Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt a Fee Schedule To Establish the Fees for Industry Members Related to the National Market System Plan Governing the Consolidated Audit Trail, 23639-23657 [2017-10466]
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Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
(‘‘ISG’’).24 The proposed replacement of
‘‘investment company units’’ with
‘‘Investment Company Units’’ in two
places in NYSE Arca Equities Rule
5.2(j)(6)(B)(I)(1) is appropriate as such
changes conform to other usages of this
term in Exchange rules. The proposed
replacement of the word ‘‘Index’’ with
‘‘index’’ in two places in Rule
5.2(j)(6)(B)(I)(2)(a)(i) is appropriate as
such changes would conform to other
usages of this word in Rule
5.2(j)(6)(B)(I)(2).
The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
Index-Linked Securities in all trading
sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws. All
Index-Linked Securities listed pursuant
to NYSE Arca Equities Rule 5.2(j)(6) are
included within the definition of
‘‘security’’ or ‘‘securities’’ as such terms
are used in the Exchange rules and, as
such, are subject to Exchange rules and
procedures that currently govern the
trading of securities on the Exchange.
Trading in the securities will be halted
under the conditions specified in NYSE
Arca Equities Rule 5.2(j)(6)(E).
For these reasons, the Exchange
believes that the proposal is consistent
with the Act.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,25 the Exchange does not believe
that the proposed rule change will
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
Instead, the Exchange believes that the
proposed change will encourage
competition by enabling additional
types of Equity Index-Linked Securities
to be listed on the Exchange and, by
eliminating an unnecessary
consideration regarding underlying
components, create a more efficient
24 See, e.g., Securities Exchange Act Release No.
76719 (December 21, 2015), 80 FR 80859 (December
28, 2015) (order approving Exchange listing and
trading of shares of the Guggenheim Total Return
Bond ETF (‘‘Fund’’) under NYSE Arca Equities Rule
8.600), which filing stated: ‘‘Not more than 10% of
the net assets of the Fund in the aggregate invested
in equity securities (other than non-exchangetraded investment company securities) will consist
of equity securities whose principal market is not
a member of the ISG or is a market with which the
Exchange does not have a comprehensive
surveillance sharing agreement. In addition, not
more than 10% of the net assets of the Fund in the
aggregate invested in futures contracts or exchangetraded options contracts will consist of futures
contracts or exchange-traded options contracts
whose principal market is not a member of ISG or
is a market with which the Exchange does not have
a comprehensive surveillance sharing agreement.’’
25 15 U.S.C. 78f(b)(8).
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process surrounding the listing of
Equity Index-Linked Securities.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or up to 90 days (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
NYSEArca–2017–54 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File No.
SR–NYSEArca–2017–54. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
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23639
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–NYSEArca–
2017–54, and should be submitted on or
before June 13, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–10463 Filed 5–22–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80710; File No. SR–FINRA–
2017–011]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt a Fee Schedule
To Establish the Fees for Industry
Members Related to the National
Market System Plan Governing the
Consolidated Audit Trail
May 17, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on May 8, 2017, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA. FINRA
has designated the proposed rule change
as ‘‘establishing or changing a due, fee
or other charge’’ under Section
19(b)(3)(A)(ii) of the Act 3 and Rule 19b–
4(f)(2) thereunder,4 which renders the
26 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
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proposal effective upon receipt of this
filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt a fee
schedule to establish the fees for
Industry Members related to the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).5
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA 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,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
Bats BYX Exchange, Inc., Bats BZX
Exchange, Inc., Bats EDGA Exchange,
Inc., Bats EDGX Exchange, Inc., BOX
Options Exchange LLC, C2 Options
Exchange, Incorporated, Chicago Board
Options Exchange, Incorporated,
Chicago Stock Exchange, Inc., Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’), Investors’ Exchange LLC,
Miami International Securities
Exchange, LLC, MIAX PEARL, LLC,
NASDAQ BX, Inc., Nasdaq GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC,6
NASDAQ PHLX LLC, The NASDAQ
5 Unless otherwise specified, capitalized terms
used in this fee filing are defined as set forth herein,
the CAT Compliance Rule Series or in the CAT
NMS Plan.
6 ISE Gemini, LLC, ISE Mercury, LLC and
International Securities Exchange, LLC have been
renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC,
and Nasdaq ISE, LLC, respectively. See Securities
Exchange Act Release No. 80248 (March 15, 2017),
82 FR 14547 (March 21, 2017); Securities Exchange
Act Release No. 80326 (March 29, 2017), 82 FR
16460 (April 4, 2017); and Securities Exchange Act
Release No. 80325 (March 29, 2017), 82 FR 16445
(April 4, 2017).
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Stock Market LLC, New York Stock
Exchange LLC, NYSE MKT LLC, NYSE
Arca, Inc. and NYSE National, Inc.7
(collectively, the ‘‘Participants’’) filed
with the Commission, pursuant to
Section 11A of the Exchange Act 8 and
Rule 608 of Regulation NMS
thereunder,9 the CAT NMS Plan.10 The
Participants filed the Plan to comply
with Rule 613 of Regulation NMS under
the Exchange Act. The Plan was
published for comment in the Federal
Register on May 17, 2016,11 and
approved by the Commission, as
modified, on November 15, 2016.12 The
Plan is designed to create, implement
and maintain a consolidated audit trail
(‘‘CAT’’) that would capture customer
and order event information for orders
in NMS Securities and OTC Equity
Securities, across all markets, from the
time of order inception through routing,
cancellation, modification, or execution
in a single consolidated data source.
The Plan accomplishes this by creating
CAT NMS, LLC (the ‘‘Company’’), of
which each Participant is a member, to
operate the CAT.13 Under the CAT NMS
Plan, the Operating Committee of the
Company (‘‘Operating Committee’’) has
discretion to establish funding for the
Company to operate the CAT, including
establishing fees that the Participants
will pay, and establishing fees for
Industry Members that will be
implemented by the Participants (‘‘CAT
Fees’’).14 The Participants are required
to file with the SEC under Section 19(b)
of the Exchange Act any such CAT Fees
applicable to Industry Members that the
Operating Committee approves.15
Accordingly, FINRA submits this fee
filing to propose the Consolidated Audit
Trail Funding Fees, which will require
Industry Members that are FINRA
members to pay the CAT Fees
7 National Stock Exchange, Inc. has been renamed
NYSE National, Inc. See Securities Exchange Act
Release No. 79902 (January 30, 2017), 82 FR 9258
(February 3, 2017).
8 15 U.S.C. 78k–1.
9 17 CFR 242.608.
10 See Letter from the Participants to Brent J.
Fields, Secretary, Commission, dated September 30,
2014; and Letter from Participants to Brent J. Fields,
Secretary, Commission, dated February 27, 2015.
On December 24, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter
from Participants to Brent J. Fields, Secretary,
Commission, dated December 23, 2015.
11 Securities Exchange Act Release No. 77724
(April 27, 2016), 81 FR 30614 (May 17, 2016).
12 Securities Exchange Act Release No. 79318
(November 15, 2016), 81 FR 84696 (November 23,
2016) (‘‘Approval Order’’).
13 The Plan also serves as the limited liability
company agreement for the Company.
14 Section 11.1(b) of the CAT NMS Plan.
15 See supra note 14.
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determined by the Operating
Committee.
(1) Executive Summary
The following provides an executive
summary of the CAT funding model
approved by the Operating Committee,
as well as Industry Members’ rights and
obligations related to the payment of
CAT Fees calculated pursuant to the
CAT funding model. A detailed
description of the CAT funding model
and the CAT Fees follows this executive
summary.
(A) CAT Funding Model
• CAT Costs. The CAT funding model
is designed to establish CAT-specific
fees to collectively recover the costs of
building and operating the CAT from all
CAT Reporters, including Industry
Members and Participants. The overall
CAT costs for the calculation of the CAT
Fees in this fee filing are comprised of
Plan Processor CAT costs and non-Plan
Processor CAT costs incurred, and
estimated to be incurred, from
November 21, 2016 through November
21, 2017. (See Section II.A.1.(2)(E)
below)
• Bifurcated Funding Model. The
CAT NMS Plan requires a bifurcated
funding model, where costs associated
with building and operating the CAT
would be borne by (1) Participants and
Industry Members that are Execution
Venues for Eligible Securities through
fixed tier fees based on market share,
and (2) Industry Members (other than
alternative trading systems (‘‘ATSs’’)
that execute transactions in Eligible
Securities (‘‘Execution Venue ATSs’’))
through fixed tier fees based on message
traffic for Eligible Securities. (See
Section II.A.1.(2) below)
• Industry Member Fees. Each
Industry Member (other than Execution
Venue ATSs) will be placed into one of
nine tiers of fixed fees, based on
‘‘message traffic’’ in Eligible Securities
for a defined period (as discussed
below). Prior to the start of CAT
reporting, ‘‘message traffic’’ will be
comprised of historical equity and
equity options orders, cancels and
quotes provided by each exchange and
FINRA over the previous three months.
After an Industry Member begins
reporting to the CAT, ‘‘message traffic’’
will be calculated based on the Industry
Member’s Reportable Events reported to
the CAT. Industry Members with lower
levels of message traffic will pay a lower
fee and Industry Members with higher
levels of message traffic will pay a
higher fee. (See Section II.A.1.(2)(B)
below)
• Execution Venue Fees. Each Equity
Execution Venue will be placed in one
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of two tiers of fixed fees based on
market share, and each Options
Execution Venue will be placed in one
of two tiers of fixed fees based on
market share. Equity Execution Venue
market share will be determined by
calculating each Equity Execution
Venue’s proportion of the total volume
of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues
during the relevant time period.
Similarly, market share for Options
Execution Venues will be determined by
calculating each Options Execution
Venue’s proportion of the total volume
of Listed Options contracts reported by
all Options Execution Venues during
the relevant time period. Equity
Execution Venues with a larger market
share will pay a larger CAT Fee than
Equity Execution Venues with a smaller
market share. Similarly, Options
Execution Venues with a larger market
share will pay a larger CAT Fee than
Options Execution Venues with a
smaller market share. (See Section
II.A.1.(2)(C) below)
• Cost Allocation. For the reasons
discussed below, in designing the
model, the Operating Committee
determined that 75 percent of total costs
recovered would be allocated to
Industry Members (other than Execution
Venue ATSs) and 25 percent would be
allocated to Execution Venues. In
addition, the Operating Committee
determined to allocate 75 percent of
Execution Venue costs recovered to
Equity Execution Venues and 25 percent
to Options Execution Venues. (See
Section II.A.1.(2)(D) below)
• Comparability of Fees. The CAT
funding model requires that the CAT
Fees charged to the CAT Reporters with
the most CAT-related activity (measured
by market share and/or message traffic,
as applicable) are generally comparable
(where, for these comparability
purposes, the tiered fee structure takes
into consideration affiliations between
or among CAT Reporters, whether
Execution Venues and/or Industry
Members). (See Section II.A.1.(2)(F)
below)
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(B) CAT Fees for Industry Members
• Fee Schedule. The quarterly CAT
Fees for each tier for Industry Members
are set forth in the two fee schedules in
the Consolidated Audit Trail Funding
Fees, one for Equity ATSs and one for
Industry Members other than Equity
ATSs. (See Section II.A.1.(3)(B) below)
• Quarterly Invoices. Industry
Members will be billed quarterly for
CAT Fees, with the invoices payable
within 30 days. The quarterly invoices
will identify within which tier the
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Industry Member falls. (See Section
II.A.1.(3)(C) below)
• Centralized Payment. Each Industry
Member will receive from the Company
one invoice for its applicable CAT Fees,
not separate invoices from each
Participant of which it is a member. The
Industry Members will pay its CAT Fees
to the Company via the centralized
system for the collection of CAT Fees
established by the Operating Committee.
(See Section II.A.1.(3)(C) below)
• Billing Commencement. Industry
Members will begin to receive invoices
for CAT Fees as promptly as possible
following the establishment of a billing
mechanism. FINRA will issue a notice
to its members when the billing
mechanism is established, specifying
the date when such invoicing of
Industry Members will commence. (See
Section II.A.1.(2)(G) below)
(2) Description of the CAT Funding
Model
Article XI of the CAT NMS Plan
requires the Operating Committee to
approve the operating budget, including
projected costs of developing and
operating the CAT for the upcoming
year. As set forth in Article XI of the
CAT NMS Plan, the CAT NMS Plan
requires a bifurcated funding model,
where costs associated with building
and operating the Central Repository
would be borne by (1) Participants and
Industry Members that are Execution
Venues through fixed tier fees based on
market share, and (2) Industry Members
(other than Execution Venue ATSs)
through fixed tier fees based on message
traffic. In its order approving the CAT
NMS Plan, the Commission determined
that the proposed funding model was
‘‘reasonable’’ 16 and ‘‘reflects a
reasonable exercise of the Participants’
funding authority to recover the
Participants’ costs related to the
CAT.’’ 17
More specifically, the Commission
stated in approving the CAT NMS Plan
that ‘‘[t]he Commission believes that the
proposed funding model is reasonably
designed to allocate the costs of the CAT
between the Participants and Industry
Members.’’ 18 The Commission further
noted the following:
The Commission believes that the
proposed funding model reflects a reasonable
exercise of the Participants’ funding
authority to recover the Participants’ costs
related to the CAT. The CAT is a regulatory
facility jointly owned by the Participants and
. . . the Exchange Act specifically permits
the Participants to charge their members fees
16 Approval
Order at 84796.
Order at 84794.
18 Approval Order at 84795.
17 Approval
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23641
to fund their self-regulatory obligations. The
Commission further believes that the
proposed funding model is designed to
impose fees reasonably related to the
Participants’ self-regulatory obligations
because the fees would be directly associated
with the costs of establishing and
maintaining the CAT, and not unrelated SRO
services.19
Accordingly, the funding model
imposes fees on both Participants and
Industry Members.
In addition, as discussed in Appendix
C of the CAT NMS Plan, the Operating
Committee considered the advantages
and disadvantages of a variety of
alternative funding and cost allocation
models before selecting the proposed
model.20 After analyzing the various
alternatives, the Operating Committee
determined that the proposed tiered,
fixed fee funding model provides a
variety of advantages in comparison to
the alternatives. First, the fixed fee
model, as opposed to a variable fee
model, provides transparency, ease of
calculation, ease of billing and other
administrative functions, and
predictability of a fixed fee. Such factors
are crucial to estimating a reliable
revenue stream for the Company and for
permitting CAT Reporters to reasonably
predict their payment obligations for
budgeting purposes.21 Additionally, a
strictly variable or metered funding
model based on message volume would
be far more likely to affect market
behavior and place an inappropriate
burden on competition. Moreover, as
the SEC noted in approving the CAT
NMS Plan, ‘‘[t]he Participants also have
offered a reasonable basis for
establishing a funding model based on
broad tiers, in that it be may be easier
to implement.’’ 22
In addition, multiple reviews of
current broker-dealer order and trading
data submitted under existing reporting
requirements showed a wide range in
activity among broker-dealers, with a
number of broker-dealers submitting
fewer than 1,000 orders per month and
other broker-dealers submitting millions
and even billions of orders in the same
period. Accordingly, the CAT NMS Plan
includes a tiered approach to fees. The
19 Approval
Order at 84794.
B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
21 In choosing a tiered fee structure, the
Participants concluded that the variety of benefits
offered by a tiered fee structure, discussed above,
outweighed the fact that Industry Members in any
particular tier would pay different rates per message
traffic order event (e.g., an Industry Member with
the largest amount of message traffic in one tier
would pay a smaller amount per order event than
an Industry Member in the same tier with the least
amount of message traffic). Such variation is the
natural result of a tiered fee structure.
22 Approval Order at 84796.
20 Section
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sradovich on DSK3GMQ082PROD with NOTICES
tiered approach helps ensure that fees
are equitably allocated among similarly
situated CAT Reporters and furthers the
goal of lessening the impact on smaller
firms.23 The self-regulatory
organizations considered several
approaches to developing a tiered
model, including defining fee tiers
based on such factors as size of firm,
message traffic or trading dollar volume.
After analyzing the alternatives, it was
concluded that the tiering should be
based on the relative impact of CAT
Reporters on the CAT System.
Accordingly, the CAT NMS Plan
contemplates that costs will be allocated
across the CAT Reporters on a tiered
basis to allocate costs to those CAT
Reporters that contribute more to the
costs of creating, implementing and
maintaining the CAT.24 The fees to be
assessed at each tier are calculated so as
to recoup a proportion of costs
appropriate to the message traffic or
market share (as applicable) from CAT
Reporters in each tier. Therefore,
Industry Members generating the most
message traffic will be in the higher
tiers, and therefore be charged a higher
fee. Industry Members with lower levels
of message traffic will be in lower tiers
and will be assessed a smaller fee for the
CAT.25 Correspondingly, Execution
Venues with the highest market share
will be in the top tier, and therefore will
be charged a higher fee. Execution
Venues with a lower market share will
be in the lower tier and will be assessed
a smaller fee for the CAT.26
The Commission also noted in
approving the CAT NMS Plan that
‘‘[t]he Participants have offered a
credible justification for using different
criteria to charge Execution Venues
(market share) and Industry Members
(message traffic)’’ 27 in the CAT funding
model. While there are multiple factors
that contribute to the cost of building,
maintaining and using the CAT,
processing and storage of incoming
message traffic is one of the most
significant cost drivers for the CAT.28
Thus, the CAT NMS Plan provides that
the fees payable by Industry Members
(other than Execution Venue ATSs) will
be based on the message traffic
generated by such Industry Member.29
The CAT NMS Plan provides that the
Operating Committee will use different
criteria to establish fees for Execution
23 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
24 Approval Order at 85005.
25 See supra note 24.
26 See supra note 24.
27 Approval Order at 84796.
28 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85005.
29 Section 11.3(b) of the CAT NMS Plan.
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Venues and non-Execution Venues due
to the fundamental differences between
the two types of entities. In particular,
the CAT NMS Plan provides that fees
charged to CAT Reporters that are
Execution Venues will be based on the
level of market share and that costs
charged to Industry Members (other
than Execution Venue ATSs) will be
based upon message traffic.30 Because
most Participant message traffic consists
of quotations, and Participants usually
disseminate quotations in all
instruments they trade, regardless of
execution volume, Execution Venues
that are Participants generally
disseminate similar amounts of message
traffic. Accordingly, basing fees for
Execution Venues on message traffic
would not provide the same degree of
differentiation among Execution Venues
that it does among Industry Members
(other than Execution Venue ATSs). In
contrast, execution volume more
accurately delineates the different levels
of trading activity of Execution
Venues.31
The CAT NMS Plan’s funding model
also is structured to avoid a ‘‘reduction
in market quality.’’ 32 The tiered, fixed
fee funding model is designed to limit
the disincentives to providing liquidity
to the market. For example, the
Participants expect that a firm that had
a large volume of quotes would likely be
categorized in one of the upper tiers,
and would not be assessed a fee for this
traffic directly as they would under a
more directly metered model. In
contrast, strictly variable or metered
funding models based on message
volume were far more likely to affect
market behavior. In approving the CAT
NMS Plan, the SEC stated that ‘‘[t]he
Participants also offered a reasonable
basis for establishing a funding model
based on broad tiers, in that it may be
. . . less likely to have an incremental
deterrent effect on liquidity
provision.’’ 33
The CAT NMS Plan is structured to
avoid potential conflicts raised by the
Operating Committee determining fees
applicable to its own members—the
Participants. First, the Company will be
operated on a ‘‘break-even’’ basis, with
fees imposed to cover costs and an
appropriate reserve. Any surpluses will
be treated as an operational reserve to
offset future fees and will not be
distributed to the Participants as
profits.34 To ensure that the
30 Section
11.2(c) of the CAT NMS Plan.
