 1 Application. 244 See Topaz Exchange Rule 710 and Supplementary Material .01. The Commission has approved exchange rules on a pilot basis that permit an exchange to quote series with premiums under $3 in pennies and series with premiums of $3 and over in nickels in approximately 360 options classes (‘‘Penny Pilot’’). In addition, these rules allow all series in QQQQs, IWM, and SPY to be quoted in pennies. See, e.g., Securities Exchange Act Release Nos. 60711 (September 23, 2009), 74 FR 49419 (September 28, 2009); 61061 (November 24, 2009), 74 FR 62857 (December 1, 2009) (File No. SR–NYSEArca–2009–44) (approving Penny Pilot program expansions for NYSE Arca). Proposed Supplementary Material .01 to Rule 710 would permit Topaz Exchange to operate a pilot to permit certain options classes to be quoted and traded in increments as low as $0.01, consistent with these previously approved rules. Specifically, this pilot is consistent with the penny pilot on ISE, which was last extended on June 21, 2013 and is scheduled to expire on December 31, 2013. See Securities Exchange Act Release No. 69828 (June 21, 2013), 78 FR 38745 (June 27, 2013) (File No. SR–ISE–2013– 40). Similar to ISE, Topaz Exchange has further agreed to submit to the Commission such reports regarding the Penny Pilot as the Commission may request. See Exhibit B to Topaz Exchange Form 1 Application. 245 A limit order is an order to buy or sell a stated number of options contracts at a specified price or better. Topaz Exchange Rule 715(b). VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 orders).246 Members may submit the following orders to Topaz Exchange: Market Orders; Limit Orders (including Marketable Limit, Fill-or-Kill, Immediate or Cancel, Non-Displayed Penny Order, Intermarket Sweep, and Stopped Orders); 247 or Contingency Orders (including All-Or-None, Stop, Stop Limit, Customer Participation, Reserve, Attributable, Customer Cross, Qualified Contingent Cross, Minimum Quantity,248 Do-Not-Route, Add Liquidity, Opening Only, and Good-TillDate Orders).249 Like ISE, Topaz 246 A market order is an order to buy or sell a stated number of options contracts that is to be executed at the best price obtainable when the order reaches Topaz Exchange. Topaz Exchange Rule 715(a). 247 See Topaz Exchange Rule 715. A Marketable Limit Order is a limit order to buy (sell) at or above (below) the best offer (bid) on the Topaz Exchange. A Fill-or-Kill Order is a limit order that is to be executed in its entirety as soon as it is received and, if not so executed, treated as cancelled. An Immediate-or-Cancel Order is a limit order that is to be executed in whole or in part upon receipt and any portion not so executed is to be treated as cancelled. A Non-Displayed Penny Order is a limit order that specifies a one-cent price increment in a security that has a minimum trading increment pursuant to Topaz Exchange Rule 710 that is larger than one-cent. An Intermarket Sweep Order is a limit order that meets the requirements of Topaz Exchange Rule 1900(h), which incorporates by reference ISE Rule 1900(h). A Stopped Order is a limit order that meets the requirements of Topaz Exchange Rule 1901(b)(8), which incorporates by reference ISE Rule 1901(b)(8). To execute Stopped Orders, members must enter them into the Facilitation Mechanism or Solicited Order Mechanism pursuant to Topaz Exchange Rule 716. 248 The NASDAQ Letter noted that both Topaz Exchange Rules 715(l) and 715(q) appear to describe Minimum Quantity Orders and urged that Topaz Exchange clarify the difference between these two types of Minimum Quantity Orders. See NASDAQ Letter, supra note 6. Topaz Exchange stated that it will correct the duplicative definition. See Topaz Exchange Response Letter, supra note 7, and Amendment No. 3. The Commission believes that Topaz Exchange’s revision to Topaz Exchange Rule 715(l) appropriately addresses the commenter’s concern. 249 See Topaz Exchange Rule 715. An All-or-None Order is a limit or market order that is to be executed in its entirety or not at all. A Stop Order is an order that becomes a market order when the stop price is elected. A Stop Limit Order is an order that becomes a limit order when the stop price is elected. A Customer Participation Order is a limit order on behalf of a Public Customer (as defined in Topaz Exchange Rule 100(a)(38)) that, in addition to the limit order price in standard increments according to Topaz Exchange Rule 710, includes a price stated in one-cent increments at which the Public Customer wishes to participate in trades executed in the same options series in penny increments through the Price Improvement Mechanism pursuant to Topaz Exchange Rule 723. A Reserve Order is a limit order that contains both a displayed portion and a non-displayed portion. An Attributable Order is a market or limit order which displays the user firm ID for purposes of electronic trading on Topaz Exchange. A Customer Cross Order is comprised of a Priority Customer Order (as defined in Topaz Exchange Rule 100(a)(37B) to buy and a Priority Customer Order to sell at the same price and for the same quantity. A Qualified Contingent Cross order is comprised of PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 Exchange also will permit flash mechanisms, which thereby permit certain orders to first be exposed at the NBBO to all Topaz Exchange members for execution at the National Best Bid or Offer (‘‘NBBO’’) before an unaffiliated broker will, under contract with Topaz Exchange, route the order to another market for execution.250 Quotes entered by PMMs and CMMs must, like Limit Orders, be priced and have a designated size.251 Orders will be accepted for any security traded on Topaz Exchange, whether submitted by a member on a proprietary or agency basis in any size,252 whereas quotes for any security traded on Topaz Exchange may only be submitted by PMMs and CMMs and only in the options classes to which the market makers are appointed.253 Topaz Exchange will be required to maintain a full audit trail of every incoming and outgoing message (including all orders and quotes) submitted to the Topaz Exchange’s system.254 Members may receive status reports regarding orders submitted to Topaz Exchange or change or cancel an an order to buy or sell at least 1000 contracts that is identified as being part of a qualified contingent trade (as defined in Topaz Exchange Rule 715, Supplementary Material .02) coupled with a contraside order to buy or sell an equal number of contracts. A Minimum Quantity Order is an order that is initially available for partial execution only for a specified number of contracts or greater. A DoNot-Route Order is a market or limit order that is to be executed in whole or in part on Topaz Exchange only. An Add Liquidity Order is a limit order that is to be executed in whole or in part on Topaz Exchange (i) only after being displayed on Topaz Exchange’s limit order book; and (ii) without routing any portion of the order to another market center. An Opening Only Order is a limit order that can be entered for the opening rotation only. A Good-Till-Date Order is a limit order to buy or sell which, if not executed, will be cancelled at the sooner of the end of the expiration date assigned to the order, or the expiration of the series. These order types are the same order types that are available on ISE, except that ISE also includes several complex order types that are not proposed for Topaz Exchange. See Topaz Exchange Rule 715; ISE Rules 715 and 722; see also Exhibit B to Topaz Exchange Form 1 Application. 250 See Topaz Exchange Rule 1901, Supplementary Material .02 (which incorporates by reference ISE Rule 1901, Supplementary Material .02). See also Amendment No. 3 (removing exposure and routing obligation from PMMs under Topaz Exchange Rule 800 Series). 251 See Topaz Exchange Rule 804(b). The NASDAQ Letter noted that proposed Topaz Exchange Rule 804(g) and Supplementary Material .01 appear to be identical and urged that Topaz Exchange clarify this provision. See NASDAQ Letter, supra note 6. Topaz Exchange stated that it will correct the duplicative provision. See Topaz Exchange Response Letter, supra note 7, and Amendment No. 3. The Commission believes that Topaz Exchange’s revision to Topaz Exchange Rule 804, Supplementary Material .01 appropriately addresses the commenter’s concern. 252 See Topaz Exchange Rule 713(a). 253 See Topaz Exchange Rule 804(a). 254 See 17 CFR 240.17a–5. See also Exhibit E to Topaz Exchange Form 1 Application, Section C. E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES order at any time before that order is executed on Topaz Exchange, except as otherwise specified in Topaz Exchange Rule 723 (Price Improvement Mechanism for Crossing Transactions).255 All orders and quotes submitted to Topaz Exchange will be displayed unless designated otherwise by the member submitting the order.256 Displayed orders and quotes will be displayed on an anonymous basis (except for Attributable Orders,257 which will allow voluntary disclosure of firm identification information) at a member’s specified price. NonDisplayed Orders (the non-displayed portion of a Reserve Order or a NonDisplayed Penny Order) will not be displayed to anyone and will not have time priority over displayed orders at the same price.258 Topaz Exchange will utilize a pro-rata priority scheme with a Priority Customer preference.259 This scheme is the same as what the Commission has approved for ISE.260 In addition, under Topaz Exchange rules, PMMs are granted certain participation entitlements. For example, PMMs will be entitled to a participation entitlement with respect to each incoming order if they have a quote at 255 See Exhibit E to Topaz Exchange Form 1 Application, Section C. 256 See Topaz Exchange Rule 704. 257 An Attributable Order is a market or limit order which displays the user firm’s ID for purposes of trading on the Topaz Exchange. Use of Attributable Orders would be voluntary. This order type is consistent with similar order types on other exchanges. See, e.g., CBOE Rule 6.53(o) (attributable order type). 258 See Topaz Exchange Rules 715(b)(4) and 715(g). 259 See Topaz Exchange Rule 713, Supplementary Material 01. Under this priority methodology, the highest bid and lowest offer will have priority except that Priority Customer Orders will have priority over professional interest and all market maker interest at the same price. Subject to certain limits, Professional Orders and market maker quotes at the best price receive allocations based upon the percentage of the total number of contracts available at the best price that is represented by the size of the Professional Order or quote. If there were two or more Priority Customer Orders for the same options series at the same price, priority will be afforded based on the sequence in which such orders were received. Topaz Exchange rules will define ‘‘Priority Customer’’ as a person or entity that is not a broker or dealer in securities, and does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial accounts. ‘‘Professional Orders,’’ i.e., orders for the account of a person or entity that is not a Priority Customer, will be subordinate to Priority Customer Orders for priority and fee purposes. Professional Orders will include orders of broker-dealers and orders of those Public Customers that are not Priority Customers. See Topaz Exchange Rules 100(a)(37A)–(37C) for definitions of Priority Customer, Priority Customer Order and Professional Order, respectively. 260 See, e.g., ISE Rule 713, Priority of Quotes and Orders. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 the NBBO.261 The PMM participation entitlement will apply only to any remaining balance after any Priority Customer 262 orders have first been satisfied.263 The PMM will not be allocated a total quantity greater than the quantity it is quoting at the execution price, and it will not receive any further allocation of an order if it receives a participation entitlement.264 Another such entitlement provides that small size orders (i.e., five or fewer contracts) will be allocated in full to the PMM if it has a quote at the NBBO.265 These participation entitlements for PMMs are consistent with provisions that the Commission has approved for other exchanges.266 The Commission believes that these entitlements are appropriately balanced by the obligations imposed on these classes of market makers, as discussed in detail above.267 In particular, PMMs are subject to higher quoting obligations than other Market Makers who are not eligible to receive the aforementioned participation entitlements.268 Therefore, the Commission believes that the proposed rules regarding participation entitlements are consistent with the Act. Topaz Exchange proposes to make available certain additional order processing and matching features, largely based on features available on ISE.269 Mechanisms that will be utilized by Topaz Exchange include: A Price Improvement Mechanism (which affords the opportunity for price improvement after an auction for 261 See Topaz Exchange Rule 713, Supplementary Material .01. Specifically, the PMM’s participation entitlement will be equal to the greater of: (i) The proportion of the total size at the best price represented by the size of its quote, or (ii) 60% of the contracts to be allocated if there is only one other Market Maker quotation at the NBBO or 40% if there are two or more other Market Maker quotes at the NBBO. See Topaz Exchange Rule 713, Supplementary Material .01(b). 262 See supra note 259 for the definition of Priority Customer. 263 See Topaz Exchange Rule 713, Supplementary Material .01. 264 See id. 265 See Topaz Exchange Rule 713, Supplementary Material .01(c). The rule provides that Topaz Exchange will review the functioning of this provision quarterly to make sure that small size orders do not account for more than 40% of the volume executed on Topaz Exchange. Id. 266 See, e.g., ISE Rule 713, Supplementary Materials .01 and .03; see also MIAX Order, supra note 30. 267 See supra Section II.D.3.b (discussing market maker obligations). 268 For example, as discussed above, supra Section II.D.3.b., PMMs must provide continuous two-sided quotes in each appointed option class. 269 The primary difference between Topaz Exchange’s order processing and matching features and those of ISE previously approved by the Commission will be that Topaz Exchange will not accept complex orders. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 46637 eligible orders above the NBBO); 270 a Facilitation Mechanism (which affords members an opportunity to cross orders after an auction and provides the facilitating member the opportunity to receive 40% of the agency order); 271 and a Solicited Order Mechanism (which allows members representing agency orders the opportunity to cross large size solicited orders after an auction).272 These mechanisms are consistent with substantially similar mechanisms currently existing on other options exchanges, including identical mechanisms on ISE with respect to noncomplex orders.273 Members will be able to access Topaz Exchange through a variety of electronic 270 See Topaz Exchange Rule 723. Topaz Exchange will operate a pilot program whereby there will be no minimum size requirements for orders to be eligible for the PIM. See Exhibit B to Topaz Exchange Form 1 Application; see also Topaz Exchange Rule 723, Supplementary Material .03. 271 See Topaz Exchange Rule 716(d). The NASDAQ Letter stated that it appears that the rule concerning the Facilitation Mechanism was internally inconsistent in part. Specifically, the NASDAQ Letter noted that proposed Topaz Exchange Rule 716(d)(3)(i) stated that Priority Customer bids (offers) that are priced higher (lower) than the facilitation price will be executed at the facilitation price, and further noted that the same section of the rule also stated that a facilitation order would be cancelled at the end of the exposure period if an execution would take place a price that is inferior to the best bid (offer) on Topaz. See NASDAQ Letter, supra note 6. The NASDAQ Letter suggested that this means that a Priority Customer bidding higher than the facilitation price would cause the facilitation order to be cancelled. See id. Topaz Exchange clarified this point by explaining that, because Topaz Exchange is a price priority exchange, Topaz Exchange will not execute a facilitation order at a price that is inferior to the Topaz Exchange best bid or offer (‘‘Topaz BBO’’) at the time of execution. Topaz Exchange noted that, since interest on the opposite side of a facilitation order participates in the execution of the facilitation order, the only instance where a better priced Priority Customer Order might be outside of the Topaz BBO is when the order is on the same side of the market as the facilitation order. In other words, the text of Rule 716(d) means that betterpriced Priority Customer Orders on the opposite side of the market from the order being facilitated will be given the benefit of executing at the facilitation price, whereas better-priced Priority Customer Orders on the same side of the market as the order being facilitated will cause the facilitation order to be cancelled. See Topaz Exchange Response Letter, supra note 7. 272 See Topaz Exchange Rule 716(e). With respect to the Block Order, Facilitation and Solicited Order Mechanisms described in Topaz Exchange Rule 716(b), (d) and (e), the NYSE Euronext Letter II recommended clarifying language to describe what terms, if any, should be contained within a ‘‘broadcast message.’’ See NYSE Euronext Letter II, supra note 6. Topaz Exchange stated that it would amend the various sections of the rule to clarify the terms of the broadcast message. See Topaz Exchange Response Letter, supra note 7, and Amendment No. 3. The Commission believes that Topaz Exchange’s revisions to Topaz Exchange Rule 716(b), (d), and (e) appropriately address the commenter’s concerns. 273 See ISE Rules 716 and 723. E:\FR\FM\01AUN1.SGM 01AUN1 46638 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES systems, and non-members will be able to access Topaz Exchange pursuant to sponsored access arrangements with Topaz Exchange members, pursuant to Topaz Exchange rules.274 As noted above, Topaz Exchange also intends to become a participant in the Linkage Plan.275 The manner in which Topaz Exchange proposes to comply with the Linkage Plan is identical to the manner in which ISE complies with the Linkage Plan.276 To comply with the Linkage Plan, Topaz Exchange, among other things, will prohibit its members from effecting a transaction at a price that is inferior to the NBBO, unless an exception applies.277 Topaz Exchange will provide a centralized process for sending intermarket sweep orders to other exchanges on behalf of Public Customer Orders.278 Topaz Exchange will contract with one or more unaffiliated brokers to route orders to other exchanges when necessary to comply with the Linkage Plan. In circumstances where marketable Public Customer Orders are received when Topaz Exchange is not at the NBBO or orders are received that would lock or cross another market, they will be exposed to Topaz Exchange members for up to one second.279 If, after a Public Customer Order is exposed, such order cannot be executed in full on Topaz Exchange at the then-current NBBO or better and is marketable, the lesser of the full displayed size of the protected bid(s) or protected offer(s) that are priced better than the Topaz Exchange’s quote or the balance of the order will be sent to a contracted unaffiliated broker, and any additional balance of the order that is not marketable against the then274 See, e.g., Topaz Exchange Rule 706, Supplementary Material .01. 275 See Topaz Exchange Rule 1900 Series, which incorporates by reference ISE Rule 1900 Series. 276 The Commission recently approved a change in the way in which ISE complies with the Linkage Plan by now contracting with one or more unaffiliated brokers to route intermarket sweep orders of Public Customers to other exchanges when necessary. See Securities Exchange Act Release No. 69396 (April 18, 2013), 78 FR 24273 (April 24, 2013) (File No. SR–ISE–2013–18). PMMs no longer have the responsibility of either executing the Public Customer Order at a price that at least matches the NBBO or obtaining better prices from the away market(s) by sending one or more intermarket sweep orders on the Public Customer’s behalf. See also Amendment No. 3 (removing exposure and routing obligation from PMMs under Topaz Exchange’s Rule 800 Series). 277 See Topaz Exchange Rule 714; see also ISE Rule 714. 278 See Topaz Exchange Rule 1901, which incorporates by reference ISE Rule 1901. 279 See Topaz Exchange Rule 1901, Supplementary Material .02, which incorporates by reference ISE Rule 1901, Supplementary Material .02. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 current NBBO will be placed on the Topaz Exchange book.280 The Commission believes that Topaz Exchange’s proposed display, execution, and priority rules are consistent with the Act. In particular, the Commission finds that the proposed rules are consistent with Section 6(b)(5) of the Act,281 which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and to not permit unfair discrimination between customers, issuers, or dealers. The Commission also finds that the proposed rules are consistent with Section 6(b)(8) of the Act,282 which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The trading rules of Topaz Exchange are substantially similar to the current ISE trading rules, which were approved at the time ISE’s registration as a national securities exchange was granted 283 or filed with and approved by the Commission (or otherwise became effective) pursuant to Section 19(b) of the Act.284 The Commission believes that Topaz Exchange’s trading rules, in general, do not raise any novel or controversial issues.285 280 See id. Any additional balance of the order will be executed on Topaz Exchange if it is marketable. 281 15 U.S.C. 78f(b)(5). 282 15 U.S.C. 78f(b)(8). 283 See ISE Order, supra note 167. 284 The Commission notes, however, that some of Topaz Exchange’s rules differ in some respects from the rules of ISE. For example, Topaz Exchange is not proposing to incorporate ISE’s rules relating to the trading of equity securities or to incorporate any rules concerning the trading of complex or multilegged orders at this time. 285 With respect to clearing rules, the three commenters recommended clarifying language with respect to Topaz Exchange Rule 712(b), specifically ‘‘. . . or other guarantee given by such Clearing Member to such Member . . . .’’ The commenters noted that this language lacks clarity whether Topaz Exchange Rule 712(b) requires some form of written authorization between a clearing member and a member in order for the member to give up the name of a particular clearing member. See CBOE Letter, NASDAQ Letter and NYSE Euronext Letter I, supra note 6. The NASDAQ Letter noted that a written, transparent and auditable authorization is needed to provide proper safeguards and protections for clearing members and to ensure clearing members are in compliance with aspects of the Commission Rule 15c3–3 in general. See NASDAQ Letter, supra note 6. The NYSE Euronext Letter I noted that the requirements for a letter of PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 5. Section 11(a) of the Act Section 11(a)(1) of the Act 286 prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises discretion (collectively, ‘‘covered accounts’’), unless an exception applies. The Exchange has represented that it has analyzed its rules proposed hereunder, and believes that they are consistent with Section 11(a) of the Act and rules thereunder. For the reasons set forth below, based on Topaz Exchange’s representations, the Commission believes that Topaz Exchange’s order execution algorithm, including the Facilitation, Solicitation and Customer Cross processes (but excluding the Price Improvement Mechanism), will allow members to meet the requirements of Rule 11a2– 2(T) for executions on Topaz Exchange. Additionally, the Commission believes that Topaz Exchange members’ executions that occur through the Price Improvement Mechanism will be consistent with the requirements in Section 11(a)(1)(G) of the Act and rule 11a1–1(T) thereunder. a. Rule 11a2–2(T) Rule 11a2–2(T) under the Act,287 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with Rule 11a2–2(T)’s conditions, a member: (i) May not be affiliated with the executing member; (ii) must transmit the order from off the exchange floor; (iii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 288 and (iv) authorization were also not clearly defined and that Topaz Exchange should have rule text that governs the terms and revocation of letters of authorization. Topaz Exchange clarified this point by noting that ISE has interpreted and applied its identical rule to require the submission of written authorization in order for an ISE member to give up a particular clearing member’s name. Topaz Exchange further noted that it would amend the rule to make clear that written authorization is required. See Topaz Exchange Response Letter, supra note 7, and Amendment No 3. The Commission believes that Topaz Exchange’s revision to Topaz Exchange Rule 712(b) appropriately addresses the commenters’ concerns. 286 15 U.S.C. 78k(a)(1). 287 17 CFR 240.11a2–2(T). 288 The member may, however, participate in clearing and settling the transaction. See Securities E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. In a letter to the Commission,289 Topaz Exchange requested that the Commission concur with its conclusion that Topaz Exchange members that enter orders through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, (but excluding those transactions effected through the PIM process), satisfy the requirements of Rule 11a2–2(T). For the reasons set forth below, the Commission believes that Topaz Exchange members that enter orders through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, but excluding those transactions effected through the PIM process, will satisfy the conditions of Rule 11a2–2(T). Rule 11a2–2(T)’s first condition is that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages over non-members in handling their orders after transmitting them to the Exchange.290 Topaz Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE’s Designated Order Turnaround System) (‘‘1978 Release’’). 289 See Letter from Michael Simon, General Counsel, Secretary and Chief Regulatory Officer, Topaz Exchange, to Elizabeth Murphy, Secretary, Commission, dated December 14, 2012 (‘‘Exchange 11(a) Request Letter’’). 290 In considering the operation of automated execution systems operated by an exchange, the Commission noted that while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into each system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084, 6086 n.25 (January 31, 1979) (File No. S7–613) (regarding the American Stock Exchange (‘‘Amex’’) Post Execution Reporting System, the Amex Switching System, the Intermarket Trading System, the Multiple Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX Communications and Execution System, and the Philadelphia Stock Exchange Automated VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 Exchange has represented that the design of the trading platform ensures that no member has any special or unique trading advantage in the handling of its orders after transmitting its orders to Topaz Exchange.291 Based on the Exchange’s representation, the Commission believes that the Topaz Exchange trading system, including the Facilitation, Solicitation and Customer Cross processes, will satisfy this requirement. Second, Rule 11a2–2(T) requires orders for covered accounts to be transmitted from off the exchange floor. Topaz Exchange will not have a physical trading floor, and like other automated systems, will receive orders electronically through remote terminals or computer-to-computer interfaces. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.292 Orders sent to Topaz Exchange, regardless of where it executes within the Topaz Exchange system, including as a Facilitation, a Solicitation or a Customer Cross process, will be transmitted from remote terminals directly to Topaz Exchange by electronic means. Since the Topaz Exchange trading system receives all orders electronically through remote terminals or computer-to-computer interfaces, the Commission believes that the trading system, including the Facilitation, Solicitation and Customer Cross processes, will satisfy the off-floor transmission requirement. Third, Rule 11a2–2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution.293 Topaz Exchange Communications and Execution System (‘‘1979 Release’’)). 291 See Exchange 11(a) Request Letter, supra note 289. 292 See, e.g., Securities Exchange Act Release Nos. 59154 (December 23, 2008) 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48) (order approving proposed rules of BX); 49068, (January 13, 2004), 69 FR 2775 (January 20, 2004) (SR–BSE–2002–15) (establishing, among other things, BOX as an options trading facility of BSE); 44983, (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR–PCX– 00–25) (approving the PCX’s use of the Archipelago Exchange as its equity trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–NYSE– 90–52 and SR–NYSE–90–53) (regarding NYSE’s OffHours Trading Facility). See 1978 Release, supra note 288. See also 1979 Release, supra note 290. 293 The member may cancel or modify the order, or modify the instructions for executing the order, but only from off the Exchange floor. See 1978 Release, supra note 288, at 43 FR 11547. The Commission has stated that the non-participation requirement is satisfied under such circumstances so long as such modifications or cancellations are PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 46639 represented that at no time following the submission of an order is a member able to acquire control or influence over the result or timing of an order’s execution. According to Topaz Exchange, orders submitted through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, also meet the nonparticipation requirement. The execution of a member’s order depends not on the member entering the order, but rather on what orders, bids, or offers are present in the system at the time the member submits the order and on the priority of those orders, bids or offers.294 Topaz Exchange represents that orders sent to Topaz Exchange and through the Facilitation, Solicitation and Customer Cross processes will be centrally processed and executed automatically by Topaz Exchange.295 Topaz Exchange further represents that orders sent to Topaz Exchange will be transmitted from remote terminals directly to the system by electronic means.296 Once an order is submitted to Topaz Exchange, the order is executed against another order based on the established matching algorithms for the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes.297 Trades will execute when orders or quotations on Topaz Exchange match one another based on their priority.298 As Topaz Exchange stated in its Exchange 11(a) Request Letter, the execution does not depend on the participant but rather upon what other orders are entered into the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, at or around the same time as the subject order; what orders are on Topaz Exchange; or submitted as Responses; and where the order is ranked based on the priority ranking algorithm.299 Therefore, at no time following the submission of an order to the Topaz Exchange system, including through the Facilitation, Solicitation or Customer Cross processes, is a participant able to acquire control or influence the result or timing of orders also transmitted from off the floor. See id. (stating that the ‘‘non-participation requirement does not prevent initiating members from canceling or modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 294 See Exchange 11(a) Request Letter, supra note 289. 