B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85005.
32 Section 11.2(e) of the CAT NMS Plan.
33 Approval Order at 84796.
34 Approval Order at 84792.
31 Section
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Participants’ operation of the CAT will
not contribute to the funding of their
other operations, Section 11.1(c) of the
CAT NMS Plan specifically states that
‘‘[a]ny surplus of the Company’s
revenues over its expenses shall be
treated as an operational reserve to
offset future fees.’’ In addition, as set
forth in Article VIII of the CAT NMS
Plan, the Company ‘‘intends to operate
in a manner such that it qualifies as a
‘business league’ within the meaning of
Section 501(c)(6) of the [Internal
Revenue] Code.’’ To qualify as a
business league, an organization must
‘‘not [be] organized for profit and no
part of the net earnings of [the
organization can] inure[ ] to the benefit
of any private shareholder or
individual.’’ 35 As the SEC stated when
approving the CAT NMS Plan, ‘‘the
Commission believes that the
Company’s application for Section
501(c)(6) business league status
addresses issues raised by commenters
about the Plan’s proposed allocation of
profit and loss by mitigating concerns
that the Company’s earnings could be
used to benefit individual
Participants.’’ 36
Finally, by adopting a CAT-specific
fee, the Participants will be fully
transparent regarding the costs of the
CAT. Charging a general regulatory fee,
which would be used to cover CAT
costs as well as other regulatory costs,
would be less transparent than the
selected approach of charging a fee
designated to cover CAT costs only.
A full description of the funding
model is set forth below. This
description includes the framework for
the funding model as set forth in the
CAT NMS Plan, as well as the details as
to how the funding model will be
applied in practice, including the
number of fee tiers and the applicable
fees for each tier. FINRA notes that the
complete funding model is described
below, including those fees that are to
be paid by the Participants. The
proposed Consolidated Audit Trail
Funding Fees, however, do not apply to
the Participants; the proposed
Consolidated Audit Trail Funding Fees
only apply to Industry Members. The
CAT fees for Participants will be
imposed separately by the Operating
Committee pursuant to the CAT NMS
Plan.
(A) Funding Principles
Section 11.2 of the CAT NMS Plan
sets forth the principles that the
Operating Committee applied in
establishing the funding for the
35 26
U.S.C. 501(c)(6).
Order at 84793.
36 Approval
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sradovich on DSK3GMQ082PROD with NOTICES
Company. The Operating Committee has
considered these funding principles as
well as the other funding requirements
set forth in the CAT NMS Plan and in
Rule 613 in developing the proposed
funding model. The following are the
funding principles in Section 11.2 of the
CAT NMS Plan:
• To create transparent, predictable
revenue streams for the Company that
are aligned with the anticipated costs to
build, operate and administer the CAT
and other costs of the Company;
• To establish an allocation of the
Company’s related costs among
Participants and Industry Members that
is consistent with the Exchange Act,
taking into account the timeline for
implementation of the CAT and
distinctions in the securities trading
operations of Participants and Industry
Members and their relative impact upon
the Company’s resources and
operations;
• To establish a tiered fee structure in
which the fees charged to: (i) CAT
Reporters that are Execution Venues,
including ATSs, are based upon the
level of market share; (ii) Industry
Members’ non-ATS activities are based
upon message traffic; (iii) the CAT
Reporters with the most CAT-related
activity (measured by market share and/
or message traffic, as applicable) are
generally comparable (where, for these
comparability purposes, the tiered fee
structure takes into consideration
affiliations between or among CAT
Reporters, whether Execution Venue
and/or Industry Members);
• To provide for ease of billing and
other administrative functions;
• To avoid any disincentives such as
placing an inappropriate burden on
competition and a reduction in market
quality; and
• To build financial stability to
support the Company as a going
concern.
(B) Industry Member Tiering
Under Section 11.3(b) of the CAT
NMS Plan, the Operating Committee is
required to establish fixed fees to be
payable by Industry Members, based on
message traffic generated by such
Industry Member, with the Operating
Committee establishing at least five and
no more than nine tiers.
The CAT NMS Plan clarifies that the
fixed fees payable by Industry Members
pursuant to Section 11.3(b) shall, in
addition to any other applicable
message traffic, include message traffic
generated by: (i) An ATS that does not
execute orders that is sponsored by such
Industry Member; and (ii) routing orders
to and from any ATS sponsored by such
Industry Member. In addition, the
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Industry Member fees will apply to
Industry Members that act as routing
broker-dealers for exchanges. The
Industry Member fees will not be
applicable, however, to an ATS that
qualifies as an Execution Venue, as
discussed in more detail in the section
on Execution Venue tiering.
In accordance with Section 11.3(b),
the Operating Committee approved a
tiered fee structure for Industry
Members (other than Execution Venue
ATSs) as described in this section. In
determining the tiers, the Operating
Committee considered the funding
principles set forth in Section 11.2 of
the CAT NMS Plan, seeking to create
funding tiers that take into account the
relative impact on CAT System
resources of different Industry Members,
and that establish comparable fees
among the CAT Reporters with the most
Reportable Events. The Operating
Committee has determined that
establishing nine tiers results in the
fairest allocation of fees, best
distinguishing between Industry
Members with differing levels of
message traffic. Thus, each such
Industry Member will be placed into
one of nine tiers of fixed fees, based on
‘‘message traffic’’ for a defined period
(as discussed below). A nine tier
structure was selected to provide the
widest range of levels for tiering
Industry Members such that Industry
Members submitting significantly less
message traffic to the CAT would be
adequately differentiated from Industry
Members submitting substantially more
message traffic. The Operating
Committee considered historical
message traffic generated by Industry
Members across all exchanges and as
submitted to FINRA’s Order Audit Trail
System (‘‘OATS’’), and considered the
distribution of firms with similar levels
of message traffic, grouping together
firms with similar levels of message
traffic. Based on this, the Operating
Committee determined that nine tiers
would best group firms with similar
levels of message traffic, charging those
firms with higher impact on the CAT
more, while lowering the burden of
Industry Members that have less CATrelated activity.
Each Industry Member (other than
Execution Venue ATSs) will be ranked
by message traffic and tiered by
predefined Industry Member
percentages (the ‘‘Industry Member
Percentages’’). The Operating
Committee determined to use
predefined percentages rather than fixed
volume thresholds to allow the funding
model to ensure that the total CAT fees
collected recover the intended CAT
costs regardless of changes in the total
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23643
level of message traffic. To determine
the fixed percentage of Industry
Members in each tier, the Operating
Committee analyzed historical message
traffic generated by Industry Members
across all exchanges and as submitted to
OATS, and considered the distribution
of firms with similar levels of message
traffic, grouping together firms with
similar levels of message traffic. Based
on this, the Operating Committee
identified tiers that would group firms
with similar levels of message traffic,
charging those firms with higher impact
on the CAT more, while lowering the
burden on Industry Members that have
less CAT-related activity.
The percentage of costs recovered by
each Industry Member tier will be
determined by predefined percentage
allocations (the ‘‘Industry Member
Recovery Allocation’’). In determining
the fixed percentage allocation of costs
recovered for each tier, the Operating
Committee considered the impact of
CAT Reporter message traffic on the
CAT System as well as the distribution
of total message volume across Industry
Members while seeking to maintain
comparable fees among the largest CAT
Reporters. Accordingly, following the
determination of the percentage of
Industry Members in each tier, the
Operating Committee identified the
percentage of total market volume for
each tier based on the historical message
traffic upon which Industry Members
had been initially ranked. Taking this
into account along with the resulting
percentage of total recovery, the
percentage allocation of costs recovered
for each tier were assigned, allocating
higher percentages of recovery to tiers
with higher levels of message traffic
while avoiding any inappropriate
burden on competition. Furthermore, by
using percentages of Industry Members
and costs recovered per tier, the
Operating Committee sought to include
stability and elasticity within the
funding model, allowing the funding
model to respond to changes in either
the total number of Industry Members or
the total level of message traffic.
The following chart illustrates the
breakdown of nine Industry Member
tiers across the monthly average of total
equity and equity options orders,
cancels and quotes in Q1 2016 and
identifies relative gaps across varying
levels of Industry Member message
traffic as well as message traffic
thresholds between the largest of
Industry Member message traffic gaps.
The Operating Committee referenced
similar distribution illustrations to
determine the appropriate division of
Industry Member percentages in each
tier by considering the grouping of firms
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with similar levels of message traffic
and seeking to identify relative
breakpoints in the message traffic
between such groupings. In reviewing
the chart and its corresponding table,
note that while these distribution
illustrations were referenced to help
differentiate between Industry Member
tiers, the proposed funding model is
directly driven, not by fixed message
traffic thresholds, but rather by fixed
percentages of Industry Members across
tiers to account for fluctuating levels of
message traffic across time and to
provide for the financial stability of the
CAT by ensuring that the funding model
will recover the required amounts
regardless of changes in the number of
Industry Members or the amount of
message traffic. Actual messages in any
tier will vary based on the actual traffic
in a given measurement period, as well
as the number of firms included in the
measurement period. The Industry
Member Percentages and Industry
Member Recovery Allocation for each
tier will remain fixed with each
Industry Member’s tier to be reassigned
periodically, as described below in
Section II.A.1.(1)(H) [sic].
Monthly average
message traffic
per industry
member
(orders, quotes
and cancels)
Industry member tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
6
7
8
9
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
Based on the above analysis, the
Operating Committee approved the
following Industry Member Percentages
and Recovery Allocations:
Percentage
of industry
members
sradovich on DSK3GMQ082PROD with NOTICES
Industry member tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
6
7
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
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Jkt 241001
>10,000,000,000
>1,000,000,000
>100,000,000
>2,500,000
>200,000
>50,000
>5,000
>1,000
≤1,000
PO 00000
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0.500
2.500
2.125
4.625
3.625
4.000
17.500
E:\FR\FM\23MYN1.SGM
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Percentage
of industry
member
recovery
8.50
35.00
21.25
15.75
7.75
5.25
4.50
Percentage
of total
recovery
6.38
26.25
15.94
11.81
5.81
3.94
3.38
EN23MY17.000</GPH>
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Percentage
of industry
members
Industry member tier
Percentage
of industry
member
recovery
Percentage
of total
recovery
Tier 8 ............................................................................................................................................
Tier 9 ............................................................................................................................................
20.125
45.000
1.50
0.50
1.13
0.38
Total ......................................................................................................................................
100
100
75
sradovich on DSK3GMQ082PROD with NOTICES
For the purposes of creating these
tiers based on message traffic, the
Operating Committee determined to
define the term ‘‘message traffic’’
separately for the period before the
commencement of CAT reporting and
for the period after the start of CAT
reporting. The different definition for
message traffic is necessary as there will
be no Reportable Events as defined in
the Plan, prior to the commencement of
CAT reporting. Accordingly, prior to the
start of CAT reporting, ‘‘message traffic’’
will be comprised of historical equity
and equity options orders, cancels and
quotes provided by each exchange and
FINRA over the previous three
months.37 Prior to the start of CAT
reporting, orders would be comprised of
the total number of equity and equity
options orders received and originated
by a member of an exchange or FINRA
over the previous three-month period,
including principal orders, cancel/
replace orders, market maker orders
originated by a member of an exchange,
and reserve (iceberg) orders as well as
order routes and executions originated
by a member of FINRA, and excluding
order rejects and implied orders.38 In
addition, prior to the start of CAT
reporting, cancels would be comprised
of the total number of equity and equity
option cancels received and originated
by a member of an exchange or FINRA
over a three-month period, excluding
order modifications (e.g., order updates,
order splits, partial cancels).
Furthermore, prior to the start of CAT
reporting, quotes would be comprised of
37 The SEC approved exemptive relief permitting
Options Market Maker quotes to be reported to the
Central Repository by the relevant Options
Exchange in lieu of requiring that such reporting be
done by both the Options Exchange and the Options
Market Maker, as required by Rule 613 of
Regulation NMS. See Securities Exchange Act
Release No. 77265 (March 1, 2016 [sic], 81 FR
11856 (March 7, 2016). This exemption applies to
Options Market Maker quotes for CAT reporting
purposes only. Therefore, notwithstanding the
reporting exemption provided for Options Market
Maker quotes, Options Market Maker quotes will be
included in the calculation of total message traffic
for Options Market Makers for purposes of tiering
under the CAT funding model both prior to CAT
reporting and once CAT reporting commences.
38 Consequently, firms that do not have ‘‘message
traffic’’ reported to an exchange or OATS before
they are reporting to the CAT would not be subject
to a fee until they begin to report information to
CAT.
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21:15 May 22, 2017
Jkt 241001
information readily available to the
exchanges and FINRA, such as the total
number of historical equity and equity
options quotes received and originated
by a member of an exchange or FINRA
over the prior three-month period.
After an Industry Member begins
reporting to the CAT, ‘‘message traffic’’
will be calculated based on the Industry
Member’s Reportable Events reported to
the CAT as will be defined in the
Technical Specifications.39
The Operating Committee has
determined to calculate fee tiers every
three months, on a calendar quarter
basis, based on message traffic from the
prior three months. Based on its
analysis of historical data, the Operating
Committee believes that calculating tiers
based on three months of data will
provide the best balance between
reflecting changes in activity by
Industry Members while still providing
predictability in the tiering for Industry
Members. Because fee tiers will be
calculated based on message traffic from
the prior three months, the Operating
Committee will begin calculating
message traffic based on an Industry
Member’s Reportable Events reported to
the CAT once the Industry Member has
been reporting to the CAT for three
months. Prior to that, fee tiers will be
calculated as discussed above with
regard to the period prior to CAT
reporting.
(C) Execution Venue Tiering
Under Section 11.3(a) of the CAT
NMS Plan, the Operating Committee is
required to establish fixed fees payable
by Execution Venues. Section 1.1 of the
CAT NMS Plan defines an Execution
Venue as ‘‘a Participant or an alternative
trading system (‘‘ATS’’) (as defined in
Rule 300 of Regulation ATS) that
operates pursuant to Rule 301 of
Regulation ATS (excluding any such
ATS that does not execute orders).’’ 40
39 If an Industry Member (other than an Execution
Venue ATS) has no orders, cancels or quotes prior
to the commencement of CAT Reporting, or no
Reportable Events after CAT reporting commences,
then the Industry Member would not have a CAT
fee obligation.
40 Although FINRA does not operate an execution
venue, because it is a Participant, it is considered
an ‘‘Execution Venue’’ under the Plan for purposes
of determining fees.
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The Participants determined that
ATSs should be included within the
definition of Execution Venue. Given
the similarity between the activity of
exchanges and ATSs, both of which
meet the definition of an ‘‘exchange’’ as
set forth in the Exchange Act and the
fact that the similar trading models
would have similar anticipated burdens
on the CAT, the Participants determined
that ATSs should be treated in the same
manner as the exchanges for the
purposes of determining the level of fees
associated with the CAT.41
Given the differences between
Execution Venues that trade NMS
Stocks and/or OTC Equity Securities
and Execution Venues that trade Listed
Options, Section 11.3(a) addresses
Execution Venues that trade NMS
Stocks and/or OTC Equity Securities
separately from Execution Venues that
trade Listed Options. Equity and
Options Execution Venues are treated
separately for two reasons. First, the
differing quoting behavior of Equity and
Options Execution Venues makes
comparison of activity between
Execution Venues difficult. Second,
Execution Venue tiers are calculated
based on market share of share volume,
and it is therefore difficult to compare
market share between asset classes (i.e.,
equity shares versus options contracts).
Discussed below is how the funding
model treats the two types of Execution
Venues.
(I) NMS Stocks and OTC Equity
Securities
Section 11.3(a)(i) of the CAT NMS
Plan states that each Execution Venue
that (i) executes transactions or, (ii) in
the case of a national securities
association, has trades reported by its
members to its trade reporting facility or
facilities for reporting transactions
effected otherwise than on an exchange,
in NMS Stocks or OTC Equity Securities
will pay a fixed fee depending on the
market share of that Execution Venue in
NMS Stocks and OTC Equity Securities,
with the Operating Committee
establishing at least two and not more
than five tiers of fixed fees, based on an
Execution Venue’s NMS Stocks and
41 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85005.
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OTC Equity Securities market share. For
these purposes, market share for
Execution Venues that execute
transactions will be calculated by share
volume, and market share for a national
securities association that has trades
reported by its members to its trade
reporting facility or facilities for
reporting transactions effected
otherwise than on an exchange in NMS
Stocks or OTC Equity Securities will be
calculated based on share volume of
trades reported, provided, however, that
the share volume reported to such
national securities association by an
Execution Venue shall not be included
in the calculation of such national
security association’s market share.
In accordance with Section 11.3(a)(i)
of the CAT NMS Plan, the Operating
Committee approved a tiered fee
structure for Equity Execution Venues
and Option Execution Venues. In
determining the Equity Execution
Venue Tiers, the Operating Committee
considered the funding principles set
forth in Section 11.2 of the CAT NMS
Plan, seeking to create funding tiers that
take into account the relative impact on
system resources of different Equity
Execution Venues, and that establish
comparable fees among the CAT
Reporters with the most Reportable
Events. Each Equity Execution Venue
will be placed into one of two tiers of
fixed fees, based on the Execution
Venue’s NMS Stocks and OTC Equity
Securities market share. In choosing two
tiers, the Operating Committee
performed an analysis similar to that
discussed above with regard to the nonExecution Venue Industry Members to
determine the number of tiers for Equity
Execution Venues. The Operating
Committee determined to establish two
tiers for Equity Execution Venues, rather
than a larger number of tiers as
established for non-Execution Venue
Industry Members, because the two tiers
were sufficient to distinguish between
the smaller number of Equity Execution
Venues based on market share.
Furthermore, the incorporation of
additional Equity Execution Venue tiers
would result in significantly higher fees
for Tier 1 Equity Execution Venues and
diminish comparability between
Execution Venues and Industry
Members.
Each Equity Execution Venue will be
ranked by market share and tiered by
predefined Execution Venue
percentages, (the ‘‘Equity Execution
Venue Percentages’’). In determining the
fixed percentage of Equity Execution
Venues in each tier, the Operating
Committee looked at historical market
share of share volume for execution
venues. Equities Execution Venue
market share of share volume were
sourced from market statistics made
publicly-available by Bats Global
Markets, Inc. (‘‘Bats’’). ATS market
share of share volume was sourced from
market statistics made publiclyavailable by FINRA. FINRA trade
reporting facility (‘‘TRF’’) market share
of share volume was sourced from
market statistics made publicly
available by Bats. As indicated by
FINRA, ATSs accounted for 37.80% of
the share volume across the TRFs
during the recent tiering period. A
37.80/62.20 split was applied to the
ATS and non-ATS breakdown of FINRA
market share, with FINRA tiered based
only on the non-ATS portion of its TRF
market share of share volume.
Based on this, the Operating
Committee considered the distribution
of Execution Venues, and grouped
together Execution Venues with similar
levels of market share of share volume.
In doing so, the Participants considered
that, as previously noted, Execution
Venues in many cases have similar
levels of message traffic due to quoting
activity, and determined that it was
simpler and more appropriate to have
fewer, rather than more, Execution
Venue tiers to distinguish between
Execution Venues.
The percentage of costs recovered by
each Equity Execution Venue tier will
be determined by predefined percentage
allocations (the ‘‘Equity Execution
Venue Recovery Allocation’’). In
determining the fixed percentage
allocation of costs recovered for each
tier, the Operating Committee
considered the impact of CAT Reporter
market share activity on the CAT
System as well as the distribution of
total market volume across Equity
Execution Venues while seeking to
maintain comparable fees among the
largest CAT Reporters. Accordingly,
following the determination of the
percentage of Execution Venues in each
tier, the Operating Committee identified
the percentage of total market volume
for each tier based on the historical
market share upon which Execution
Venues had been initially ranked.
Taking this into account along with the
resulting percentage of total recovery,
the percentage allocation of costs
recovered for each tier were assigned,
allocating higher percentages of
recovery to the tier with a higher level
of market share while avoiding any
inappropriate burden on competition.
Furthermore, due to the similar levels of
impact on the CAT System across
Execution Venues, there is less variation
in CAT Fees between the highest and
lowest of tiers for Execution Venues.
Furthermore, by using percentages of
Equity Execution Venues and costs
recovered per tier, the Operating
Committee sought to include stability
and elasticity within the funding model,
allowing the funding model to respond
to changes in either the total number of
Equity Execution Venues or changes in
market share.
Based on this analysis, the Operating
Committee approved the following
Equity Execution Venue Percentages
and Recovery Allocations:
Percentage
of Equity
Execution
Venues
Equity Execution Venue tier
Percentage
of Execution
Venue
Recovery
Percentage
of total
Recovery
25.00
75.00
26.00
49.00
6.50
12.25
Total ......................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
100
75
18.75
The following table exhibits the
relative separation of market share of
share volume between Tier 1 and Tier
2 Equity Execution Venues. In
reviewing the table, note that while this
division was referenced as a data point
to help differentiate between Equity
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Execution Venue tiers, the proposed
funding model is directly driven not by
market share thresholds, but rather by
fixed percentages of Equity Execution
Venues across tiers to account for
fluctuating levels of market share across
time. Actual market share in any tier
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will vary based on the actual market
activity in a given measurement period,
as well as the number of Equity
Execution Venues included in the
measurement period. The Equity
Execution Venue Percentages and
Equity Execution Venue Recovery
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Reportable Events. Each Options
Execution Venue will be placed into one
of two tiers of fixed fees, based on the
Execution Venue’s Listed Options
market share. In choosing two tiers, the
Operating Committee performed an
Equity market analysis similar to that discussed above
share of
with regard to Industry Members (other
Equity Execution Venue tier
share volume
than Execution Venue ATSs) to
(%)
determine the number of tiers for
Tier 1 ....................................
≥1 Options Execution Venues. The
Tier 2 ....................................
<1 Operating Committee determined to
establish two tiers for Options
(II) Listed Options
Execution Venues, rather than a larger
number of tiers as established for
Section 11.3(a)(ii) of the CAT NMS
Industry Members (other than Execution
Plan states that each Execution Venue
Venue ATSs), because the two tiers
that executes transactions in Listed
were sufficient to distinguish between
Options will pay a fixed fee depending
the smaller number of Options
on the Listed Options market share of
Execution Venues based on market
that Execution Venue, with the
share. Furthermore, due to the smaller
Operating Committee establishing at
number of Options Execution Venues,
least two and no more than five tiers of
the incorporation of additional Options
fixed fees, based on an Execution
Execution Venue tiers would result in
Venue’s Listed Options market share.
For these purposes, market share will be significantly higher fees for Tier 1
Options Execution Venues and reduce
calculated by contract volume.
In accordance with Section 11.3(a)(ii) comparability between Execution
Venues and Industry Members.
of the CAT NMS Plan, the Operating
Committee approved a tiered fee
Each Options Execution Venue will
structure for Options Execution Venues. be ranked by market share and tiered by
In determining the tiers, the Operating
predefined Execution Venue
Committee considered the funding
percentages, (the ‘‘Options Execution
principles set forth in Section 11.2 of
Venue Percentages’’). To determine the
the CAT NMS Plan, seeking to create
fixed percentage of Options Execution
funding tiers that take into account the
Venues in each tier, the Operating
relative impact on system resources of
Committee analyzed the historical and
different Options Execution Venues,
publicly available market share of
and that establish comparable fees
Options Execution Venues to group
among the CAT Reporters with the most Options Execution Venues with similar
Allocation for each tier will remain
fixed with each Equity Execution Venue
tier to be reassigned periodically, as
described below in Section II.A.1.(1)(I)
[sic].
market shares across the tiers. Options
Execution Venue market share of share
volume were sourced from market
statistics made publicly-available by
Bats. The process for developing the
Options Execution Venue Percentages
was the same as discussed above with
regard to Equity Execution Venues.
The percentage of costs recovered by
each Options Execution Venue tier will
be determined by predefined percentage
allocations (the ‘‘Options Execution
Venue Recovery Allocation’’). In
determining the fixed percentage
allocation of costs recovered for each
tier, the Operating Committee
considered the impact of CAT Reporter
market share activity on the CAT
System as well as the distribution of
total market volume across Options
Execution Venues while seeking to
maintain comparable fees among the
largest CAT Reporters. Furthermore, by
using percentages of Options Execution
Venues and costs recovered per tier, the
Operating Committee sought to include
stability and elasticity within the
funding model, allowing the funding
model to respond to changes in either
the total number of Options Execution
Venues or changes in market share. The
process for developing the Options
Execution Venue Recovery Allocation
was the same as discussed above with
regard to Equity Execution Venues.
Based on this analysis, the Operating
Committee approved the following
Options Execution Venue Percentages
and Recovery Allocations:
Percentage
of Options
Execution
Venues
Options Execution Venue tier
Percentage
of Execution
Venue
Recovery
Percentage
of total
recovery
75.00
25.00
20.00
5.00
5.00
1.25
Total ......................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
100
25
6.25
The following table exhibits the
relative separation of market share of
share volume between Tier 1 and Tier
2 Options Execution Venues. In
reviewing the table, note that while this
division was referenced as a data point
to help differentiate between Options
Execution Venue tiers, the proposed
funding model is directly driven, not by
market share thresholds, but rather by
fixed percentages of Options Execution
Venues across tiers to account for
fluctuating levels of market share across
time. Actual market share in any tier
will vary based on the actual market
activity in a given measurement period,
as well as the number of Options
Execution Venues included in the
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21:15 May 22, 2017
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measurement period. The Options
Execution Venue Percentages and
Equity Execution Venue Recovery
Allocation for each tier will remain
fixed with each Options Execution
Venue tier to be reassigned periodically,
as described below in Section
II.A.1.(1)(I) [sic].
Options Execution Venue
Tier
Tier 1 ....................................
Tier 2 ....................................
PO 00000
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Fmt 4703
(III) Market Share/Tier Assignments
The Operating Committee determined
that, prior to the start of CAT reporting,
market share for Execution Venues
would be sourced from publiclyavailable market data. Options and
equity volumes for Participants will be
sourced from market data made publicly
available by Bats while Execution
Options
Venue ATS volumes will be sourced
market share
of share
from market data made publicly
volume
available by FINRA. Set forth in the
(%)
Appendix are two charts, one listing the
≥1 current Equity Execution Venues, each
<1 with its rank and tier, and one listing
the current Options Execution Venues,
each with its rank and tier.
Sfmt 4703
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After the commencement of CAT
reporting, market share for Execution
Venues will be sourced from data
reported to the CAT. Equity Execution
Venue market share will be determined
by calculating each Equity Execution
Venue’s proportion of the total volume
of NMS Stock and OTC Equity shares
reported by all Equity Execution Venues
during the relevant time period.
Similarly, market share for Options
Execution Venues will be determined by
calculating each Options Execution
Venue’s proportion of the total volume
of Listed Options contracts reported by
all Options Execution Venues during
the relevant time period.
The Operating Committee has
determined to calculate fee tiers for
Execution Venues every three months
based on market share from the prior
three months. Based on its analysis of
historical data, the Operating Committee
believes calculating tiers based on three
months of data will provide the best
balance between reflecting changes in
activity by Execution Venues while still
providing predictability in the tiering
for Execution Venues.
sradovich on DSK3GMQ082PROD with NOTICES
(D) Allocation of Costs
In addition to the funding principles
discussed above, including
comparability of fees, Section 11.1(c) of
the CAT NMS Plan also requires
expenses to be fairly and reasonably
shared among the Participants and
Industry Members. Accordingly, in
developing the proposed fee schedules
pursuant to the funding model, the
Operating Committee calculated how
the CAT costs would be allocated
between Industry Members and
Execution Venues, and how the portion
of CAT costs allocated to Execution
Venues would be allocated between
Equity Execution Venues and Options
Execution Venues. These
determinations are described below.
(I) Allocation Between Industry
Members and Execution Venues
In determining the cost allocation
between Industry Members (other than
Execution Venue ATSs) and Execution
Venues, the Operating Committee
analyzed a range of possible splits for
revenue recovered from such Industry
Members and Execution Venues. Based
on this analysis, the Operating
Committee determined that 75 percent
of total costs recovered would be
allocated to Industry Members (other
than Execution Venue ATSs) and 25
percent would be allocated to Execution
Venues. The Operating Committee
determined that this 75/25 division
maintained the greatest level of
comparability across the funding model,
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Jkt 241001
keeping in view that comparability
should consider affiliations among or
between CAT Reporters (e.g., firms with
multiple Industry Members and/or
exchange licenses). For example, the
cost allocation establishes fees for the
largest Industry Members (i.e., those
Industry Members in Tiers 1, 2 and 3)
that are comparable to the largest Equity
Execution Venues and Options
Execution Venues (i.e., those Execution
Venues in Tier 1). In addition, the cost
allocation establishes fees for Execution
Venue complexes that are comparable to
those of Industry Member complexes.
For example, when analyzing
alternative allocations, other possible
allocations led to much higher fees for
larger Industry Members than for larger
Execution Venues or vice versa, and/or
led to much higher fees for Industry
Member complexes than Execution
Venue complexes or vice versa.
Furthermore, the allocation of total
CAT costs recovered recognizes the
difference in the number of CAT
Reporters that are Industry Members
versus CAT Reporters that are Execution
Venues. Specifically, the cost allocation
takes into consideration that there are
approximately 25 times more Industry
Members expected to report to the CAT
than Execution Venues (e.g., an
estimated 1,630 Industry Members
versus 70 Execution Venues as of
January 2017).
(II) Allocation Between Equity
Execution Venues and Options
Execution Venues
The Operating Committee also
analyzed how the portion of CAT costs
allocated to Execution Venues would be
allocated between Equity Execution
Venues and Options Execution Venues.
In considering this allocation of costs,
the Operating Committee analyzed a
range of alternative splits for revenue
recovered between Equity and Options
Execution Venues, including a 70/30,
67/33, 65/35, 50/50 and 25/75 split.
Based on this analysis, the Operating
Committee determined to allocate 75
percent of Execution Venue costs
recovered to Equity Execution Venues
and 25 percent to Options Execution
Venues. The Operating Committee
determined that a 75/25 division
between Equity and Options Execution
Venues maintained elasticity across the
funding model as well the greatest level
of fee equitability and comparability
based on the current number of Equity
and Options Execution Venues. For
example, the allocation establishes fees
for the larger Equity Execution Venues
that are comparable to the larger
Options Execution Venues, and fees for
the smaller Equity Execution Venues
PO 00000
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Sfmt 4703
that are comparable to the smaller
Options Execution Venues. In addition
to fee comparability between Equity
Execution Venues and Options
Execution Venues, the allocation also
establishes equitability between larger
(Tier 1) and smaller (Tier 2) Execution
Venues based upon the level of market
share. Furthermore, the allocation is
intended to reflect the relative levels of
current equity and options order events.
(E) Fee Levels
The Operating Committee determined
to establish a CAT-specific fee to
collectively recover the costs of building
and operating the CAT. Accordingly,
under the funding model, the sum of the
CAT Fees is designed to recover the
total cost of the CAT. The Operating
Committee has determined overall CAT
costs to be comprised of Plan Processor
costs and non-Plan Processor costs,
which are estimated to be $50,700,000
in total for the year beginning November
21, 2016.42
The Plan Processor costs relate to
costs incurred by the Plan Processor and
consist of the Plan Processor’s current
estimates of average yearly ongoing
costs, including development cost,
which total $37,500,000. This amount is
based upon the fees due to the Plan
Processor pursuant to the agreement
with the Plan Processor.
The non-Plan Processor estimated
costs incurred and to be incurred by the
Company through November 21, 2017
consist of three categories of costs. The
first category of such costs are third
party support costs, which include
historic legal fees, consulting fees and
audit fees from November 21, 2016 until
the date of filing as well as estimated
third party support costs for the rest of
the year. These amount to an estimated
$5,200,000. The second category of nonPlan Processor costs are estimated
insurance costs for the year. Based on
discussions with potential insurance
providers, assuming $2–5 million
insurance premium on $100 million in
coverage, the Company has received an
estimate of $3,000,000 for the annual
cost. The final cost figures will be
determined following receipt of final
underwriter quotes. The third category
of non-Plan Processor costs is the
operational reserve, which is comprised
of three months of ongoing Plan
Processor costs ($9,375,000), third party
support costs ($1,300,000) and
insurance costs ($750,000). The
Operating Committee aims to
accumulate the necessary funds for the
42 It is anticipated that CAT-related costs incurred
prior to November 21, 2016 will be addressed via
a separate fee filing.
E:\FR\FM\23MYN1.SGM
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Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
establishment of the three-month
operating reserve for the Company
through the CAT Fees charged to CAT
Reporters for the year. On an ongoing
basis, the Operating Committee will
account for any potential need for the
replenishment of the operating reserve
or other changes to total cost during its
annual budgeting process. The
following table summarizes the Plan
Processor and non-Plan Processor cost
components which comprise the total
CAT costs of $50,700,000.
Cost category
Cost component
Plan Processor ............................................................................
Non-Plan Processor ....................................................................
Operational Costs ......................................................................
Third Party Support Costs .........................................................
Operational Reserve ..................................................................
Insurance Costs .........................................................................
$37,500,000
5,200,000
43 5,000,000
3,000,000
Estimated Total ....................................................................
....................................................................................................
50,700,000
Basedon the estimated costs and the
calculations for the funding model
described above, the Operating
Committee determined to impose the
following fees: 44
For Industry Members (other than
Execution Venue ATSs):
Monthly
CAT fee
Tier
1
2
3
4
5
6
7
8
9
Amount
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
$33,668
27,051
19,239
6,655
4,163
2,560
501
145
22
Quarterly
CAT fee
$101,004
81,153
57,717
19,965
12,489
7,680
1,503
435
66
CAT
fees paid
annually 45
$404,016
324,612
230,868
79,860
49,956
30,720
6,012
1,740
264
For Execution Venues for NMS Stocks
and OTC Equity Securities:
Monthly
CAT fee
Tier
1 ...................................................................................................................................................
2 ...................................................................................................................................................
$21,125
12,940
Quarterly
CAT fee
$63,375
38,820
CAT
fees paid
annually 46
$253,500
155,280
For Execution Venues for Listed
Options:
Monthly
CAT fee
Tier
sradovich on DSK3GMQ082PROD with NOTICES
1 ...................................................................................................................................................
2 ...................................................................................................................................................
$19,205
13,204
Quarterly
CAT fee
$57,615
39,612
CAT
fees paid
annually 47
$230,460
158,448
As noted above, the fees set forth in
the tables reflect the Operating
Committee’s decision to ensure
comparable fees between Execution
Venues and Industry Members. The fees
of the top tiers for Industry Members
(other than Execution Venue ATSs) are
not identical to the top tier for
Execution Venues, however, because the
Operating Committee also determined
that the fees for Execution Venue
complexes should be comparable to
those of Industry Member complexes.
The difference in the fees reflects this
decision to recognize affiliations.
The Operating Committee has
calculated the schedule of effective fees
for Industry Members (other than
Execution Venue ATSs) and Execution
Venues in the following manner. Note
43 This $5,000,000 represents the gradual
accumulation of the funds for a target operating
reserve of $11,425,000.
44 Note that all monthly, quarterly and annual
CAT Fees have been rounded to the nearest dollar.
45 This column represents the approximate total
CAT Fees paid each year by each Industry Member
(other than Execution Venue ATSs) (i.e., ‘‘CAT Fees
Paid Annually’’ = ‘‘Monthly CAT Fee’’ × 12
months).
46 This column represents the approximate total
CAT Fees paid each year by each Execution Venue
for NMS Stocks and OTC Equity Securities (i.e.,
‘‘CAT Fees Paid Annually’’ = ‘‘Monthly CAT Fee’’
× 12 months).
47 This column represents the approximate total
CAT Fees paid each year by each Execution Venue
for Listed Options (i.e., ‘‘CAT Fees Paid Annually’’
= ‘‘Monthly CAT Fee’’ × 12 months).
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Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
that the calculation of CAT Reporter
fees assumes 53 Equity Execution
Venues, 15 Options Execution Venues
and 1,631 Industry Members (other than
Execution Venue ATSs) as of January
2017.
Percentage
of industry
members
Industry member tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
6
7
8
9
Calculation of Annual Tier Fees for
Industry Members (‘‘IM’’)
Percentage
of industry
member
recovery
Percentage
of total
recovery
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
0.500
2.500
2.125
4.625
3.625
4.000
17.500
20.125
45.000
8.50
35.00
21.25
15.75
7.75
5.25
4.50
1.50
0.50
6.38
26.25
15.94
11.81
5.81
3.94
3.38
1.13
0.38
Total ......................................................................................................................................
100
100
75
Estimated
number of
industry
members
Industry member tier
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
..............................................................................................................................................................................................
8
41
35
75
59
65
285
328
735
Total ........................................................................................................................................................................................
sradovich on DSK3GMQ082PROD with NOTICES
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
6
7
8
9
1,631
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E:\FR\FM\23MYN1.SGM
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Calculation of Annual Tier Fees for
Equity Execution Venues (‘‘EV’’)
Percentage
of Equity
Execution
Venues
Percentage
of Execution
Venue
Recovery
Percentage
of total
recovery
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
25.00
75.00
26.00
49.00
6.50
12.25
Total ......................................................................................................................................
100
75
18.75
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E:\FR\FM\23MYN1.SGM
23MYN1
EN23MY17.001</GPH>
sradovich on DSK3GMQ082PROD with NOTICES
Equity Execution Venue Tier
23652
Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
Estimated
number of
Equity
Execution
Venues
Equity Execution Venue Tier
Tier 1 ..............................................................................................................................................................................................
Tier 2 ..............................................................................................................................................................................................
13
40
Total ........................................................................................................................................................................................
53
Calculation of Annual Tier Fees for
Options Execution Venues (‘‘EV’’)
Percentage
of options
Execution
Venues
Options Execution Venue Tier
Percentage
of execution
Venue
Recovery
Percentage
of total
recovery
Tier 1 ............................................................................................................................................
Tier 2 ............................................................................................................................................
75.00
25.00
20.00
5.00
5.00
1.25
Total ......................................................................................................................................
100
25
6.25
Estimated
number of
Options
Execution
Venues
Options Execution Venue Tier
Tier 1 ..............................................................................................................................................................................................
Tier 2 ..............................................................................................................................................................................................
11
4
Total ........................................................................................................................................................................................