295 See id. 296 See id. 297 See id. 298 See id. 299 See id. E:\FR\FM\01AUN1.SGM 01AUN1 46640 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices submitted to the Topaz Exchange system, including through the Facilitation, Solicitation or Customer Cross processes.300 Accordingly, the Commission believes that the nonparticipation requirement will be met when orders are executed automatically through use of the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes. Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T).301 Topaz Exchange members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule’s exemption.302 b. Section 11(a)(1)(G) and Rule 11a1– 1(T) Section 11(a)(1)(G) of the Act provides an additional exemption from the general prohibition set forth in Section 11(a)(1) for any transaction for a member’s own account, provided that: (i) Such member is primarily engaged in certain underwriting, distribution, and other activities generally associated with broker-dealers and whose gross income is derived principally from such business and related activities; and (ii) the transaction is effected in compliance with the rules of the Commission, which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for 300 See id. CFR 240.11a2–2(T)(a)(2)(iv). In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated person thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 288, at 43 FR 11548 (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). 302 See Exchange 11(a) Request Letter, supra note 289. mstockstill on DSK4VPTVN1PROD with NOTICES 301 17 VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 the account of persons who are not members or associated with members of the exchange.303 In addition, Rule 11a1– 1(T) under the Act specifies that a transaction effected on a national securities exchange for the account of a member which meets the requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in accordance with the requirements of Section 11(a)(1)(G)(ii), to be not inconsistent with the maintenance of fair and orderly markets and to yield priority, parity, and precedence in execution to orders for the account of non-members or persons associated with non-members of the exchange, if such transaction is effected in compliance with certain requirements.304 Topaz Exchange represented that its Price Improvement Mechanism, or PIM, is a process set forth in Topaz Exchange Rule 723 whereby an EAM can provide price improvement opportunities for a transaction.305 As Topaz Exchange stated in its Exchange 11(a) Request Letter, Topaz Exchange’s proposed PIM rules will require that Priority Customer interest, at any given price, be executed in full before Professional Orders and market maker quotes.306 Additionally, Topaz Exchange’s proposed PIM rules will require non-member Professional Orders to be executed in full before any 15 U.S.C. 78k(a)(1)(G). 11a1–1(T)(a)(1)–(3) provides that each of the following requirements must be met: (1) A member must disclose that a bid or offer for its account is for its account to any member with whom such bid or offer is placed or to whom it is communicated, and any member through whom that bid or offer is communicated must disclose to others participating in effecting the order that it is for the account of a member; (2) immediately before executing the order, a member (other than the specialist in such security) presenting any order for the account of a member on the exchange must clearly announce or otherwise indicate to the specialist and to other members then present for the trading in such security on the exchange that he is presenting an order for the account of a member; and (3) notwithstanding rules of priority, parity, and precedence otherwise applicable, any member presenting for execution a bid or offer for its own account or for the account of another member must grant priority to any bid or offer at the same price for the account of a person who is not, or is not associated with, a member, irrespective of the size of any such bid or offer or the time when entered. See 17 CFR 240.11a1–1(T)(a)(1)–(3). 305 The PIM is a process wherein an EAM may seek to facilitate an order it represents as agent, and/or a transaction wherein the EAM solicited interest to execute against an order it represents as agent (a ‘‘Crossing Transaction’’). A Crossing Transaction is comprised of the order the EAM represents as agent (the ‘‘Agency Order’’) and a counter-side order for the full size of the Agency Order (the ‘‘Counter-Side Order’’). The CounterSide Order may represent interest for the Member’s own account, or interest the Member has solicited from one or more other parties, or a combination of both. See Exchange 11(a) Request Letter, supra note 289. See also Topaz Exchange Rule 723. 306 See Exchange 11(a) Request Letter, supra note 289. See also Topaz Exchange Rule 723(d)(1). PO 00000 303 See 304 Rule Frm 00076 Fmt 4703 Sfmt 4703 proprietary interest of members (i.e., proprietary interest from EAMs and market makers).307 Because Topaz Exchange Rule 723(d) will require Topaz Exchange members to yield priority to Priority Customers and nonmember Professional Orders in the PIM process, the Commission believes that the proposal with respect to transactions effected through the PIM process will be consistent with Section 11(a)(1)(G) and Rule 11a1–1(T) thereunder.308 The Commission also reminds exchanges and their members, however, that, in addition to yielding priority to nonmember orders at the same price, members must also meet the other requirements under Section 11(a)(1)(G) of the Act and Rule 11a1–1(T) thereunder (or satisfy the requirements of another exception) to effect transactions for their own accounts. E. Discipline and Oversight of Members As noted above, one prerequisite for the Commission’s grant of an exchange’s application for registration is that a proposed exchange must be so organized and have the capacity to be able to carry out the purposes of the Act.309 Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with the Act and the rules and regulations thereunder and the rules of the exchange.310 Topaz Exchange rules codify Topaz Exchange’s disciplinary jurisdiction over its members, thereby facilitating its ability to enforce its members’ compliance with its rules and the federal securities laws.311 Topaz Exchange’s rules permit it to sanction members for violations of the Act and the rules and regulation thereunder and Topaz Exchange’s rules by, among other things, expelling or suspending members; limiting members’ activities, functions, or operations; fining or censuring members; suspending or barring a person from being associated with a member; or any other fitting sanction in accordance with Topaz Exchange rules.312 Topaz Exchange’s disciplinary and oversight functions will be administered in accordance with Chapter 16 of the Topaz Exchange rules, which 307 See Exchange 11(a) Request Letter, supra note 289. See also Topaz Exchange Rule 723(d)(3). 308 See Securities Exchange Act Release No. 50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (File No. SR–ISE–2003–06). 309 See 15 U.S.C. 78f(b)(1). 310 See id. 311 See Topaz Exchange Rule 1600(a) (which incorporates by reference ISE Rule 1600(a)). 312 See id. See also MIAX Rule 1000 and BOX Exchange Rule 12000 Series (containing identical provisions). E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES incorporates by reference Chapter 16 of ISE rules, governing disciplinary jurisdiction. Unless delegated to another SRO pursuant to the terms of an effective 17d–2 Plan,313 Topaz Exchange regulatory staff (including regulatory staff of another SRO that may be acting on Topaz Exchange’s behalf pursuant to a regulatory services agreement) will, among other things, investigate potential securities laws violations and initiate charges pursuant to Topaz Exchange rules.314 Upon a finding of probable cause of a violation within the disciplinary jurisdiction of Topaz Exchange and where further proceedings are warranted,315 Topaz Exchange will conduct a hearing on disciplinary matters before a professional hearing officer 316 and two members of the Business Conduct Committee 317 (‘‘Panel’’).318 The Topaz Exchange 313 See supra notes 154–156 and accompanying text (concerning the multiparty 17d–2 Plans to which Topaz Exchange has committed to join). 314 See Topaz Exchange Rule 1602 (which incorporates by reference ISE Rule 1602). As noted above, Topaz Exchange has entered into an RSA with FINRA and a FMA with ISE under which FINRA and ISE, respectively, will perform certain regulatory functions on behalf of Topaz Exchange. Topaz Exchange may perform some or all of the functions specified in Chapter 16 of the Topaz Exchange Rules. See Topaz Exchange Rule 1615 (which incorporates by reference ISE Rule 1615). 315 See Topaz Exchange Rule 1604 (which incorporates by reference ISE Rule 1604). If there is probable cause for finding a violation, Topaz Exchange’s regulatory staff will prepare a statement of charges including the allegations and specifying the provisions of the Act and the rules and regulations promulgated thereunder, provisions of the Topaz Exchange Constitution or rules, or interpretations or resolutions of which such acts are in violation. The CRO must approve the statement of charges. 316 See Topaz Exchange Rule 1606 (which incorporates by reference ISE Rule 1606); see also Topaz Exchange Rule 1615, Supplemental Material .01 (which incorporates by reference ISE Rule 1615, Supplemental Material .01). 317 Pursuant to a Resolution of the Topaz Exchange Board, the President and CEO shall establish Topaz Exchange’s Business Conduct Committee, pursuant to a charter. The Committee shall consist of no more than 21 persons, all of whom are employees of members of Topaz Exchange, representing members as follows: at least three persons shall represent PMMs; at least three persons shall represent CMMs that are not also PMMs; and at least four persons shall represent EAMs that neither are, nor are affiliated with, a PMM or CMM. See Amendment No. 3. 318 See Topaz Exchange Rule 1606 (which incorporates by reference ISE Rule 1606). A Panel may make a determination without a hearing and may impose a penalty as to violations that the member or associated person has admitted or has failed to answer or that otherwise do not appear to be in dispute. See Topaz Exchange Rule 1608 (which incorporates by reference ISE Rule 1608). A member or associated person alleged to have committed a disciplinary violation may submit a written offer of settlement to the Panel, or CRO if a Panel is not yet been appointed, which the Panel or CRO may accept or reject. See Topaz Exchange Rule 1609 (which incorporates by reference ISE VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 member (or its associated person) or the Topaz Exchange regulatory staff may petition for review of the Panel’s decision by the Topaz Exchange Board.319 Any review will be conducted by the Topaz Exchange Board or a committee thereof composed of at least three of its directors, at least one of which shall be an Industry Director 320 (whose decision must be ratified by the Topaz Exchange Board).321 In addition, the Topaz Exchange Board on its own motion may order review of a disciplinary decision.322 The Topaz Exchange Board may affirm, reverse, or modify, in whole or in part, the Panel’s decision.323 The decision of the Topaz Exchange Board will be in writing and will be final.324 Appeals from any determination that impacts access to Topaz Exchange, such as termination or suspension of membership, will be instituted under, and governed by, the provisions in the Chapter 17 of the Topaz Exchange rules, which incorporates by reference the provisions in Chapter 17 of ISE rules. Topaz Exchange’s Chapter 17 applies to persons economically aggrieved by any of the following actions of Topaz Exchange including, but not limited to: (a) Denial of an application to become a Member; (b) barring a person from becoming associated with a Member; and (c) limiting or prohibiting services provided by the Topaz Exchange or services of any exchange member.325 Any person aggrieved by an action of Topaz Exchange within the scope of the Chapter 17 may file a written Rule 1609). If the second offer of settlement is rejected (such decision is not subject to review), a hearing will proceed in accordance with Topaz Exchange Rule 1606 (which incorporates by reference ISE Rule 1606). See also Topaz Exchange Rule 1609 (which incorporates by reference ISE Rule 1609). 319 See Topaz Exchange Rule 1610 (which incorporates by reference ISE Rule 1610). 320 See Topaz Exchange Rule 1704 (which incorporates by reference ISE Rule 1704) (detailing the composition of the Appeals Committee); see also Amendment No. 3. Any director who participated in a matter before it was appealed to the Topaz Exchange Board shall not participate in any review of the action by the Board concerning the matter. See Topaz Exchange Rule 1704. 321 See Topaz Exchange Rule 1610 (which incorporates by reference ISE Rule 1610). 322 See id. 323 See id. 324 See id. 325 See Topaz Exchange Rule 1700 (which incorporates by reference ISE Rule 1700). As noted above, Topaz Exchange has entered into an RSA with FINRA and a FMA with ISE under which FINRA and ISE, respectively, will perform certain regulatory functions on behalf of Topaz Exchange. For example, FINRA may perform some or all of the functions specified in Chapter 17 of Topaz Exchange rules. See supra notes 158–160 and accompanying text. See also Topaz Exchange Rule 1706 (which incorporates by reference ISE Rule 1706). PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 46641 application to be heard within thirty days 326 after such action has been taken.327 Applications for hearing and review will be referred to the Business Conduct Committee, which will appoint a hearing panel of no less than three members of such Committee.328 The decision of the hearing panel made pursuant to Chapter 17 of the Topaz Exchange rules is subject to review by the Topaz Exchange Board, either on its own motion, or upon written request submitted by the applicant or the President of Topaz Exchange.329 The review will be conducted by the Topaz Exchange Board or a committee of the Topaz Exchange Board composed of at least three directors.330 The Commission finds that Topaz Exchange’s proposed disciplinary and oversight rules and structure, as well as its proposed process for persons economically aggrieved by certain Topaz Exchange actions, are consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act 331 in that they provide fair procedures for the disciplining of members and persons associated with members. The Commission further finds that the proposed Topaz Exchange rules, which incorporate by reference ISE rules, are designed to provide Topaz Exchange with the ability to comply, and with the authority to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of Topaz Exchange.332 The Commission notes that Topaz Exchange’s proposed disciplinary and oversight rules and 326 An applicant may file for an extension of time within thirty days of Topaz Exchange’s action. An application for such an extension will be ruled upon by the Chairman of the Business Conduct Committee and is not subject to appeal. See Topaz Exchange Rule 1701 (which incorporates by reference ISE Rule 1701). 327 See Topaz Exchange Rule 1701 (which incorporates by reference ISE Rule 1701). 328 See Topaz Exchange Rule 1702 (which incorporates by reference ISE Rule 1702). 329 See Topaz Exchange Rule 1704 (which incorporates by reference ISE Rule 1704). The Topaz Exchange Board, or a committee of the Topaz Exchange Board, will have sole discretion to grant or deny either request. See id. 330 See Topaz Exchange Rule 1704 (which incorporates by reference ISE Rule 1704). The Topaz Exchange Board or its designated committee may affirm, reverse, or modify in whole or in part, the decision of the hearing panel. The decision of the Topaz Exchange Board or its designated committee will be in writing and will be final. See Topaz Exchange Rule 1704 (which incorporates by reference ISE Rule 1704). 331 15 U.S.C. 78f(b)(6) and (b)(7), respectively. 332 See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1). E:\FR\FM\01AUN1.SGM 01AUN1 46642 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices structures are similar to the rules of other exchanges.333 F. Listing Requirements Topaz Exchange does not intend to offer original listings when it commences operations. Instead, Topaz Exchange will list and trade only standardized option contracts that are listed on other national securities exchanges and cleared by the Options Clearing Corporation.334 Topaz Exchange’s listing rules, including the criteria for the underlying securities of the options to be traded, incorporate by reference all of the listing rules of ISE.335 The Commission finds that Topaz Exchange’s proposed initial and continued listing rules are consistent with the Act, including Section 6(b)(5),336 in that they are designed to protect investors and the public interest and to promote just and equitable principles of trade. Before beginning operation, Topaz Exchange will need to become a participant in the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Act (‘‘OLPP’’).337 In addition, before beginning operation, Topaz Exchange will need to become a participant in the Options Clearing Corporation. mstockstill on DSK4VPTVN1PROD with NOTICES III. Exemption From Section 19(b) of the Act With Regard to ISE, CBOE, NYSE, and FINRA Rules Incorporated by Reference Topaz Exchange proposes to incorporate by reference certain ISE, CBOE, NYSE and FINRA rules.338 Thus, 333 See, e.g., MIAX Order, supra note 30, and BOX Order, supra note 39. 334 See Exhibit H to Topaz Exchange Form 1 Application. 335 See Topaz Exchange Rule 500 Series (which incorporates by reference ISE Rule 500 Series) (Securities Traded on the Exchange). See also MIAX Rule 400 Series and BOX Rule 5000 Series. 336 15 U.S.C. 78f(b)(5). 337 15 U.S.C. 78k–1(a)(3)(B). 338 Specifically, Topaz Exchange proposes to incorporate by reference the following ISE Rules: Chapter 4 (Business Conduct), Chapter 5 (Securities Traded on the Exchange), Chapter 6 (Doing Business with the Public), Chapter 10 (Closing Transactions), Chapter 11 (Exercises and Deliveries), Chapter 12 (Margins), Chapter 13 (Net Capital Requirements), Chapter 14 (Records, Reports and Audits), Chapter 15 (Summary Suspension), Chapter 16 (Discipline), Chapter 17 (Hearings and Review), Chapter 18 (Arbitration), Chapter 19 (Order Protection; Locked and Crossed Market), Chapter 20 (Index Rules), Chapter 22 (RateModified Foreign Currency Options Rules). The following rules are cross-referenced in the ISE rules: ISE Rule 1202 (Margin Requirements) crossreferences the same CBOE and NYSE rules that may be in effect from time to time; ISE Rule 1615 (Disciplinary Functions) cross-references the FINRA Code of Procedure and ISE Rule 1800 cross- VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 for certain Topaz Exchange rules, Topaz Exchange members will comply with a Topaz Exchange rule by complying with the referenced ISE, CBOE, NYSE or FINRA rule. In connection with the proposal to incorporate the ISE, CBOE, NYSE and FINRA rules by reference, Topaz Exchange requested, pursuant to Rule 240.0–12 under the Act,339 an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to the Topaz Exchange rules that are effected solely by virtue of a change to a cross-referenced ISE, CBOE, NYSE or FINRA rule.340 Topaz Exchange proposes to incorporate by reference categories of rules, rather than individual rules within a category, that are not trading rules. In addition, Topaz Exchange agrees to provide written notice to its members whenever FINRA, ISE, CBOE or NYSE proposes a change to a cross-referenced rule 341 and whenever any such proposed changes are approved by the Commission or otherwise become effective.342 Using the authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act.343 The Commission is hereby granting Topaz Exchange’s request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that Topaz Exchange proposes to incorporate by reference. The exemption is conditioned upon Topaz Exchange providing written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or NYSE proposes to change an incorporated by reference rule and when the Commission approves any such changes. The Commission believes that the exemption is appropriate in the references the 12000 and 13000 Series of the FINRA Manual and FINRA Rule 2268. 339 17 CFR 240.0–12. 340 See Letter from Michael Simon, General Counsel, Secretary and Chief Regulatory Officer, Topaz Exchange, to Elizabeth M. Murphy, Secretary, Commission, dated December 14, 2012 (‘‘Section 19(b) Exemption Request’’). 341 See id. 342 Topaz Exchange will provide such notice through a posting on the same Web site location where Topaz Exchange posts its own rule filings pursuant to Rule 19b–4 under the Act, within the required time frame. The Web site posting will include a link to the location on the FINRA, ISE, CBOE or NYSE Web site where FINRA’s, ISE’s, CBOE’s or NYSE’s proposed rule change is posted. See id. 343 See, e.g., DirectEdge Exchanges Order, supra note 70, BATS Order, supra note 29, C2 Order, supra note 169, Nasdaq Order, supra note 29 and NOM Approval Order, supra note 164. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 public interest and consistent, with the protection of investors because it will promote more efficient use of Commission’s and SROs’ resources by avoiding duplicative rule filings based on simultaneous changes to identical rule text sought to be implemented by more than one SRO. IV. Conclusion It is ordered that the application of Topaz Exchange for registration as a national securities exchange be, and it hereby is, granted. It is furthered ordered that operation of Topaz Exchange is conditioned on the satisfaction of the requirements below: A. Participation in National Market System Plans Relating to Options Trading. Topaz Exchange must join: (1) The Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (Options Price Reporting Authority); (2) the OLPP; (3) the Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance Authority. B. Participation in Multiparty Rule 17d–2 Plans. Topaz Exchange must become a party to the multiparty Rule 17d–2 agreements concerning options sales practice regulation and market surveillance. C. Participation in the Options Clearing Corporation. Topaz Exchange must become an Options Clearing Corporation participant exchange. D. Participation in the Intermarket Surveillance Group. Topaz Exchange must join the Intermarket Surveillance Group. E. Effective Regulation. Topaz Exchange must have, and represent in a letter to the staff in the Commission’s Office of Compliance Inspections and Examinations that it has, adequate procedures and programs in place to effectively regulate Topaz Exchange. F. Trade Processing and Exchange Systems. Topaz Exchange must have, and represent in a letter to the staff in the Commission’s Division of Trading and Markets that it has, adequate procedures and programs in place, as detailed in Commission Automation Policy Review guidelines, to effectively process trades and maintain the confidentiality, integrity, and availability of Topaz Exchange’s systems.344 344 On November 16, 1989, the Commission published its first Automation Review Policy (‘‘ARP I’’), in which the Commission created a voluntary framework for SROs to establish comprehensive planning and assessment programs to determine systems capacity and vulnerability. On May 9, 1991, the Commission published its second Automation Review Policy (‘‘ARP II’’) to clarify the E:\FR\FM\01AUN1.SGM 01AUN1 Federal Register / Vol. 78, No. 148 / Thursday, August 1, 2013 / Notices It is further ordered, pursuant to Section 36 of the Act,345 that Topaz Exchange shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the FINRA, ISE, CBOE and NYSE rules that Topaz Exchange proposes to incorporate by reference, subject to the conditions specified in this Order that Topaz Exchange provide written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or NYSE propose to change an incorporated by reference rule and when the Commission approves any such changes. By the Commission. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–18474 Filed 7–31–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70045; File No. SR– NYSEArca–2013–73] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the NYSE Arca Options Fee Schedule With Respect to Cap on Fees for Firm and Broker Dealer Open Outcry Executions July 26, 2013. mstockstill on DSK4VPTVN1PROD with NOTICES Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 18, 2013, NYSE Arca, Inc. (the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. types of review and reports expected from SROs. See Securities Exchange Act Release Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989) and 29185 (May 9, 1991), 56 FR 22490 (May 15, 1991). The Commission has proposed Regulation Systems Compliance and Integrity, which, if adopted, would replace this policy. See Securities Exchange Act Release No. 69077 (March 8, 2013), 78 FR 18084 (March 25, 2013) (File No. S7–01–13). 345 15 U.S.C. 78mm. 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. VerDate Mar<15>2010 17:02 Jul 31, 2013 Jkt 229001 I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend the NYSE Arca Options Fee Schedule (‘‘Fee Schedule’’) with respect to cap on fees for Firm and Broker Dealer open outcry executions. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule with respect to the cap on fees for Firm and Broker Dealer open outcry executions. Currently, there is a $100,000 cap per month on Proprietary fees and Broker Dealer fees for transactions in standard option contracts cleared in the customer range for open outcry executions, exclusive of strategy executions, royalty fees, and Firm trades executed via a Joint Back Office (‘‘JBO’’) agreement.4 The Exchange proposes to amend the text of the Fee Schedule to make more explicit that the $100,000 cap applies to the fees on a combined basis. For example, if in a given month a Firm incurred $55,000 in Proprietary fees and $55,000 in Broker Dealer fees for standard option contract transactions cleared in the customer range for open outcry executions, exclusive of strategy executions, royalty fees and Firm trades executed via a JBO agreement, then the 4 See Securities Exchange Act Release No. 69690 (June 4, 2013), 78 FR 34681 (June 10, 2013) (SR– NYSEArca–2013–55) (setting cap at $100,000); see also Securities Exchange Act Release Nos. 67419 (July 12, 2012), 77 FR 42343 (July 18, 2012) (SR– NYSEArca–2012–71) (extending fee cap to Broker Dealers); 63471 (Dec. 8, 2010), 75 FR 77928 (Dec. 14, 2010) (SR–NYSEArca–2010–108) (adopting initial $75,000 fee cap for Proprietary fees). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 46643 Firm would only have to pay a total of $100,000 in such fees.5 If a Firm or Broker Dealer only had one of the two types of fees that met those qualifications, then it could still qualify if such fees exceeded $100,000 per month. The proposed change is not intended to address any other issues, and the Exchange is not aware of any problems that Firms or Broker Dealers would have in complying with the proposed change. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,6 in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,7 in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its members, issuers and other persons using its facilities and does not unfairly discriminate between customers, issuers, brokers or dealers. The Exchange believes that the proposed change is reasonable because it will provide better notice about how to qualify for the fee cap. The Exchange further believes that the fee cap is equitable and not unfairly discriminatory because it is designed to encourage Firms and Broker Dealers to engage in a high level of open outcry executions, which will increase liquidity on the Exchange and benefit all market participants. The Exchange believes that it is equitable and not unfairly discriminatory to offer the fee cap to Firms and Broker Dealers, and not other market participants, because its purpose is to attract large block order flow to the floor of the Exchange, where such orders can be better handled in comparison with electronic orders that are not negotiable. Finally, the Exchange believes that it is subject to significant competitive forces, as described below in the Exchange’s statement regarding the burden on competition. For these 5 Since the fee cap was amended in July 2012 to include Broker Dealer fees, the Exchange has provided a monthly report to its member firms that may have incorrectly suggested that fees for each of the two types of volume had to each separately reach $100,000 before the fee cap applied. While the Exchange believes that the current text of the Fee Schedule is clear that both types of fees count toward the $100,000 cap, the Exchange wishes to avoid any potential misunderstanding on the qualifications for the fee cap. The report text also will be updated accordingly to avoid any such misunderstanding. The Exchange notes that, since the $75,000 fee cap and, later, the $100,000 fee cap were implemented, no Firm or Broker Dealer has qualified for the fee cap, whether applied on a combined or separate basis. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(4) and (5). E:\FR\FM\01AUN1.SGM 01AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 148 (Thursday, August 1, 2013)]
[Notices]
[Pages 46622-46643]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18474]

=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70050; File No. 10-209]

Application of Topaz Exchange, LLC for Registration as a National
Securities Exchange; Findings, Opinion, and Order of the Commission

July 26, 2013.

I. Introduction

On July 3, 2012, Topaz Exchange, LLC (``Topaz Exchange'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') an Application for Registration as a National
Securities Exchange (``Form 1 Application'') \1\ under Section 6 of the
Securities Exchange Act of 1934 (``Act'').\2\ On December 19, 2012,
Topaz Exchange submitted Amendment No. 1 to its Form 1 Application.\3\
On December 31, 2012, Topaz Exchange submitted Amendment No. 2 to its
Form 1 Application.\4\ Notice of the Form 1 Application, as modified by
Amendment Nos. 1 and 2, was published for comment in the Federal
Register on March 7, 2013.\5\ The Commission received four comment
letters regarding the Form 1 Application.\6\ Topaz Exchange submitted a
detailed response to comments on July 11, 2013.\7\ On July 11, 2013,
Topaz Exchange submitted Amendment No. 3 to the Form 1 Application.\8\
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\1\ On March 1, 2013, the Commission issued an order granting
Topaz Exchange exemptive relief, subject to certain conditions, in
connection with the filing of its Form 1 Application. See Securities
Exchange Act Release No. 69011, 78 FR 14844 (March 7, 2013). Because
Topaz Exchange's Form 1 Application was incomplete without the
exemptive relief, the date of filing of such application is March 1,
2013. Id.
\2\ 15 U.S.C. 78f.
\3\ Amendment No. 1, among other things, includes changes to the
Limited Liability Company Agreement of Topaz Exchange, LLC (``Topaz
Exchange LLC Agreement'') and the Constitution of Topaz Exchange,
LLC (``Topaz Exchange Constitution'') concerning board composition
and size, the initial director election process, and the use of
regulatory funds. Amendment No. 1 also includes revisions to
proposed rules of Topaz Exchange to remove rules relating to complex
orders; to respond to comments on the Form 1 application from
Commission staff; and to reflect recent changes to comparable rules
of International Securities Exchange, LLC (``ISE''). Amendment No. 1
further provides additional descriptions in the Form 1 Application
regarding proposed allocation procedures, auction mechanisms,
execution of qualified contingent crosses, and the interim and
initial director election processes, and removes references to
complex orders.
\4\ Amendment No. 2, among other things, provides updated
information regarding the board of directors of ISE and the
Corporate Governance Committee of ISE and includes information
regarding Longitude S.A., a newly incorporated affiliate of Topaz
Exchange, which information includes the Articles of Incorporation
and financial information for Longitude S.A. Finally, Amendment No.
2 provides an updated organizational chart that reflects the
affiliates of Topaz Exchange.
\5\ See Securities Exchange Act Release No. 69012 (March 1,
2013), 78 FR 14847 (``Notice'').
\6\ See Letter from Angelo Evangelou, Associate General Counsel,
Chicago Board Options Exchange, Incorporated, to Elizabeth M.
Murphy, Secretary, Commission, dated April 23, 2013 (``CBOE
Letter''); Letter from Jeffrey S. Davis, Vice President and Deputy
General Counsel, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated April 25, 2013 (``NASDAQ Letter'');
Letter from Janet McGinness, EVP and Corporate Secretary, NYSE
Euronext, General Counsel, NYSE Markets, to Elizabeth M. Murphy,
Secretary, Commission, dated May 10, 2013 (``NYSE Euronext Letter
I''); and Letter from Janet McGinness, EVP and Corporate Secretary,
NYSE Euronext, General Counsel, NYSE Markets, to Elizabeth M.
Murphy, Secretary, Commission, dated June 20, 2013 (``NYSE Euronext
Letter II'').
\7\ See Letter from Michael Simon, General Counsel and
Secretary, Topaz Exchange, to Elizabeth M. Murphy, Secretary,
Commission, dated July 10, 2013 (``Topaz Exchange Response
Letter'').
\8\ Amendment No. 3, among other things, includes changes to
proposed Topaz Exchange rules to respond to concerns raised by the
commenters and to reflect changes to comparable ISE rules since the
filing of Amendment No. 1. The changes are discussed below in
Section II.D. Amendment No. 3 also provides further descriptions or
updates information in the Form 1 Application. The changes proposed
in Amendment No. 3 are not substantive, are consistent with the
existing rules of other registered national securities exchanges, or
are responsive to the concerns of the commenters and do not raise
any new or novel regulatory issues.
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II. Discussion

Under Sections 6(b) and 19(a) of the Act,\9\ the Commission shall
by order grant an application for registration as a national securities
exchange if the Commission finds, among other things, that the proposed
exchange is so organized and has the capacity to carry out the purposes
of the Act and can comply, and can enforce compliance by its members
and persons associated with its members, with the provisions of the
Act, the rules and regulations thereunder, and the rules of the
exchange.
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\9\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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As discussed in greater detail below, the Commission finds that
Topaz Exchange's application for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of Topaz Exchange
are consistent with Section 6 of the Act in that, among other things,
they assure a fair representation of the exchange's members in the
selection of its directors and administration of its affairs and
provide that one or more directors shall be representative of issuers
and investors and not be associated with a member of the exchange, or
with a broker or dealer; \10\ and that they are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, and remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general,
protect investors and the public interest and are not designed to
permit unfair discrimination between customers, issuers, or broker-
dealers.\11\ Finally, the Commission finds that Topaz Exchange's
proposed rules do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\12\
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\10\ See 15 U.S.C. 78f(b)(3).
\11\ See 15 U.S.C. 78f(b)(5).
\12\ See 15 U.S.C. 78f(b)(8).
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A. Overview of Ownership of Topaz Exchange

Topaz Exchange is structured as a Delaware limited liability
company

[[Page 46623]]

(``LLC''), and is a wholly-owned subsidiary of International Securities
Exchange Holdings, Inc. (``ISE Holdings'').\13\ In December 2007, ISE
Holdings became a direct, wholly-owned subsidiary of various German
companies and Swiss companies \14\ through an intermediary holding
company, U.S. Exchange Holdings, Inc. (``U.S. Exchange Holdings'').\15\
U.S. Exchange Holdings is wholly-owned by a German stock corporation,
Eurex Frankfurt AG (``Eurex Frankfurt''). Eurex Frankfurt is a wholly-
owned subsidiary of a Swiss stock corporation, Eurex Zurich AG (``Eurex
Zurich''), which, in turn, was in 2007 jointly owned by Deutsche
B[ouml]rse and SWX Swiss Exchange AG (``SWX'') \16\ (``Eurex
Acquisition''). In 2012, SWX transferred its interest in Eurex Zurich
to a Swiss subsidiary of Deutsche B[ouml]rse (``Deutsche B[ouml]rse
Acquisition''), such that Eurex Zurich is now jointly owned by Deutsche
B[ouml]rse (together with Eurex Frankfurt, the ``German companies'')
and EGD (together with Eurex Zurich, the ``Swiss companies,'' and the
Swiss companies and the German companies are referred to collectively
as the ``Non-U.S. Upstream Owners,'' and collectively with U.S.
Exchange Holdings, the ``Upstream Owners''). As Deutsche B[ouml]rse
holds a 100% direct ownership interest in EGD, it therefore holds a
100% indirect ownership interest in Eurex Zurich.
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\13\ Following any Commission grant of registration to Topaz
Exchange, ISE Holdings will be: (1) The sole holding company of two
registered national securities exchanges, ISE and Topaz Exchange;
and (2) the holder of a 31.54% ownership interest of a holding
company, DE Holdings, that in turn owns two registered national
securities exchanges, EDGX Exchange, Inc. (``EDGX'') and EDGA
Exchange, Inc. (``EDGA''). See Exhibit C to Topaz Exchange Form 1
Application, Section R (``Organizational Chart of Affiliates of
Deutsche B[ouml]rse AG'').
\14\ See Organizational Chart of Affiliates of Deutsche
B[ouml]rse, Exhibit C. Section R. to Topaz Exchange Form 1
Application.
\15\ See Securities Exchange Act Release No. 56955 (December 13,
2007), 72 FR 71979 (December 19, 2007) (File No. SR-ISE-2007-101)
(order approving a transaction in which ISE Holdings became a
wholly-owned indirect subsidiary of Eurex Frankfurt) (``Eurex
Acquisition Order'').
\16\ At the time, SWX was owned by SWX Group AG (later became
part of SIX Group AG), which in turn was owned by Verein SWX Swiss
Exchange. In 2008, SWX changed its name to SIX. In 2012, SIX
transferred its interest to Eurex Global Derivatives AG (``EGD'').
See Securities Exchange Act Release No. 66834 (April 19, 2012), 77
FR 24752 (April 25, 2012) (File Nos. SR-EDGA-2012-08; SR-EDGX-2012-
07; and SR-ISE-2012-21) (order approving a transaction in which
Eurex Frankfurt became a wholly-owned indirect subsidiary of
Deutsche B[ouml]rse) (``Deutsche B[ouml]rse Acquisition Order'').
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B. Governance of Topaz Exchange

1. Topaz Exchange Board of Directors
The board of directors of Topaz Exchange (``Topaz Exchange Board''
or ``Board'') will be its governing body and will possess all of the
powers necessary for the management of its business and affairs,
including governance of Topaz Exchange as a self-regulatory
organization (``SRO'').\17\ Topaz Exchange will be governed by a board
of directors comprised of no fewer than 8, but no more than 16,
directors.\18\ Specifically:
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\17\ See Topaz Exchange Constitution, Article III, Section 3.1.
\18\ See Topaz Exchange Constitution, Article III, Section
3.2(a).
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At least 50% of Topaz Exchange Board must be comprised of
Non-Industry Directors; \19\
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\19\ See Topaz Exchange Constitution, Article III, Section
3.2(b)(ii). In no event shall the number of Non-Industry Directors
constitute less than the number of Industry Directors. ISE Holdings,
Inc. may, in its sole discretion, elect one additional director who
shall meet the requirements of Non-Industry Directors, except that
such person was employed by Topaz Exchange at any time during the
three-year period prior to his or her initial election. See Topaz
Exchange Constitution, Article III, Section 3.2(b)(iv). This
provision is similar to a provision in ISE's Constitution and has
been used in the past to place a former president/chief executive
officer of ISE on its board of directors (``ISE Board'').
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At least one of the Non-Industry Directors must be a
Public Director; \20\
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\20\ See Topaz Exchange Constitution, Article III, Section
3.2(b)(ii).
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Topaz Exchange Board will include the President/Chief
Executive Officer as a director; \21\ and
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\21\ See Topaz Exchange Constitution, Article III, Section
3.2(b)(iii).
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At least 30% of Topaz Exchange Board must be officers,
directors or partners of Topaz Exchange members, and must be elected by
a plurality of holders of Exchange Rights (``Industry Directors''), of
which at least one must be elected by a plurality of holders of Primary
Market Maker (``PMM'') Exchange Rights, one must be elected by a
plurality of holders of Competitive Market Maker (``CMM'') Exchange
Rights, and one must be elected by a plurality of holders of Electronic
Access Member (``EAM'') Exchange Rights, provided that the number of
each type of Industry Director shall always be equal to one
another.\22\
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\22\ See Topaz Exchange Constitution, Article III, Section
3.2(b)(i).
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As part of the process to elect members of the Board, the
Nominating Committee will nominate the proposed Industry Directors and
the Corporate Governance Committee \23\ or ISE Holdings will nominate
the proposed Non-Industry Directors.\24\ A petition process will allow
Topaz Exchange members to nominate alternative candidates for
consideration as Industry Directors.\25\ At the first annual meeting
and at each annual meeting thereafter, ISE Holdings will elect all of
the members of the Topaz Exchange Board (except the Industry Directors
which are elected by Topaz Exchange members \26\), but it will be
required to do so in compliance with the compositional requirements for
the Board outlined in the Topaz Exchange Constitution.
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\23\ See infra Section II.B.2. for a description of Topaz
Exchange's Nominating Committee and Corporate Governance Committee.
\24\ See, e.g., Topaz Exchange Constitution, Article III,
Section 3.10(a)-(b). ISE Holdings, as the Sole LLC Member of Topaz
Exchange, is permitted to petition the Corporate Governance
Committee to propose alternative Non-Industry Directors and Public
Directors. See Topaz Exchange Constitution, Article III, Section
3.10(b)(ii).
\25\ See, e.g., Topaz Exchange Constitution, Article III,
Section 3.10(a)(ii). Specifically, as proposed in Amendment No. 1,
in addition to the Industry Director nominees named by the
Nominating Committee, persons eligible to serve as such may be
nominated for election to the Topaz Exchange Board by a petition,
signed by the holders of not less than five percent (5%) of the
outstanding Exchange Rights of the series entitled to elect such
person if there are more than eighty (80) Exchange Rights in the
series entitled to vote, ten percent (10%) of the outstanding rights
of such series entitled to elect such person if there are between
eighty (80) and forty (40) Exchange Rights in the series entitled to
vote, and twenty-five percent (25%) of the outstanding Exchange
Rights of such series entitled to elect such person if there are
less than forty (40) Exchange Rights in the series entitled to vote.
For purposes of determining whether a person has been nominated for
election by petition by the requisite percentage, no Topaz Exchange
member, alone or together with its affiliates, may account for more
than 50% of the signatures of the holders of outstanding Exchange
Rights of the series entitled to elect such person, and any such
signatures by such Exchange Members, alone or together with its
affiliates, in excess of such 50% limitation shall be disregarded.
Id. This process is identical to the process in place at ISE. See
ISE Constitution, Article III, Section 3.10(a)(ii).
\26\ See Topaz Exchange Constitution, Article III, Sections
3.2(b)(i) and (c).
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The Commission believes that the requirement in the Topaz Exchange
Constitution that at least 30% of the directors be Industry Directors
and the means by which they will be chosen by Topaz Exchange members
\27\ provide for the fair representation of members in the selection of
directors and the administration of Topaz Exchange and therefore is
consistent with Section 6(b)(3) of the Act.\28\ Section 6(b)(3) of the
Act requires that ``the rules of the exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs and provide that one or more directors
shall be representative of issuers and investors and not be associated
with a member of the

[[Page 46624]]

exchange, broker, or dealer.'' As the Commission previously has noted,
this statutory requirement helps to ensure that members have a voice in
the exchange's use of self-regulatory authority, and that the exchange
is administered in a way that is equitable to all those persons who
trade on its market or through its facilities.\29\ In addition, with
respect to the requirement that the number of Non-Industry Directors,
including at least one Public Director, will at all times be at least
50% of the Board, the Commission believes that the proposed composition
of the Topaz Exchange Board satisfies the requirements of Section
6(b)(3) of the Act.\30\
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\27\ Id.
\28\ 15 U.S.C. 78f(b)(3).
\29\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(order granting the exchange registration of Nasdaq Stock Market,
Inc.) (``Nasdaq Order''); and 58375 (August 18, 2008), 73 FR 49498
(August 21, 2008) (File No. 10-182) (order granting the exchange
registration of BATS Exchange, Inc.) (``BATS Order''). See also
Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (File No. SR-NYSE-2005-77) (``NYSE/Archipelago
Merger Approval Order'').
\30\ 15 U.S.C. 78f(b)(3). See also Securities Exchange Act
Release No. 68341, p.8, (December 3, 2012), 77 FR 73065, 73067
(December 7, 2012) (File No. 10-207) (order granting the
registration of Miami International Securities Exchange, LLC)
(``MIAX Order'') and Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
---------------------------------------------------------------------------

Interim Board
After Topaz Exchange is granted registration by the Commission, but
prior to commencing operations, ISE Holdings, as the sole shareholder
of Topaz Exchange,\31\ will appoint an interim board of directors for
Topaz Exchange that will serve only until the first annual meeting
(``Interim Topaz Exchange Board''). The Interim Topaz Exchange Board
will include the same individuals as the then-serving ISE Board and
will consist of 15 directors: the President/Chief Executive Officer
Director; \32\ 6 Industry Directors; and 8 Non-Industry Directors.\33\
Topaz Exchange represents that it anticipates that there will be a
significant overlap between its membership and the membership of
ISE.\34\ Topaz Exchange further represents that it does not expect to
receive a meaningful number of applications for membership from non-ISE
members during the tenure of the Interim Topaz Exchange Board.\35\
Thus, the 6 interim Industry Directors to be appointed to the Topaz
Exchange Board likely will have been elected by Topaz Exchange members
in their capacity as ISE members.\36\
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\31\ See infra Section II.C.1. for a discussion of the ownership
of Topaz Exchange.
\32\ See Exhibit J to Topaz Exchange Form 1 Application.
\33\ See Exhibit J to Topaz Exchange Form 1 Application. See
also Amendment No. 3.
\34\ See Exhibit L to Topaz Exchange Form 1 Application. Based
on discussions with ISE members, Topaz Exchange represented that it
currently expects that Topaz Exchange's membership will consist
substantially of current ISE members, including, but not limited to,
those ISE members that have representatives serving as industry
directors on the ISE Board. See Exhibit J to Topaz Exchange Form 1
Application.
\35\ See Exhibit J to Topaz Exchange Form 1 Application.
\36\ See id.
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These interim Industry Directors will serve until the first initial
Topaz Exchange Board is elected pursuant to the full nomination,
petition, and voting process set forth in the Topaz Exchange
Constitution and described above.\37\ Topaz Exchange will complete such
process as promptly as possible and within 90 days after its
application for registration as a national securities exchange is
granted by the Commission.\38\
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\37\ See Topaz Exchange Constitution, Article III, Sections
3.2(c) and 3.10; see also Exhibit J to Topaz Exchange Form 1
Application.
\38\ See Exhibit J to Topaz Exchange Form 1 Application.
---------------------------------------------------------------------------

The Commission believes that the process for electing the interim
Topaz Exchange Board, as proposed, is consistent with the requirements
of the Act, including that the rules of the exchange assure fair
representation of the exchange's members in the selection of its
directors and administration of its affairs.\39\ The Interim Topaz
Exchange Board will be filled by current ISE Board members (which
currently include Industry Directors who were elected by current ISE
members) until the first annual meeting of Topaz Exchange. As noted
above, Topaz Exchange represents that it anticipates that there will be
significant overlap between the initial members of Topaz Exchange and
the current members of ISE.\40\ Topaz Exchange further represents that
it will complete the full nomination, petition, and voting process as
set forth in the Topaz Exchange Constitution,\41\ as promptly as
possible and within 90 days of when Topaz Exchange's application for
registration as a national securities exchange is granted.\42\ As noted
above, as part of this process, members of Topaz Exchange will be able
to petition for alternative candidates to be considered for Industry
Director positions.\43\ This process will provide persons who are
approved as members of Topaz Exchange after the effective date of this
Order with the opportunity to participate in the selection of the
Industry Directors within 90 days of when Topaz Exchange's application
for registration as a national securities exchange is granted.
---------------------------------------------------------------------------

\39\ See 15 U.S.C. 78f(b)(3). Topaz Exchange's proposed timeline
for the interim Topaz Exchange Board process comports with the
interim board process recently approved by the Commission for the
Boston Options Exchange (``BOX'') and Miami International Securities
Exchange, LLC (``MIAX''). BOX, which previously operated as a
facility of NASDAQ OMX BX, Inc., recently was granted registration
as a national securities exchange. See Securities Exchange Act
Release No. 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (File
No. 10-206) (``BOX Order''). NASDAQ OMX BX recently received
approval for a new options market. See Securities Exchange Act
Release No. 67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) (File
No. SR-BX-2012-030) (``BX Order''). MIAX recently was granted
registration as a national securities exchange. See MIAX Order,
supra note 30.
\40\ Topaz Exchange will have a streamlined waive-in process for
existing ISE members to apply for membership on Topaz Exchange. See
Topaz Exchange Rule 302(a).
\41\ See, e.g., Topaz Exchange Constitution, Article III,
Section 3.10(a)-(b).
\42\ See Topaz Exchange Constitution, Article III, Sections
3.2(c) and 3.10.
\43\ See Topaz Exchange Constitution, Article III, Section
3.10(a)(ii).
---------------------------------------------------------------------------

The Commission believes that the Interim Topaz Exchange Board
process is designed to provide member representation sufficient to
allow Topaz Exchange to commence operations for an interim period prior
to going through the process to elect a new Board pursuant to the full
nomination, petition, and voting process set forth in the Topaz
Exchange Constitution.

2. Exchange Committees

Topaz Exchange will have a number of Board committees,\44\
including an Executive Committee (consisting of six directors,
including three Non-Industry Directors),\45\ a Finance and Audit
Committee (consisting of between three and five directors, all of whom
must be Non-Industry Directors),\46\ a Compensation Committee
(consisting of between three and five directors, all of whom must be
Non-Industry Directors),\47\ and a Corporate Governance Committee
(consisting of at least three directors, all of whom must be Non-
Industry Directors),\48\ and such other additional committees as may be
approved by the Topaz Exchange Board.\49\
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\44\ See Topaz Exchange Constitution, Article V, Section 5.1(a).
\45\ See Topaz Exchange Constitution, Article V, Section 5.2.
\46\ See Topaz Exchange Constitution, Article V, Section 5.5.
\47\ See Topaz Exchange Constitution, Article V, Section 5.6.
\48\ See Topaz Exchange Constitution, Article V, Section 5.4.
\49\ See Topaz Exchange Constitution, Article V, Section 5.1(a).
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Topaz Exchange also will have a Nominating Committee, which will be
a

[[Page 46625]]

committee of Topaz Exchange and not a committee of the Board.\50\ The
Nominating Committee will be composed of three industry
representatives, and will be responsible for nominating candidates for
Industry Director positions.\51\ As noted above, there will be a
petition process by which members of Topaz Exchange can nominate their
own nominees for the Industry Director positions.\52\ These nomination
processes are consistent with processes that the Commission has
approved for other exchanges.\53\
---------------------------------------------------------------------------

\50\ See Topaz Exchange Constitution, Article V, Section 5.3.
\51\ See id. The Interim Topaz Exchange Board shall appoint the
initial members of the Nominating Committee in accordance with the
qualifications prescribed in Section 5.3 of the Topaz Exchange
Constitution.
\52\ See Topaz Exchange Constitution, Article III, Section
3.10(a)(ii). See also supra note 25 and accompanying text.
\53\ See, e.g., ISE Constitution, Articles III and V, Sections
3.10 and 5.3; MIAX By-laws Articles II and V, Sections 2.4 and 5.3.
---------------------------------------------------------------------------

The Commission believes that Topaz Exchange's proposed committees,
which are similar to committees maintained by other exchanges,\54\ are
designed to help enable Topaz Exchange to carry out its
responsibilities under the Act and are consistent with the Act,
including Section 6(b)(1), which requires, in part, an exchange to be
so organized and have the capacity to carry out the purposes of the
Act.\55\
---------------------------------------------------------------------------

\54\ See, e.g., MIAX Order, supra note 30, and BOX Order, supra
note 39.
\55\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

C. Regulation of Topaz Exchange

When Topaz Exchange commences operations as a national securities
exchange, Topaz Exchange will have all the attendant regulatory
obligations under the Act. In particular, Topaz Exchange will be
responsible for the operation and regulation of its trading system and
the regulation of its members. Certain provisions in the Topaz Exchange
and ISE Holdings governance documents are designed to facilitate the
ability of Topaz Exchange and the Commission to fulfill their
regulatory and oversight obligations under the Act. The discussion
below summarizes some of these key provisions.
1. Ownership Structure: Ownership and Voting Limitations
As noted above in Section II.A, Topaz Exchange will be structured
as a Delaware LLC and will be a wholly-owned subsidiary of ISE Holdings
\56\ following any Commission grant of registration to Topaz Exchange
as a national securities exchange.\57\ ISE Holdings is owned by German
companies and Swiss companies through an intermediary holding company,
U.S. Exchange Holdings.\58\ ISE Holdings' governing documents impose
limits on any direct or indirect change in control of ISE Holdings,
which are to be enforced through the creation of a statutory trust.\59\
---------------------------------------------------------------------------

\56\ The Topaz Exchange LLC Agreement provides that ISE Holdings
may not assign its interest in Topaz Exchange unless such assignment
is subject to prior approval by the Commission pursuant to the rule
filing procedure under Section 19 of the Act. See Topaz Exchange LLC
Agreement, Section 7.1 (Assignments; Additional LLC Members).
\57\ See supra note 13 and accompanying text.
\58\ See supra note 14 and accompanying text.
\59\ See Article FOURTH, Section III.(c) of the Amended and
Restated Certificate of Incorporation of International Securities
Exchange Holdings, Inc. (``ISE Holdings Certificate''). See infra
notes 72-74 and 110-114 and accompanying text for a discussion of
the statutory trust.
---------------------------------------------------------------------------

First, ISE Holdings' governing documents prohibit any Topaz
Exchange member (alone or together with its Related Persons \60\) from
owning more than 20% of any class of Voting Shares of ISE Holdings.\61\
A second limit prohibits any other person (alone or together with its
related persons) from owning more than 40% of any class of Voting
Shares of ISE Holdings.\62\ A third limit prohibits any person (alone
or together with its Related Persons) from voting or causing the voting
of shares representing more than 20% of the voting power of the then
outstanding Voting Shares of ISE Holdings.\63\ As described more fully
below, if a person exceeds an ISE Holdings' ownership or voting limit,
a majority of the capital stock of ISE Holdings that has the right by
its terms to vote in the election of the ISE Holdings board of
directors (``ISE Holdings Board'') or on other matters (other than
matters affecting the rights, preferences or privileges of the capital
stock) automatically will be transferred to a Delaware statutory trust
(``Trust'').\64\
---------------------------------------------------------------------------

\60\ See ISE Holdings Certificate, Article FOURTH, Section III
for the definition of ``Related Persons.''
\61\ See id. for the definition of ``Voting Shares.''
\62\ See ISE Holdings Certificate, Article FOURTH, Section
III.(a)(i).
\63\ See ISE Holdings Certificate, Article FOURTH, Section
III.(b). See also Second Amended and Restated Bylaws of ISE Holdings
(``ISE Holdings Bylaws''), Article XI, Section 11.1(b).
\64\ See ISE Holdings Certificate, Article FOURTH, Section
III.(c). See also infra notes 72-75 and accompanying text for a
discussion of the Trust and the related Trust Agreement.
---------------------------------------------------------------------------

Consistent with the governance structure of other exchanges, ISE
Holdings' Board may waive the 40% ownership limitation and the 20%
voting restriction for persons other than Topaz Exchange members,
subject to certain specified conditions,\65\ but such waiver will not
be effective unless approved by the Commission.\66\
---------------------------------------------------------------------------

\65\ The ISE Holdings Certificate allows the ISE Holdings Board
to waive the ISE Holdings ownership and voting limits pursuant to an
amendment to the ISE Holdings Bylaws, provided that the ISE Holdings
Board makes certain determinations. See ISE Holdings Certificate,
Article FOURTH, Sections III.(a)(i)(A), III.(a)(i)(B) and
III.(b)(i). Article XI of the ISE Holdings Bylaws was adopted in
connection with the Eurex Acquisition (see supra note 15 and
accompanying text), when ISE LLC was the sole national securities
exchange controlled by ISE Holdings. See Eurex Acquisition Order,
supra note 15. Article XI, Section 11.1(b) was subsequently amended
to apply to any Controlled National Securities Exchange, which will
include Topaz Exchange.
\66\ See ISE Holdings Certificate, Article FOURTH, Sections
III.(a)(i)(A) and III.(b)(i). Article XI of the ISE Holdings Bylaws,
which originally was adopted in connection with the Eurex
Acquisition (see supra note 15 and accompanying text for a
description of the Eurex Acquisition), waives the ISE Holdings
ownership and voting limits to allow the Upstream Owners to own and
vote all of the common stock of ISE Holdings. Article XI, Section
11.1(b) states that, in waiving the ISE Holdings ownership and
voting limits to permit the Upstream Owners to own and vote the
capital stock of ISE Holdings, the ISE Holdings Board has
determined, with respect to each Upstream Owner, that: (i) Such
waiver will not impair the ability of ISE Holdings and each
``Controlled National Securities Exchange'' (i.e., any national
securities exchange or facility thereof controlled, directly or
indirectly, by ISE Holdings, including ISE, EDGA, EDGX, and as a
result of this Order, Topaz Exchange) to carry out their respective
functions and responsibilities under the Act; (ii) such waiver is in
the best interests of ISE Holdings, its stockholders, and each
Controlled National Securities Exchange; (iii) such waiver will not
impair the ability of the Commission to enforce the Act; (iv)
neither the Upstream Owner nor any of its related persons is subject
to a statutory disqualification (within the meaning of Section
3(a)(39) of the Act, 15 U.S.C. 78c(a)(39)); and (v) neither the
Upstream Owner nor any of its related persons is a member of such
Controlled National Securities Exchange.
---------------------------------------------------------------------------