15
Traceability of Total CAT Fees
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Frm 00132
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Tier
Tier
Tier
Tier
Tier
Tier
Tier
Sfmt 4703
1
2
3
4
5
6
7
.............
.............
.............
.............
.............
.............
.............
E:\FR\FM\23MYN1.SGM
8
41
35
75
59
65
285
23MYN1
CAT
fees paid
annually
$404,016
324,612
230,868
79,860
49,956
30,720
6,012
Total
recovery
$3,232,128
13,309,092
8,080,380
5,989,500
2,947,404
1,996,800
1,713,420
EN23MY17.003</GPH>
sradovich on DSK3GMQ082PROD with NOTICES
Industry Members ............................................................................................
Estimated
number of
members
EN23MY17.002</GPH>
Industry
member tier
Type
23653
Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
Industry
member tier
Type
Estimated
number of
members
CAT
fees paid
annually
Total
recovery
Tier 8 .............
Tier 9 .............
328
735
1,740
264
570,720
194,040
Total ..........................................................................................................
........................
1,631
........................
38,033,484
Equity Execution Venues ................................................................................
Tier 1 .............
Tier 2 .............
13
40
253,500
155,280
3,295,500
6,211,200
Total ..........................................................................................................
........................
53
........................
9,506,700
Options Execution Venues ..............................................................................
Tier 1 .............
Tier 2 .............
11
4
230,460
158,448
2,535,060
633,792
Total ..........................................................................................................
........................
15
........................
3,168,852
Total ..................................................................................................
........................
........................
........................
50,709,036
Excess 48 ...........................................................................................
........................
........................
........................
9,036
(F) Comparability of Fees
The funding principles require a
funding model in which the fees
charged to the CAT Reporters with the
most CAT-related activity (measured by
market share and/or message traffic, as
applicable) are generally comparable
(where, for these comparability
purposes, the tiered fee structure takes
into consideration affiliations between
or among CAT Reporters, whether
Execution Venue and/or Industry
Members). Accordingly, in creating the
aggregate fees that would be paid by
such firms.
While the proposed fees for Tier 1 and
Tier 2 Industry Members are relatively
higher than those of Tier 1 and Tier 2
Execution Venues, Execution Venue
complex fees are relatively higher than
those of Industry Member complexes
largely due to affiliations between
Execution Venues. The tables set forth
below describe the largest Execution
Venue and Industry Member complexes
and their associated fees: 49
model, the Operating Committee sought
to take account of the affiliations
between or among CAT Reporters—that
is, where affiliated entities may have
multiple Industry Member and/or
Execution Venue licenses, by
maintaining relative comparability of
fees among such affiliations with the
most expected CAT-related activity. To
do this, the Participants identified
representative affiliations in the largest
tier of both Execution Venues and
Industry Members and compared the
EXECUTION VENUE COMPLEXES
Execution Venue Complex
Listing of Equity Execution
Venue Tiers
Execution Venue Complex 1 ....................................................
• Tier 1 (x2) ............................
• Tier 2 (x1) ............................
• Tier 1 (x2) ............................
Execution Venue Complex 2 ....................................................
Execution Venue Complex 3 ....................................................
• Tier 1 (x2) ............................
• Tier 2 (x2) ............................
Listing of Options Execution
Venue Tier
•
•
•
•
•
Tier
Tier
Tier
Tier
Tier
1
2
1
2
1
(x4)
(x2)
(x2)
(x1)
(x2)
............................
............................
............................
............................
............................
Total fees
by EV
complex
$1,900,962
1,863,801
1,278,447
INDUSTRY MEMBER COMPLEXES
Listing of industry member
tiers
Industry member complex
Industry Member Complex 1 ....................................................
Industry Member Complex 2 ....................................................
Industry Member Complex 3 ....................................................
sradovich on DSK3GMQ082PROD with NOTICES
Industry Member Complex 4 ....................................................
Industry Member Complex 5 ....................................................
48 The amount in excess of the total CAT costs
will contribute to the gradual accumulation of the
target operating reserve of $11.425 million.
VerDate Sep<11>2014
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Jkt 241001
•
•
•
•
•
•
•
•
•
•
•
•
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
Tier
1
1
4
1
2
1
2
4
2
3
4
7
(x2)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
(x1)
............................
............................
............................
............................
............................
............................
............................
............................
............................
............................
............................
............................
49 Note that the analysis of the complexes was
performed on a best efforts basis, as all affiliations
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Listing of ATS tiers
Total fees by
IM complex
• Tier 2 (x1) ............................
• Tier 2 (x3) ............................
$963,300
949,674
• Tier 2 (x1) ............................
883,888
N/A ..........................................
808,472
• Tier 2 (x1) ............................
796,595
between the 1631 Industry Members may not be
included.
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(G) Billing Onset
Under Section 11.1(c) of the CAT
NMS Plan, to fund the development and
implementation of the CAT, the
Company shall time the imposition and
collection of all fees on Participants and
Industry Members in a manner
reasonably related to the timing when
the Company expects to incur such
development and implementation costs.
The Company is currently incurring
such development and implementation
costs and will continue to do so prior
to the commencement of CAT reporting
and thereafter. For example, the Plan
Processor has required up-front
payments to begin building the CAT. In
addition, the Company continues to
incur consultant and legal expenses on
an on-going basis to implement the
CAT. Accordingly, the Operating
Committee determined that all CAT
Reporters, including both Industry
Members and Execution Venues
(including Participants), would begin to
be invoiced as promptly as possible
following the establishment of a billing
mechanism. FINRA will issue a notice
to its members when the billing
mechanism is established, specifying
the date when such invoicing of
Industry Members will commence.
(H) Changes to Fee Levels and Tiers
Section 11.3(d) of the CAT NMS Plan
states that ‘‘[t]he Operating Committee
shall review such fee schedule on at
least an annual basis and shall make any
changes to such fee schedule that it
deems appropriate. The Operating
Committee is authorized to review such
fee schedule on a more regular basis, but
shall not make any changes on more
than a semi-annual basis unless,
pursuant to a Supermajority Vote, the
Operating Committee concludes that
such change is necessary for the
adequate funding of the Company.’’
With such reviews, the Operating
Committee will review the distribution
of Industry Members and Execution
Venues across tiers, and make any
updates to the percentage of CAT
Reporters allocated to each tier as may
be necessary. In addition, the reviews
will evaluate the estimated ongoing
CAT costs and the level of the operating
reserve. To the extent that the total CAT
costs decrease, the fees would be
adjusted downward, and, to the extent
that the total CAT costs increase, the
fees would be adjusted upward.50
Furthermore, any surplus of the
Company’s revenues over its expenses is
to be included within the operational
reserve to offset future fees. The
limitations on more frequent changes to
the fee, however, are intended to
provide budgeting certainty for the CAT
Reporters and the Company.51 To the
extent that the Operating Committee
approves changes to the number of tiers
in the funding model or the fees
assigned to each tier, then FINRA will
file such changes with the SEC pursuant
to Section 19(b) of the Exchange Act,
and any such changes will become
effective in accordance with the
requirements of Section 19(b).
(I) Initial and Periodic Tier
Reassignments
The Operating Committee has
determined to calculate fee tiers every
three months based on market share or
message traffic, as applicable, from the
prior three months. For the initial tier
assignments, the Company will
calculate the relevant tier for each CAT
Reporter using the three months of data
prior to the commencement date. As
with the initial tier assignment, for the
tri-monthly reassignments, the
Company will calculate the relevant tier
using the three months of data prior to
the relevant tri-monthly date. FINRA
notes that any movement of CAT
Reporters between tiers will not change
the criteria for each tier or the fee
amount corresponding to each tier.
In performing the tri-monthly
reassignments, FINRA notes that the
percentage of CAT Reporters in each
assigned tier is relative. Therefore, a
CAT Reporter’s assigned tier will
depend, not only on its own message
traffic or market share, but it also will
depend on the message traffic/market
share across all CAT Reporters. For
example, the percentage of Industry
Members (other than Execution Venue
ATSs) in each tier is relative such that
such Industry Member’s assigned tier
will depend on message traffic
generated across all CAT Reporters as
well as the total number of CAT
Reporters. The Operating Committee
will inform CAT Reporters of their
assigned tier every three months
following the periodic tiering process,
as the funding model will compare an
individual CAT Reporter’s activity to
that of other CAT Reporters in the
marketplace.
The following demonstrates a tier
reassignment. In accordance with the
funding model, the top 75% of Options
Execution Venues in market share are
categorized as Tier 1 while the bottom
25% of Options Execution Venues in
market share are categorized as Tier 2.
In the sample scenario below, Options
Execution Venue L is initially
categorized as a Tier 2 Options
Execution Venue in Period A due to its
market share. When market share is
recalculated for Period B, the market
share of Execution Venue L increases,
and it is therefore subsequently
reranked and reassigned to Tier 1 in
Period B. Correspondingly, Options
Execution Venue K, initially a Tier 1
Options Execution Venue in Period A,
is reassigned to Tier 2 in Period B due
to decreases in its market share of share
volume.
Period A
Market
share rank
sradovich on DSK3GMQ082PROD with NOTICES
Options Execution Venue
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Period B
A .............
B .............
C .............
D .............
E .............
F ..............
G .............
H .............
I ...............
J ..............
K .............
1
2
3
4
5
6
7
8
9
10
11
50 The CAT Fees are designed to recover the costs
associated with the CAT. Accordingly, CAT Fees
would not be affected by increases or decreases in
other non-CAT expenses incurred by the
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21:15 May 22, 2017
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Tier
1
1
1
1
1
1
1
1
1
1
1
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Execution
Participants, such as any changes in costs related
to the retirement of existing regulatory systems,
such as OATS.
PO 00000
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Market
share rank
Options Execution Venue
Fmt 4703
Sfmt 4703
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
Venue
A ............
B ............
C ............
D ............
E ............
F .............
I ..............
H ............
G ............
J .............
L .............
1
2
3
4
5
6
7
8
9
10
11
Tier
1
1
1
1
1
1
1
1
1
1
1
51 Section B.7, Appendix C of the CAT NMS Plan,
Approval Order at 85006.
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Period A
Market
share rank
Options Execution Venue
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Venue
Venue
Venue
Venue
Period B
L ..............
M .............
N .............
O .............
12
13
14
15
sradovich on DSK3GMQ082PROD with NOTICES
(3) Proposed CAT Fee Schedule
FINRA proposes the Consolidated
Audit Trail Funding Fees to implement
the CAT Fees determined by the
Operating Committee on FINRA’s
Industry Members. The proposed fee
schedule has three sections, covering
definitions, the fee schedule for CAT
Fees, and the timing and manner of
payments. Each of these sections is
discussed in detail below.
(A) Definitions
Paragraph (a) of the proposed fee
schedule sets forth the definitions for
the proposed fee schedule. Paragraph
(a)(1) states that, for purposes of the
Consolidated Audit Trail Funding Fees,
the terms ‘‘CAT NMS Plan,’’ ‘‘Industry
Member,’’ ‘‘NMS Stock,’’ ‘‘OTC Equity
Security’’, and ‘‘Participant’’ are defined
as set forth in Rule 6810 (Consolidated
Audit Trail—Definitions).
The proposed fee schedule imposes
different fees on Equity ATSs and
Industry Members that are not Equity
ATSs. Accordingly, the proposed fee
schedule defines the term ‘‘Equity
ATS.’’ First, paragraph (a)(2) defines an
‘‘ATS’’ to mean an alternative trading
system as defined in Rule 300(a) of SEC
Regulation ATS under the Securities
Exchange Act of 1934, as amended, that
operates pursuant to Rule 301 of SEC
Regulation ATS. This is the same
definition of an ATS as set forth in
Section 1.1 of the CAT NMS Plan in the
definition of an ‘‘Execution Venue.’’
Then, paragraph (a)(4) defines an
‘‘Equity ATS’’ as an ATS that executes
transactions in NMS Stocks and/or OTC
Equity Securities.
Paragraph (a)(3) of the proposed fee
schedule defines the term ‘‘CAT Fee’’ to
mean the Consolidated Audit Trail
Funding Fee(s) to be paid by Industry
Members as set forth in paragraph (b) in
the proposed fee schedule.
Finally, Paragraph (a)(6) defines an
‘‘Execution Venue’’ as a Participant or
an ATS (excluding any such ATS that
does not execute orders). This definition
is the same substantive definition as set
forth in Section 1.1 of the CAT NMS
Plan. Paragraph (a)(5) defines an
‘‘Equity Execution Venue’’ as an
Execution Venue that trades NMS
Stocks and/or OTC Equity Securities.
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Tier
2
2
2
2
Options
Options
Options
Options
Execution
Execution
Execution
Execution
Venue
Venue
Venue
Venue
(B) Fee Schedule
FINRA proposes to impose the CAT
Fees applicable to its Industry Members
through paragraph (b) of the proposed
fee schedule. Paragraph (b)(1) of the
proposed fee schedule sets forth the
CAT Fees applicable to Industry
Members other than Equity ATSs.
Specifically, paragraph (b)(1) states that
the Company will assign each Industry
Member (other than an Equity ATS) to
a fee tier once every quarter, where such
tier assignment is calculated by ranking
each Industry Member based on its total
message traffic for the three months
prior to the quarterly tier calculation
day and assigning each Industry
Member to a tier based on that ranking
and predefined Industry Member
percentages. The Industry Members
with the highest total quarterly message
traffic will be ranked in Tier 1, and the
Industry Members with lowest quarterly
message traffic will be ranked in Tier 9.
Each quarter, each Industry Member
(other than an Equity ATS) shall pay the
following CAT Fee corresponding to the
tier assigned by the Company for such
Industry Member for that quarter:
Percentage
of industry
members
Tier
1
2
3
4
5
6
7
8
9
........................
........................
........................
........................
........................
........................
........................
........................
........................
0.500
2.500
2.125
4.625
3.625
4.000
17.500
20.125
45.000
Quarterly
CAT fee
$101,004
81,153
57,717
19,965
12,489
7,680
1,503
435
66
Paragraph (b)(2) of the proposed fee
schedule sets forth the CAT Fees
applicable to Equity ATSs.52 These are
the same fees that Participants that trade
NMS Stocks and/or OTC Equity
Securities will pay. Specifically,
paragraph (b)(2) states that the Company
will assign each Equity ATS to a fee tier
once every quarter, where such tier
assignment is calculated by ranking
52 Note that no fee schedule is provided for
Execution Venue ATSs that execute transactions in
Listed Options, as no such Execution Venue ATSs
currently exist due to trading restrictions related to
Listed Options.
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share rank
Options Execution Venue
Fmt 4703
Sfmt 4703
K
N
M
O
............
............
............
............
Tier
12
13
14
15
2
2
2
2
each Equity Execution Venue based on
its total market share of NMS Stocks and
OTC Equity Securities for the three
months prior to the quarterly tier
calculation day and assigning each
Equity Execution Venue to a tier based
on that ranking and predefined Equity
Execution Venue percentages. The
Equity Execution Venues with the
higher total quarterly market share will
be ranked in Tier 1, and the Equity
Execution Venues with the lower
quarterly market share will be ranked in
Tier 2. Specifically, paragraph (b)(2)
states that, each quarter, each Equity
ATS shall pay the following CAT Fee
corresponding to the tier assigned by the
Company for such Equity ATS for that
quarter:
Tier
1 ........................
2 ........................
Percentage
of equity
execution
venues
25.00
75.00
Quarterly
CAT fee
$63,375
38,820
(C) Timing and Manner of Payment
Section 11.4 of the CAT NMS Plan
states that the Operating Committee
shall establish a system for the
collection of fees authorized under the
CAT NMS Plan. The Operating
Committee may include such collection
responsibility as a function of the Plan
Processor or another administrator. To
implement the payment process to be
adopted by the Operating Committee,
paragraph (c)(1) of the proposed fee
schedule states that the Company will
provide each Industry Member with one
invoice each quarter for its CAT Fees as
determined pursuant to paragraph (b) of
the proposed fee schedule, regardless of
whether the Industry Member is a
member of multiple self-regulatory
organizations. Paragraph (c)(1) further
states that each Industry Member will
pay its CAT Fees to the Company via
the centralized system for the collection
of CAT Fees established by the
Company in the manner prescribed by
the Company. FINRA will provide
Industry Members with details
regarding the manner of payment of
CAT Fees by Regulatory Notice.
Although the exact fee collection
system and processes for CAT fees has
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sradovich on DSK3GMQ082PROD with NOTICES
not yet been established, all CAT fees
will be billed and collected centrally
through the Company, via the Plan
Processor or otherwise. Although each
Participant will adopt its own fee
schedule regarding CAT Fees, no CAT
Fees or portion thereof will be collected
by the individual Participants. Each
Industry Member will receive from the
Company one invoice for its applicable
CAT fees, not separate invoices from
each Participant of which it is a
member. The Industry Members will
pay the CAT Fees to the Company via
the centralized system for the collection
of CAT fees established by the
Company.53
Section 11.4 of the CAT NMS Plan
also states that Participants shall require
each Industry Member to pay all
applicable authorized CAT Fees within
thirty days after receipt of an invoice or
other notice indicating payment is due
(unless a longer payment period is
otherwise indicated). Section 11.4
further states that, if an Industry
Member fails to pay any such fee when
due, such Industry Member shall pay
interest on the outstanding balance from
such due date until such fee is paid at
a per annum rate equal to the lesser of:
(i) The Prime Rate plus 300 basis points;
or (ii) the maximum rate permitted by
applicable law. Therefore, in accordance
with Section 11.4 of the CAT NMS Plan,
FINRA proposed to adopt paragraph
(c)(2) of the proposed fee schedule.
Paragraph (c)(2) of the proposed fee
schedule states that each Industry
Member shall pay CAT Fees within
thirty days after receipt of an invoice or
other notice indicating payment is due
(unless a longer payment period is
otherwise indicated). If an Industry
Member fails to pay any such fee when
due, such Industry Member shall pay
interest on the outstanding balance from
such due date until such fee is paid at
a per annum rate equal to the lesser of:
(i) The Prime Rate plus 300 basis points;
or (ii) the maximum rate permitted by
applicable law.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,54 which
require, among other things, that the
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest, and not designed to
permit unfair discrimination between
customers, issuers, brokers and dealer
11.4 of the CAT NMS Plan.
U.S.C. 78o–3(b)(6).
[sic], and Section 15A(b)(5) of the Act,55
which requires that FINRA rules
provide for the equitable allocation of
reasonable dues, fees, and other charges
among members and issuers and other
persons using any facility or system
which the Participants operates or
controls. As discussed above, the SEC
approved the bifurcated, tiered, fixed
fee funding model in the CAT NMS
Plan, finding it was reasonable and that
it equitably allocated fees among
Participants and Industry Members.
FINRA believes that the proposed tiered
fees adopted pursuant to the funding
model approved by the SEC in the CAT
NMS Plan are reasonable, equitably
allocated and not unfairly
discriminatory.
FINRA believes that this proposal is
consistent with the Act because it
implements, interprets or clarifies the
provisions of the Plan, and is designed
to assist FINRA and its Industry
Members in meeting regulatory
obligations pursuant to the Plan. In
approving the Plan, the SEC noted that
the Plan ‘‘is necessary and appropriate
in the public interest, for the protection
of investors and the maintenance of fair
and orderly markets, to remove
impediments to, and perfect the
mechanism of a national market system,
or is otherwise in furtherance of the
purposes of the Act.’’ 56 To the extent
that this proposal implements,
interprets or clarifies the Plan and
applies specific requirements to
Industry Members, FINRA believes that
this proposal furthers the objectives of
the Plan, as identified by the SEC, and
is therefore consistent with the Act.