The Topaz Exchange LLC Agreement and Topaz Exchange Constitution do
not include change of control provisions that are similar to those in
the ISE Holdings Certificate and ISE Holdings Bylaws. However, the
Topaz Exchange LLC Agreement and the Topaz Exchange Constitution
explicitly provide that ISE Holdings is the Sole LLC Member of Topaz
Exchange.\67\ ISE Holdings is permitted under the Topaz Exchange LLC
Agreement to assign all but not less than all of its interest in Topaz
Exchange (and therefore no longer would be its sole owner), but the
assignment of all of ISE Holdings' interest in Topaz Exchange will be
subject to the rule filing procedures under Section 19 of the Act.\68\
---------------------------------------------------------------------------

\67\ See Topaz Exchange LLC Agreement, Article II, Section 2.1
and Topaz Exchange Constitution Article I, Section 1.1 (both of
which define ``Sole LLC Member'' to mean ISE Holdings, as the sole
member of Topaz Exchange).
\68\ See 15 U.S.C. 78s; see also Topaz Exchange LLC Agreement,
Article VII, Section 7.1 and Topaz Exchange Constitution, Article I,
Section 1.1.
---------------------------------------------------------------------------

As detailed above, ISE Holdings is owned by various Upstream
Owners, none of which have similar ownership

[[Page 46626]]

and voting limits in their governing documents. To facilitate
compliance with the ISE Holdings ownership and voting limits, the
Upstream Owners have committed to take reasonable steps necessary to
cause ISE Holdings to be in compliance with the ISE Holdings ownership
and voting limits. These commitments are contained in the governing
documents for U.S. Exchange Holdings \69\ and in corporate resolutions
for the non-U.S. Upstream Owners.\70\
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\69\ For a U.S. Upstream Owner, the U.S. Exchange Holdings
Certificate provides that, for so long as U.S. Exchange Holdings
directly or indirectly controls a Controlled National Securities
Exchange, U.S. Exchange Holdings will take reasonable steps
necessary to cause ISE Holdings to be in compliance with the ISE
Holdings' ownership and voting limits. See U.S. Exchange Holdings
Certificate, Article THIRTEENTH.
\70\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Section (4)), Exhibit B to Topaz Exchange Form 1
Application. In its Form 1 Application, Topaz Exchange included
these supplemental resolutions that each of the current Non-U.S.
Upstream Owners of Topaz Exchange has adopted that, in part,
incorporate provisions regarding the ownership and voting limits
(``Topaz Exchange Resolutions'') in the same manner and to the same
extent as prior corporate resolutions signed by the Non-U.S.
Upstream Owners apply to ISE (``2007 Resolutions''). The Topaz
Exchange Resolutions were signed by the Non-U.S. Upstream Owners and
extend to Topaz Exchange the commitments that the then non-U.S.
upstream owners made in the 2007 Resolutions with respect to ISE.
For example, Topaz Exchange represented in Exhibit B to its Form 1
Application that Deutsche B[ouml]rse AG Executive Board executed its
corporate resolution on November 10, 2009.
Since 2007, U.S. Exchange Holdings' governing documents and the
non-U.S. upstream owners' 2007 Resolutions have been updated, where
appropriate, to reflect changes in corporate structure and ownership
as described herein. In 2010, to effect the registrations of EDGA
and EDGX as national securities exchanges, and to maintain ISE
Holdings' ownership and voting limits, as well as the independence
of the regulatory function of EDGA and EDGX, the U.S. Exchange
Holdings governing documents and the 2007 Resolutions were
supplemented by each of the then non-U.S. upstream owners through
supplemental resolutions (``DirectEdge Resolutions'') that applied
the commitments of the 2007 Resolutions to EDGA and EDGX, as
affiliates of ISE, see supra note 13, in the same manner and to the
same extent as the 2007 Resolutions applied to ISE and the U.S.
Exchange Holdings governing documents were updated to apply
prospectively to any other national securities exchange that ISE
Holdings may control, either directly or indirectly, including, but
not limited to, ISE, EDGA and EDGX. See Securities Exchange Act
Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010)
(File Nos. 10-194 and 10-196) (order granting the exchange
registration of EDGA and EDGX) (``DirectEdge Exchanges Order''). The
Commission also approved changes to U.S. Exchange Holdings' and ISE
Holdings' governing documents to apply these governing documents to
any prospective national securities exchange that U.S. Exchange
Holdings or ISE Holdings, as applicable, directly or indirectly
controlled. See Securities Exchange Act Release Nos. 59135 (December
22, 2008), 73 FR 79954 (December 30, 2008) (``ISE Holdings Order'')
and 61498 (February 4, 2010), 75 FR 7299 (February 18, 2010) (``U.S.
Exchange Holdings Order'').
In 2012, new resolutions were executed by EGD, a Swiss
corporation, when it became a wholly-owned subsidiary of Deutsche
B[ouml]rse, and thus a Non-U.S. Upstream Owner of ISE, EDGA and
EDGX. See Deutsche B[ouml]rse Acquisition Order, supra note 16.
---------------------------------------------------------------------------

Further, in connection with the Eurex Acquisition, ISE implemented
the Trust pursuant to a Trust Agreement (``2007 Trust Agreement'') \71\
among ISE Holdings, U.S. Exchange Holdings, trustees (``Trustees''),
and a Delaware trustee, which agreement has been subsequently amended
to take into account subsequent acquisitions, including the current
transaction.\72\
---------------------------------------------------------------------------

\71\ The term of the Trust is perpetual, provided that ISE
Holdings directly or indirectly controls a national securities
exchange or a facility thereof, which would include Topaz Exchange.
\72\ See Eurex Acquisition Order, supra note 15, at Section
II.C., for a more detailed description of the Trust. By its terms,
the 2007 Trust Agreement related solely to ISE Holdings' ownership
of ISE LLC, and not to any other national securities exchange that
ISE Holdings might control, directly or indirectly. In 2010, the
Commission approved proposed rule changes that revised the 2007
Trust Agreement to replace references to ISE with references to any
Controlled National Securities Exchange (the 2007 Trust Agreement,
as thereby amended, is referred to herein as the ``2009 Trust
Agreement''). See ISE Holdings Order and U.S. Exchange Holdings
Order, supra note 70; see also DirectEdge Exchanges Order, supra
note 70; 2009 Trust Agreement, Articles I and II, Sections 1.1 and
2.6.
Thus, the 2009 Trust Agreement will apply to Topaz Exchange upon
the Commission's granting its registration as a national securities
exchange because it is controlled directly by ISE Holdings. Except
for the expanded scope, the 2009 Trust Agreement was substantially
similar to the 2007 Trust Agreement. In 2012, the Commission
approved a proposed rule change that revised the 2009 Trust
Agreement to replace references to a former owner, SIX, to the new
owner, EGD (the 2009 Trust Agreement, as thereby amended, is
referred to herein as the ``2012 Trust Agreement''). See Deutsche
B[ouml]rse Acquisition Order, supra note 16, for more detailed
information on the addition of EGD as a Non-U.S. Upstream Owner of
ISE, EDGA, and EDGX. Except for reflecting a new Upstream Owner of
ISE Holdings, the 2012 Trust Agreement was substantially similar to
the 2009 Trust Agreement.
---------------------------------------------------------------------------

The current agreement (``2012 Trust Agreement'') serves, in part,
to effectuate the ownership and voting limits for ISE Holdings in the
event that a person obtains an ownership or voting interest in excess
of the limits established in the ISE Holdings Certificate without prior
Commission approval. To accomplish that purpose, for as long as ISE
Holdings controls, directly or indirectly, a national securities
exchange, including Topaz Exchange, the Trust would accept, hold and
dispose of Trust Shares \73\ on the terms and subject to the conditions
set forth therein.\74\ Specifically, if any person's ownership
percentage exceeds the ownership limits or any person's voting control
percentage exceeds the voting limits without Commission approval, the
Excess Shares will be transferred automatically to the Trust pursuant
to the terms prescribed in the ISE Holdings Certificate.\75\ The Trust
then would accept the Excess Shares and hold them for the benefit of
the trust beneficiary, U.S. Exchange Holdings, who has the right to
reacquire the Excess Shares either when a person no longer exceeds the
ownership or voting limits or when such excess ownership percentage or
voting control percentage is approved by the Commission in accordance
with ISE Holdings Certificate.\76\
---------------------------------------------------------------------------

\73\ Under the Trust, the term ``Trust Shares'' means either
Excess Shares or Deposited Shares, or both, as the case may be. The
term ``Excess Shares'' means that a person obtained an ownership or
voting interest in ISE Holdings in excess of the ownership and
voting limits pursuant to Article FOURTH of the ISE Holdings
Certificate, for example, through ownership of one of the Non-U.S.
Upstream Owners or U.S. Exchange Holdings, without obtaining the
approval of the Commission. The term ``Deposited Shares'' means
shares that are transferred to the Trust pursuant to the Trust's
exercise of the Call Option. Under the Trust, the term ``Call
Option'' means the option granted by the Trust beneficiary to the
Trust to call the Voting Shares as set forth in Section 4.2 therein.
See infra Section II.C.2.b for further discussion of the Call
Option.
\74\ See 2012 Trust Agreement, Article IV, Section 4.1; see also
ISE Holdings Certificate, Article FOURTH, Section III.(c); Eurex
Acquisition Order, supra note 15, at 72 FR 71982 n.37 and
accompanying text.
\75\ See id.
\76\ See 2012 Trust Agreement, Article IV, Section 4.1(f). In
addition, as discussed in Section II.C.2.b below, the Trust also may
accept, hold and dispose of Trust Shares in connection with the Call
Option. Section 4.2(h) of the 2012 Trust Agreement governs when the
Trustees can transfer Deposited Shares in connection with the Call
Option. Section 4.3(a) of the 2012 Trust Agreement further permits
the Trustees, upon receipt of written instructions from the Trust
Beneficiary, to sell Trust Shares to a person or persons whose
ownership percentage or voting control percentage will not violate
the ownership or voting limits.
---------------------------------------------------------------------------

Although ISE Holdings is not independently responsible for
regulation of Topaz Exchange, its activities with respect to the
operation of Topaz Exchange must be consistent with, and must not
interfere with, the self-regulatory obligations of Topaz Exchange.\77\
As described above, the provisions applicable to direct and indirect
changes in control of ISE Holdings and Topaz Exchange, as well as the
voting limitation, are designed to help prevent any owner of ISE
Holdings from exercising undue influence or control over the operation
of Topaz Exchange and to help assure that Topaz Exchange is able to
effectively carry out its regulatory obligations under the Act. In
addition, these limitations are designed to address the conflicts of
interests that might result from a member of a national securities
exchange owning interests in the

[[Page 46627]]

exchange. As the Commission has noted in the past, however, a member's
interest in an exchange, including an entity that controls an exchange,
could become so large as to cast doubts on whether the exchange may
fairly and objectively exercise its self-regulatory responsibilities
with respect to such member.\78\ A member that is a controlling
shareholder of an exchange could seek to exercise that controlling
influence by directing the exchange to refrain from, or the exchange
may hesitate to, diligently monitor and conduct surveillance of the
member's conduct or diligently enforce the exchange's rules and the
federal securities laws with respect to conduct by the member that
violates such provisions. As such, these requirements are designed to
minimize the potential that a person or entity can improperly interfere
with or restrict the ability of Topaz Exchange to effectively carry out
its regulatory oversight responsibilities under the Act.
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\77\ See also infra Section II.C.2. (Regulatory Independence).
\78\ See, e.g., DirectEdge Exchanges Order, supra note 70, and
BATS Order, supra note 29; see also MIAX Order, supra note 30.
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The Commission believes that Topaz Exchange's and ISE Holdings'
proposed ownership and voting limitation provisions, coupled with the
provisions in U.S. Exchange Holdings' governing documents, the Topaz
Exchange Resolutions and the 2012 Trust Agreement described above,\79\
are consistent with the Act, including Section 6(b)(1), which requires,
in part, an exchange to be so organized and have the capacity to carry
out the purposes of the Act.\80\ In particular, these requirements are
designed to minimize the potential that a person could improperly
interfere with or restrict the ability of the Commission or Topaz
Exchange to effectively carry out their regulatory oversight
responsibilities under the Act.\81\
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\79\ See supra notes 69-70, and accompanying text.
\80\ 15 U.S.C. 78f(b)(1).
\81\ In addition, the 2012 Trust Agreement, like the 2007 and
2009 Trust Agreements, is consistent with the provisions that other
entities that directly or indirectly own or control a SRO have
instituted and that have been approved by the Commission. See, e.g.,
Securities Exchange Act Release No. 55293 (February 14, 2007), 72 FR
8033 (February 22, 2007) (File No. SR-NYSE-2006-120) (order relating
to the combination between NYSE Group, Inc. and Euronext N.V.). See
also Eurex Acquisition Order, supra note 15, at 72 FR 71986 n.111.
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2. Regulatory Independence and Oversight
a. ISE Holdings
Although ISE Holdings itself will not itself carry out regulatory
functions, its activities with respect to the operation of Topaz
Exchange must be consistent with, and not interfere with, the self-
regulatory obligations of Topaz Exchange.\82\ In this regard, Topaz
Exchange and ISE Holdings' respective corporate documents include
certain provisions that are designed to maintain the independence of
the Topaz Exchange's self-regulatory function.\83\ These provisions are
substantially similar to those included in the governing documents of
other exchanges that recently have been granted registration.\84\
Specifically:
---------------------------------------------------------------------------

\82\ See, e.g., BOX Order, supra note 39, and DirectEdge
Exchanges Order, supra note 70.
\83\ See supra note 66, noting that the ISE Holdings Certificate
and the ISE Holdings Bylaws were revised in 2010 to cover any
Controlled National Securities Exchange, which would include Topaz
Exchange.
\84\ See, e.g., BOX Order, supra note 39, and MIAX Order, supra
note 30.
---------------------------------------------------------------------------

The directors, officers, and employees of ISE Holdings
must give due regard to the preservation of the independence of the
self-regulatory function of Topaz Exchange and must not take actions
that would interfere with the effectuation of decisions by the Topaz
Exchange Board relating to its regulatory functions (including
disciplinary matters) or that would adversely affect the ability of
Topaz Exchange to carry out its responsibilities under the Act.\85\
---------------------------------------------------------------------------

\85\ See ISE Holdings Bylaws, Article I, Section 1.5. Similarly,
Article V, Section 5.1(b) of the Topaz Exchange LLC Agreement
requires each Topaz Exchange Board director to take into
consideration the effect that his or her actions would have on the
ability of Topaz Exchange to carry out its responsibilities under
the Act and on the ability of Topaz Exchange to engage in conduct
that fosters and does not interfere with Topaz Exchange's ability to
prevent fraudulent and manipulative acts and practices; to promote
just and equitable principles of trade; to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to and facilitating transactions
in securities or assist in the removal of impediments to or
perfection of the mechanisms for a free and open market and a
national market system; and in general to protect investors and the
public interest.
---------------------------------------------------------------------------

ISE Holdings must comply with federal securities laws and
the rules and regulations promulgated thereunder, and must cooperate
with Topaz Exchange and the Commission pursuant to, and to the extent
of, their respective regulatory authority. In addition, ISE Holdings'
officers, directors, and employees must comply with federal securities
laws and the rules and regulations thereunder and agree to cooperate
with Topaz Exchange and the Commission pursuant to their respective
regulatory authority.\86\
---------------------------------------------------------------------------

\86\ See ISE Holdings Certificate, Article TENTH. ISE Holdings
also shall take reasonable steps necessary to cause its agents to
cooperate with Topaz Exchange and the Commission pursuant to their
respective regulatory authority. ISE Holdings Certificate, Article
THIRTEENTH.
---------------------------------------------------------------------------

ISE Holdings, and its officers, directors, employees, and
agents are deemed to irrevocably submit to the jurisdiction of the U.S.
federal courts, the Commission, and Topaz Exchange, for purposes of any
suit, action, or proceeding pursuant to U.S. federal securities laws,
and the rules and regulations thereunder, arising out of, or relating
to, Topaz Exchange's activities.\87\
---------------------------------------------------------------------------

\87\ See ISE Holdings Bylaws, Article I, Section 1.4.
---------------------------------------------------------------------------

All books and records of Topaz Exchange containing
confidential information pertaining to the self-regulatory function of
Topaz Exchange (including but not limited to confidential information
regarding disciplinary matters, trading data, trading practices and
audit information) shall be retained in confidence by Topaz Exchange
and its officers, directors, employees and agents and will not be used
by Topaz Exchange for any commercial purpose and shall not be made
available to persons other than those officers, directors, employees
and agents that have a reasonable need to know the contents
thereof.\88\
---------------------------------------------------------------------------

\88\ See Topaz Exchange LLC Agreement, Article VI, Section
4.1(b) and ISE Holdings Certificate, Article ELEVENTH. ISE Holdings
LLC Agreement also provides that all books and records of Topaz
Exchange reflecting confidential information pertaining to the self-
regulatory function of Topaz Exchange will be subject to
confidentiality restrictions. See ISE Holdings Certificate, Article
ELEVENTH. The requirement to keep such information confidential
shall not limit or impede the Commission's ability to access and
examine such information or limit or impede the ability of officers,
directors, employees, or agents of ISE Holdings to disclose such
information to the Commission. See id.
---------------------------------------------------------------------------

The books and records of Topaz Exchange and ISE Holdings
must be maintained in the United States \89\ and, to the extent they
are related to the operation or administration of Topaz Exchange, ISE
Holdings books and records will be subject at all times to inspection
and copying by the Commission.\90\
---------------------------------------------------------------------------

\89\ See Topaz Exchange LLC Agreement, Article IV, Section 4.1
and ISE Holdings Bylaws, Article I, Section 1.3.
\90\ See ISE Holdings Certificate, Article TWELFTH.
---------------------------------------------------------------------------

Furthermore, to the extent that they are related to the
activities of Topaz Exchange, the books, records, premises, officers,
directors, and employees of ISE Holdings will be deemed to be the
books, records, premises, officers, directors, and employees of Topaz
Exchange, for purposes of, and subject to oversight pursuant to, the
Act.\91\
---------------------------------------------------------------------------

\91\ See id.
---------------------------------------------------------------------------

ISE Holdings will take necessary steps to cause its
officers, directors, and employees, prior to accepting a position as an
officer, director, or employee (as

[[Page 46628]]

applicable) to consent in writing to the applicability of provisions
regarding books and records, confidentiality, jurisdiction, and
regulatory obligations, with respect to their activities related to
Topaz Exchange.\92\
---------------------------------------------------------------------------

\92\ See ISE Holdings Bylaws, Article I, Section 1.6.
---------------------------------------------------------------------------

ISE Holdings Certificate and ISE Holdings Bylaws require
that, so long as ISE Holdings controls Topaz Exchange, any changes to
those documents be submitted to the Topaz Exchange Board, and, if such
change is required to be filed with, or filed with and approved by, the
Commission before it may be effective pursuant to Section 19 of the Act
and the rules thereunder, such change shall not be effective until
filed with, or filed with and approved by, the Commission.\93\
---------------------------------------------------------------------------

\93\ See ISE Holdings Certificate, Article FOURTEENTH; and ISE
Holdings Bylaws, Article X; see also supra notes 67-68 and
accompanying text discussing a similar provision for Topaz Exchange.
---------------------------------------------------------------------------

b. Upstream Owners
Although the Upstream Owners will not carry out any regulatory
functions, the activities of each of the Upstream Owners with respect
to the operation of Topaz Exchange must be consistent with, and not
interfere with, the self-regulatory obligations of Topaz Exchange. The
2007 Resolutions, as supplemented by the supplemental Resolutions for
Topaz Exchange, the U.S. Exchange Holdings Certificate, and the U.S.
Exchange Holdings Bylaws include certain provisions that are designed
to maintain the independence of the self-regulatory function of Topaz
Exchange, enable Topaz Exchange to operate in a manner that complies
with the U.S. federal securities laws, including the objectives and
requirements of Sections 6(b) and 19(g) of the Act,\94\ and facilitate
the ability of Topaz Exchange, and the Commission to fulfill their
regulatory and oversight obligations under the Act. Specifically:
---------------------------------------------------------------------------

\94\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

Each such Non-U.S. Upstream Owner and U.S. Exchange
Holdings will comply with the U.S. federal securities laws and the
rules and regulations thereunder and cooperate with the Commission and
Topaz Exchange.\95\ Also, each board member, officer, and employee of
the Non-U.S. Upstream Owners, and of U.S. Exchange Holdings, in
discharging his or her responsibilities, must comply with the U.S.
federal securities laws and the rules and regulations thereunder, and
must cooperate with the Commission and Topaz Exchange.\96\
---------------------------------------------------------------------------

\95\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Section (1) and Topaz Exchange Resolution Section
(2)(a)); and U.S. Exchange Holdings Certificate, Article ELEVENTH.
\96\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Sections (7)(a) and (8)(a) and Topaz Exchange
Resolution Sections (2)(b) and (2)(c)); U.S. Exchange Holdings
Certificate, Article TENTH. The Resolutions also provide that each
Non-U.S. Upstream Owner will take reasonable steps necessary to
cause each person who subsequently becomes a board member of the
Non-U.S. Upstream Owner to agree in writing to certain matters
included in the Resolutions. See, e.g., Form of German Parent
Corporate Resolutions (2007 Resolution Section (7) and Topaz
Exchange Resolution Section (2)(b)).
---------------------------------------------------------------------------

In discharging his or her responsibilities as a board
member of a Non-U.S. Upstream Owner, or of U.S. Exchange Holdings, each
such member must, to the fullest extent permitted by applicable law,
take into consideration the effect that the actions of the Upstream
Owner or U.S. Exchange Holdings, as applicable, will have on the
ability of Topaz Exchange to carry out its responsibilities under the
Act.\97\ In addition, each of the Non-U.S. Upstream Owners and U.S.
Exchange Holdings, and their board members, officers, and employees,
must give due regard to the preservation of the independence of the
self-regulatory function of Topaz Exchange (or in the case of the Non-
U.S. Upstream Owners, that they will take reasonable steps necessary to
cause their officers and employees involved in the activities of Topaz
Exchange to give due regard to preserving the independence of the self-
regulatory functions of Topaz Exchange).\98\
---------------------------------------------------------------------------

\97\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Section (7)(f) and Topaz Exchange Resolution
Section (2)(b)); and U.S. Exchange Holdings Certificate, Article
TENTH.
\98\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Sections (5), (7)(d), and (8)(d) and Topaz Exchange
Resolution Section (2)); and U.S. Exchange Holdings Certificate,
Article TWELFTH.
---------------------------------------------------------------------------

The Non-U.S. Upstream Owners (along with their respective
board members, officers, and employees), and U.S. Exchange Holdings
agree to keep confidential, to the fullest extent permitted by
applicable law, all confidential information pertaining to the self-
regulatory function of Topaz Exchange, including, but not limited to,
confidential information regarding disciplinary matters, trading data,
trading practices and audit information, contained in the books and
records of Topaz Exchange and not use such information for any
commercial purposes.\99\
---------------------------------------------------------------------------

\99\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Sections (6), (7)(e) and (8)(e) and Topaz Exchange
Resolution Section (2)); and U.S. Exchange Holdings Certificate,
Article FOURTEENTH.
The Commission believes that any non-regulatory use of such
information would be for a commercial purpose. See DirectEdge
Exchanges Order, supra note 70, at 75 FR 13155 n.53.
---------------------------------------------------------------------------

The books and records of the Non-U.S. Upstream Owners
related to the activities of Topaz Exchange must at all times be made
available for, and the books and records of U.S. Exchange Holdings must
be subject at all times to, inspection and copying by the Commission
and Topaz Exchange.\100\
---------------------------------------------------------------------------

\100\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Section (3) and Topaz Exchange Resolution Section
(2)(a)); and U.S. Exchange Holdings Certificate, Article FIFTEENTH.
See infra Section II.C.2.c for a discussion of the 2009 Procedure
through which the Swiss companies would make available their books
and records relating to the activities of the Topaz Exchange.
---------------------------------------------------------------------------

Books and records of U.S. Exchange Holdings related to the
activities of Topaz Exchange will be maintained within the United
States.\101\
---------------------------------------------------------------------------

\101\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH.
---------------------------------------------------------------------------

For so long as each of the Non-U.S. Upstream Owners or
U.S. Exchange Holdings directly or indirectly controls Topaz Exchange,
the books, records, officers, directors (or equivalent), and employees
of each of the Non-U.S. Upstream Owners or of U.S. Exchange Holdings
will be deemed to be the books, records, officers, directors, and
employees of Topaz Exchange, as applicable.\102\ And, for so long as
U.S. Exchange Holdings directly or indirectly controls Topaz Exchange,
the premises of U.S. Exchange Holdings will be deemed to be the
premises of Topaz Exchange.\103\
---------------------------------------------------------------------------

\102\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Sections (3) and (8)(c) and Topaz Exchange
Resolution Sections (2)(a) and (2)(c)); and U.S. Exchange Holdings
Certificate, Article FIFTEENTH.
\103\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH.
---------------------------------------------------------------------------

To the extent involved in the activities of Topaz
Exchange, each of the Non-U.S. Upstream Owners, its board members,
officers, and employees, irrevocably submit to the jurisdiction of the
U.S. federal courts and the Commission for purposes of any suit, action
or proceeding arising out of, or relating to, the activities of Topaz
Exchange to the extent such board member, officer or employee are
involved in the activities of Topaz Exchange.\104\ Likewise, U.S.
Exchange Holdings, its officers, directors, and employees whose
principal place of business and residence is outside of the United
States, to the extent such director, officer, or employee is involved
in the activities of Topaz Exchange, irrevocably submit to the

[[Page 46629]]

jurisdiction of the U.S. federal courts and the Commission for purposes
of any suit, action or proceeding pursuant to the U.S. federal
securities laws, and the rules or regulations thereunder, commended or
initiated by the Commission arising out of, or relating to, the
activities of Topaz Exchange.\105\
---------------------------------------------------------------------------

\104\ See, e.g., Form of German Parent Corporate Resolutions
(2007 Resolution Sections (2), (7)(b), and (8)(b) and Topaz Exchange
Resolution Section (2)).
\105\ See U.S. Exchange Holdings Bylaws, Article VI, Section 16.
---------------------------------------------------------------------------

The 2007 Resolutions, as supplemented by the Topaz
Exchange Resolutions, and the U.S. Exchange Holdings Certificate and
the U.S. Exchange Holdings Bylaws each require that any change to the
applicable document (including any action by the Non-U.S. Upstream
Owners that would have the effect of amending or repealing the Topaz
Exchange Resolutions or the 2007 Resolutions) must be submitted to the
Topaz Exchange Board.\106\ If such change must be filed with, or filed
with and approved by, the Commission under Section 19 of the Act,\107\
and the rules thereunder, then such change shall not be effective until
filed with, or filed with and approved by, the Commission.\108\
---------------------------------------------------------------------------

\106\ See, e.g., Form of German Parent Corporate Resolutions
(Topaz Exchange Resolution Section (3)); U.S. Exchange Holdings
Certificate, Article SIXTEENTH; and U.S. Exchange Holdings Bylaws,
Article VI, Section 9.
\107\ 15 U.S.C. 78s.
\108\ See, e.g., Form of German Parent Corporate Resolutions
(Topaz Exchange Resolution Section (3)); U.S. Exchange Holdings
Certificate, Article SIXTEENTH; and U.S. Exchange Holdings Bylaws,
Article VI, Section 9. The requirement to submit changes to the
Topaz Exchange Board endures for as long as U.S. Exchange Holdings
directly or indirectly controls Topaz Exchange. See U.S. Exchange
Holdings Bylaws, Article VI, Section 9.
---------------------------------------------------------------------------

The 2012 Trust Agreement, in addition to enforcing the ownership
and voting limits,\109\ also serves to effectuate compliance with the
other commitments made under the Topaz Exchange Resolutions, which
incorporate the 2007 Resolutions. To accomplish that purpose, the Trust
would determine whether a Material Compliance Event \110\ has occurred
or is continuing. The Trust would determine whether the occurrence and
continuation of a Material Compliance Event requires the exercise of
the Call Option.\111\ The Trust holds a Call Option over the capital
stock of ISE Holdings that may be exercised if a Material Compliance
Event has occurred and continues to be in effect, and upon such
exercise, the Trust Beneficiary \112\ and ISE Holdings, as applicable,
will take such actions as are necessary to transfer, or cause the
transfer to the Trust of a majority of the Voting Shares then
outstanding.\113\ The Trust will transfer Deposited Shares from the
Trust back to the Trust Beneficiary, as provided in Section 4.2(h)
therein, only if no Material Compliance Event is continuing or,
notwithstanding its continuation, the Trustees determine that the
retention of the Deposited Shares could not reasonably be expected to
address the continuing Material Compliance Event, provided that the
determination is filed with, or filed with and approved by, the
Commission.\114\
---------------------------------------------------------------------------

\109\ See supra notes 61-63 and 73-76 and accompanying text for
a discussion of the ownership and voting limits.
\110\ Under the 2012 Trust Agreement, a ``Material Compliance
Event'' is any state of facts, development, event, circumstance,
condition, occurrence, or effect that results in the failure of any
of the Non-U.S. Upstream Owners to adhere to its respective
commitments under the Resolutions adopted by the respective Non-U.S.
Upstream Owners, in any material respect. See 2012 Trust Agreement,
Article I, Section 1.1.
\111\ See supra note 73.
\112\ Under the Trust, the term ``Trust Beneficiary'' means U.S.
Exchange Holdings.
\113\ See 2012 Trust Agreement, Article IV, Section 4.2.
Specifically, if a Material Compliance Event occurs and continues to
be in effect, the Trustees must take certain actions, including,
after a specified cure period, the exercise of a Call Option for a
transfer of the majority of capital stock of ISE Holdings that has
the right by its terms to vote in the election of the ISE Holdings
Board or on other matters.
\114\ See 2012 Trust Agreement, Article IV, Section 4.2.
---------------------------------------------------------------------------

The Commission believes that the provisions discussed above in
Sections II.C.2.a. and b., which are designed to help maintain the
independence of Topaz Exchange's regulatory function and help
facilitate the ability of Topaz Exchange to carry out its regulatory
responsibilities and operate in a manner consistent with the Act, are
appropriate and consistent with the requirements of the Act,
particularly with Section 6(b)(1), which requires, in part, an exchange
to be so organized and have the capacity to carry out the purposes of
the Act.\115\ Whether Topaz Exchange operates in compliance with the
Act, however, depends on how it and ISE Holdings in practice implement
the governance and other provisions that are the subject of this
Order.\116\
---------------------------------------------------------------------------

\115\ 15 U.S.C. 78f(b)(1).
\116\ The Commission has noted that it is reviewing the various
standards and processes it uses to facilitate the registration of
national securities exchanges and other entities required to
register with the Commission and may issue a concept release
designed to collect relevant information to evaluate aspects of
these registration standards and processes, including the policy
objectives of registration, and how best to achieve those policy
objectives through registration and other means, and the relative
benefits and costs of the various means available. See Securities
Exchange Act Release No. 65543 (October 12, 2011), 76 FR 65784,
65786 fn. 13 (October 24, 2011).
---------------------------------------------------------------------------

Further, Section 19(h)(1) of the Act \117\ provides the Commission
with the authority ``to suspend for a period not exceeding twelve
months or revoke the registration of [an SRO], or to censure or impose
limitations upon the activities, functions, and operations of [an SRO],
if [the Commission] finds, on the record after notice and opportunity
for hearing, that [the SRO] has violated or is unable to comply with
any provision of [the Act], the rules or regulations thereunder, or its
own rules or without reasonable justification or excuse has failed to
enforce compliance'' with any such provision by its members (including
associated persons thereof).\118\ If Commission staff were to find, or
become aware of, through staff review and inspection or otherwise,
facts indicating any violations of the Act, including without
limitation Sections 6(b)(1) \119\ and 19(g)(1),\120\ these matters
could provide the basis for a disciplinary proceeding under Section
19(h)(1) of the Act.\121\
---------------------------------------------------------------------------

\117\ See 15 U.S.C. 78s(h)(1).
\118\ See id.
\119\ See 15 U.S.C. 78f(b)(1)
\120\ See 15 U.S.C. 78s(g)(1).
\121\ See 15 U.S.C. 78s(h)(1).
---------------------------------------------------------------------------

Even in the absence of the provisions described above, under
Section 20(a) of the Act,\122\ any person with a controlling interest
in Topaz Exchange would be jointly and severally liable with and to the
same extent that Topaz Exchange is liable under any provision of the
Act, unless the controlling person acted in good faith and did not
directly or indirectly induce the act or acts constituting the
violation or cause of action. In addition, Section 20(e) of the Act)
\123\ creates aiding and abetting liability for any person who
knowingly provides substantial assistance to another person in
violation of any provision of the Act or rule thereunder. Further,
Section 21C of the Act authorizes the Commission to enter a cease-and-
desist order against any person who has been ``a cause of'' a violation
of any provision of the Act through an act or omission that the person
knew or should have known would contribute to the violation.\124\ These
provisions are applicable to all entities controlling Topaz Exchange,
including the Trust, ISE Holdings, U.S. Exchange Holdings, and the Non-
U.S. Upstream Owners.
---------------------------------------------------------------------------

\122\ See 15 U.S.C. 78t(a).
\123\ See 15 U.S.C. 78t(e).
\124\ See 15 U.S.C. 78u-3(a).
---------------------------------------------------------------------------

c. Swiss Resolutions and Procedure With FINMA
As discussed more fully in the Eurex Acquisition Order,\125\ Swiss
law is designed to protect Swiss sovereignty concerns and prohibits the
direct delivery of information from the Swiss

[[Page 46630]]

owners of Topaz Exchange to the Commission or Topaz Exchange with
respect to the activities of Topaz Exchange. In light of the Swiss
penal code,\126\ the Swiss companies agreed to make their books and
records relating to the activities of ISE, EDGA and EDGX available for
inspection and copying by the Commission through FINMA.\127\ The Swiss
companies made the same agreement in connection with the Eurex
Acquisition, and agreed to do so again with respect to the Topaz
Exchange prior to the grant of registration to Topaz Exchange as a
national securities exchange.\128\ In November 2009, the Commission and
FINMA both approved and signed the Undertaking Relating to the
Oversight of Affiliated Markets (``2009 Undertaking'') pursuant to
which FINMA undertook to serve as a conduit for the delivery of
information between the Commission and the Swiss owners of ISE Holdings
(``Procedure'') \129\ for any national securities exchange registered
under Section 6 of the Act that ISE Holdings controls or would, in the
future, control, directly or indirectly.\130\
---------------------------------------------------------------------------

\125\ See supra note 15.
\126\ Art. 271 of the Swiss penal code, ``Prohibited acts for a
foreign state,'' states, in part: ``Whoever, without being
authorized, performs acts for a foreign state on Swiss territory
that are reserved to an authority or an official, whoever performs
such acts for a foreign party or another foreign organization,
whoever aids and abets such acts, shall be punished with
imprisonment and, in serious cases, sentenced to the penitentiary.''
\127\ In 2007, the Swiss Federal Banking Commission (``SFBC'')
(the predecessor to FINMA) undertook to serve as a conduit for the
delivery of information between the Commission and the Swiss
companies relating to the activities of ISE. On January 1, 2009, the
SFBC, the Swiss Federal Office of Private Insurance and the Swiss
Anti-Money Laundering Control Authority merged to form FINMA, a new
consolidated financial regulator for Switzerland. In 2009, a new
undertaking was expanded to cover EDGA and EDGX and any future U.S.
exchanges controlled by ISE Holdings. The 2009 undertaking became
effective after the Commission approved the Form 1 applications of
EDGA and EDGX. See DirectEdge Exchanges Order, supra note 70. The
2009 undertaking covers all U.S. markets that currently are, or in
the future may be, controlled by ISE Holdings. Accordingly, by its
terms, the new undertaking from 2009 also would apply to the
activities of Topaz Exchange upon its registration. See https://www.sec.gov/about/offices/oia/oia_bilateral/switzerland_sfbc.pdf.
\128\ See supra note 15. The forms of these agreements are
included as part of the Form 1 Application. Form of Swiss Parent
Corporate Resolutions; see also Form of EGD Corporate Resolutions.
Based on the representation of Topaz Exchange in the submission of
its Form 1 Application to the Commission, the resolutions were
signed by the respective Swiss companies prior to the grant of
registration by the Commission. See Exhibit B to Topaz Exchange Form
1 Application and Amendment No. 3.
\129\ Where necessitated by Swiss law, the Procedure provides:
(1) If the Commission makes a request to any of the Swiss Upstream
Owners for information related to the activities of a U.S. Market,
including books and records related to the activities of such U.S.
Market, FINMA shall deliver to the Commission without delay any
responsive information provided to FINMA by the Swiss Upstream
Owners; (2) written requests for information, including books and
records, related to the activities of a U.S. Market shall be made by
the Commission directly to the Swiss Upstream Owners, and FINMA
would be copied on any such requests; and (3) a FINMA staff member
shall participate in any oral exchanges between the Commission and
any of the Swiss Upstream Owners. As used in the 2009 Undertaking,
``U.S. Markets'' means ISE, EDGX, EDGA, and any national securities
exchange registered under Section 6 of the Act that ISE Holdings
may, in the future, control, directly or indirectly. See 2009
Undertaking, paragraph 6.
Notwithstanding this Procedure, the Swiss Upstream Owners remain
fully responsible for meeting all of their obligations as owners of
a U.S. securities exchange, to be set forth in binding corporate
resolutions.
\130\ FINMA serves as a conduit for the delivery of information
and for participation in oral exchanges between the Commission and
the Swiss companies, and would serve in that capacity for Topaz
Exchange. The 2009 Undertaking explicitly states that it covers
changes in Swiss companies that become future direct or indirect
owners of the U.S. Markets. Specifically, when SIX Swiss Exchange
AG's transferred its interest to the newly formed Swiss corporation,
EGD, EGD was covered by the 2009 Undertaking. See supra note 16.
---------------------------------------------------------------------------

Subject to the terms and conditions relating to the Procedure,
coupled with the fact that under the Topaz Exchange LLC Agreement, all
trading records of Topaz Exchange must be maintained in the United
States,\131\ the Commission believes that the Procedure should not
result in a level of access materially different from that agreed to by
other entities that control U.S. national securities exchanges.\132\
---------------------------------------------------------------------------

\131\ See Topaz Exchange LLC Agreement, ARTICLE IV, Section 4.1
(Books and Records).
\132\ See Eurex Acquisition Order, supra note 15, at 72 FR 71984
n.66 and accompanying text; see also DirectEdge Exchanges Order,
supra note 70. If a Non-U.S. Upstream Owner fails to make its books
and record relating to the operation of Topaz Exchange available to
the Commission, the Commission could bring an action under, among
other provisions, Section 17 of the Act, 15 U.S.C. 78q, and Rule
17a-1(b) thereunder, 17 CFR 240.17a-1(b), against Topaz Exchange
pursuant to Section 19(h) of the Act, 15 U.S.C. 78s(h).
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3. Regulation of Topaz Exchange
As a prerequisite to the Commission's granting of an exchange's
application for registration, an exchange must be so organized and have
the capacity to carry out the purposes of the Act.\133\ Specifically,
an exchange must be able to enforce compliance by its members, and
persons associated with its members, with the Act and the rules and
regulations thereunder and the rules of the exchange.\134\ The
discussion below summarizes how Topaz Exchange proposes to structure
and conduct its regulatory operations.
---------------------------------------------------------------------------

\133\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
\134\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
---------------------------------------------------------------------------

a. Corporate Governance Committee and Finance and Audit Committee
Topaz Exchange will have a Chief Regulatory Officer (``CRO'') with
general responsibility for supervision of the regulatory operations of
Topaz Exchange. The CRO will report to the Corporate Governance
Committee\135\ and to the President/Chief Executive Officer, although
the Topaz Exchange Board would retain the power to call the CRO to
report directly to the Board as needed, and the CRO may call special
meetings of the Board, as necessary.\136\ The Corporate Governance
Committee will meet regularly with the CRO to review regulatory
matters.
---------------------------------------------------------------------------

\135\ The Corporate Governance Committee will consist of at
least three directors, all of whom must be Non-Industry Directors.
See Topaz Exchange Constitution, Article V, Section 5.4.
\136\ See Exhibit L to Topaz Exchange Form 1 Application.
---------------------------------------------------------------------------

The Corporate Governance Committee will monitor the regulatory
program for sufficiency, effectiveness and independence, and will
oversee trade practices and market surveillance, audits, examinations
and other regulatory responsibilities with respect to members and the
conduct of investigations. The Corporate Governance Committee also will
supervise the CRO; will receive an annual report from the CRO assessing
Topaz Exchange's self-regulatory program for the Board; will recommend
changes that would ensure fair and effective regulation; and will
review regulatory proposals and advise the Board as to whether and how
such changes may impact regulation. The Corporate Governance Committee
will review annually the regulatory budget and specifically inquire
into the adequacy of the resources available in the budget for
regulatory activities. The Corporate Governance Committee will
authorize unbudgeted expenditures for necessary regulatory expenses. In
addition, the Finance and Audit Committee will provide oversight over
the systems of internal controls established by management and the
Board and the Exchange's regulatory and compliance process.\137\
---------------------------------------------------------------------------

\137\ See Exhibit L to Topaz Exchange Form 1 Application. See
also Amendment No. 3.
---------------------------------------------------------------------------

The Compensation Committee will set compensation for the CRO. The
Corporate Governance Committee, in its sole discretion, will make
hiring and termination decisions with respect to the CRO, in each case
taking into consideration any recommendations made by the President/
Chief Executive Officer. The Corporate Governance Committee will be
informed about the

[[Page 46631]]

compensation of the CRO, including factors affecting changes thereto.
b. Regulatory Funding
To help assure the Commission that it has and will continue to have
adequate funding to be able to meet its responsibilities under the Act,
Topaz Exchange represented that, prior to commencing operations as a
national securities exchange, ISE Holdings will provide sufficient
funding to Topaz Exchange for the exchange to carry out its
responsibilities under the Act.\138\ Specifically, Topaz Exchange
represented that ISE Holdings will make a cash contribution to Topaz
Exchange of $5 million, in addition to previously provided ``in-kind''
contributions of legal, regulatory and infrastructure-related services
to Topaz Exchange\139\ Topaz Exchange represented in its Form 1
Application that the cash and in-kind contributions to Topaz Exchange
will be adequate to operate Topaz Exchange, including its regulatory
program.\140\ Further, Topaz Exchange, with ISE Holdings as its parent,
will be affiliated with an existing exchange, ISE. Individuals
currently employed by ISE have been providing, and will continue to
provide, services to Topaz Exchange.\141\
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\138\ See Exhibit I to Topaz Exchange Form 1 Application.
\139\ Other applicants for registration as a national securities
exchange have noted in their Form 1 applications similar funding
commitments and representations. BOX Exchange represented that,
prior to launch, BOX Group LLC would allocate sufficient operational
assets, including regulatory infrastructure and industry and
regulatory memberships, along with a $1,000,000 loan to BOX
Exchange. In MIAX, the exchange represented that Miami International
Holdings, Inc. would allocate sufficient operational assets and make
a capital contribution of not less than $2,000,000 into MIAX capital
account prior to launching operations. See, e.g., MIAX Order, supra
note 30.
\140\ See Exhibit I to Topaz Exchange Form 1 Application.
\141\ See id.
---------------------------------------------------------------------------

Topaz Exchange represented in its Form 1 Application that there
will be a written agreement between Topaz Exchange and ISE Holdings
that requires ISE Holdings to provide adequate funding for Topaz
Exchange's operation, including the regulation of Topaz Exchange.\142\
This agreement further provides that ISE Holdings will reimburse Topaz
Exchange for its costs and expenses to the extent Topaz Exchange's
assets are insufficient to meet its costs and expenses.\143\ Excess
funds, as solely determined by Topaz Exchange, will be remitted to ISE
Holdings.\144\ Further, Topaz Exchange will receive all fees, including
regulatory fees and trading fees, payable by Topaz Exchange's members,
as well as any funds received from any applicable market data fees and
OPRA tape revenue.\145\ Regulatory funds, meaning the fees, fines or
penalties derived from the regulatory operations of Topaz Exchange,
will be used to fund the legal, regulatory and surveillance operations
of Topaz Exchange.\146\
---------------------------------------------------------------------------

\142\ See Amendment No. 3. Both BOX and MIAX also represented in
their Form 1 applications that there would be explicit agreements
with their respective holding companies to provide adequate funding
for the exchanges' operations, including regulation.
\143\ See Exhibit I to Topaz Exchange Form 1 Application.
\144\ See id.
\145\ See id.
\146\ See id. See also Topaz Exchange LLC Agreement, Article
III, Section 3.3. The Topaz Exchange LLC Agreement defines
``Regulatory Funds'' as fees, fines or penalties derived from the
regulatory operations of the [Topaz Exchange], provided that such
term shall not include revenues derived from listing fees, market
data revenues, transaction revenues or any other aspect of the
commercial operations of the [Topaz Exchange], even if a portion of
such revenues are used to pay costs associated with the regulatory
operations of the [Topaz Exchange]. Id. This definition is
consistent with the rules of other SROs. See, e.g., MIAX LLC
Agreement Section 16; and MIAX By-Laws Article IX, Section 9.4.
---------------------------------------------------------------------------

c. Rule 17d-2 Agreements; Regulatory Contracts with FINRA and ISE
Section 19(g)(1) of the Act,\147\ among other things, requires
every SRO registered as either a national securities exchange or
national securities association to examine for, and enforce compliance
by, its members and persons associated with its members with the Act,
the rules and regulations thereunder, and the SRO's own rules, unless
the SRO is relieved of this responsibility pursuant to Section 17(d) or
Section 19(g)(2) of the Act.\148\ Rule 17d-2 of the Act\149\ permits
SROs to propose joint plans to allocate regulatory responsibilities
amongst themselves for their common rules with respect to their common
members.\150\ These agreements, which must be filed with and declared
effective by the Commission, generally cover areas where each SRO's
rules substantively overlap, including such regulatory functions as
personnel registration and sales practices. Without this relief, the
statutory obligation of each individual SRO could result in a pattern
of multiple examinations of broker-dealers that maintain memberships in
more than one SRO. Such regulatory duplication would add unnecessary
expenses for common members and their SROs.
---------------------------------------------------------------------------

\147\ 15 U.S.C. 78s(g)(1).
\148\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
\149\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder,
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the
Act allows the Commission to relieve an SRO of certain
responsibilities with respect to members of the SRO who are also
members of another SRO. Specifically, Section 17(d)(1) allows the
Commission to relieve an SRO of its responsibilities to: (i) Receive
regulatory reports from such members; (ii) examine such members for
compliance with the Act and the rules and regulations thereunder,
and the rules of the SRO; or (iii) carry out other specified
regulatory responsibilities with respect to such members.
\150\ 17 CFR 240.17d-2. Section 19(g)(1) of the Act requires
every SRO to examine its members and persons associated with its
members and to enforce compliance with the federal securities laws
and the SRO's own rules, unless the SRO is relieved of this
responsibility pursuant to Section 17(d) of the Act. Section 17(d)
was intended, in part, to eliminate unnecessary multiple
examinations and regulatory duplication with respect to Common
Members. See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting
Release'').
---------------------------------------------------------------------------

A 17d-2 plan that is declared effective by the Commission relieves
the specified SRO of those regulatory responsibilities allocated by the
plan to another SRO.\151\ Many SROs have entered into Rule 17d-2
agreements.\152\
---------------------------------------------------------------------------

\151\ See id.
\152\ See, e.g., Securities Exchange Act Release Nos. 59218
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575)
(Financial Industry Regulatory Authority, Inc. (``FINRA'')/Boston
Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 63752
(October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, Inc.);
55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-536)
(National Association of Securities Dealers, Inc. (``NASD'') (n/k/a
FINRA) and Chicago Board of Options Exchange, Inc. (``CBOE'')
concerning the CBOE Stock Exchange, LLC); 55367 (February 27, 2007),
72 FR 9983 (March 6, 2007) (File No. 4-529) (NASD/ISE) (``ISE
Bilateral 17d-2 Plan''); and 54136 (July 12, 2006), 71 FR 40759
(July 18, 2006) (File No. 4-517) (NASD/The Nasdaq Stock Market LLC).
---------------------------------------------------------------------------

Topaz Exchange has represented to the Commission that it will enter
into the following allocation of regulatory responsibilities pursuant
to Rule 17d-2 of the Act (``17d-2 Plans''),\153\ including the two
existing multiparty plans applicable to options trading:
---------------------------------------------------------------------------

\153\ Rule 17d-2 under the Act permits SROs to propose joint
plans for the allocation of regulatory responsibilities with respect
to their common members (i.e., 17d-2 plans).
---------------------------------------------------------------------------

Multiparty 17d-2 Plan for the Allocation of Regulatory
Responsibility for Options Sales Practice Matters;\154\
---------------------------------------------------------------------------

\154\ See Exhibit L to Topaz Exchange Form 1 Application. See
also Securities Exchange Act Release No. 68363 (December 5, 2012),
77 FR 73711 (December 11, 2012) (File No. S7-966) (notice of filing
and order approving and declaring effective an amendment to the
multiparty 17d-2 plan concerning options-related sales practice
matters).
---------------------------------------------------------------------------

Multiparty 17d-2 Plan for the Allocation of Regulatory
Responsibility for Options Related Market Surveillance Matters;\155\
and
---------------------------------------------------------------------------

\155\ See Exhibit L to Topaz Exchange Form 1 Application. See
also Securities Exchange Act Release No. 68362 (December 5, 2012),
77 FR 73719 (December 11, 2012) (File No. 4-551) (notice of filing
and order approving and declaring effective an amendment to the
multiparty 17d-2 plan concerning options-related market
surveillance).