FINRA believes that the proposed
tiered fees are reasonable. First, the total
CAT Fees to be collected would be
directly associated with the costs of
establishing and maintaining the CAT,
where such costs include Plan Processor
costs and costs related to insurance,
third party services and the operational
reserve. The CAT Fees would not cover
Participant services unrelated to the
CAT. In addition, any surplus CAT Fees
cannot be distributed to the individual
Participants; such surpluses must be
used as a reserve to offset future fees.
Given the direct relationship between
the fees and the CAT costs, FINRA
believes that the total level of the CAT
Fees is reasonable.
In addition, FINRA believes that the
proposed CAT Fees are reasonably
designed to allocate the total costs of the
CAT equitably between and among the
Participants and Industry Members, and
are therefore not unfairly
53 Section
55 15
54 15
56 Approval
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21:15 May 22, 2017
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PO 00000
U.S.C. 78o–3(b)(5).
Order at 84697.
Frm 00136
Fmt 4703
Sfmt 4703
discriminatory. As discussed in detail
above, the proposed tiered fees impose
comparable fees on similarly situated
CAT Reporters. For example, those with
a larger impact on the CAT (measured
via message traffic or market share) pay
higher fees, whereas CAT Reporters
with a smaller impact pay lower fees.
Correspondingly, the tiered structure
lessens the impact on smaller CAT
Reporters by imposing smaller fees on
those CAT Reporters with less market
share or message traffic. In addition, the
funding model takes into consideration
affiliations between CAT Reporters,
imposing comparable fees on such
affiliated entities.
Moreover, FINRA believes that the
division of the total CAT costs between
Industry Members and Execution
Venues, and the division of the
Execution Venue portion of total costs
between Equity and Options Execution
Venues, is reasonably designed to
allocate CAT costs among CAT
Reporters. The 75/25 division between
Industry Members and Execution
Venues maintains the greatest level of
comparability across the funding model,
keeping in view that comparability
should consider affiliations among or
between CAT Reporters (e.g., firms with
multiple Industry Members or exchange
licenses). Similarly, the 75/25 division
between Equity and Options Execution
Venues maintains elasticity across the
funding model as well as the greatest
level of fee equitability and
comparability based on the current
number of Equity and Options
Execution Venues.
Finally, FINRA believes that the
proposed fees are reasonable because
they would provide ease of calculation,
ease of billing and other administrative
functions, and predictability of a fixed
fee. Such factors are crucial to
estimating a reliable revenue stream for
the Company and for permitting CAT
Reporters to reasonably predict their
payment obligations for budgeting
purposes.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. FINRA notes
that the proposed rule change
implements provisions of the CAT NMS
Plan approved by the Commission, and
is designed to assist FINRA in meeting
its regulatory obligations pursuant to the
Plan. Similarly, all national securities
exchanges and FINRA are proposing
this proposed fee schedule to
implement the requirements of the CAT
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Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices
NMS Plan. Therefore, this is not a
competitive fee filing and, therefore, it
does not raise competition issues
between and among the exchanges and
FINRA.
Moreover, as previously described,
FINRA believes that the proposed rule
change fairly and equitably allocates
costs among CAT Reporters. In
particular, the proposed fee schedule is
structured to impose comparable fees on
similarly situated CAT Reporters, and
lessen the impact on smaller CAT
Reporters. CAT Reporters with similar
levels of CAT activity will pay similar
fees. For example, Industry Members
(other than Execution Venue ATSs) with
higher levels of message traffic will pay
higher fees, and those with lower levels
of message traffic will pay lower fees.
Similarly, Execution Venue ATSs and
other Execution Venues with larger
market share will pay higher fees, and
those with lower levels of market share
will pay lower fees. Therefore, given
that there is generally a relationship
between message traffic and market
share to the CAT Reporter’s size, smaller
CAT Reporters generally pay less than
larger CAT Reporters. Accordingly,
FINRA does not believe that the CAT
Fees would have a disproportionate
effect on smaller or larger CAT
Reporters. In addition, ATSs and
exchanges will pay the same fees based
on market share. Therefore, FINRA does
not believe that the fees will impose any
burden on the competition between
ATSs and exchanges. Accordingly,
FINRA believes that the proposed fees
will minimize the potential for adverse
effects on competition between CAT
Reporters in the market.
Furthermore, the tiered, fixed fee
funding model limits the disincentives
to providing liquidity to the market.
Therefore, the proposed fees are
structured to limit burdens on
competitive quoting and other liquidity
provision in the market.
sradovich on DSK3GMQ082PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act,57 and paragraph (f)(2) of Rule
19b–4 thereunder.58 At any time within
60 days of the filing of the proposed rule
57 15
58 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
21:15 May 22, 2017
Jkt 241001
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2017–011 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2017–011. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
23657
available publicly. All submissions
should refer to File Number SR–FINRA–
2017–011, and should be submitted on
or before June 13, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–10466 Filed 5–22–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80720; File No. SR–BOX–
2016–48]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing of Amendment No. 2 to a
Proposed Rule Change To Adopt Rules
for an Open-Outcry Trading Floor
May 18, 2017.
On November 16, 2016, BOX Options
Exchange LLC (‘‘BOX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt rules for an open-outcry trading
floor. The proposed rule change was
published for comment in the Federal
Register on December 05, 2016.3 The
Commission received three comment
letters in response to the publication of
the Notice.4 On January 10, 2017, the
Commission extended the time period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change to
March 05, 2017.5 On February 21, 2017,
the Commission received a response
letter from the Exchange, as well as
Amendment No. 1 to the proposed rule
change.6 On March 1, 2017, the
59 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79421
(November 29, 2016), 81 FR 87607 (‘‘Notice’’).
4 See letters to Brent J. Fields, Secretary,
Commission, from Angelo Evangelou, Deputy
General Counsel, The Chicago Board Options
Exchange, Inc. (‘‘CBOE’’), dated January 10, 2017;
Steve Crutchfield, Head of Market Structure, CTC
Trading Group, LLC (‘‘CTC Trading’’), dated
December 31, 2016; and Joan C. Conley, Senior Vice
President and Corporate Secretary, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’), dated December 22,
2016.
5 See Securities Exchange Act Release No. 79768
(January 10, 2017), 82 FR 4956 (January 17, 2017).
6 See letter to Brent J. Fields, Secretary,
Commission, from Lisa J. Fall, President, Exchange,
1 15
E:\FR\FM\23MYN1.SGM
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23MYN1
]]>Agencies
[Federal Register Volume 82, Number 98 (Tuesday, May 23, 2017)]
[Notices]
[Pages 23639-23657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10466]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80710; File No. SR-FINRA-2017-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt a Fee Schedule To Establish the Fees for
Industry Members Related to the National Market System Plan Governing
the Consolidated Audit Trail
May 17, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on May 8, 2017, Financial Industry Regulatory
Authority, Inc. (``FINRA'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by FINRA. FINRA has designated the proposed rule change as
``establishing or changing a due, fee or other charge'' under Section
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\
which renders the
[[Page 23640]]
proposal effective upon receipt of this filing by the Commission. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt a fee schedule to establish the fees
for Industry Members related to the National Market System Plan
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or
``Plan'').\5\
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\5\ Unless otherwise specified, capitalized terms used in this
fee filing are defined as set forth herein, the CAT Compliance Rule
Series or in the CAT NMS Plan.
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The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA 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, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA
Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2
Options Exchange, Incorporated, Chicago Board Options Exchange,
Incorporated, Chicago Stock Exchange, Inc., Financial Industry
Regulatory Authority, Inc. (``FINRA''), Investors' Exchange LLC, Miami
International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX,
Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC,\6\ NASDAQ
PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC,
NYSE MKT LLC, NYSE Arca, Inc. and NYSE National, Inc.\7\ (collectively,
the ``Participants'') filed with the Commission, pursuant to Section
11A of the Exchange Act \8\ and Rule 608 of Regulation NMS
thereunder,\9\ the CAT NMS Plan.\10\ The Participants filed the Plan to
comply with Rule 613 of Regulation NMS under the Exchange Act. The Plan
was published for comment in the Federal Register on May 17, 2016,\11\
and approved by the Commission, as modified, on November 15, 2016.\12\
The Plan is designed to create, implement and maintain a consolidated
audit trail (``CAT'') that would capture customer and order event
information for orders in NMS Securities and OTC Equity Securities,
across all markets, from the time of order inception through routing,
cancellation, modification, or execution in a single consolidated data
source. The Plan accomplishes this by creating CAT NMS, LLC (the
``Company''), of which each Participant is a member, to operate the
CAT.\13\ Under the CAT NMS Plan, the Operating Committee of the Company
(``Operating Committee'') has discretion to establish funding for the
Company to operate the CAT, including establishing fees that the
Participants will pay, and establishing fees for Industry Members that
will be implemented by the Participants (``CAT Fees'').\14\ The
Participants are required to file with the SEC under Section 19(b) of
the Exchange Act any such CAT Fees applicable to Industry Members that
the Operating Committee approves.\15\ Accordingly, FINRA submits this
fee filing to propose the Consolidated Audit Trail Funding Fees, which
will require Industry Members that are FINRA members to pay the CAT
Fees determined by the Operating Committee.
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\6\ ISE Gemini, LLC, ISE Mercury, LLC and International
Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq
MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange
Act Release No. 80248 (March 15, 2017), 82 FR 14547 (March 21,
2017); Securities Exchange Act Release No. 80326 (March 29, 2017),
82 FR 16460 (April 4, 2017); and Securities Exchange Act Release No.
80325 (March 29, 2017), 82 FR 16445 (April 4, 2017).
\7\ National Stock Exchange, Inc. has been renamed NYSE
National, Inc. See Securities Exchange Act Release No. 79902
(January 30, 2017), 82 FR 9258 (February 3, 2017).
\8\ 15 U.S.C. 78k-1.
\9\ 17 CFR 242.608.
\10\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated September 30, 2014; and Letter from
Participants to Brent J. Fields, Secretary, Commission, dated
February 27, 2015. On December 24, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter from Participants to
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
\11\ Securities Exchange Act Release No. 77724 (April 27, 2016),
81 FR 30614 (May 17, 2016).
\12\ Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
\13\ The Plan also serves as the limited liability company
agreement for the Company.
\14\ Section 11.1(b) of the CAT NMS Plan.
\15\ See supra note 14.
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(1) Executive Summary
The following provides an executive summary of the CAT funding
model approved by the Operating Committee, as well as Industry Members'
rights and obligations related to the payment of CAT Fees calculated
pursuant to the CAT funding model. A detailed description of the CAT
funding model and the CAT Fees follows this executive summary.
(A) CAT Funding Model
CAT Costs. The CAT funding model is designed to establish
CAT-specific fees to collectively recover the costs of building and
operating the CAT from all CAT Reporters, including Industry Members
and Participants. The overall CAT costs for the calculation of the CAT
Fees in this fee filing are comprised of Plan Processor CAT costs and
non-Plan Processor CAT costs incurred, and estimated to be incurred,
from November 21, 2016 through November 21, 2017. (See Section
II.A.1.(2)(E) below)
Bifurcated Funding Model. The CAT NMS Plan requires a
bifurcated funding model, where costs associated with building and
operating the CAT would be borne by (1) Participants and Industry
Members that are Execution Venues for Eligible Securities through fixed
tier fees based on market share, and (2) Industry Members (other than
alternative trading systems (``ATSs'') that execute transactions in
Eligible Securities (``Execution Venue ATSs'')) through fixed tier fees
based on message traffic for Eligible Securities. (See Section
II.A.1.(2) below)
Industry Member Fees. Each Industry Member (other than
Execution Venue ATSs) will be placed into one of nine tiers of fixed
fees, based on ``message traffic'' in Eligible Securities for a defined
period (as discussed below). Prior to the start of CAT reporting,
``message traffic'' will be comprised of historical equity and equity
options orders, cancels and quotes provided by each exchange and FINRA
over the previous three months. After an Industry Member begins
reporting to the CAT, ``message traffic'' will be calculated based on
the Industry Member's Reportable Events reported to the CAT. Industry
Members with lower levels of message traffic will pay a lower fee and
Industry Members with higher levels of message traffic will pay a
higher fee. (See Section II.A.1.(2)(B) below)
Execution Venue Fees. Each Equity Execution Venue will be
placed in one
[[Page 23641]]
of two tiers of fixed fees based on market share, and each Options
Execution Venue will be placed in one of two tiers of fixed fees based
on market share. Equity Execution Venue market share will be determined
by calculating each Equity Execution Venue's proportion of the total
volume of NMS Stock and OTC Equity shares reported by all Equity
Execution Venues during the relevant time period. Similarly, market
share for Options Execution Venues will be determined by calculating
each Options Execution Venue's proportion of the total volume of Listed
Options contracts reported by all Options Execution Venues during the
relevant time period. Equity Execution Venues with a larger market
share will pay a larger CAT Fee than Equity Execution Venues with a
smaller market share. Similarly, Options Execution Venues with a larger
market share will pay a larger CAT Fee than Options Execution Venues
with a smaller market share. (See Section II.A.1.(2)(C) below)
Cost Allocation. For the reasons discussed below, in
designing the model, the Operating Committee determined that 75 percent
of total costs recovered would be allocated to Industry Members (other
than Execution Venue ATSs) and 25 percent would be allocated to
Execution Venues. In addition, the Operating Committee determined to
allocate 75 percent of Execution Venue costs recovered to Equity
Execution Venues and 25 percent to Options Execution Venues. (See
Section II.A.1.(2)(D) below)
Comparability of Fees. The CAT funding model requires that
the CAT Fees charged to the CAT Reporters with the most CAT-related
activity (measured by market share and/or message traffic, as
applicable) are generally comparable (where, for these comparability
purposes, the tiered fee structure takes into consideration
affiliations between or among CAT Reporters, whether Execution Venues
and/or Industry Members). (See Section II.A.1.(2)(F) below)
(B) CAT Fees for Industry Members
Fee Schedule. The quarterly CAT Fees for each tier for
Industry Members are set forth in the two fee schedules in the
Consolidated Audit Trail Funding Fees, one for Equity ATSs and one for
Industry Members other than Equity ATSs. (See Section II.A.1.(3)(B)
below)
Quarterly Invoices. Industry Members will be billed
quarterly for CAT Fees, with the invoices payable within 30 days. The
quarterly invoices will identify within which tier the Industry Member
falls. (See Section II.A.1.(3)(C) below)
Centralized Payment. Each Industry Member will receive
from the Company one invoice for its applicable CAT Fees, not separate
invoices from each Participant of which it is a member. The Industry
Members will pay its CAT Fees to the Company via the centralized system
for the collection of CAT Fees established by the Operating Committee.
(See Section II.A.1.(3)(C) below)
Billing Commencement. Industry Members will begin to
receive invoices for CAT Fees as promptly as possible following the
establishment of a billing mechanism. FINRA will issue a notice to its
members when the billing mechanism is established, specifying the date
when such invoicing of Industry Members will commence. (See Section
II.A.1.(2)(G) below)
(2) Description of the CAT Funding Model
Article XI of the CAT NMS Plan requires the Operating Committee to
approve the operating budget, including projected costs of developing
and operating the CAT for the upcoming year. As set forth in Article XI
of the CAT NMS Plan, the CAT NMS Plan requires a bifurcated funding
model, where costs associated with building and operating the Central
Repository would be borne by (1) Participants and Industry Members that
are Execution Venues through fixed tier fees based on market share, and
(2) Industry Members (other than Execution Venue ATSs) through fixed
tier fees based on message traffic. In its order approving the CAT NMS
Plan, the Commission determined that the proposed funding model was
``reasonable'' \16\ and ``reflects a reasonable exercise of the
Participants' funding authority to recover the Participants' costs
related to the CAT.'' \17\
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\16\ Approval Order at 84796.
\17\ Approval Order at 84794.
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More specifically, the Commission stated in approving the CAT NMS
Plan that ``[t]he Commission believes that the proposed funding model
is reasonably designed to allocate the costs of the CAT between the
Participants and Industry Members.'' \18\ The Commission further noted
the following:
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\18\ Approval Order at 84795.
The Commission believes that the proposed funding model reflects
a reasonable exercise of the Participants' funding authority to
recover the Participants' costs related to the CAT. The CAT is a
regulatory facility jointly owned by the Participants and . . . the
Exchange Act specifically permits the Participants to charge their
members fees to fund their self-regulatory obligations. The
Commission further believes that the proposed funding model is
designed to impose fees reasonably related to the Participants'
self-regulatory obligations because the fees would be directly
associated with the costs of establishing and maintaining the CAT,
and not unrelated SRO services.\19\
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\19\ Approval Order at 84794.
Accordingly, the funding model imposes fees on both Participants and
Industry Members.
In addition, as discussed in Appendix C of the CAT NMS Plan, the
Operating Committee considered the advantages and disadvantages of a
variety of alternative funding and cost allocation models before
selecting the proposed model.\20\ After analyzing the various
alternatives, the Operating Committee determined that the proposed
tiered, fixed fee funding model provides a variety of advantages in
comparison to the alternatives. First, the fixed fee model, as opposed
to a variable fee model, provides transparency, ease of calculation,
ease of billing and other administrative functions, and predictability
of a fixed fee. Such factors are crucial to estimating a reliable
revenue stream for the Company and for permitting CAT Reporters to
reasonably predict their payment obligations for budgeting
purposes.\21\ Additionally, a strictly variable or metered funding
model based on message volume would be far more likely to affect market
behavior and place an inappropriate burden on competition. Moreover, as
the SEC noted in approving the CAT NMS Plan, ``[t]he Participants also
have offered a reasonable basis for establishing a funding model based
on broad tiers, in that it be may be easier to implement.'' \22\
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\20\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
\21\ In choosing a tiered fee structure, the Participants
concluded that the variety of benefits offered by a tiered fee
structure, discussed above, outweighed the fact that Industry
Members in any particular tier would pay different rates per message
traffic order event (e.g., an Industry Member with the largest
amount of message traffic in one tier would pay a smaller amount per
order event than an Industry Member in the same tier with the least
amount of message traffic). Such variation is the natural result of
a tiered fee structure.
\22\ Approval Order at 84796.
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In addition, multiple reviews of current broker-dealer order and
trading data submitted under existing reporting requirements showed a
wide range in activity among broker-dealers, with a number of broker-
dealers submitting fewer than 1,000 orders per month and other broker-
dealers submitting millions and even billions of orders in the same
period. Accordingly, the CAT NMS Plan includes a tiered approach to
fees. The
[[Page 23642]]
tiered approach helps ensure that fees are equitably allocated among
similarly situated CAT Reporters and furthers the goal of lessening the
impact on smaller firms.\23\ The self-regulatory organizations
considered several approaches to developing a tiered model, including
defining fee tiers based on such factors as size of firm, message
traffic or trading dollar volume. After analyzing the alternatives, it
was concluded that the tiering should be based on the relative impact
of CAT Reporters on the CAT System.