---------------------------------------------------------------------------

[[Page 46632]]

Bilateral 17d-2 Plan with FINRA that would cover, among
other things, general inspection, examination, and enforcement
activity.\156\
---------------------------------------------------------------------------

\156\ See Exhibit L to Topaz Exchange Form 1 Application. See
also ISE Bilateral 17d-2 Plan, supra note 152.
---------------------------------------------------------------------------

If the Commission declares effective the amendments to the
multilateral 17d-2 Plans and the new bilateral 17d-2 Plan, another SRO
(often FINRA) would assume certain regulatory responsibility for
members of Topaz Exchange that are also members of the SRO that assumes
the regulatory responsibilities. This regulatory structure would be
consistent with that of other exchanges, including ISE.\157\
---------------------------------------------------------------------------

\157\ Amendments to the multilateral 17d-2 Plans and the new
bilateral 17d-2 Plan are not before the Commission as part of this
Order and, therefore, the Commission is not acting on them at this
time.
---------------------------------------------------------------------------

In addition, Topaz Exchange has entered into a third-party
Regulatory Service Agreement (``RSA'') with FINRA.\158\ Under the RSA,
FINRA \159\ will carry out certain specified regulatory activities on
behalf of Topaz Exchange. For example, FINRA, in its capacity as
service provider to Topaz Exchange, will provide member operation
services, including membership application review, conducting market
surveillance investigation services, conducting routine and cause
examination services, assisting Topaz Exchange with disciplinary
proceedings pursuant to Topaz Exchange's rules including conducting
hearings, and providing dispute resolution services to Topaz Exchange
members on behalf of Topaz Exchange. Topaz Exchange, however, will
retain ultimate legal responsibility for the regulation of its members
and market.\160\ This regulatory structure would be consistent with
that of other exchanges.\161\
---------------------------------------------------------------------------

\158\ See, e.g., Exhibit L to Topaz Exchange Form 1 Application.
\159\ FINRA executed a single RSA with both ISE and Topaz
Exchange as signatories. The single RSA, however, has two separate
statements of work. The first statement of work describes the
specified regulatory activities that FINRA will carry out on behalf
of ISE. The second statement of work describes the specified
regulatory activities that FINRA will carry out on behalf of Topaz
Exchange.
\160\ See Amendment No. 3.
\161\ For example, ISE, EDGA, EDGX and BATS have entered into
17d-2 Plans and RSAs with FINRA.
---------------------------------------------------------------------------

Topaz Exchange has also entered into a facilities management
agreement (``FMA'') with ISE.\162\ Pursuant to the proposed FMA, ISE
intends to provide to Topaz Exchange certain services, including, for
example, business management services, facilities management services,
IT services, fiscal services, as well as Commission and other
regulatory compliance services and other legal services, such as
surveillance programs, legal programs, systems and other operational
services.\163\ Topaz Exchange, however, will retain ultimate legal
responsibility for the regulation of its members and market.
---------------------------------------------------------------------------

\162\ See, e.g., Exhibit L to Topaz Exchange Form 1 Application.
The FMA with ISE provides, in part, for the provision of Commission
and other regulatory compliance services.
\163\ See Exhibit L of Topaz Exchange Form 1 Application; see
also Amendment No. 3.
---------------------------------------------------------------------------

The Commission believes that it is consistent with the Act for
Topaz Exchange to contract with other SROs to perform certain
examination, enforcement, and disciplinary functions.\164\ These
functions are fundamental elements of a regulatory program, and
constitute core self-regulatory functions. The Commission believes that
both FINRA, as a SRO that provides contractual services to other SROs,
and ISE, as an SRO that currently operates an options exchange, should
have the capacity to perform these functions for Topaz Exchange.\165\
However, Topaz Exchange, unless relieved by the Commission of its
responsibility,\166\ bears the ultimate responsibility for self-
regulatory responsibilities and primary liability for self-regulatory
failures, not the SRO retained to perform regulatory functions on Topaz
Exchange's behalf. In performing these regulatory functions, however,
the SRO retained to perform specified regulatory functions may
nonetheless bear liability for causing or aiding and abetting the
failure of Topaz Exchange to perform its regulatory functions.\167\
Accordingly, although FINRA and ISE will not act on their own behalves
under their respective SRO responsibilities in carrying out these
regulatory services for Topaz Exchange, as the SROs retained to perform
regulatory functions, FINRA and ISE may have secondary liability if,
for example, the Commission finds that the contracted functions are
being performed so inadequately as to cause a violation of the federal
securities laws by Topaz Exchange.
---------------------------------------------------------------------------

\164\ See, e.g., Regulation ATS Release, supra note 30. See also
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that
allowed Amex to contract with another SRO for regulatory services)
(``Amex Regulatory Services Approval Order''); 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (``NOM Approval Order''); Nasdaq Order, supra note
29; and BATS Order, supra note 29.
\165\ See, e.g., Amex Regulatory Services Approval Order, supra
note 164; NOM Approval Order, supra note 164; and Nasdaq Order,
supra note 29. The Commission notes that the RSA and FMA are not
before the Commission and, therefore, the Commission is not acting
on them.
\166\ See supra note 149.
\167\ For example, if failings by the SRO retained to perform
regulatory functions have the effect of leaving an exchange in
violation of any aspect of the exchange's self-regulatory
obligations, the exchange will bear direct liability for the
violation, while the SRO retained to perform regulatory functions
may bear liability for causing or aiding and abetting the violation.
See, e.g., MIAX Order, supra note 30; BOX Order, supra note 39; and
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR
11388 (March 2, 2000) (File No. 10-127) (order granting the exchange
registration of ISE) (``ISE Order'').
---------------------------------------------------------------------------

As part of its FMA with ISE, Topaz Exchange proposes to use dual
employees to staff its regulatory services program. In other words,
current ISE employees will also serve in a similar capacity for Topaz
Exchange under the FMA. Topaz Exchange represents that the FMA will
contain an obligation on the part of Topaz Exchange and ISE to preserve
the other party's information and materials which are confidential,
proprietary and/or trade secrets and prevent unauthorized use or
disclosure to third parties.\168\
---------------------------------------------------------------------------

\168\ See Exhibit L to Topaz Exchange Form 1 Application; see
also Amendment No. 3.
---------------------------------------------------------------------------

The Commission believes that the use of ISE employees by Topaz
Exchange is appropriate, as the operations, rules, and management of
ISE and Topaz Exchange will overlap to a considerable degree such that
Topaz Exchange should benefit by leveraging the experience of current
ISE staff. The Commission has approved such arrangements in a similar
context.\169\ However, the Commission expects both ISE and Topaz
Exchange to monitor the workload of their dual employees and supplement
their staffs, if necessary, so that Topaz Exchange maintains sufficient
personnel to allow it to carry out the purposes of the Act and enforce
compliance with the rules of Topaz Exchange and the federal securities
laws.
---------------------------------------------------------------------------

\169\ See, e.g., Securities Exchange Act Release No. 61152
(December 10, 2009), 74 FR 66699 (December 16, 2009) (File No. 10-
191) (order granting registration to C2 Options Exchange) (``C2
Order'').
---------------------------------------------------------------------------

D. Trading System

1. Access to Topaz Exchange
Access to Topaz Exchange will be through the use of Exchange
Rights.\170\ Through an application process, organizations will be
approved to become members of Topaz Exchange

[[Page 46633]]

and to exercise trading rights.\171\ Exchange Rights will not convey
any ownership rights, but will provide for voting rights for
representation on the Topaz Exchange Board and will confer the ability
to transact on Topaz Exchange.\172\ Exchange Rights may not be leased
and are not transferable except in the event of a change in control of
a member or corporate reorganization involving a member.\173\ There is
no limit on the number of Exchange Rights issued by Topaz
Exchange.\174\
---------------------------------------------------------------------------

\170\ See Topaz Exchange Rule 300 Series. ``Exchange Rights''
means the PMM Rights, CMM Rights and EAM Rights collectively. See
Topaz Exchange Rule 100(a)(17). PMM Rights, CMM Rights and EAM
Rights have the meaning set forth in Article VI of Topaz Exchange
LLC Agreement. See Topaz Exchange Rules 100(a)(12), 100(a)(15) and
100(a)(36).
\171\ The term ``Member'' means an organization that has been
approved to exercise trading rights associated with Exchange Rights,
and the term ``Membership'' refers to the trading privileges
associated with Exchange Rights. See Topaz Exchange Rules 100(a)(23)
and 100(a)(24). Under Topaz Exchange Rules 300 and 302(c), Topaz
Exchange shall issue Memberships that confer the ability to transact
on Topaz Exchange, although no rights shall be conferred upon a
Member except those set forth in the Topaz Exchange LLC Agreement or
Topaz Exchange Rules as amended from time to time. A Membership
shall not convey any ownership interest in the Exchange. See Topaz
Exchange Rules 300 and 302(c).
\172\ See Topaz Exchange Rules 300 and 302(c); see also Topaz
Exchange LLC Agreement, Article VI, Sections 6.1 and 6.3.
\173\ See Topaz Exchange Rule 302(c). In such case, member
status may be transferred to a qualified affiliate or successor upon
written notice to Topaz Exchange. Id.
\174\ See Topaz Exchange Rule 300(a); see also Topaz Exchange
LLC Agreement, Article VI, Section 6.1.
---------------------------------------------------------------------------

Membership in Topaz Exchange will be open to any broker-dealer
registered under Section 15(b) of the Act that meets the standards for
membership set forth in the rules of Topaz Exchange.\175\ The
Exchange's denials from, and impositions of conditions upon, becoming
or continuing to be a member may be appealed pursuant to rules
governing hearing and review, described in Section II.E below.\176\ In
addition to its regular membership application process, Topaz Exchange
also will provide a process whereby a current member of ISE in good
standing that is a registered broker-dealer can submit an abbreviated
``waive-in'' application to Topaz Exchange.\177\ This waive-in process
is similar to arrangements in place at other exchanges.\178\
---------------------------------------------------------------------------

\175\ See Topaz Exchange Rule 301.
\176\ See Topaz Exchange Rule 1700 Series, which incorporates by
reference ISE Rule 1700 Series.
\177\ See Topaz Exchange Rule 302(a).
\178\ See, e.g., C2 Options Exchange, Inc. Rule 3.1(c)(1)
(containing a similar expedited waive-in membership process for
members of CBOE).
---------------------------------------------------------------------------

Topaz Exchange will have three classes of membership: (1) PMMs; (2)
CMMs; and (3) EAMs.\179\ PMM and CMMs may seek appointment to become
market makers in one or more options classes traded on the
exchange.\180\ Topaz Exchange proposes to allow firms that register as
market makers to receive special privileges or rights over non-market
maker members, such as participation entitlements for PMMs, if they
satisfy certain affirmative and negative market making obligations on
the exchange.\181\ This is similar to arrangements in place at other
exchanges, such as ISE.\182\
---------------------------------------------------------------------------

\179\ See Topaz Exchange Rule 301(c).
\180\ See Topaz Exchange Rule 800 Series.
\181\ See Topaz Exchange Rules 713, 802 and 803. See infra
Section II.D.3.b. for further discussion of market maker privileges
and obligations.
\182\ See, e.g., ISE Rules 713, 802 and 803 (containing similar
rights and obligations for market makers on ISE). However, some of
Topaz Exchange's proposed access rules differ in some respects from
the rules of ISE. For example, as a result of their differing
membership structures, there is no limit on the number of PMMs that
Topaz Exchange can approve for membership, whereas ISE can appoint
only ten PMMs in total. There will still be only one PMM per options
class on Topaz Exchange. There also will be no limit to the number
of CMMs on Topaz Exchange, whereas ISE can appoint only 160 CMMs in
total. EAM rights, however, will be unlimited on both ISE and Topaz
Exchange. Topaz Exchange's approach is consistent with the rules of
other exchanges that have no limit on the number of exchange rights,
or their functional equivalent, that may be issued by the exchange.
See, e.g., C2 Order, supra note 169.
---------------------------------------------------------------------------

The Commission finds that Topaz Exchange's proposed membership
rules are consistent with the Act, including Section 6(b)(2) of the
Act,\183\ which requires the rules of an exchange to provide that any
registered broker or dealer or natural person associated with a broker
or dealer may become a member of such exchange or associated with a
member thereof. Topaz Exchange's proposed rules with respect to
exchange membership are substantively similar to the rules of other
exchanges.\184\
---------------------------------------------------------------------------

\183\ 15 U.S.C. 78f(b)(2).
\184\ See, e.g., MIAX Rule 200 Series (``Access'').
---------------------------------------------------------------------------

The Commission notes that pursuant to Section 6(c) of the Act,\185\
an exchange must deny membership to any person, other than a natural
person, that is not a registered broker or dealer, any natural person
that is not, or is not associated with, a registered broker or dealer,
and registered broker-dealers that do not satisfy certain standards,
such as financial responsibility or operational capacity. As a
registered exchange, Topaz Exchange must independently determine if an
applicant satisfies the standards set forth in the Act, regardless of
whether an applicant is a member of another SRO.\186\
---------------------------------------------------------------------------

\185\ 15 U.S.C. 78f(c).
\186\ See, e.g., MIAX Order, supra note 30, at 77 FR 73074; BOX
Order, supra note 39, at 77 FR 26337; BATS Order, supra note 29, at
73 FR 49502; and Nasdaq Order, supra note 29, at 71 FR 3555.
---------------------------------------------------------------------------

In addition, Topaz Exchange also will allow non-members to access
Topaz Exchange as ``sponsored customers'' of a Topaz Exchange member,
subject to certain rules.\187\ The sponsoring member will be
responsible for implementing policies and procedures to supervise and
monitor the trading of its sponsored users to ensure compliance with
all applicable federal securities laws and rules and Topaz Exchange
rules.\188\ Topaz Exchange's proposed sponsored access rules are
similar to the rules of other exchanges that provide for sponsored
access\189\ and are consistent with Rule 15c3-5 under the Act.\190\
---------------------------------------------------------------------------

\187\ See Topaz Exchange Rule 706, Supplementary Material .01.
\188\ See Topaz Exchange Rule 706. See also 17 CFR 240.15c3-5.
\189\ See, e.g., ISE Rule 706; see also MIAX Rule 210.
\190\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

2. Linkage
Topaz Exchange intends to become a participant in the Plan Relating
to Options Order Protection and Locked/Crossed Markets or any successor
plan (``Linkage Plan'').\191\ If admitted as a participant to the
Linkage Plan, other plan participants will be able to send orders to
Topaz Exchange in accordance with the terms of the plan as applied to
Topaz Exchange.
---------------------------------------------------------------------------

\191\ See Exhibit E to Topaz Exchange Form 1 Application,
Section B (``Non-Member Access'') for a discussion of the Linkage
Plan. See also Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (order
approving the National Market System Plan Relating to Options Order
Protection and Locked/Crossed Markets Submitted by the Chicago Board
Options Exchange, Incorporated, International Securities Exchange,
LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.).
---------------------------------------------------------------------------

Topaz Exchange rules include relevant definitions; establish the
conditions pursuant to which members may enter orders in accordance
with the Linkage Plan; impose obligations on Topaz Exchange regarding
how it must process incoming orders; establish a general standard that
members and Topaz Exchange should avoid trade-throughs; establish
potential regulatory liability for members that engage in a pattern or
practice of trading through other exchanges; and establish obligations
with respect to locked and crossed markets.
The Commission believes that Topaz Exchange has proposed rules that
are designed to comply with the requirements of the Linkage Plan.\192\
Further, as provided below, before Topaz Exchange can commence
operations as an exchange, it must

[[Page 46634]]

become a participant in the Linkage Plan.
---------------------------------------------------------------------------

\192\ See, e.g., Topaz Exchange Rules relating to Intermarket
Linkage in Rule 1900 Series, which incorporates by reference ISE
Rule 1900 Series. See also Amendment No. 3.
---------------------------------------------------------------------------

3. Market Makers
a. Registration of Market Makers
Members of Topaz Exchange may apply to become one of two types of
market maker: PMMs or CMMs (collectively, ``Market Makers''). Market
Makers are entitled to receive certain benefits and privileges in
exchange for fulfilling certain affirmative and negative market-making
obligations.\193\ Each class of Market Maker will receive a specific
level of benefits and privileges in exchange for a specific level of
obligation that such Market Maker assumes to the Topaz Exchange market.
---------------------------------------------------------------------------

\193\ Market Makers' benefits and obligations are discussed in
greater detail in the following section.
---------------------------------------------------------------------------

To begin the process of registering as a PMM or CMM, a member will
be required to file a written application with Topaz Exchange.\194\ In
reviewing a member's application for membership, Topaz Exchange will
consider, among other things, the applicant's market making
ability.\195\ To qualify for registration as a Market Maker, a member
of Topaz Exchange must meet the requirements established in Rule 15c3-1
under the Act \196\ and the general requirements set forth in Topaz
Exchange Rule 800 series, including the minimum financial requirements
of Topaz Exchange Rule 809.\197\ All members who are approved to become
Market Makers will be designated as specialists on Topaz Exchange for
all purposes under the Act and rules thereunder.\198\ Topaz Exchange
will not limit the number of qualifying entities that may become Market
Makers.\199\
---------------------------------------------------------------------------

\194\ See Topaz Exchange Rule 800(b).
\195\ See id. The provision permitting Topaz Exchange to
consider ``such other factors as [it] deems appropriate'' must be
applied in a manner that is consistent with the Act, including
provisions that prohibit an exchange from acting in an unfairly
discriminatory manner. See 15 U.S.C. 78f(b)(5); see also MIAX Order,
supra note 30, at 77 FR 73074 n.149.
\196\ 17 CFR 240.15c3-1.
\197\ See Topaz Exchange Rule 800 Series. See also Topaz
Exchange Rule 1300 Series relating to Net Capital Requirements,
which incorporates by reference ISE Rule 1300 Series.
\198\ See Topaz Exchange Rule 800(a).
\199\ See Topaz Exchange Rule 300. See also Exhibit E to Topaz
Exchange Form 1 Application, Section A (``Introduction'').
---------------------------------------------------------------------------

In addition, all ISE market makers in good standing will be
eligible for an Exchange Right in the same membership category in which
they operate on ISE to trade on Topaz Exchange.\200\ For example, a CMM
in good standing on ISE will be eligible to become a CMM on Topaz
Exchange, through the submission and approval of a Topaz Exchange
Waive-In Membership Application.\201\
---------------------------------------------------------------------------

\200\ See Topaz Exchange Rule 302(a).
\201\ See id. See also Exhibit F to Topaz Exchange Form 1
Application.
---------------------------------------------------------------------------

Once approved, a Market Maker may seek appointment to make markets
in one or more options classes traded on the Topaz Exchange.\202\ Topaz
Exchange will provide non-ISE Members with at least sixty days advance
written notice of the date upon which the Exchange will allocate
options classes and appoint market makers in order to ensure that non-
ISE Members have a reasonable opportunity to participate in those
processes.\203\ A market participant must have completed a membership
application to be eligible to participate in the appointment and
allocation processes.\204\
---------------------------------------------------------------------------

\202\ See Topaz Exchange Rule 802(a).
\203\ See Topaz Exchange Rule 302(b).
\204\ See Exhibit E to Topaz Exchange Form 1 Application,
Section A (``Introduction'').
---------------------------------------------------------------------------

Either the Topaz Exchange Board or a committee thereof \205\ will
appoint classes of options contracts traded on Topaz Exchange to Market
Makers taking into consideration: (1) The financial resources available
to the Market Maker; (2) the Market Maker's experience and expertise in
market making or options trading; and (3) the maintenance and
enhancement of competition among Market Makers in each option class to
which they are appointed.\206\ No appointment of a Market Maker will be
without the Market Maker's consent to such appointment, provided that
refusal to accept an appointment may be deemed sufficient cause for
termination or suspension of a market maker's registration.\207\ Topaz
Exchange will appoint a PMM to each options class traded on Topaz
Exchange.\208\ Once appointed, Topaz Exchange will surveil a Market
Maker's activity for continued compliance with all applicable rules and
requirements, which are discussed in more detail below.\209\
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\205\ See Topaz Exchange Rule 802(a). Topaz Exchange Rule 1700
Series provides the process for hearings, review, and arbitration of
claims by persons economically aggrieved by Topaz Exchange action,
which would include denial of registration as a Market Maker.
\206\ See id.
\207\ See id.
\208\ See Topaz Exchange Rule 802(b).
\209\ See Topaz Exchange Rule 802(e).
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The Commission finds that Topaz Exchange's proposed rules for the
registration and appointment of Market Makers are consistent with the
Act. In particular, Topaz Exchange's rules provide an objective process
by which a member could become a Market Maker on Topaz Exchange and
provide for oversight by Topaz Exchange to monitor for continued
compliance by Market Makers with the terms of their application for
such status. The Commission notes that Topaz Exchange's proposed Market
Maker registration and appointment requirements are similar to those of
other options exchanges.\210\
---------------------------------------------------------------------------

\210\ See, e.g., ISE Rules 800 and 801 and MIAX Rule 600
(registration); ISE Rule 802 and MIAX Rule 602 (appointment).
---------------------------------------------------------------------------

b. Market Maker Obligations
Pursuant to Topaz Exchange rules, Market Makers will be subject to
a number of general obligations. In particular, the transactions of a
Market Maker should constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market and a Marker Maker should not make bids or offers or enter into
transactions that are inconsistent with such a course of dealings.\211\
A Market Maker has a continuous obligation to engage, to a reasonable
degree under the existing circumstances, in dealings for his own
account when there exists, or it is reasonably anticipated that there
will exist, a lack of price continuity, a temporary disparity between
the supply of and demand for a particular options contract, or a
temporary distortion of the price relationships between options
contracts of the same class.\212\ For all series of option classes
which the Market Maker is appointed, the Market Maker is expected to:
(1) Compete with other Market Makers to improve the market; (2) make
markets that, absent changed market conditions, will be honored for the
number of contracts entered into the Topaz Exchange's system; (3)
update market quotations in response to changed market conditions; (4)
price options contracts fairly by, among other things, bidding and
offering so as to create the prescribed bid/ask differentials.\213\
These provisions are similar to arrangements in place at other options
exchanges.\214\
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\211\ See Topaz Exchange Rule 803(a).
\212\ See Topaz Exchange Rule 803(b).
\213\ See Topaz Exchange Rule 803(b)(1)-(4). Specifically under
Topaz Exchange Rule 803(b)(4), following the opening rotation,
Market Makers must create differences of no more than $5 between the
bid and offer. Prior to the opening rotation, spread differentials
shall be no more than $.25 between the bid and offer for each
options contract for which the bid is less than $2, no more than
$.40 where the bid is at least $2 but does not exceed $5, no more
than $.50 where the bid is more than $5 but does not exceed $10, no
more than $.80 where the bid is more than $10 but does not exceed
$20, and no more than $1 where the bid is $20 or greater, provided
that the Topaz Exchange may establish differences other than the
above for one or more options series.
\214\ See, e.g., ISE Rules 802 and 803 (containing similar
rights and obligations for market makers on ISE). However, some of
Topaz Exchange's access rules differ in some respect from the rules
of ISE. See also supra note 182.

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[[Page 46635]]

Further, Market Makers must maintain minimum net capital in
accordance with Topaz Exchange rules, including the minimum financial
requirement of Topaz Exchange Rule 809, in addition to the Act and
rules and regulations thereunder.\215\ Market Makers also must maintain
information barriers between their market making activity and Other
Business Activities \216\ that are reasonably designed to prevent the
misuse of material, non-public corporate or market information in the
possession of persons on one side of the barrier from influencing the
conduct of persons on the other side of the barrier.\217\
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\215\ See Topaz Exchange Rule 1300 Series, which incorporates by
reference ISE Rule 1300 Series; see also Topaz Exchange Rule 809.
\216\ ``Other Business Activities'' means: (1) Conducting an
investment or banking or public securities business; (2) making
markets in the stocks underlying the options in which it makes
markets; or (3) handling listed options orders as agent on behalf of
Public Customers or broker-dealers; (4) conducting non-market making
proprietary listed options trading activities. See Topaz Exchange
Rule 810(a).
\217\ See Topaz Exchange Rule 810.
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Topaz Exchange's rules governing Market Maker quoting obligations
are tailored to the specific class of Market Maker (that is, PMM or
CMM).\218\ Specifically, a PMM will be subject to the highest standard
applicable on Topaz Exchange, as a PMM must enter continuous two-sided
quotations and enter into any resulting transactions in all of the
series listed on the Topaz Exchange of the options classes to which it
is appointed on a daily basis.\219\ PMMs are also required to
participate in the opening rotation.\220\ Although a CMM is not
required to enter quotations in the options classes to which it is
appointed, whenever a CMM does enter a quote in an options class to
which it is appointed, the CMM must then provide continuous quotations
in that class for 60% of the time the options class is open for trading
on the Topaz Exchange.\221\ Further, CMMs may be called upon by a Topaz
Exchange official to submit a single quote or maintain continuous
quotes in one or more series of options class to which the CMM is
appointed whenever, in the judgment of such official, it is necessary
to do so in the interest of fair and orderly markets.\222\ For purposes
of meeting the continuous quoting obligations discussed herein, a
Market Maker's quote must meet the bid/ask differential requirements of
Topaz Exchange Rule 803(b)(4).\223\
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\218\ See Topaz Exchange Rule 804.
\219\ See Topaz Exchange Rule 804(e)(1); see also Topaz Exchange
Rule 804(c). A PMM shall be deemed to have provided continuous
quotes pursuant to paragraph (e)(1) of Rule 804 if it provides two-
sided quotes for 90% of the time that an options class is open for
trading on the Topaz Exchange. See Topaz Exchange Rule 804,
Supplementary Material .01; see also Amendment No. 3.
\220\ See Topaz Exchange Rule 701(b)(1). See also Amendment No.
3.
\221\ See Topaz Exchange Rule 804(e)(2). A CMM must maintain
continuous quotations for at least 90% of the time the options class
for which it receives Preferenced Orders is open for trading on the
Topaz Exchange. See Topaz Exchange Rule 804(e)(2)(iii); see also
Topaz Exchange Rule 713, Supplementary Material .03 regarding
Preferenced Orders.
\222\ See Topaz Exchange Rule 804(e)(2)(iv).
\223\ See Topaz Exchange Rule 804(e)(1)-(2). See also supra note
213.
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In options classes other than to which it is appointed, a Market
Maker should not engage in transactions in an account in which it has
an interest that are disproportionate in relation to, or in derogation
of, the performance of its market making obligations as specified in
the Topaz Exchange rules.\224\ Further, the total number of contracts
executed during a quarter by a CMM in options classes to which it is
not appointed may not exceed 25% of the total number of contracts
traded by such CMMs in classes to which it is appointed and with
respect to which it was quoting pursuant to Topaz Exchange Rule
804(e)(2).\225\ Similarly, the total number of contracts executed
during a quarter by a PMM in options classes to which it is not
appointed may not exceed 10% of the total number of contracts traded
per each PMM membership.\226\
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\224\ See Topaz Exchange Rule 803(d). Among other things, a
Market Maker should not effect purchases or sales on the Topaz
Exchange except in a reasonable and orderly manner. See id.
\225\ See Topaz Exchange Rule 805(b)(2).
\226\ See Topaz Exchange Rule 805(b)(3).
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If Topaz Exchange finds any failure by a Market Maker to properly
perform as a market maker, such Market Maker may be subject to
suspension or termination.\227\ Topaz Exchange may suspend or terminate
any appointment of a Market Maker under Topaz Exchange Rule 802 and may
make additional appointments whenever, in Topaz Exchange's judgment,
the interests of a fair and orderly market are best served by such
action.\228\
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\227\ See Topaz Exchange Rule 800.
\228\ See Topaz Exchange Rule 802(d).
---------------------------------------------------------------------------

Market Makers receive certain benefits for carrying out their
responsibilities.\229\ For example, a broker-dealer or other lender may
extend ``good faith'' credit to a member of a national securities
exchange or registered broker-dealer to finance its activities as a
market maker or specialist.\230\ PMMs are also entitled to certain
participation entitlements.\231\ In addition, market makers are
excepted from the prohibition in Section 11(a) of the Act.\232\
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\229\ See, e.g., MIAX Order, supra note 30 (discussing the
benefits and obligations of market makers).
\230\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR
240.15c3-1(a)(6) (capital requirements for market makers).
\231\ See Topaz Exchange Rule 713, Supplementary Material
.01(b)-(c). See also infra notes 261-268 and accompanying text
(describing the PMM participation entitlements).
\232\ 15 U.S.C. 78k(a).
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The Commission believes that a market maker must be subject to
sufficient and commensurate affirmative obligations, including the
obligation to hold itself out as willing to buy and sell options for
its own account on a regular or continuous basis, to justify favorable
treatment.\233\ The Commission further believes that the rules of all
U.S. options markets need not provide the same standards for market
maker participation, so long as they impose affirmative obligations
that are consistent with the Act.\234\
---------------------------------------------------------------------------

\233\ See MIAX Order, supra note 30, at 77 FR 73076; and BOX
Order supra note 39; see also, e.g., C2 Order, supra note 169.
\234\ See id.
---------------------------------------------------------------------------

The Commission believes that Topaz Exchange's Market Maker
participation requirements impose appropriate affirmative obligations
on Topaz Exchange's Market Makers that are commensurate with the
benefits afforded to such participants, as discussed above, and,
accordingly, are consistent with the Act. The Commission believes that
the specific levels of benefits conferred on the different classes of
Market Makers (PMMs and CMMs) are appropriately balanced by the
obligations imposed by Topaz Exchange's rules. The Commission further
believes that Topaz Exchange's market maker requirements,\235\ which
are identical to ISE's rules\236\ and similar to other options
exchanges' rules,\237\ impose sufficient appropriate obligations that
are consistent with the Act.
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\235\ See Topaz Exchange Rule 803.
\236\ See, e.g., ISE Rule 800 Series.
\237\ See, e.g., MIAX Order, supra note 30, and BOX Order, supra
note 39.
---------------------------------------------------------------------------

Finally, the Commission believes that the Act does not mandate a
particular market model for exchanges, and while Market Makers may
become an important source of liquidity on Topaz Exchange, they will
likely not be the only source as Topaz Exchange is designed to match
buying and selling interest of all Topaz Exchange participants.

[[Page 46636]]

4. Order Display, Execution, and Priority
Topaz Exchange proposes to operate a fully automated electronic
options trading platform to buy or sell securities with a continuous,
automated matching function.\238\ Liquidity will be derived from Topaz
Exchange members acting as principal or as agent electronically
submitting quotes as well as market and various types of limit orders
to buy or to sell.\239\ Non-members also may access Topaz Exchange
pursuant to Topaz Exchange rules governing ``sponsored access.'' \240\
All of these electronic submissions to Topaz Exchange will be from
remote locations, as there will be no trading floor.\241\ Topaz
Exchange's Optimise system generally will automatically execute
incoming orders.\242\ Non-opening trades will occur when a buy order/
quote and a sell order/quote match on the Topaz Exchange's order
book.\243\ All options will be traded in decimals on Topaz Exchange and
will be consistent with the Penny Pilot.\244\
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\238\ See Exhibit E to Topaz Exchange Form 1 Application.
\239\ See id.
\240\ See id.
\241\ See id.
\242\ See Topaz Exchange Rule 714.
\243\ See Exhibit E to Topaz Exchange Form 1 Application.
\244\ See Topaz Exchange Rule 710 and Supplementary Material
.01. The Commission has approved exchange rules on a pilot basis
that permit an exchange to quote series with premiums under $3 in
pennies and series with premiums of $3 and over in nickels in
approximately 360 options classes (``Penny Pilot''). In addition,
these rules allow all series in QQQQs, IWM, and SPY to be quoted in
pennies. See, e.g., Securities Exchange Act Release Nos. 60711
(September 23, 2009), 74 FR 49419 (September 28, 2009); 61061
(November 24, 2009), 74 FR 62857 (December 1, 2009) (File No. SR-
NYSEArca-2009-44) (approving Penny Pilot program expansions for NYSE
Arca). Proposed Supplementary Material .01 to Rule 710 would permit
Topaz Exchange to operate a pilot to permit certain options classes
to be quoted and traded in increments as low as $0.01, consistent
with these previously approved rules. Specifically, this pilot is
consistent with the penny pilot on ISE, which was last extended on
June 21, 2013 and is scheduled to expire on December 31, 2013. See
Securities Exchange Act Release No. 69828 (June 21, 2013), 78 FR
38745 (June 27, 2013) (File No. SR-ISE-2013-40). Similar to ISE,
Topaz Exchange has further agreed to submit to the Commission such
reports regarding the Penny Pilot as the Commission may request. See
Exhibit B to Topaz Exchange Form 1 Application.
---------------------------------------------------------------------------

All orders submitted to Topaz Exchange's trading platform must have
a designated price and size (limit orders) \245\ or must be orders to
buy or sell a stated amount of a security at the national best bid or
offer when the order reaches Topaz Exchange (market orders).\246\
Members may submit the following orders to Topaz Exchange: Market
Orders; Limit Orders (including Marketable Limit, Fill-or-Kill,
Immediate or Cancel, Non-Displayed Penny Order, Intermarket Sweep, and
Stopped Orders); \247\ or Contingency Orders (including All-Or-None,
Stop, Stop Limit, Customer Participation, Reserve, Attributable,
Customer Cross, Qualified Contingent Cross, Minimum Quantity,\248\ Do-
Not-Route, Add Liquidity, Opening Only, and Good-Till-Date
Orders).\249\ Like ISE, Topaz Exchange also will permit flash
mechanisms, which thereby permit certain orders to first be exposed at
the NBBO to all Topaz Exchange members for execution at the National
Best Bid or Offer (``NBBO'') before an unaffiliated broker will, under
contract with Topaz Exchange, route the order to another market for
execution.\250\
---------------------------------------------------------------------------

\245\ A limit order is an order to buy or sell a stated number
of options contracts at a specified price or better. Topaz Exchange
Rule 715(b).
\246\ A market order is an order to buy or sell a stated number
of options contracts that is to be executed at the best price
obtainable when the order reaches Topaz Exchange. Topaz Exchange
Rule 715(a).
\247\ See Topaz Exchange Rule 715. A Marketable Limit Order is a
limit order to buy (sell) at or above (below) the best offer (bid)
on the Topaz Exchange. A Fill-or-Kill Order is a limit order that is
to be executed in its entirety as soon as it is received and, if not
so executed, treated as cancelled. An Immediate-or-Cancel Order is a
limit order that is to be executed in whole or in part upon receipt
and any portion not so executed is to be treated as cancelled. A
Non-Displayed Penny Order is a limit order that specifies a one-cent
price increment in a security that has a minimum trading increment
pursuant to Topaz Exchange Rule 710 that is larger than one-cent. An
Intermarket Sweep Order is a limit order that meets the requirements
of Topaz Exchange Rule 1900(h), which incorporates by reference ISE
Rule 1900(h). A Stopped Order is a limit order that meets the
requirements of Topaz Exchange Rule 1901(b)(8), which incorporates
by reference ISE Rule 1901(b)(8). To execute Stopped Orders, members
must enter them into the Facilitation Mechanism or Solicited Order
Mechanism pursuant to Topaz Exchange Rule 716.
\248\ The NASDAQ Letter noted that both Topaz Exchange Rules
715(l) and 715(q) appear to describe Minimum Quantity Orders and
urged that Topaz Exchange clarify the difference between these two
types of Minimum Quantity Orders. See NASDAQ Letter, supra note 6.
Topaz Exchange stated that it will correct the duplicative
definition. See Topaz Exchange Response Letter, supra note 7, and
Amendment No. 3. The Commission believes that Topaz Exchange's
revision to Topaz Exchange Rule 715(l) appropriately addresses the
commenter's concern.
\249\ See Topaz Exchange Rule 715. An All-or-None Order is a
limit or market order that is to be executed in its entirety or not
at all. A Stop Order is an order that becomes a market order when
the stop price is elected. A Stop Limit Order is an order that
becomes a limit order when the stop price is elected. A Customer
Participation Order is a limit order on behalf of a Public Customer
(as defined in Topaz Exchange Rule 100(a)(38)) that, in addition to
the limit order price in standard increments according to Topaz
Exchange Rule 710, includes a price stated in one-cent increments at
which the Public Customer wishes to participate in trades executed
in the same options series in penny increments through the Price
Improvement Mechanism pursuant to Topaz Exchange Rule 723. A Reserve
Order is a limit order that contains both a displayed portion and a
non-displayed portion. An Attributable Order is a market or limit
order which displays the user firm ID for purposes of electronic
trading on Topaz Exchange. A Customer Cross Order is comprised of a
Priority Customer Order (as defined in Topaz Exchange Rule
100(a)(37B) to buy and a Priority Customer Order to sell at the same
price and for the same quantity. A Qualified Contingent Cross order
is comprised of an order to buy or sell at least 1000 contracts that
is identified as being part of a qualified contingent trade (as
defined in Topaz Exchange Rule 715, Supplementary Material .02)
coupled with a contra-side order to buy or sell an equal number of
contracts. A Minimum Quantity Order is an order that is initially
available for partial execution only for a specified number of
contracts or greater. A Do-Not-Route Order is a market or limit
order that is to be executed in whole or in part on Topaz Exchange
only. An Add Liquidity Order is a limit order that is to be executed
in whole or in part on Topaz Exchange (i) only after being displayed
on Topaz Exchange's limit order book; and (ii) without routing any
portion of the order to another market center. An Opening Only Order
is a limit order that can be entered for the opening rotation only.
A Good-Till-Date Order is a limit order to buy or sell which, if not
executed, will be cancelled at the sooner of the end of the
expiration date assigned to the order, or the expiration of the
series. These order types are the same order types that are
available on ISE, except that ISE also includes several complex
order types that are not proposed for Topaz Exchange. See Topaz
Exchange Rule 715; ISE Rules 715 and 722; see also Exhibit B to
Topaz Exchange Form 1 Application.
\250\ See Topaz Exchange Rule 1901, Supplementary Material .02
(which incorporates by reference ISE Rule 1901, Supplementary
Material .02). See also Amendment No. 3 (removing exposure and
routing obligation from PMMs under Topaz Exchange Rule 800 Series).
---------------------------------------------------------------------------

Quotes entered by PMMs and CMMs must, like Limit Orders, be priced
and have a designated size.\251\ Orders will be accepted for any
security traded on Topaz Exchange, whether submitted by a member on a
proprietary or agency basis in any size,\252\ whereas quotes for any
security traded on Topaz Exchange may only be submitted by PMMs and
CMMs and only in the options classes to which the market makers are
appointed.\253\ Topaz Exchange will be required to maintain a full
audit trail of every incoming and outgoing message (including all
orders and quotes) submitted to the Topaz Exchange's system.\254\
Members may receive status reports regarding orders submitted to Topaz
Exchange or change or cancel an

[[Page 46637]]

order at any time before that order is executed on Topaz Exchange,
except as otherwise specified in Topaz Exchange Rule 723 (Price
Improvement Mechanism for Crossing Transactions).\255\
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\251\ See Topaz Exchange Rule 804(b). The NASDAQ Letter noted
that proposed Topaz Exchange Rule 804(g) and Supplementary Material
.01 appear to be identical and urged that Topaz Exchange clarify
this provision. See NASDAQ Letter, supra note 6. Topaz Exchange
stated that it will correct the duplicative provision. See Topaz
Exchange Response Letter, supra note 7, and Amendment No. 3. The
Commission believes that Topaz Exchange's revision to Topaz Exchange
Rule 804, Supplementary Material .01 appropriately addresses the
commenter's concern.
\252\ See Topaz Exchange Rule 713(a).
\253\ See Topaz Exchange Rule 804(a).
\254\ See 17 CFR 240.17a-5. See also Exhibit E to Topaz Exchange
Form 1 Application, Section C.
\255\ See Exhibit E to Topaz Exchange Form 1 Application,
Section C.
---------------------------------------------------------------------------

All orders and quotes submitted to Topaz Exchange will be displayed
unless designated otherwise by the member submitting the order.\256\
Displayed orders and quotes will be displayed on an anonymous basis
(except for Attributable Orders,\257\ which will allow voluntary
disclosure of firm identification information) at a member's specified
price. Non-Displayed Orders (the non-displayed portion of a Reserve
Order or a Non-Displayed Penny Order) will not be displayed to anyone
and will not have time priority over displayed orders at the same
price.\258\
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\256\ See Topaz Exchange Rule 704.
\257\ An Attributable Order is a market or limit order which
displays the user firm's ID for purposes of trading on the Topaz
Exchange. Use of Attributable Orders would be voluntary. This order
type is consistent with similar order types on other exchanges. See,
e.g., CBOE Rule 6.53(o) (attributable order type).
\258\ See Topaz Exchange Rules 715(b)(4) and 715(g).
---------------------------------------------------------------------------

Topaz Exchange will utilize a pro-rata priority scheme with a
Priority Customer preference.\259\ This scheme is the same as what the
Commission has approved for ISE.\260\
---------------------------------------------------------------------------

\259\ See Topaz Exchange Rule 713, Supplementary Material 01.
Under this priority methodology, the highest bid and lowest offer
will have priority except that Priority Customer Orders will have
priority over professional interest and all market maker interest at
the same price. Subject to certain limits, Professional Orders and
market maker quotes at the best price receive allocations based upon
the percentage of the total number of contracts available at the
best price that is represented by the size of the Professional Order
or quote. If there were two or more Priority Customer Orders for the
same options series at the same price, priority will be afforded
based on the sequence in which such orders were received. Topaz
Exchange rules will define ``Priority Customer'' as a person or
entity that is not a broker or dealer in securities, and does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial accounts.
``Professional Orders,'' i.e., orders for the account of a person or
entity that is not a Priority Customer, will be subordinate to
Priority Customer Orders for priority and fee purposes. Professional
Orders will include orders of broker-dealers and orders of those
Public Customers that are not Priority Customers. See Topaz Exchange
Rules 100(a)(37A)-(37C) for definitions of Priority Customer,
Priority Customer Order and Professional Order, respectively.
\260\ See, e.g., ISE Rule 713, Priority of Quotes and Orders.
---------------------------------------------------------------------------

In addition, under Topaz Exchange rules, PMMs are granted certain
participation entitlements. For example, PMMs will be entitled to a
participation entitlement with respect to each incoming order if they
have a quote at the NBBO.\261\ The PMM participation entitlement will
apply only to any remaining balance after any Priority Customer \262\
orders have first been satisfied.\263\ The PMM will not be allocated a
total quantity greater than the quantity it is quoting at the execution
price, and it will not receive any further allocation of an order if it
receives a participation entitlement.\264\ Another such entitlement
provides that small size orders (i.e., five or fewer contracts) will be
allocated in full to the PMM if it has a quote at the NBBO.\265\
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\261\ See Topaz Exchange Rule 713, Supplementary Material .01.
Specifically, the PMM's participation entitlement will be equal to
the greater of: (i) The proportion of the total size at the best
price represented by the size of its quote, or (ii) 60% of the
contracts to be allocated if there is only one other Market Maker
quotation at the NBBO or 40% if there are two or more other Market
Maker quotes at the NBBO. See Topaz Exchange Rule 713, Supplementary
Material .01(b).
\262\ See supra note 259 for the definition of Priority
Customer.
\263\ See Topaz Exchange Rule 713, Supplementary Material .01.
\264\ See id.
\265\ See Topaz Exchange Rule 713, Supplementary Material
.01(c). The rule provides that Topaz Exchange will review the
functioning of this provision quarterly to make sure that small size
orders do not account for more than 40% of the volume executed on
Topaz Exchange. Id.
---------------------------------------------------------------------------

These participation entitlements for PMMs are consistent with
provisions that the Commission has approved for other exchanges.\266\
The Commission believes that these entitlements are appropriately
balanced by the obligations imposed on these classes of market makers,
as discussed in detail above.\267\ In particular, PMMs are subject to
higher quoting obligations than other Market Makers who are not
eligible to receive the aforementioned participation entitlements.\268\
Therefore, the Commission believes that the proposed rules regarding
participation entitlements are consistent with the Act.
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\266\ See, e.g., ISE Rule 713, Supplementary Materials .01 and
.03; see also MIAX Order, supra note 30.
\267\ See supra Section II.D.3.b (discussing market maker
obligations).
\268\ For example, as discussed above, supra Section II.D.3.b.,
PMMs must provide continuous two-sided quotes in each appointed
option class.
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Topaz Exchange proposes to make available certain additional order
processing and matching features, largely based on features available
on ISE.\269\ Mechanisms that will be utilized by Topaz Exchange
include: A Price Improvement Mechanism (which affords the opportunity
for price improvement after an auction for eligible orders above the
NBBO); \270\ a Facilitation Mechanism (which affords members an
opportunity to cross orders after an auction and provides the
facilitating member the opportunity to receive 40% of the agency
order); \271\ and a Solicited Order Mechanism (which allows members
representing agency orders the opportunity to cross large size
solicited orders after an auction).\272\ These mechanisms are
consistent with substantially similar mechanisms currently existing on
other options exchanges, including identical mechanisms on ISE with
respect to non-complex orders.\273\
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\269\ The primary difference between Topaz Exchange's order
processing and matching features and those of ISE previously
approved by the Commission will be that Topaz Exchange will not
accept complex orders.
\270\ See Topaz Exchange Rule 723. Topaz Exchange will operate a
pilot program whereby there will be no minimum size requirements for
orders to be eligible for the PIM. See Exhibit B to Topaz Exchange
Form 1 Application; see also Topaz Exchange Rule 723, Supplementary
Material .03.
\271\ See Topaz Exchange Rule 716(d). The NASDAQ Letter stated
that it appears that the rule concerning the Facilitation Mechanism
was internally inconsistent in part. Specifically, the NASDAQ Letter
noted that proposed Topaz Exchange Rule 716(d)(3)(i) stated that
Priority Customer bids (offers) that are priced higher (lower) than
the facilitation price will be executed at the facilitation price,
and further noted that the same section of the rule also stated that
a facilitation order would be cancelled at the end of the exposure
period if an execution would take place a price that is inferior to
the best bid (offer) on Topaz. See NASDAQ Letter, supra note 6. The
NASDAQ Letter suggested that this means that a Priority Customer
bidding higher than the facilitation price would cause the
facilitation order to be cancelled. See id. Topaz Exchange clarified
this point by explaining that, because Topaz Exchange is a price
priority exchange, Topaz Exchange will not execute a facilitation
order at a price that is inferior to the Topaz Exchange best bid or
offer (``Topaz BBO'') at the time of execution. Topaz Exchange noted
that, since interest on the opposite side of a facilitation order
participates in the execution of the facilitation order, the only
instance where a better priced Priority Customer Order might be
outside of the Topaz BBO is when the order is on the same side of
the market as the facilitation order. In other words, the text of
Rule 716(d) means that better-priced Priority Customer Orders on the
opposite side of the market from the order being facilitated will be
given the benefit of executing at the facilitation price, whereas
better-priced Priority Customer Orders on the same side of the
market as the order being facilitated will cause the facilitation
order to be cancelled. See Topaz Exchange Response Letter, supra
note 7.
\272\ See Topaz Exchange Rule 716(e). With respect to the Block
Order, Facilitation and Solicited Order Mechanisms described in
Topaz Exchange Rule 716(b), (d) and (e), the NYSE Euronext Letter II
recommended clarifying language to describe what terms, if any,
should be contained within a ``broadcast message.'' See NYSE
Euronext Letter II, supra note 6. Topaz Exchange stated that it
would amend the various sections of the rule to clarify the terms of
the broadcast message. See Topaz Exchange Response Letter, supra
note 7, and Amendment No. 3. The Commission believes that Topaz
Exchange's revisions to Topaz Exchange Rule 716(b), (d), and (e)
appropriately address the commenter's concerns.
\273\ See ISE Rules 716 and 723.
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Members will be able to access Topaz Exchange through a variety of
electronic

[[Page 46638]]

systems, and non-members will be able to access Topaz Exchange pursuant
to sponsored access arrangements with Topaz Exchange members, pursuant
to Topaz Exchange rules.\274\ As noted above, Topaz Exchange also
intends to become a participant in the Linkage Plan.\275\ The manner in
which Topaz Exchange proposes to comply with the Linkage Plan is
identical to the manner in which ISE complies with the Linkage
Plan.\276\ To comply with the Linkage Plan, Topaz Exchange, among other
things, will prohibit its members from effecting a transaction at a
price that is inferior to the NBBO, unless an exception applies.\277\
Topaz Exchange will provide a centralized process for sending
intermarket sweep orders to other exchanges on behalf of Public
Customer Orders.\278\ Topaz Exchange will contract with one or more
unaffiliated brokers to route orders to other exchanges when necessary
to comply with the Linkage Plan. In circumstances where marketable
Public Customer Orders are received when Topaz Exchange is not at the
NBBO or orders are received that would lock or cross another market,
they will be exposed to Topaz Exchange members for up to one
second.\279\ If, after a Public Customer Order is exposed, such order
cannot be executed in full on Topaz Exchange at the then-current NBBO
or better and is marketable, the lesser of the full displayed size of
the protected bid(s) or protected offer(s) that are priced better than
the Topaz Exchange's quote or the balance of the order will be sent to
a contracted unaffiliated broker, and any additional balance of the
order that is not marketable against the then-current NBBO will be
placed on the Topaz Exchange book.\280\
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\274\ See, e.g., Topaz Exchange Rule 706, Supplementary Material
.01.
\275\ See Topaz Exchange Rule 1900 Series, which incorporates by
reference ISE Rule 1900 Series.
\276\ The Commission recently approved a change in the way in
which ISE complies with the Linkage Plan by now contracting with one
or more unaffiliated brokers to route intermarket sweep orders of
Public Customers to other exchanges when necessary. See Securities
Exchange Act Release No. 69396 (April 18, 2013), 78 FR 24273 (April
24, 2013) (File No. SR-ISE-2013-18). PMMs no longer have the
responsibility of either executing the Public Customer Order at a
price that at least matches the NBBO or obtaining better prices from
the away market(s) by sending one or more intermarket sweep orders
on the Public Customer's behalf. See also Amendment No. 3 (removing
exposure and routing obligation from PMMs under Topaz Exchange's
Rule 800 Series).
\277\ See Topaz Exchange Rule 714; see also ISE Rule 714.
\278\ See Topaz Exchange Rule 1901, which incorporates by
reference ISE Rule 1901.
\279\ See Topaz Exchange Rule 1901, Supplementary Material .02,
which incorporates by reference ISE Rule 1901, Supplementary
Material .02.
\280\ See id. Any additional balance of the order will be
executed on Topaz Exchange if it is marketable.
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The Commission believes that Topaz Exchange's proposed display,
execution, and priority rules are consistent with the Act. In
particular, the Commission finds that the proposed rules are consistent
with Section 6(b)(5) of the Act,\281\ which, among other things,
requires that the rules of a national securities exchange be designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest, and to not
permit unfair discrimination between customers, issuers, or dealers.
The Commission also finds that the proposed rules are consistent with
Section 6(b)(8) of the Act,\282\ which requires that the rules of an
exchange not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The trading
rules of Topaz Exchange are substantially similar to the current ISE
trading rules, which were approved at the time ISE's registration as a
national securities exchange was granted \283\ or filed with and
approved by the Commission (or otherwise became effective) pursuant to
Section 19(b) of the Act.\284\ The Commission believes that Topaz
Exchange's trading rules, in general, do not raise any novel or
controversial issues.\285\
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\281\ 15 U.S.C. 78f(b)(5).
\282\ 15 U.S.C. 78f(b)(8).
\283\ See ISE Order, supra note 167.
\284\ The Commission notes, however, that some of Topaz
Exchange's rules differ in some respects from the rules of ISE. For
example, Topaz Exchange is not proposing to incorporate ISE's rules
relating to the trading of equity securities or to incorporate any
rules concerning the trading of complex or multi-legged orders at
this time.
\285\ With respect to clearing rules, the three commenters
recommended clarifying language with respect to Topaz Exchange Rule
712(b), specifically ``. . . or other guarantee given by such
Clearing Member to such Member . . . .'' The commenters noted that
this language lacks clarity whether Topaz Exchange Rule 712(b)
requires some form of written authorization between a clearing
member and a member in order for the member to give up the name of a
particular clearing member. See CBOE Letter, NASDAQ Letter and NYSE
Euronext Letter I, supra note 6. The NASDAQ Letter noted that a
written, transparent and auditable authorization is needed to
provide proper safeguards and protections for clearing members and
to ensure clearing members are in compliance with aspects of the
Commission Rule 15c3-3 in general. See NASDAQ Letter, supra note 6.
The NYSE Euronext Letter I noted that the requirements for a letter
of authorization were also not clearly defined and that Topaz
Exchange should have rule text that governs the terms and revocation
of letters of authorization. Topaz Exchange clarified this point by
noting that ISE has interpreted and applied its identical rule to
require the submission of written authorization in order for an ISE
member to give up a particular clearing member's name. Topaz
Exchange further noted that it would amend the rule to make clear
that written authorization is required. See Topaz Exchange Response
Letter, supra note 7, and Amendment No 3. The Commission believes
that Topaz Exchange's revision to Topaz Exchange Rule 712(b)
appropriately addresses the commenters' concerns.
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5. Section 11(a) of the Act
Section 11(a)(1) of the Act \286\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts''), unless an exception applies. The
Exchange has represented that it has analyzed its rules proposed
hereunder, and believes that they are consistent with Section 11(a) of
the Act and rules thereunder. For the reasons set forth below, based on
Topaz Exchange's representations, the Commission believes that Topaz
Exchange's order execution algorithm, including the Facilitation,
Solicitation and Customer Cross processes (but excluding the Price
Improvement Mechanism), will allow members to meet the requirements of
Rule 11a2-2(T) for executions on Topaz Exchange. Additionally, the
Commission believes that Topaz Exchange members' executions that occur
through the Price Improvement Mechanism will be consistent with the
requirements in Section 11(a)(1)(G) of the Act and rule 11a1-1(T)
thereunder.
---------------------------------------------------------------------------

\286\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

a. Rule 11a2-2(T)
Rule 11a2-2(T) under the Act,\287\ known as the ``effect versus
execute'' rule, provides exchange members with an exemption from the
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange
member, subject to certain conditions, to effect transactions for
covered accounts by arranging for an unaffiliated member to execute the
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) May not be affiliated with the executing
member; (ii) must transmit the order from off the exchange floor; (iii)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution; \288\ and (iv)

[[Page 46639]]

with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule.
---------------------------------------------------------------------------

\287\ 17 CFR 240.11a2-2(T).
\288\ The member may, however, participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the
NYSE's Designated Order Turnaround System) (``1978 Release'').
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In a letter to the Commission,\289\ Topaz Exchange requested that
the Commission concur with its conclusion that Topaz Exchange members
that enter orders through the Topaz Exchange system, including the
Facilitation, Solicitation and Customer Cross processes, (but excluding
those transactions effected through the PIM process), satisfy the
requirements of Rule 11a2-2(T). For the reasons set forth below, the
Commission believes that Topaz Exchange members that enter orders
through the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes, but excluding those
transactions effected through the PIM process, will satisfy the
conditions of Rule 11a2-2(T).
---------------------------------------------------------------------------

\289\ See Letter from Michael Simon, General Counsel, Secretary
and Chief Regulatory Officer, Topaz Exchange, to Elizabeth Murphy,
Secretary, Commission, dated December 14, 2012 (``Exchange 11(a)
Request Letter'').
---------------------------------------------------------------------------

Rule 11a2-2(T)'s first condition is that the order be executed by
an exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as the Topaz Exchange system,
including the Facilitation, Solicitation and Customer Cross processes,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages over non-
members in handling their orders after transmitting them to the
Exchange.\290\ Topaz Exchange has represented that the design of the
trading platform ensures that no member has any special or unique
trading advantage in the handling of its orders after transmitting its
orders to Topaz Exchange.\291\ Based on the Exchange's representation,
the Commission believes that the Topaz Exchange trading system,
including the Facilitation, Solicitation and Customer Cross processes,
will satisfy this requirement.
---------------------------------------------------------------------------