---------------------------------------------------------------------------
\23\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
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Accordingly, the CAT NMS Plan contemplates that costs will be
allocated across the CAT Reporters on a tiered basis to allocate costs
to those CAT Reporters that contribute more to the costs of creating,
implementing and maintaining the CAT.\24\ The fees to be assessed at
each tier are calculated so as to recoup a proportion of costs
appropriate to the message traffic or market share (as applicable) from
CAT Reporters in each tier. Therefore, Industry Members generating the
most message traffic will be in the higher tiers, and therefore be
charged a higher fee. Industry Members with lower levels of message
traffic will be in lower tiers and will be assessed a smaller fee for
the CAT.\25\ Correspondingly, Execution Venues with the highest market
share will be in the top tier, and therefore will be charged a higher
fee. Execution Venues with a lower market share will be in the lower
tier and will be assessed a smaller fee for the CAT.\26\
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\24\ Approval Order at 85005.
\25\ See supra note 24.
\26\ See supra note 24.
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The Commission also noted in approving the CAT NMS Plan that
``[t]he Participants have offered a credible justification for using
different criteria to charge Execution Venues (market share) and
Industry Members (message traffic)'' \27\ in the CAT funding model.
While there are multiple factors that contribute to the cost of
building, maintaining and using the CAT, processing and storage of
incoming message traffic is one of the most significant cost drivers
for the CAT.\28\ Thus, the CAT NMS Plan provides that the fees payable
by Industry Members (other than Execution Venue ATSs) will be based on
the message traffic generated by such Industry Member.\29\
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\27\ Approval Order at 84796.
\28\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85005.
\29\ Section 11.3(b) of the CAT NMS Plan.
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The CAT NMS Plan provides that the Operating Committee will use
different criteria to establish fees for Execution Venues and non-
Execution Venues due to the fundamental differences between the two
types of entities. In particular, the CAT NMS Plan provides that fees
charged to CAT Reporters that are Execution Venues will be based on the
level of market share and that costs charged to Industry Members (other
than Execution Venue ATSs) will be based upon message traffic.\30\
Because most Participant message traffic consists of quotations, and
Participants usually disseminate quotations in all instruments they
trade, regardless of execution volume, Execution Venues that are
Participants generally disseminate similar amounts of message traffic.
Accordingly, basing fees for Execution Venues on message traffic would
not provide the same degree of differentiation among Execution Venues
that it does among Industry Members (other than Execution Venue ATSs).
In contrast, execution volume more accurately delineates the different
levels of trading activity of Execution Venues.\31\
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\30\ Section 11.2(c) of the CAT NMS Plan.
\31\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85005.
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The CAT NMS Plan's funding model also is structured to avoid a
``reduction in market quality.'' \32\ The tiered, fixed fee funding
model is designed to limit the disincentives to providing liquidity to
the market. For example, the Participants expect that a firm that had a
large volume of quotes would likely be categorized in one of the upper
tiers, and would not be assessed a fee for this traffic directly as
they would under a more directly metered model. In contrast, strictly
variable or metered funding models based on message volume were far
more likely to affect market behavior. In approving the CAT NMS Plan,
the SEC stated that ``[t]he Participants also offered a reasonable
basis for establishing a funding model based on broad tiers, in that it
may be . . . less likely to have an incremental deterrent effect on
liquidity provision.'' \33\
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\32\ Section 11.2(e) of the CAT NMS Plan.
\33\ Approval Order at 84796.
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The CAT NMS Plan is structured to avoid potential conflicts raised
by the Operating Committee determining fees applicable to its own
members--the Participants. First, the Company will be operated on a
``break-even'' basis, with fees imposed to cover costs and an
appropriate reserve. Any surpluses will be treated as an operational
reserve to offset future fees and will not be distributed to the
Participants as profits.\34\ To ensure that the Participants' operation
of the CAT will not contribute to the funding of their other
operations, Section 11.1(c) of the CAT NMS Plan specifically states
that ``[a]ny surplus of the Company's revenues over its expenses shall
be treated as an operational reserve to offset future fees.'' In
addition, as set forth in Article VIII of the CAT NMS Plan, the Company
``intends to operate in a manner such that it qualifies as a `business
league' within the meaning of Section 501(c)(6) of the [Internal
Revenue] Code.'' To qualify as a business league, an organization must
``not [be] organized for profit and no part of the net earnings of [the
organization can] inure[ ] to the benefit of any private shareholder or
individual.'' \35\ As the SEC stated when approving the CAT NMS Plan,
``the Commission believes that the Company's application for Section
501(c)(6) business league status addresses issues raised by commenters
about the Plan's proposed allocation of profit and loss by mitigating
concerns that the Company's earnings could be used to benefit
individual Participants.'' \36\
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\34\ Approval Order at 84792.
\35\ 26 U.S.C. 501(c)(6).
\36\ Approval Order at 84793.
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Finally, by adopting a CAT-specific fee, the Participants will be
fully transparent regarding the costs of the CAT. Charging a general
regulatory fee, which would be used to cover CAT costs as well as other
regulatory costs, would be less transparent than the selected approach
of charging a fee designated to cover CAT costs only.
A full description of the funding model is set forth below. This
description includes the framework for the funding model as set forth
in the CAT NMS Plan, as well as the details as to how the funding model
will be applied in practice, including the number of fee tiers and the
applicable fees for each tier. FINRA notes that the complete funding
model is described below, including those fees that are to be paid by
the Participants. The proposed Consolidated Audit Trail Funding Fees,
however, do not apply to the Participants; the proposed Consolidated
Audit Trail Funding Fees only apply to Industry Members. The CAT fees
for Participants will be imposed separately by the Operating Committee
pursuant to the CAT NMS Plan.
(A) Funding Principles
Section 11.2 of the CAT NMS Plan sets forth the principles that the
Operating Committee applied in establishing the funding for the
[[Page 23643]]
Company. The Operating Committee has considered these funding
principles as well as the other funding requirements set forth in the
CAT NMS Plan and in Rule 613 in developing the proposed funding model.
The following are the funding principles in Section 11.2 of the CAT NMS
Plan:
To create transparent, predictable revenue streams for the
Company that are aligned with the anticipated costs to build, operate
and administer the CAT and other costs of the Company;
To establish an allocation of the Company's related costs
among Participants and Industry Members that is consistent with the
Exchange Act, taking into account the timeline for implementation of
the CAT and distinctions in the securities trading operations of
Participants and Industry Members and their relative impact upon the
Company's resources and operations;
To establish a tiered fee structure in which the fees
charged to: (i) CAT Reporters that are Execution Venues, including
ATSs, are based upon the level of market share; (ii) Industry Members'
non-ATS activities are based upon message traffic; (iii) the CAT
Reporters with the most CAT-related activity (measured by market share
and/or message traffic, as applicable) are generally comparable (where,
for these comparability purposes, the tiered fee structure takes into
consideration affiliations between or among CAT Reporters, whether
Execution Venue and/or Industry Members);
To provide for ease of billing and other administrative
functions;
To avoid any disincentives such as placing an
inappropriate burden on competition and a reduction in market quality;
and
To build financial stability to support the Company as a
going concern.
(B) Industry Member Tiering
Under Section 11.3(b) of the CAT NMS Plan, the Operating Committee
is required to establish fixed fees to be payable by Industry Members,
based on message traffic generated by such Industry Member, with the
Operating Committee establishing at least five and no more than nine
tiers.
The CAT NMS Plan clarifies that the fixed fees payable by Industry
Members pursuant to Section 11.3(b) shall, in addition to any other
applicable message traffic, include message traffic generated by: (i)
An ATS that does not execute orders that is sponsored by such Industry
Member; and (ii) routing orders to and from any ATS sponsored by such
Industry Member. In addition, the Industry Member fees will apply to
Industry Members that act as routing broker-dealers for exchanges. The
Industry Member fees will not be applicable, however, to an ATS that
qualifies as an Execution Venue, as discussed in more detail in the
section on Execution Venue tiering.
In accordance with Section 11.3(b), the Operating Committee
approved a tiered fee structure for Industry Members (other than
Execution Venue ATSs) as described in this section. In determining the
tiers, the Operating Committee considered the funding principles set
forth in Section 11.2 of the CAT NMS Plan, seeking to create funding
tiers that take into account the relative impact on CAT System
resources of different Industry Members, and that establish comparable
fees among the CAT Reporters with the most Reportable Events. The
Operating Committee has determined that establishing nine tiers results
in the fairest allocation of fees, best distinguishing between Industry
Members with differing levels of message traffic. Thus, each such
Industry Member will be placed into one of nine tiers of fixed fees,
based on ``message traffic'' for a defined period (as discussed below).
A nine tier structure was selected to provide the widest range of
levels for tiering Industry Members such that Industry Members
submitting significantly less message traffic to the CAT would be
adequately differentiated from Industry Members submitting
substantially more message traffic. The Operating Committee considered
historical message traffic generated by Industry Members across all
exchanges and as submitted to FINRA's Order Audit Trail System
(``OATS''), and considered the distribution of firms with similar
levels of message traffic, grouping together firms with similar levels
of message traffic. Based on this, the Operating Committee determined
that nine tiers would best group firms with similar levels of message
traffic, charging those firms with higher impact on the CAT more, while
lowering the burden of Industry Members that have less CAT-related
activity.
Each Industry Member (other than Execution Venue ATSs) will be
ranked by message traffic and tiered by predefined Industry Member
percentages (the ``Industry Member Percentages''). The Operating
Committee determined to use predefined percentages rather than fixed
volume thresholds to allow the funding model to ensure that the total
CAT fees collected recover the intended CAT costs regardless of changes
in the total level of message traffic. To determine the fixed
percentage of Industry Members in each tier, the Operating Committee
analyzed historical message traffic generated by Industry Members
across all exchanges and as submitted to OATS, and considered the
distribution of firms with similar levels of message traffic, grouping
together firms with similar levels of message traffic. Based on this,
the Operating Committee identified tiers that would group firms with
similar levels of message traffic, charging those firms with higher
impact on the CAT more, while lowering the burden on Industry Members
that have less CAT-related activity.
The percentage of costs recovered by each Industry Member tier will
be determined by predefined percentage allocations (the ``Industry
Member Recovery Allocation''). In determining the fixed percentage
allocation of costs recovered for each tier, the Operating Committee
considered the impact of CAT Reporter message traffic on the CAT System
as well as the distribution of total message volume across Industry
Members while seeking to maintain comparable fees among the largest CAT
Reporters. Accordingly, following the determination of the percentage
of Industry Members in each tier, the Operating Committee identified
the percentage of total market volume for each tier based on the
historical message traffic upon which Industry Members had been
initially ranked. Taking this into account along with the resulting
percentage of total recovery, the percentage allocation of costs
recovered for each tier were assigned, allocating higher percentages of
recovery to tiers with higher levels of message traffic while avoiding
any inappropriate burden on competition. Furthermore, by using
percentages of Industry Members and costs recovered per tier, the
Operating Committee sought to include stability and elasticity within
the funding model, allowing the funding model to respond to changes in
either the total number of Industry Members or the total level of
message traffic.
The following chart illustrates the breakdown of nine Industry
Member tiers across the monthly average of total equity and equity
options orders, cancels and quotes in Q1 2016 and identifies relative
gaps across varying levels of Industry Member message traffic as well
as message traffic thresholds between the largest of Industry Member
message traffic gaps. The Operating Committee referenced similar
distribution illustrations to determine the appropriate division of
Industry Member percentages in each tier by considering the grouping of
firms
[[Page 23644]]
with similar levels of message traffic and seeking to identify relative
breakpoints in the message traffic between such groupings. In reviewing
the chart and its corresponding table, note that while these
distribution illustrations were referenced to help differentiate
between Industry Member tiers, the proposed funding model is directly
driven, not by fixed message traffic thresholds, but rather by fixed
percentages of Industry Members across tiers to account for fluctuating
levels of message traffic across time and to provide for the financial
stability of the CAT by ensuring that the funding model will recover
the required amounts regardless of changes in the number of Industry
Members or the amount of message traffic. Actual messages in any tier
will vary based on the actual traffic in a given measurement period, as
well as the number of firms included in the measurement period. The
Industry Member Percentages and Industry Member Recovery Allocation for
each tier will remain fixed with each Industry Member's tier to be
reassigned periodically, as described below in Section II.A.1.(1)(H)
[sic].
[GRAPHIC] [TIFF OMITTED] TN23MY17.000
------------------------------------------------------------------------
Monthly average
message traffic
per industry
Industry member tier member (orders,
quotes and
cancels)
------------------------------------------------------------------------
Tier 1............................................... >10,000,000,000
Tier 2............................................... >1,000,000,000
Tier 3............................................... >100,000,000
Tier 4............................................... >2,500,000
Tier 5............................................... >200,000
Tier 6............................................... >50,000
Tier 7............................................... >5,000
Tier 8............................................... >1,000
Tier 9............................................... <=1,000
------------------------------------------------------------------------
Based on the above analysis, the Operating Committee approved the
following Industry Member Percentages and Recovery Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of
Percentage of industry Percentage of
Industry member tier industry member total recovery
members recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 0.500 8.50 6.38
Tier 2.......................................................... 2.500 35.00 26.25
Tier 3.......................................................... 2.125 21.25 15.94
Tier 4.......................................................... 4.625 15.75 11.81
Tier 5.......................................................... 3.625 7.75 5.81
Tier 6.......................................................... 4.000 5.25 3.94
Tier 7.......................................................... 17.500 4.50 3.38
[[Page 23645]]
Tier 8.......................................................... 20.125 1.50 1.13
Tier 9.......................................................... 45.000 0.50 0.38
-----------------------------------------------
Total....................................................... 100 100 75
----------------------------------------------------------------------------------------------------------------
For the purposes of creating these tiers based on message traffic,
the Operating Committee determined to define the term ``message
traffic'' separately for the period before the commencement of CAT
reporting and for the period after the start of CAT reporting. The
different definition for message traffic is necessary as there will be
no Reportable Events as defined in the Plan, prior to the commencement
of CAT reporting. Accordingly, prior to the start of CAT reporting,
``message traffic'' will be comprised of historical equity and equity
options orders, cancels and quotes provided by each exchange and FINRA
over the previous three months.\37\ Prior to the start of CAT
reporting, orders would be comprised of the total number of equity and
equity options orders received and originated by a member of an
exchange or FINRA over the previous three-month period, including
principal orders, cancel/replace orders, market maker orders originated
by a member of an exchange, and reserve (iceberg) orders as well as
order routes and executions originated by a member of FINRA, and
excluding order rejects and implied orders.\38\ In addition, prior to
the start of CAT reporting, cancels would be comprised of the total
number of equity and equity option cancels received and originated by a
member of an exchange or FINRA over a three-month period, excluding
order modifications (e.g., order updates, order splits, partial
cancels). Furthermore, prior to the start of CAT reporting, quotes
would be comprised of information readily available to the exchanges
and FINRA, such as the total number of historical equity and equity
options quotes received and originated by a member of an exchange or
FINRA over the prior three-month period.
---------------------------------------------------------------------------
\37\ The SEC approved exemptive relief permitting Options Market
Maker quotes to be reported to the Central Repository by the
relevant Options Exchange in lieu of requiring that such reporting
be done by both the Options Exchange and the Options Market Maker,
as required by Rule 613 of Regulation NMS. See Securities Exchange
Act Release No. 77265 (March 1, 2016 [sic], 81 FR 11856 (March 7,
2016). This exemption applies to Options Market Maker quotes for CAT
reporting purposes only. Therefore, notwithstanding the reporting
exemption provided for Options Market Maker quotes, Options Market
Maker quotes will be included in the calculation of total message
traffic for Options Market Makers for purposes of tiering under the
CAT funding model both prior to CAT reporting and once CAT reporting
commences.
\38\ Consequently, firms that do not have ``message traffic''
reported to an exchange or OATS before they are reporting to the CAT
would not be subject to a fee until they begin to report information
to CAT.
---------------------------------------------------------------------------
After an Industry Member begins reporting to the CAT, ``message
traffic'' will be calculated based on the Industry Member's Reportable
Events reported to the CAT as will be defined in the Technical
Specifications.\39\
---------------------------------------------------------------------------
\39\ If an Industry Member (other than an Execution Venue ATS)
has no orders, cancels or quotes prior to the commencement of CAT
Reporting, or no Reportable Events after CAT reporting commences,
then the Industry Member would not have a CAT fee obligation.
---------------------------------------------------------------------------
The Operating Committee has determined to calculate fee tiers every
three months, on a calendar quarter basis, based on message traffic
from the prior three months. Based on its analysis of historical data,
the Operating Committee believes that calculating tiers based on three
months of data will provide the best balance between reflecting changes
in activity by Industry Members while still providing predictability in
the tiering for Industry Members. Because fee tiers will be calculated
based on message traffic from the prior three months, the Operating
Committee will begin calculating message traffic based on an Industry
Member's Reportable Events reported to the CAT once the Industry Member
has been reporting to the CAT for three months. Prior to that, fee
tiers will be calculated as discussed above with regard to the period
prior to CAT reporting.
(C) Execution Venue Tiering
Under Section 11.3(a) of the CAT NMS Plan, the Operating Committee
is required to establish fixed fees payable by Execution Venues.
Section 1.1 of the CAT NMS Plan defines an Execution Venue as ``a
Participant or an alternative trading system (``ATS'') (as defined in
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of
Regulation ATS (excluding any such ATS that does not execute orders).''
\40\
---------------------------------------------------------------------------
\40\ Although FINRA does not operate an execution venue, because
it is a Participant, it is considered an ``Execution Venue'' under
the Plan for purposes of determining fees.
---------------------------------------------------------------------------
The Participants determined that ATSs should be included within the
definition of Execution Venue. Given the similarity between the
activity of exchanges and ATSs, both of which meet the definition of an
``exchange'' as set forth in the Exchange Act and the fact that the
similar trading models would have similar anticipated burdens on the
CAT, the Participants determined that ATSs should be treated in the
same manner as the exchanges for the purposes of determining the level
of fees associated with the CAT.\41\
---------------------------------------------------------------------------
\41\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85005.
---------------------------------------------------------------------------
Given the differences between Execution Venues that trade NMS
Stocks and/or OTC Equity Securities and Execution Venues that trade
Listed Options, Section 11.3(a) addresses Execution Venues that trade
NMS Stocks and/or OTC Equity Securities separately from Execution
Venues that trade Listed Options. Equity and Options Execution Venues
are treated separately for two reasons. First, the differing quoting
behavior of Equity and Options Execution Venues makes comparison of
activity between Execution Venues difficult. Second, Execution Venue
tiers are calculated based on market share of share volume, and it is
therefore difficult to compare market share between asset classes
(i.e., equity shares versus options contracts). Discussed below is how
the funding model treats the two types of Execution Venues.
(I) NMS Stocks and OTC Equity Securities
Section 11.3(a)(i) of the CAT NMS Plan states that each Execution
Venue that (i) executes transactions or, (ii) in the case of a national
securities association, has trades reported by its members to its trade
reporting facility or facilities for reporting transactions effected
otherwise than on an exchange, in NMS Stocks or OTC Equity Securities
will pay a fixed fee depending on the market share of that Execution
Venue in NMS Stocks and OTC Equity Securities, with the Operating
Committee establishing at least two and not more than five tiers of
fixed fees, based on an Execution Venue's NMS Stocks and
[[Page 23646]]
OTC Equity Securities market share. For these purposes, market share
for Execution Venues that execute transactions will be calculated by
share volume, and market share for a national securities association
that has trades reported by its members to its trade reporting facility
or facilities for reporting transactions effected otherwise than on an
exchange in NMS Stocks or OTC Equity Securities will be calculated
based on share volume of trades reported, provided, however, that the
share volume reported to such national securities association by an
Execution Venue shall not be included in the calculation of such
national security association's market share.