\290\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that while
there is no independent executing exchange member, the execution of
an order is automatic once it has been transmitted into each system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084, 6086
n.25 (January 31, 1979) (File No. S7-613) (regarding the American
Stock Exchange (``Amex'') Post Execution Reporting System, the Amex
Switching System, the Intermarket Trading System, the Multiple
Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX
Communications and Execution System, and the Philadelphia Stock
Exchange Automated Communications and Execution System (``1979
Release'')).
\291\ See Exchange 11(a) Request Letter, supra note 289.
---------------------------------------------------------------------------

Second, Rule 11a2-2(T) requires orders for covered accounts to be
transmitted from off the exchange floor. Topaz Exchange will not have a
physical trading floor, and like other automated systems, will receive
orders electronically through remote terminals or computer-to-computer
interfaces. In the context of other automated trading systems, the
Commission has found that the off-floor transmission requirement is met
if a covered account order is transmitted from a remote location
directly to an exchange's floor by electronic means.\292\ Orders sent
to Topaz Exchange, regardless of where it executes within the Topaz
Exchange system, including as a Facilitation, a Solicitation or a
Customer Cross process, will be transmitted from remote terminals
directly to Topaz Exchange by electronic means. Since the Topaz
Exchange trading system receives all orders electronically through
remote terminals or computer-to-computer interfaces, the Commission
believes that the trading system, including the Facilitation,
Solicitation and Customer Cross processes, will satisfy the off-floor
transmission requirement.
---------------------------------------------------------------------------

\292\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48)
(order approving proposed rules of BX); 49068, (January 13, 2004),
69 FR 2775 (January 20, 2004) (SR-BSE-2002-15) (establishing, among
other things, BOX as an options trading facility of BSE); 44983,
(October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25)
(approving the PCX's use of the Archipelago Exchange as its equity
trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991)
(SR-NYSE-90-52 and SR-NYSE-90-53) (regarding NYSE's Off-Hours
Trading Facility). See 1978 Release, supra note 288. See also 1979
Release, supra note 290.
---------------------------------------------------------------------------

Third, Rule 11a2-2(T) requires that the member not participate in
the execution of its order once it has been transmitted to the member
performing the execution.\293\ Topaz Exchange represented that at no
time following the submission of an order is a member able to acquire
control or influence over the result or timing of an order's execution.
According to Topaz Exchange, orders submitted through the Topaz
Exchange system, including the Facilitation, Solicitation and Customer
Cross processes, also meet the non-participation requirement. The
execution of a member's order depends not on the member entering the
order, but rather on what orders, bids, or offers are present in the
system at the time the member submits the order and on the priority of
those orders, bids or offers.\294\ Topaz Exchange represents that
orders sent to Topaz Exchange and through the Facilitation,
Solicitation and Customer Cross processes will be centrally processed
and executed automatically by Topaz Exchange.\295\ Topaz Exchange
further represents that orders sent to Topaz Exchange will be
transmitted from remote terminals directly to the system by electronic
means.\296\ Once an order is submitted to Topaz Exchange, the order is
executed against another order based on the established matching
algorithms for the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes.\297\ Trades will execute
when orders or quotations on Topaz Exchange match one another based on
their priority.\298\ As Topaz Exchange stated in its Exchange 11(a)
Request Letter, the execution does not depend on the participant but
rather upon what other orders are entered into the Topaz Exchange
system, including the Facilitation, Solicitation and Customer Cross
processes, at or around the same time as the subject order; what orders
are on Topaz Exchange; or submitted as Responses; and where the order
is ranked based on the priority ranking algorithm.\299\ Therefore, at
no time following the submission of an order to the Topaz Exchange
system, including through the Facilitation, Solicitation or Customer
Cross processes, is a participant able to acquire control or influence
the result or timing of orders

[[Page 46640]]

submitted to the Topaz Exchange system, including through the
Facilitation, Solicitation or Customer Cross processes.\300\
Accordingly, the Commission believes that the non-participation
requirement will be met when orders are executed automatically through
use of the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes.
---------------------------------------------------------------------------

\293\ The member may cancel or modify the order, or modify the
instructions for executing the order, but only from off the Exchange
floor. See 1978 Release, supra note 288, at 43 FR 11547. The
Commission has stated that the non-participation requirement is
satisfied under such circumstances so long as such modifications or
cancellations are also transmitted from off the floor. See id.
(stating that the ``non-participation requirement does not prevent
initiating members from canceling or modifying orders (or the
instructions pursuant to which the initiating member wishes orders
to be executed) after the orders have been transmitted to the
executing member, provided that any such instructions are also
transmitted from off the floor'').
\294\ See Exchange 11(a) Request Letter, supra note 289.
\295\ See id.
\296\ See id.
\297\ See id.
\298\ See id.
\299\ See id.
\300\ See id.
---------------------------------------------------------------------------

Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\301\ Topaz Exchange members trading for covered accounts over
which they exercise investment discretion must comply with this
condition in order to rely on the rule's exemption.\302\
---------------------------------------------------------------------------

\301\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 288, at 43 FR 11548 (stating ``[t]he contractual and disclosure
requirements are designed to assure that accounts electing to permit
transaction-related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\302\ See Exchange 11(a) Request Letter, supra note 289.
---------------------------------------------------------------------------

b. Section 11(a)(1)(G) and Rule 11a1-1(T)
Section 11(a)(1)(G) of the Act provides an additional exemption
from the general prohibition set forth in Section 11(a)(1) for any
transaction for a member's own account, provided that: (i) Such member
is primarily engaged in certain underwriting, distribution, and other
activities generally associated with broker-dealers and whose gross
income is derived principally from such business and related
activities; and (ii) the transaction is effected in compliance with the
rules of the Commission, which, as a minimum, assure that the
transaction is not inconsistent with the maintenance of fair and
orderly markets and yields priority, parity, and precedence in
execution to orders for the account of persons who are not members or
associated with members of the exchange.\303\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national
securities exchange for the account of a member which meets the
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not
inconsistent with the maintenance of fair and orderly markets and to
yield priority, parity, and precedence in execution to orders for the
account of non-members or persons associated with non-members of the
exchange, if such transaction is effected in compliance with certain
requirements.\304\
---------------------------------------------------------------------------

\303\ See 15 U.S.C. 78k(a)(1)(G).
\304\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the
following requirements must be met: (1) A member must disclose that
a bid or offer for its account is for its account to any member with
whom such bid or offer is placed or to whom it is communicated, and
any member through whom that bid or offer is communicated must
disclose to others participating in effecting the order that it is
for the account of a member; (2) immediately before executing the
order, a member (other than the specialist in such security)
presenting any order for the account of a member on the exchange
must clearly announce or otherwise indicate to the specialist and to
other members then present for the trading in such security on the
exchange that he is presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member must
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
---------------------------------------------------------------------------

Topaz Exchange represented that its Price Improvement Mechanism, or
PIM, is a process set forth in Topaz Exchange Rule 723 whereby an EAM
can provide price improvement opportunities for a transaction.\305\ As
Topaz Exchange stated in its Exchange 11(a) Request Letter, Topaz
Exchange's proposed PIM rules will require that Priority Customer
interest, at any given price, be executed in full before Professional
Orders and market maker quotes.\306\ Additionally, Topaz Exchange's
proposed PIM rules will require non-member Professional Orders to be
executed in full before any proprietary interest of members (i.e.,
proprietary interest from EAMs and market makers).\307\ Because Topaz
Exchange Rule 723(d) will require Topaz Exchange members to yield
priority to Priority Customers and non-member Professional Orders in
the PIM process, the Commission believes that the proposal with respect
to transactions effected through the PIM process will be consistent
with Section 11(a)(1)(G) and Rule 11a1-1(T) thereunder.\308\ The
Commission also reminds exchanges and their members, however, that, in
addition to yielding priority to non-member orders at the same price,
members must also meet the other requirements under Section 11(a)(1)(G)
of the Act and Rule 11a1-1(T) thereunder (or satisfy the requirements
of another exception) to effect transactions for their own accounts.
---------------------------------------------------------------------------

\305\ The PIM is a process wherein an EAM may seek to facilitate
an order it represents as agent, and/or a transaction wherein the
EAM solicited interest to execute against an order it represents as
agent (a ``Crossing Transaction''). A Crossing Transaction is
comprised of the order the EAM represents as agent (the ``Agency
Order'') and a counter-side order for the full size of the Agency
Order (the ``Counter-Side Order''). The Counter-Side Order may
represent interest for the Member's own account, or interest the
Member has solicited from one or more other parties, or a
combination of both. See Exchange 11(a) Request Letter, supra note
289. See also Topaz Exchange Rule 723.
\306\ See Exchange 11(a) Request Letter, supra note 289. See
also Topaz Exchange Rule 723(d)(1).
\307\ See Exchange 11(a) Request Letter, supra note 289. See
also Topaz Exchange Rule 723(d)(3).
\308\ See Securities Exchange Act Release No. 50819 (December 8,
2004), 69 FR 75093 (December 15, 2004) (File No. SR-ISE-2003-06).
---------------------------------------------------------------------------

E. Discipline and Oversight of Members

As noted above, one prerequisite for the Commission's grant of an
exchange's application for registration is that a proposed exchange
must be so organized and have the capacity to be able to carry out the
purposes of the Act.\309\ Specifically, an exchange must be able to
enforce compliance by its members and persons associated with its
members with the Act and the rules and regulations thereunder and the
rules of the exchange.\310\
---------------------------------------------------------------------------

\309\ See 15 U.S.C. 78f(b)(1).
\310\ See id.
---------------------------------------------------------------------------

Topaz Exchange rules codify Topaz Exchange's disciplinary
jurisdiction over its members, thereby facilitating its ability to
enforce its members' compliance with its rules and the federal
securities laws.\311\ Topaz Exchange's rules permit it to sanction
members for violations of the Act and the rules and regulation
thereunder and Topaz Exchange's rules by, among other things, expelling
or suspending members; limiting members' activities, functions, or
operations; fining or censuring members; suspending or barring a person
from being associated with a member; or any other fitting sanction in
accordance with Topaz Exchange rules.\312\
---------------------------------------------------------------------------

\311\ See Topaz Exchange Rule 1600(a) (which incorporates by
reference ISE Rule 1600(a)).
\312\ See id. See also MIAX Rule 1000 and BOX Exchange Rule
12000 Series (containing identical provisions).
---------------------------------------------------------------------------

Topaz Exchange's disciplinary and oversight functions will be
administered in accordance with Chapter 16 of the Topaz Exchange rules,
which

[[Page 46641]]

incorporates by reference Chapter 16 of ISE rules, governing
disciplinary jurisdiction. Unless delegated to another SRO pursuant to
the terms of an effective 17d-2 Plan,\313\ Topaz Exchange regulatory
staff (including regulatory staff of another SRO that may be acting on
Topaz Exchange's behalf pursuant to a regulatory services agreement)
will, among other things, investigate potential securities laws
violations and initiate charges pursuant to Topaz Exchange rules.\314\
---------------------------------------------------------------------------

\313\ See supra notes 154-156 and accompanying text (concerning
the multiparty 17d-2 Plans to which Topaz Exchange has committed to
join).
\314\ See Topaz Exchange Rule 1602 (which incorporates by
reference ISE Rule 1602). As noted above, Topaz Exchange has entered
into an RSA with FINRA and a FMA with ISE under which FINRA and ISE,
respectively, will perform certain regulatory functions on behalf of
Topaz Exchange. Topaz Exchange may perform some or all of the
functions specified in Chapter 16 of the Topaz Exchange Rules. See
Topaz Exchange Rule 1615 (which incorporates by reference ISE Rule
1615).
---------------------------------------------------------------------------

Upon a finding of probable cause of a violation within the
disciplinary jurisdiction of Topaz Exchange and where further
proceedings are warranted,\315\ Topaz Exchange will conduct a hearing
on disciplinary matters before a professional hearing officer \316\ and
two members of the Business Conduct Committee \317\ (``Panel'').\318\
The Topaz Exchange member (or its associated person) or the Topaz
Exchange regulatory staff may petition for review of the Panel's
decision by the Topaz Exchange Board.\319\ Any review will be conducted
by the Topaz Exchange Board or a committee thereof composed of at least
three of its directors, at least one of which shall be an Industry
Director \320\ (whose decision must be ratified by the Topaz Exchange
Board).\321\ In addition, the Topaz Exchange Board on its own motion
may order review of a disciplinary decision.\322\ The Topaz Exchange
Board may affirm, reverse, or modify, in whole or in part, the Panel's
decision.\323\ The decision of the Topaz Exchange Board will be in
writing and will be final.\324\
---------------------------------------------------------------------------

\315\ See Topaz Exchange Rule 1604 (which incorporates by
reference ISE Rule 1604). If there is probable cause for finding a
violation, Topaz Exchange's regulatory staff will prepare a
statement of charges including the allegations and specifying the
provisions of the Act and the rules and regulations promulgated
thereunder, provisions of the Topaz Exchange Constitution or rules,
or interpretations or resolutions of which such acts are in
violation. The CRO must approve the statement of charges.
\316\ See Topaz Exchange Rule 1606 (which incorporates by
reference ISE Rule 1606); see also Topaz Exchange Rule 1615,
Supplemental Material .01 (which incorporates by reference ISE Rule
1615, Supplemental Material .01).
\317\ Pursuant to a Resolution of the Topaz Exchange Board, the
President and CEO shall establish Topaz Exchange's Business Conduct
Committee, pursuant to a charter. The Committee shall consist of no
more than 21 persons, all of whom are employees of members of Topaz
Exchange, representing members as follows: at least three persons
shall represent PMMs; at least three persons shall represent CMMs
that are not also PMMs; and at least four persons shall represent
EAMs that neither are, nor are affiliated with, a PMM or CMM. See
Amendment No. 3.
\318\ See Topaz Exchange Rule 1606 (which incorporates by
reference ISE Rule 1606). A Panel may make a determination without a
hearing and may impose a penalty as to violations that the member or
associated person has admitted or has failed to answer or that
otherwise do not appear to be in dispute. See Topaz Exchange Rule
1608 (which incorporates by reference ISE Rule 1608). A member or
associated person alleged to have committed a disciplinary violation
may submit a written offer of settlement to the Panel, or CRO if a
Panel is not yet been appointed, which the Panel or CRO may accept
or reject. See Topaz Exchange Rule 1609 (which incorporates by
reference ISE Rule 1609). If the second offer of settlement is
rejected (such decision is not subject to review), a hearing will
proceed in accordance with Topaz Exchange Rule 1606 (which
incorporates by reference ISE Rule 1606). See also Topaz Exchange
Rule 1609 (which incorporates by reference ISE Rule 1609).
\319\ See Topaz Exchange Rule 1610 (which incorporates by
reference ISE Rule 1610).
\320\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704) (detailing the composition of the Appeals
Committee); see also Amendment No. 3. Any director who participated
in a matter before it was appealed to the Topaz Exchange Board shall
not participate in any review of the action by the Board concerning
the matter. See Topaz Exchange Rule 1704.
\321\ See Topaz Exchange Rule 1610 (which incorporates by
reference ISE Rule 1610).
\322\ See id.
\323\ See id.
\324\ See id.
---------------------------------------------------------------------------

Appeals from any determination that impacts access to Topaz
Exchange, such as termination or suspension of membership, will be
instituted under, and governed by, the provisions in the Chapter 17 of
the Topaz Exchange rules, which incorporates by reference the
provisions in Chapter 17 of ISE rules. Topaz Exchange's Chapter 17
applies to persons economically aggrieved by any of the following
actions of Topaz Exchange including, but not limited to: (a) Denial of
an application to become a Member; (b) barring a person from becoming
associated with a Member; and (c) limiting or prohibiting services
provided by the Topaz Exchange or services of any exchange member.\325\
---------------------------------------------------------------------------

\325\ See Topaz Exchange Rule 1700 (which incorporates by
reference ISE Rule 1700). As noted above, Topaz Exchange has entered
into an RSA with FINRA and a FMA with ISE under which FINRA and ISE,
respectively, will perform certain regulatory functions on behalf of
Topaz Exchange. For example, FINRA may perform some or all of the
functions specified in Chapter 17 of Topaz Exchange rules. See supra
notes 158-160 and accompanying text. See also Topaz Exchange Rule
1706 (which incorporates by reference ISE Rule 1706).
---------------------------------------------------------------------------

Any person aggrieved by an action of Topaz Exchange within the
scope of the Chapter 17 may file a written application to be heard
within thirty days \326\ after such action has been taken.\327\
Applications for hearing and review will be referred to the Business
Conduct Committee, which will appoint a hearing panel of no less than
three members of such Committee.\328\ The decision of the hearing panel
made pursuant to Chapter 17 of the Topaz Exchange rules is subject to
review by the Topaz Exchange Board, either on its own motion, or upon
written request submitted by the applicant or the President of Topaz
Exchange.\329\ The review will be conducted by the Topaz Exchange Board
or a committee of the Topaz Exchange Board composed of at least three
directors.\330\
---------------------------------------------------------------------------

\326\ An applicant may file for an extension of time within
thirty days of Topaz Exchange's action. An application for such an
extension will be ruled upon by the Chairman of the Business Conduct
Committee and is not subject to appeal. See Topaz Exchange Rule 1701
(which incorporates by reference ISE Rule 1701).
\327\ See Topaz Exchange Rule 1701 (which incorporates by
reference ISE Rule 1701).
\328\ See Topaz Exchange Rule 1702 (which incorporates by
reference ISE Rule 1702).
\329\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704). The Topaz Exchange Board, or a committee
of the Topaz Exchange Board, will have sole discretion to grant or
deny either request. See id.
\330\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704). The Topaz Exchange Board or its designated
committee may affirm, reverse, or modify in whole or in part, the
decision of the hearing panel. The decision of the Topaz Exchange
Board or its designated committee will be in writing and will be
final. See Topaz Exchange Rule 1704 (which incorporates by reference
ISE Rule 1704).
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The Commission finds that Topaz Exchange's proposed disciplinary
and oversight rules and structure, as well as its proposed process for
persons economically aggrieved by certain Topaz Exchange actions, are
consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the
Act \331\ in that they provide fair procedures for the disciplining of
members and persons associated with members. The Commission further
finds that the proposed Topaz Exchange rules, which incorporate by
reference ISE rules, are designed to provide Topaz Exchange with the
ability to comply, and with the authority to enforce compliance by its
members and persons associated with its members, with the provisions of
the Act, the rules and regulations thereunder, and the rules of Topaz
Exchange.\332\ The Commission notes that Topaz Exchange's proposed
disciplinary and oversight rules and

[[Page 46642]]

structures are similar to the rules of other exchanges.\333\
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\331\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
\332\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
\333\ See, e.g., MIAX Order, supra note 30, and BOX Order, supra
note 39.
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F. Listing Requirements

Topaz Exchange does not intend to offer original listings when it
commences operations. Instead, Topaz Exchange will list and trade only
standardized option contracts that are listed on other national
securities exchanges and cleared by the Options Clearing
Corporation.\334\ Topaz Exchange's listing rules, including the
criteria for the underlying securities of the options to be traded,
incorporate by reference all of the listing rules of ISE.\335\ The
Commission finds that Topaz Exchange's proposed initial and continued
listing rules are consistent with the Act, including Section
6(b)(5),\336\ in that they are designed to protect investors and the
public interest and to promote just and equitable principles of trade.
Before beginning operation, Topaz Exchange will need to become a
participant in the Plan for the Purpose of Developing and Implementing
Procedures Designed to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the
Act (``OLPP'').\337\ In addition, before beginning operation, Topaz
Exchange will need to become a participant in the Options Clearing
Corporation.
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\334\ See Exhibit H to Topaz Exchange Form 1 Application.
\335\ See Topaz Exchange Rule 500 Series (which incorporates by
reference ISE Rule 500 Series) (Securities Traded on the Exchange).
See also MIAX Rule 400 Series and BOX Rule 5000 Series.
\336\ 15 U.S.C. 78f(b)(5).
\337\ 15 U.S.C. 78k-1(a)(3)(B).
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III. Exemption From Section 19(b) of the Act With Regard to ISE, CBOE,
NYSE, and FINRA Rules Incorporated by Reference

Topaz Exchange proposes to incorporate by reference certain ISE,
CBOE, NYSE and FINRA rules.\338\ Thus, for certain Topaz Exchange
rules, Topaz Exchange members will comply with a Topaz Exchange rule by
complying with the referenced ISE, CBOE, NYSE or FINRA rule.
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\338\ Specifically, Topaz Exchange proposes to incorporate by
reference the following ISE Rules: Chapter 4 (Business Conduct),
Chapter 5 (Securities Traded on the Exchange), Chapter 6 (Doing
Business with the Public), Chapter 10 (Closing Transactions),
Chapter 11 (Exercises and Deliveries), Chapter 12 (Margins), Chapter
13 (Net Capital Requirements), Chapter 14 (Records, Reports and
Audits), Chapter 15 (Summary Suspension), Chapter 16 (Discipline),
Chapter 17 (Hearings and Review), Chapter 18 (Arbitration), Chapter
19 (Order Protection; Locked and Crossed Market), Chapter 20 (Index
Rules), Chapter 22 (Rate-Modified Foreign Currency Options Rules).
The following rules are cross-referenced in the ISE rules: ISE Rule
1202 (Margin Requirements) cross-references the same CBOE and NYSE
rules that may be in effect from time to time; ISE Rule 1615
(Disciplinary Functions) cross-references the FINRA Code of
Procedure and ISE Rule 1800 cross-references the 12000 and 13000
Series of the FINRA Manual and FINRA Rule 2268.
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In connection with the proposal to incorporate the ISE, CBOE, NYSE
and FINRA rules by reference, Topaz Exchange requested, pursuant to
Rule 240.0-12 under the Act,\339\ an exemption under Section 36 of the
Act from the rule filing requirements of Section 19(b) of the Act for
changes to the Topaz Exchange rules that are effected solely by virtue
of a change to a cross-referenced ISE, CBOE, NYSE or FINRA rule.\340\
Topaz Exchange proposes to incorporate by reference categories of
rules, rather than individual rules within a category, that are not
trading rules. In addition, Topaz Exchange agrees to provide written
notice to its members whenever FINRA, ISE, CBOE or NYSE proposes a
change to a cross-referenced rule \341\ and whenever any such proposed
changes are approved by the Commission or otherwise become
effective.\342\
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\339\ 17 CFR 240.0-12.
\340\ See Letter from Michael Simon, General Counsel, Secretary
and Chief Regulatory Officer, Topaz Exchange, to Elizabeth M.
Murphy, Secretary, Commission, dated December 14, 2012 (``Section
19(b) Exemption Request'').
\341\ See id.
\342\ Topaz Exchange will provide such notice through a posting
on the same Web site location where Topaz Exchange posts its own
rule filings pursuant to Rule 19b-4 under the Act, within the
required time frame. The Web site posting will include a link to the
location on the FINRA, ISE, CBOE or NYSE Web site where FINRA's,
ISE's, CBOE's or NYSE's proposed rule change is posted. See id.
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Using the authority under Section 36 of the Act, the Commission
previously exempted certain SROs from the requirement to file proposed
rule changes under Section 19(b) of the Act.\343\ The Commission is
hereby granting Topaz Exchange's request for exemption, pursuant to
Section 36 of the Act, from the rule filing requirements of Section
19(b) of the Act with respect to the rules that Topaz Exchange proposes
to incorporate by reference. The exemption is conditioned upon Topaz
Exchange providing written notice to Topaz Exchange members whenever
FINRA, ISE, CBOE or NYSE proposes to change an incorporated by
reference rule and when the Commission approves any such changes. The
Commission believes that the exemption is appropriate in the public
interest and consistent, with the protection of investors because it
will promote more efficient use of Commission's and SROs' resources by
avoiding duplicative rule filings based on simultaneous changes to
identical rule text sought to be implemented by more than one SRO.
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\343\ See, e.g., DirectEdge Exchanges Order, supra note 70, BATS
Order, supra note 29, C2 Order, supra note 169, Nasdaq Order, supra
note 29 and NOM Approval Order, supra note 164.
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IV. Conclusion

It is ordered that the application of Topaz Exchange for
registration as a national securities exchange be, and it hereby is,
granted.
It is furthered ordered that operation of Topaz Exchange is
conditioned on the satisfaction of the requirements below:
A. Participation in National Market System Plans Relating to
Options Trading. Topaz Exchange must join: (1) The Plan for the
Reporting of Consolidated Options Last Sale Reports and Quotation
Information (Options Price Reporting Authority); (2) the OLPP; (3) the
Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance
Authority.
B. Participation in Multiparty Rule 17d-2 Plans. Topaz Exchange
must become a party to the multiparty Rule 17d-2 agreements concerning
options sales practice regulation and market surveillance.
C. Participation in the Options Clearing Corporation. Topaz
Exchange must become an Options Clearing Corporation participant
exchange.
D. Participation in the Intermarket Surveillance Group. Topaz
Exchange must join the Intermarket Surveillance Group.
E. Effective Regulation. Topaz Exchange must have, and represent in
a letter to the staff in the Commission's Office of Compliance
Inspections and Examinations that it has, adequate procedures and
programs in place to effectively regulate Topaz Exchange.
F. Trade Processing and Exchange Systems. Topaz Exchange must have,
and represent in a letter to the staff in the Commission's Division of
Trading and Markets that it has, adequate procedures and programs in
place, as detailed in Commission Automation Policy Review guidelines,
to effectively process trades and maintain the confidentiality,
integrity, and availability of Topaz Exchange's systems.\344\
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\344\ On November 16, 1989, the Commission published its first
Automation Review Policy (``ARP I''), in which the Commission
created a voluntary framework for SROs to establish comprehensive
planning and assessment programs to determine systems capacity and
vulnerability. On May 9, 1991, the Commission published its second
Automation Review Policy (``ARP II'') to clarify the types of review
and reports expected from SROs. See Securities Exchange Act Release
Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989) and
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991). The Commission has
proposed Regulation Systems Compliance and Integrity, which, if
adopted, would replace this policy. See Securities Exchange Act
Release No. 69077 (March 8, 2013), 78 FR 18084 (March 25, 2013)
(File No. S7-01-13).

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[[Page 46643]]

It is further ordered, pursuant to Section 36 of the Act,\345\ that
Topaz Exchange shall be exempted from the rule filing requirements of
Section 19(b) of the Act with respect to the FINRA, ISE, CBOE and NYSE
rules that Topaz Exchange proposes to incorporate by reference, subject
to the conditions specified in this Order that Topaz Exchange provide
written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or
NYSE propose to change an incorporated by reference rule and when the
Commission approves any such changes.
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\345\ 15 U.S.C. 78mm.

By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18474 Filed 7-31-13; 8:45 am]
BILLING CODE 8011-01-P

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