In accordance with Section 11.3(a)(i) of the CAT NMS Plan, the
Operating Committee approved a tiered fee structure for Equity
Execution Venues and Option Execution Venues. In determining the Equity
Execution Venue Tiers, the Operating Committee considered the funding
principles set forth in Section 11.2 of the CAT NMS Plan, seeking to
create funding tiers that take into account the relative impact on
system resources of different Equity Execution Venues, and that
establish comparable fees among the CAT Reporters with the most
Reportable Events. Each Equity Execution Venue will be placed into one
of two tiers of fixed fees, based on the Execution Venue's NMS Stocks
and OTC Equity Securities market share. In choosing two tiers, the
Operating Committee performed an analysis similar to that discussed
above with regard to the non-Execution Venue Industry Members to
determine the number of tiers for Equity Execution Venues. The
Operating Committee determined to establish two tiers for Equity
Execution Venues, rather than a larger number of tiers as established
for non-Execution Venue Industry Members, because the two tiers were
sufficient to distinguish between the smaller number of Equity
Execution Venues based on market share. Furthermore, the incorporation
of additional Equity Execution Venue tiers would result in
significantly higher fees for Tier 1 Equity Execution Venues and
diminish comparability between Execution Venues and Industry Members.
Each Equity Execution Venue will be ranked by market share and
tiered by predefined Execution Venue percentages, (the ``Equity
Execution Venue Percentages''). In determining the fixed percentage of
Equity Execution Venues in each tier, the Operating Committee looked at
historical market share of share volume for execution venues. Equities
Execution Venue market share of share volume were sourced from market
statistics made publicly-available by Bats Global Markets, Inc.
(``Bats''). ATS market share of share volume was sourced from market
statistics made publicly-available by FINRA. FINRA trade reporting
facility (``TRF'') market share of share volume was sourced from market
statistics made publicly available by Bats. As indicated by FINRA, ATSs
accounted for 37.80% of the share volume across the TRFs during the
recent tiering period. A 37.80/62.20 split was applied to the ATS and
non-ATS breakdown of FINRA market share, with FINRA tiered based only
on the non-ATS portion of its TRF market share of share volume.
Based on this, the Operating Committee considered the distribution
of Execution Venues, and grouped together Execution Venues with similar
levels of market share of share volume. In doing so, the Participants
considered that, as previously noted, Execution Venues in many cases
have similar levels of message traffic due to quoting activity, and
determined that it was simpler and more appropriate to have fewer,
rather than more, Execution Venue tiers to distinguish between
Execution Venues.
The percentage of costs recovered by each Equity Execution Venue
tier will be determined by predefined percentage allocations (the
``Equity Execution Venue Recovery Allocation''). In determining the
fixed percentage allocation of costs recovered for each tier, the
Operating Committee considered the impact of CAT Reporter market share
activity on the CAT System as well as the distribution of total market
volume across Equity Execution Venues while seeking to maintain
comparable fees among the largest CAT Reporters. Accordingly, following
the determination of the percentage of Execution Venues in each tier,
the Operating Committee identified the percentage of total market
volume for each tier based on the historical market share upon which
Execution Venues had been initially ranked. Taking this into account
along with the resulting percentage of total recovery, the percentage
allocation of costs recovered for each tier were assigned, allocating
higher percentages of recovery to the tier with a higher level of
market share while avoiding any inappropriate burden on competition.
Furthermore, due to the similar levels of impact on the CAT System
across Execution Venues, there is less variation in CAT Fees between
the highest and lowest of tiers for Execution Venues. Furthermore, by
using percentages of Equity Execution Venues and costs recovered per
tier, the Operating Committee sought to include stability and
elasticity within the funding model, allowing the funding model to
respond to changes in either the total number of Equity Execution
Venues or changes in market share.
Based on this analysis, the Operating Committee approved the
following Equity Execution Venue Percentages and Recovery Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of
Equity Percentage of Percentage of
Equity Execution Venue tier Execution Execution total Recovery
Venues Venue Recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 25.00 26.00 6.50
Tier 2.......................................................... 75.00 49.00 12.25
-----------------------------------------------
Total....................................................... 100 75 18.75
----------------------------------------------------------------------------------------------------------------
The following table exhibits the relative separation of market
share of share volume between Tier 1 and Tier 2 Equity Execution
Venues. In reviewing the table, note that while this division was
referenced as a data point to help differentiate between Equity
Execution Venue tiers, the proposed funding model is directly driven
not by market share thresholds, but rather by fixed percentages of
Equity Execution Venues across tiers to account for fluctuating levels
of market share across time. Actual market share in any tier will vary
based on the actual market activity in a given measurement period, as
well as the number of Equity Execution Venues included in the
measurement period. The Equity Execution Venue Percentages and Equity
Execution Venue Recovery
[[Page 23647]]
Allocation for each tier will remain fixed with each Equity Execution
Venue tier to be reassigned periodically, as described below in Section
II.A.1.(1)(I) [sic].
------------------------------------------------------------------------
Equity market
Equity Execution Venue tier share of share
volume (%)
------------------------------------------------------------------------
Tier 1.................................................. >=1
Tier 2.................................................. <1
------------------------------------------------------------------------
(II) Listed Options
Section 11.3(a)(ii) of the CAT NMS Plan states that each Execution
Venue that executes transactions in Listed Options will pay a fixed fee
depending on the Listed Options market share of that Execution Venue,
with the Operating Committee establishing at least two and no more than
five tiers of fixed fees, based on an Execution Venue's Listed Options
market share. For these purposes, market share will be calculated by
contract volume.
In accordance with Section 11.3(a)(ii) of the CAT NMS Plan, the
Operating Committee approved a tiered fee structure for Options
Execution Venues. In determining the tiers, the Operating Committee
considered the funding principles set forth in Section 11.2 of the CAT
NMS Plan, seeking to create funding tiers that take into account the
relative impact on system resources of different Options Execution
Venues, and that establish comparable fees among the CAT Reporters with
the most Reportable Events. Each Options Execution Venue will be placed
into one of two tiers of fixed fees, based on the Execution Venue's
Listed Options market share. In choosing two tiers, the Operating
Committee performed an analysis similar to that discussed above with
regard to Industry Members (other than Execution Venue ATSs) to
determine the number of tiers for Options Execution Venues. The
Operating Committee determined to establish two tiers for Options
Execution Venues, rather than a larger number of tiers as established
for Industry Members (other than Execution Venue ATSs), because the two
tiers were sufficient to distinguish between the smaller number of
Options Execution Venues based on market share. Furthermore, due to the
smaller number of Options Execution Venues, the incorporation of
additional Options Execution Venue tiers would result in significantly
higher fees for Tier 1 Options Execution Venues and reduce
comparability between Execution Venues and Industry Members.
Each Options Execution Venue will be ranked by market share and
tiered by predefined Execution Venue percentages, (the ``Options
Execution Venue Percentages''). To determine the fixed percentage of
Options Execution Venues in each tier, the Operating Committee analyzed
the historical and publicly available market share of Options Execution
Venues to group Options Execution Venues with similar market shares
across the tiers. Options Execution Venue market share of share volume
were sourced from market statistics made publicly-available by Bats.
The process for developing the Options Execution Venue Percentages was
the same as discussed above with regard to Equity Execution Venues.
The percentage of costs recovered by each Options Execution Venue
tier will be determined by predefined percentage allocations (the
``Options Execution Venue Recovery Allocation''). In determining the
fixed percentage allocation of costs recovered for each tier, the
Operating Committee considered the impact of CAT Reporter market share
activity on the CAT System as well as the distribution of total market
volume across Options Execution Venues while seeking to maintain
comparable fees among the largest CAT Reporters. Furthermore, by using
percentages of Options Execution Venues and costs recovered per tier,
the Operating Committee sought to include stability and elasticity
within the funding model, allowing the funding model to respond to
changes in either the total number of Options Execution Venues or
changes in market share. The process for developing the Options
Execution Venue Recovery Allocation was the same as discussed above
with regard to Equity Execution Venues.
Based on this analysis, the Operating Committee approved the
following Options Execution Venue Percentages and Recovery Allocations:
----------------------------------------------------------------------------------------------------------------
Percentage of
Options Percentage of Percentage of
Options Execution Venue tier Execution Execution total recovery
Venues Venue Recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 75.00 20.00 5.00
Tier 2.......................................................... 25.00 5.00 1.25
-----------------------------------------------
Total....................................................... 100 25 6.25
----------------------------------------------------------------------------------------------------------------
The following table exhibits the relative separation of market
share of share volume between Tier 1 and Tier 2 Options Execution
Venues. In reviewing the table, note that while this division was
referenced as a data point to help differentiate between Options
Execution Venue tiers, the proposed funding model is directly driven,
not by market share thresholds, but rather by fixed percentages of
Options Execution Venues across tiers to account for fluctuating levels
of market share across time. Actual market share in any tier will vary
based on the actual market activity in a given measurement period, as
well as the number of Options Execution Venues included in the
measurement period. The Options Execution Venue Percentages and Equity
Execution Venue Recovery Allocation for each tier will remain fixed
with each Options Execution Venue tier to be reassigned periodically,
as described below in Section II.A.1.(1)(I) [sic].
------------------------------------------------------------------------
Options market
Options Execution Venue Tier share of share
volume (%)
------------------------------------------------------------------------
Tier 1.................................................. >=1
Tier 2.................................................. <1
------------------------------------------------------------------------
(III) Market Share/Tier Assignments
The Operating Committee determined that, prior to the start of CAT
reporting, market share for Execution Venues would be sourced from
publicly-available market data. Options and equity volumes for
Participants will be sourced from market data made publicly available
by Bats while Execution Venue ATS volumes will be sourced from market
data made publicly available by FINRA. Set forth in the Appendix are
two charts, one listing the current Equity Execution Venues, each with
its rank and tier, and one listing the current Options Execution
Venues, each with its rank and tier.
[[Page 23648]]
After the commencement of CAT reporting, market share for Execution
Venues will be sourced from data reported to the CAT. Equity Execution
Venue market share will be determined by calculating each Equity
Execution Venue's proportion of the total volume of NMS Stock and OTC
Equity shares reported by all Equity Execution Venues during the
relevant time period. Similarly, market share for Options Execution
Venues will be determined by calculating each Options Execution Venue's
proportion of the total volume of Listed Options contracts reported by
all Options Execution Venues during the relevant time period.
The Operating Committee has determined to calculate fee tiers for
Execution Venues every three months based on market share from the
prior three months. Based on its analysis of historical data, the
Operating Committee believes calculating tiers based on three months of
data will provide the best balance between reflecting changes in
activity by Execution Venues while still providing predictability in
the tiering for Execution Venues.
(D) Allocation of Costs
In addition to the funding principles discussed above, including
comparability of fees, Section 11.1(c) of the CAT NMS Plan also
requires expenses to be fairly and reasonably shared among the
Participants and Industry Members. Accordingly, in developing the
proposed fee schedules pursuant to the funding model, the Operating
Committee calculated how the CAT costs would be allocated between
Industry Members and Execution Venues, and how the portion of CAT costs
allocated to Execution Venues would be allocated between Equity
Execution Venues and Options Execution Venues. These determinations are
described below.
(I) Allocation Between Industry Members and Execution Venues
In determining the cost allocation between Industry Members (other
than Execution Venue ATSs) and Execution Venues, the Operating
Committee analyzed a range of possible splits for revenue recovered
from such Industry Members and Execution Venues. Based on this
analysis, the Operating Committee determined that 75 percent of total
costs recovered would be allocated to Industry Members (other than
Execution Venue ATSs) and 25 percent would be allocated to Execution
Venues. The Operating Committee determined that this 75/25 division
maintained the greatest level of comparability across the funding
model, keeping in view that comparability should consider affiliations
among or between CAT Reporters (e.g., firms with multiple Industry
Members and/or exchange licenses). For example, the cost allocation
establishes fees for the largest Industry Members (i.e., those Industry
Members in Tiers 1, 2 and 3) that are comparable to the largest Equity
Execution Venues and Options Execution Venues (i.e., those Execution
Venues in Tier 1). In addition, the cost allocation establishes fees
for Execution Venue complexes that are comparable to those of Industry
Member complexes. For example, when analyzing alternative allocations,
other possible allocations led to much higher fees for larger Industry
Members than for larger Execution Venues or vice versa, and/or led to
much higher fees for Industry Member complexes than Execution Venue
complexes or vice versa.
Furthermore, the allocation of total CAT costs recovered recognizes
the difference in the number of CAT Reporters that are Industry Members
versus CAT Reporters that are Execution Venues. Specifically, the cost
allocation takes into consideration that there are approximately 25
times more Industry Members expected to report to the CAT than
Execution Venues (e.g., an estimated 1,630 Industry Members versus 70
Execution Venues as of January 2017).
(II) Allocation Between Equity Execution Venues and Options Execution
Venues
The Operating Committee also analyzed how the portion of CAT costs
allocated to Execution Venues would be allocated between Equity
Execution Venues and Options Execution Venues. In considering this
allocation of costs, the Operating Committee analyzed a range of
alternative splits for revenue recovered between Equity and Options
Execution Venues, including a 70/30, 67/33, 65/35, 50/50 and 25/75
split. Based on this analysis, the Operating Committee determined to
allocate 75 percent of Execution Venue costs recovered to Equity
Execution Venues and 25 percent to Options Execution Venues. The
Operating Committee determined that a 75/25 division between Equity and
Options Execution Venues maintained elasticity across the funding model
as well the greatest level of fee equitability and comparability based
on the current number of Equity and Options Execution Venues. For
example, the allocation establishes fees for the larger Equity
Execution Venues that are comparable to the larger Options Execution
Venues, and fees for the smaller Equity Execution Venues that are
comparable to the smaller Options Execution Venues. In addition to fee
comparability between Equity Execution Venues and Options Execution
Venues, the allocation also establishes equitability between larger
(Tier 1) and smaller (Tier 2) Execution Venues based upon the level of
market share. Furthermore, the allocation is intended to reflect the
relative levels of current equity and options order events.
(E) Fee Levels
The Operating Committee determined to establish a CAT-specific fee
to collectively recover the costs of building and operating the CAT.
Accordingly, under the funding model, the sum of the CAT Fees is
designed to recover the total cost of the CAT. The Operating Committee
has determined overall CAT costs to be comprised of Plan Processor
costs and non-Plan Processor costs, which are estimated to be
$50,700,000 in total for the year beginning November 21, 2016.\42\
---------------------------------------------------------------------------
\42\ It is anticipated that CAT-related costs incurred prior to
November 21, 2016 will be addressed via a separate fee filing.
---------------------------------------------------------------------------
The Plan Processor costs relate to costs incurred by the Plan
Processor and consist of the Plan Processor's current estimates of
average yearly ongoing costs, including development cost, which total
$37,500,000. This amount is based upon the fees due to the Plan
Processor pursuant to the agreement with the Plan Processor.
The non-Plan Processor estimated costs incurred and to be incurred
by the Company through November 21, 2017 consist of three categories of
costs. The first category of such costs are third party support costs,
which include historic legal fees, consulting fees and audit fees from
November 21, 2016 until the date of filing as well as estimated third
party support costs for the rest of the year. These amount to an
estimated $5,200,000. The second category of non-Plan Processor costs
are estimated insurance costs for the year. Based on discussions with
potential insurance providers, assuming $2-5 million insurance premium
on $100 million in coverage, the Company has received an estimate of
$3,000,000 for the annual cost. The final cost figures will be
determined following receipt of final underwriter quotes. The third
category of non-Plan Processor costs is the operational reserve, which
is comprised of three months of ongoing Plan Processor costs
($9,375,000), third party support costs ($1,300,000) and insurance
costs ($750,000). The Operating Committee aims to accumulate the
necessary funds for the
[[Page 23649]]
establishment of the three-month operating reserve for the Company
through the CAT Fees charged to CAT Reporters for the year. On an
ongoing basis, the Operating Committee will account for any potential
need for the replenishment of the operating reserve or other changes to
total cost during its annual budgeting process. The following table
summarizes the Plan Processor and non-Plan Processor cost components
which comprise the total CAT costs of $50,700,000.
------------------------------------------------------------------------
Cost category Cost component Amount
------------------------------------------------------------------------
Plan Processor................. Operational Costs...... $37,500,000
Non-Plan Processor............. Third Party Support 5,200,000
Costs.
Operational Reserve.... \43\ 5,000,000
Insurance Costs........ 3,000,000
---------------
Estimated Total............ ....................... 50,700,000
------------------------------------------------------------------------
Basedon the estimated costs and the calculations for the funding
model described above, the Operating Committee determined to impose the
following fees: \44\
---------------------------------------------------------------------------
\43\ This $5,000,000 represents the gradual accumulation of the
funds for a target operating reserve of $11,425,000.
\44\ Note that all monthly, quarterly and annual CAT Fees have
been rounded to the nearest dollar.
---------------------------------------------------------------------------
For Industry Members (other than Execution Venue ATSs):
----------------------------------------------------------------------------------------------------------------
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually \45\
----------------------------------------------------------------------------------------------------------------
1............................................................... $33,668 $101,004 $404,016
2............................................................... 27,051 81,153 324,612
3............................................................... 19,239 57,717 230,868
4............................................................... 6,655 19,965 79,860
5............................................................... 4,163 12,489 49,956
6............................................................... 2,560 7,680 30,720
7............................................................... 501 1,503 6,012
8............................................................... 145 435 1,740
9............................................................... 22 66 264
----------------------------------------------------------------------------------------------------------------
For Execution Venues for NMS Stocks and OTC Equity Securities:
----------------------------------------------------------------------------------------------------------------
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually \46\
----------------------------------------------------------------------------------------------------------------
1............................................................... $21,125 $63,375 $253,500
2............................................................... 12,940 38,820 155,280
----------------------------------------------------------------------------------------------------------------
For Execution Venues for Listed Options:
----------------------------------------------------------------------------------------------------------------
Monthly CAT Quarterly CAT CAT fees paid
Tier fee fee annually \47\
----------------------------------------------------------------------------------------------------------------
1............................................................... $19,205 $57,615 $230,460
2............................................................... 13,204 39,612 158,448
----------------------------------------------------------------------------------------------------------------
As noted above, the fees set forth in the tables reflect the
Operating Committee's decision to ensure comparable fees between
Execution Venues and Industry Members. The fees of the top tiers for
Industry Members (other than Execution Venue ATSs) are not identical to
the top tier for Execution Venues, however, because the Operating
Committee also determined that the fees for Execution Venue complexes
should be comparable to those of Industry Member complexes. The
difference in the fees reflects this decision to recognize
affiliations.
---------------------------------------------------------------------------
\45\ This column represents the approximate total CAT Fees paid
each year by each Industry Member (other than Execution Venue ATSs)
(i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x 12
months).
\46\ This column represents the approximate total CAT Fees paid
each year by each Execution Venue for NMS Stocks and OTC Equity
Securities (i.e., ``CAT Fees Paid Annually'' = ``Monthly CAT Fee'' x
12 months).
\47\ This column represents the approximate total CAT Fees paid
each year by each Execution Venue for Listed Options (i.e., ``CAT
Fees Paid Annually'' = ``Monthly CAT Fee'' x 12 months).
---------------------------------------------------------------------------
The Operating Committee has calculated the schedule of effective
fees for Industry Members (other than Execution Venue ATSs) and
Execution Venues in the following manner. Note
[[Page 23650]]
that the calculation of CAT Reporter fees assumes 53 Equity Execution
Venues, 15 Options Execution Venues and 1,631 Industry Members (other
than Execution Venue ATSs) as of January 2017.
Calculation of Annual Tier Fees for Industry Members (``IM'')
----------------------------------------------------------------------------------------------------------------
Percentage of
Percentage of industry Percentage of
Industry member tier industry member total recovery
members recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 0.500 8.50 6.38
Tier 2.......................................................... 2.500 35.00 26.25
Tier 3.......................................................... 2.125 21.25 15.94
Tier 4.......................................................... 4.625 15.75 11.81
Tier 5.......................................................... 3.625 7.75 5.81
Tier 6.......................................................... 4.000 5.25 3.94
Tier 7.......................................................... 17.500 4.50 3.38
Tier 8.......................................................... 20.125 1.50 1.13
Tier 9.......................................................... 45.000 0.50 0.38
-----------------------------------------------
Total....................................................... 100 100 75
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Estimated number
Industry member tier of industry
members
------------------------------------------------------------------------
Tier 1............................................... 8
Tier 2............................................... 41
Tier 3............................................... 35
Tier 4............................................... 75
Tier 5............................................... 59
Tier 6............................................... 65
Tier 7............................................... 285
Tier 8............................................... 328
Tier 9............................................... 735
------------------
Total............................................ 1,631
------------------------------------------------------------------------
[[Page 23651]]
[GRAPHIC] [TIFF OMITTED] TN23MY17.001
Calculation of Annual Tier Fees for Equity Execution Venues (``EV'')
----------------------------------------------------------------------------------------------------------------
Percentage of
Equity Percentage of Percentage of
Equity Execution Venue Tier Execution Execution total recovery
Venues Venue Recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 25.00 26.00 6.50
Tier 2.......................................................... 75.00 49.00 12.25
-----------------------------------------------
Total....................................................... 100 75 18.75
----------------------------------------------------------------------------------------------------------------
[[Page 23652]]
------------------------------------------------------------------------
Estimated number
Equity Execution Venue Tier of Equity
Execution Venues
------------------------------------------------------------------------
Tier 1............................................... 13
Tier 2............................................... 40
------------------
Total............................................ 53
------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TN23MY17.002
Calculation of Annual Tier Fees for Options Execution Venues (``EV'')
----------------------------------------------------------------------------------------------------------------
Percentage of
options Percentage of Percentage of
Options Execution Venue Tier Execution execution total recovery
Venues Venue Recovery
----------------------------------------------------------------------------------------------------------------
Tier 1.......................................................... 75.00 20.00 5.00
Tier 2.......................................................... 25.00 5.00 1.25
-----------------------------------------------
Total....................................................... 100 25 6.25
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Estimated number
Options Execution Venue Tier of Options
Execution Venues
------------------------------------------------------------------------
Tier 1............................................... 11
Tier 2............................................... 4
------------------
Total............................................ 15
------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TN23MY17.003
Traceability of Total CAT Fees
----------------------------------------------------------------------------------------------------------------
Estimated
Type Industry member tier number of CAT fees paid Total recovery
members annually
----------------------------------------------------------------------------------------------------------------
Industry Members.................... Tier 1.................... 8 $404,016 $3,232,128
Tier 2.................... 41 324,612 13,309,092
Tier 3.................... 35 230,868 8,080,380
Tier 4.................... 75 79,860 5,989,500
Tier 5.................... 59 49,956 2,947,404
Tier 6.................... 65 30,720 1,996,800
Tier 7.................... 285 6,012 1,713,420
[[Page 23653]]
Tier 8.................... 328 1,740 570,720
Tier 9.................... 735 264 194,040
-----------------------------------------------
Total........................... .......................... 1,631 .............. 38,033,484
----------------------------------------------------------------------------------------------------------------
Equity Execution Venues............. Tier 1.................... 13 253,500 3,295,500
Tier 2.................... 40 155,280 6,211,200
-----------------------------------------------
Total........................... .......................... 53 .............. 9,506,700
----------------------------------------------------------------------------------------------------------------
Options Execution Venues............ Tier 1.................... 11 230,460 2,535,060
Tier 2.................... 4 158,448 633,792
-----------------------------------------------
Total........................... .......................... 15 .............. 3,168,852
-----------------------------------------------
Total....................... .......................... .............. .............. 50,709,036
-----------------------------------------------
Excess \48\................. .......................... .............. .............. 9,036
----------------------------------------------------------------------------------------------------------------
(F) Comparability of Fees
---------------------------------------------------------------------------
\48\ The amount in excess of the total CAT costs will contribute
to the gradual accumulation of the target operating reserve of
$11.425 million.
---------------------------------------------------------------------------
The funding principles require a funding model in which the fees
charged to the CAT Reporters with the most CAT-related activity
(measured by market share and/or message traffic, as applicable) are
generally comparable (where, for these comparability purposes, the
tiered fee structure takes into consideration affiliations between or
among CAT Reporters, whether Execution Venue and/or Industry Members).
Accordingly, in creating the model, the Operating Committee sought to
take account of the affiliations between or among CAT Reporters--that
is, where affiliated entities may have multiple Industry Member and/or
Execution Venue licenses, by maintaining relative comparability of fees
among such affiliations with the most expected CAT-related activity. To
do this, the Participants identified representative affiliations in the
largest tier of both Execution Venues and Industry Members and compared
the aggregate fees that would be paid by such firms.
While the proposed fees for Tier 1 and Tier 2 Industry Members are
relatively higher than those of Tier 1 and Tier 2 Execution Venues,
Execution Venue complex fees are relatively higher than those of
Industry Member complexes largely due to affiliations between Execution
Venues. The tables set forth below describe the largest Execution Venue
and Industry Member complexes and their associated fees: \49\
---------------------------------------------------------------------------
\49\ Note that the analysis of the complexes was performed on a
best efforts basis, as all affiliations between the 1631 Industry
Members may not be included.
Execution Venue Complexes
----------------------------------------------------------------------------------------------------------------
Listing of Equity Listing of Options Total fees by
Execution Venue Complex Execution Venue Tiers Execution Venue Tier EV complex
----------------------------------------------------------------------------------------------------------------
Execution Venue Complex 1............... Tier 1 (x2)...... Tier 1 (x4)...... $1,900,962
Tier 2 (x1)...... Tier 2 (x2)......
Execution Venue Complex 2............... Tier 1 (x2)...... Tier 1 (x2)...... 1,863,801
Tier 2 (x1)......
Execution Venue Complex 3............... Tier 1 (x2)...... Tier 1 (x2)...... 1,278,447
Tier 2 (x2)......
----------------------------------------------------------------------------------------------------------------
Industry Member Complexes
----------------------------------------------------------------------------------------------------------------
Listing of industry member Total fees by
Industry member complex tiers Listing of ATS tiers IM complex
----------------------------------------------------------------------------------------------------------------
Industry Member Complex 1............... Tier 1 (x2)...... Tier 2 (x1)...... $963,300
Industry Member Complex 2............... Tier 1 (x1)...... Tier 2 (x3)...... 949,674
Tier 4 (x1)......
Industry Member Complex 3............... Tier 1 (x1)...... Tier 2 (x1)...... 883,888
Tier 2 (x1)......
Industry Member Complex 4............... Tier 1 (x1)...... N/A....................... 808,472
Tier 2 (x1)......
Tier 4 (x1)......
Industry Member Complex 5............... Tier 2 (x1)...... Tier 2 (x1)...... 796,595
Tier 3 (x1)......
Tier 4 (x1)......
Tier 7 (x1)......
----------------------------------------------------------------------------------------------------------------
[[Page 23654]]
(G) Billing Onset
Under Section 11.1(c) of the CAT NMS Plan, to fund the development
and implementation of the CAT, the Company shall time the imposition
and collection of all fees on Participants and Industry Members in a
manner reasonably related to the timing when the Company expects to
incur such development and implementation costs. The Company is
currently incurring such development and implementation costs and will
continue to do so prior to the commencement of CAT reporting and
thereafter. For example, the Plan Processor has required up-front
payments to begin building the CAT. In addition, the Company continues
to incur consultant and legal expenses on an on-going basis to
implement the CAT. Accordingly, the Operating Committee determined that
all CAT Reporters, including both Industry Members and Execution Venues
(including Participants), would begin to be invoiced as promptly as
possible following the establishment of a billing mechanism. FINRA will
issue a notice to its members when the billing mechanism is
established, specifying the date when such invoicing of Industry
Members will commence.
(H) Changes to Fee Levels and Tiers
Section 11.3(d) of the CAT NMS Plan states that ``[t]he Operating
Committee shall review such fee schedule on at least an annual basis
and shall make any changes to such fee schedule that it deems
appropriate. The Operating Committee is authorized to review such fee
schedule on a more regular basis, but shall not make any changes on
more than a semi-annual basis unless, pursuant to a Supermajority Vote,
the Operating Committee concludes that such change is necessary for the
adequate funding of the Company.'' With such reviews, the Operating
Committee will review the distribution of Industry Members and
Execution Venues across tiers, and make any updates to the percentage
of CAT Reporters allocated to each tier as may be necessary. In
addition, the reviews will evaluate the estimated ongoing CAT costs and
the level of the operating reserve. To the extent that the total CAT
costs decrease, the fees would be adjusted downward, and, to the extent
that the total CAT costs increase, the fees would be adjusted
upward.\50\ Furthermore, any surplus of the Company's revenues over its
expenses is to be included within the operational reserve to offset
future fees. The limitations on more frequent changes to the fee,
however, are intended to provide budgeting certainty for the CAT
Reporters and the Company.\51\ To the extent that the Operating
Committee approves changes to the number of tiers in the funding model
or the fees assigned to each tier, then FINRA will file such changes
with the SEC pursuant to Section 19(b) of the Exchange Act, and any
such changes will become effective in accordance with the requirements
of Section 19(b).
---------------------------------------------------------------------------
\50\ The CAT Fees are designed to recover the costs associated
with the CAT. Accordingly, CAT Fees would not be affected by
increases or decreases in other non-CAT expenses incurred by the
Participants, such as any changes in costs related to the retirement
of existing regulatory systems, such as OATS.
\51\ Section B.7, Appendix C of the CAT NMS Plan, Approval Order
at 85006.
---------------------------------------------------------------------------
(I) Initial and Periodic Tier Reassignments
The Operating Committee has determined to calculate fee tiers every
three months based on market share or message traffic, as applicable,
from the prior three months. For the initial tier assignments, the
Company will calculate the relevant tier for each CAT Reporter using
the three months of data prior to the commencement date. As with the
initial tier assignment, for the tri-monthly reassignments, the Company
will calculate the relevant tier using the three months of data prior
to the relevant tri-monthly date. FINRA notes that any movement of CAT
Reporters between tiers will not change the criteria for each tier or
the fee amount corresponding to each tier.
In performing the tri-monthly reassignments, FINRA notes that the
percentage of CAT Reporters in each assigned tier is relative.
Therefore, a CAT Reporter's assigned tier will depend, not only on its
own message traffic or market share, but it also will depend on the
message traffic/market share across all CAT Reporters. For example, the
percentage of Industry Members (other than Execution Venue ATSs) in
each tier is relative such that such Industry Member's assigned tier
will depend on message traffic generated across all CAT Reporters as
well as the total number of CAT Reporters. The Operating Committee will
inform CAT Reporters of their assigned tier every three months
following the periodic tiering process, as the funding model will
compare an individual CAT Reporter's activity to that of other CAT
Reporters in the marketplace.
The following demonstrates a tier reassignment. In accordance with
the funding model, the top 75% of Options Execution Venues in market
share are categorized as Tier 1 while the bottom 25% of Options
Execution Venues in market share are categorized as Tier 2. In the
sample scenario below, Options Execution Venue L is initially
categorized as a Tier 2 Options Execution Venue in Period A due to its
market share. When market share is recalculated for Period B, the
market share of Execution Venue L increases, and it is therefore
subsequently reranked and reassigned to Tier 1 in Period B.
Correspondingly, Options Execution Venue K, initially a Tier 1 Options
Execution Venue in Period A, is reassigned to Tier 2 in Period B due to
decreases in its market share of share volume.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Period A Period B
--------------------------------------------------------------------------------------------------------------------------------------------------------
Market share Market share
Options Execution Venue rank Tier Options Execution Venue rank Tier
--------------------------------------------------------------------------------------------------------------------------------------------------------
Options Execution Venue A...................... 1 1 Options Execution Venue A............. 1 1
Options Execution Venue B...................... 2 1 Options Execution Venue B............. 2 1
Options Execution Venue C...................... 3 1 Options Execution Venue C............. 3 1
Options Execution Venue D...................... 4 1 Options Execution Venue D............. 4 1
Options Execution Venue E...................... 5 1 Options Execution Venue E............. 5 1
Options Execution Venue F...................... 6 1 Options Execution Venue F............. 6 1
Options Execution Venue G...................... 7 1 Options Execution Venue I............. 7 1
Options Execution Venue H...................... 8 1 Options Execution Venue H............. 8 1
Options Execution Venue I...................... 9 1 Options Execution Venue G............. 9 1
Options Execution Venue J...................... 10 1 Options Execution Venue J............. 10 1
Options Execution Venue K...................... 11 1 Options Execution Venue L............. 11 1
[[Page 23655]]
Options Execution Venue L...................... 12 2 Options Execution Venue K............. 12 2
Options Execution Venue M...................... 13 2 Options Execution Venue N............. 13 2
Options Execution Venue N...................... 14 2 Options Execution Venue M............. 14 2
Options Execution Venue O...................... 15 2 Options Execution Venue O............. 15 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
(3) Proposed CAT Fee Schedule
FINRA proposes the Consolidated Audit Trail Funding Fees to
implement the CAT Fees determined by the Operating Committee on FINRA's
Industry Members. The proposed fee schedule has three sections,
covering definitions, the fee schedule for CAT Fees, and the timing and
manner of payments. Each of these sections is discussed in detail
below.
(A) Definitions
Paragraph (a) of the proposed fee schedule sets forth the
definitions for the proposed fee schedule. Paragraph (a)(1) states
that, for purposes of the Consolidated Audit Trail Funding Fees, the
terms ``CAT NMS Plan,'' ``Industry Member,'' ``NMS Stock,'' ``OTC
Equity Security'', and ``Participant'' are defined as set forth in Rule
6810 (Consolidated Audit Trail--Definitions).
The proposed fee schedule imposes different fees on Equity ATSs and
Industry Members that are not Equity ATSs. Accordingly, the proposed
fee schedule defines the term ``Equity ATS.'' First, paragraph (a)(2)
defines an ``ATS'' to mean an alternative trading system as defined in
Rule 300(a) of SEC Regulation ATS under the Securities Exchange Act of
1934, as amended, that operates pursuant to Rule 301 of SEC Regulation
ATS. This is the same definition of an ATS as set forth in Section 1.1
of the CAT NMS Plan in the definition of an ``Execution Venue.'' Then,
paragraph (a)(4) defines an ``Equity ATS'' as an ATS that executes
transactions in NMS Stocks and/or OTC Equity Securities.
Paragraph (a)(3) of the proposed fee schedule defines the term
``CAT Fee'' to mean the Consolidated Audit Trail Funding Fee(s) to be
paid by Industry Members as set forth in paragraph (b) in the proposed
fee schedule.
Finally, Paragraph (a)(6) defines an ``Execution Venue'' as a
Participant or an ATS (excluding any such ATS that does not execute
orders). This definition is the same substantive definition as set
forth in Section 1.1 of the CAT NMS Plan. Paragraph (a)(5) defines an
``Equity Execution Venue'' as an Execution Venue that trades NMS Stocks
and/or OTC Equity Securities.
(B) Fee Schedule
FINRA proposes to impose the CAT Fees applicable to its Industry
Members through paragraph (b) of the proposed fee schedule. Paragraph
(b)(1) of the proposed fee schedule sets forth the CAT Fees applicable
to Industry Members other than Equity ATSs. Specifically, paragraph
(b)(1) states that the Company will assign each Industry Member (other
than an Equity ATS) to a fee tier once every quarter, where such tier
assignment is calculated by ranking each Industry Member based on its
total message traffic for the three months prior to the quarterly tier
calculation day and assigning each Industry Member to a tier based on
that ranking and predefined Industry Member percentages. The Industry
Members with the highest total quarterly message traffic will be ranked
in Tier 1, and the Industry Members with lowest quarterly message
traffic will be ranked in Tier 9. Each quarter, each Industry Member
(other than an Equity ATS) shall pay the following CAT Fee
corresponding to the tier assigned by the Company for such Industry
Member for that quarter:
------------------------------------------------------------------------
Percentage
Tier of industry Quarterly
members CAT fee
------------------------------------------------------------------------
1............................................. 0.500 $101,004
2............................................. 2.500 81,153
3............................................. 2.125 57,717
4............................................. 4.625 19,965
5............................................. 3.625 12,489
6............................................. 4.000 7,680
7............................................. 17.500 1,503
8............................................. 20.125 435
9............................................. 45.000 66
------------------------------------------------------------------------
Paragraph (b)(2) of the proposed fee schedule sets forth the CAT
Fees applicable to Equity ATSs.\52\ These are the same fees that
Participants that trade NMS Stocks and/or OTC Equity Securities will
pay. Specifically, paragraph (b)(2) states that the Company will assign
each Equity ATS to a fee tier once every quarter, where such tier
assignment is calculated by ranking each Equity Execution Venue based
on its total market share of NMS Stocks and OTC Equity Securities for
the three months prior to the quarterly tier calculation day and
assigning each Equity Execution Venue to a tier based on that ranking
and predefined Equity Execution Venue percentages. The Equity Execution
Venues with the higher total quarterly market share will be ranked in
Tier 1, and the Equity Execution Venues with the lower quarterly market
share will be ranked in Tier 2. Specifically, paragraph (b)(2) states
that, each quarter, each Equity ATS shall pay the following CAT Fee
corresponding to the tier assigned by the Company for such Equity ATS
for that quarter:
---------------------------------------------------------------------------
\52\ Note that no fee schedule is provided for Execution Venue
ATSs that execute transactions in Listed Options, as no such
Execution Venue ATSs currently exist due to trading restrictions
related to Listed Options.
------------------------------------------------------------------------
Percentage
of equity Quarterly
Tier execution CAT fee
venues
------------------------------------------------------------------------
1............................................. 25.00 $63,375
2............................................. 75.00 38,820
------------------------------------------------------------------------
(C) Timing and Manner of Payment
Section 11.4 of the CAT NMS Plan states that the Operating
Committee shall establish a system for the collection of fees
authorized under the CAT NMS Plan. The Operating Committee may include
such collection responsibility as a function of the Plan Processor or
another administrator. To implement the payment process to be adopted
by the Operating Committee, paragraph (c)(1) of the proposed fee
schedule states that the Company will provide each Industry Member with
one invoice each quarter for its CAT Fees as determined pursuant to
paragraph (b) of the proposed fee schedule, regardless of whether the
Industry Member is a member of multiple self-regulatory organizations.
Paragraph (c)(1) further states that each Industry Member will pay its
CAT Fees to the Company via the centralized system for the collection
of CAT Fees established by the Company in the manner prescribed by the
Company. FINRA will provide Industry Members with details regarding the
manner of payment of CAT Fees by Regulatory Notice.
Although the exact fee collection system and processes for CAT fees
has
[[Page 23656]]
not yet been established, all CAT fees will be billed and collected
centrally through the Company, via the Plan Processor or otherwise.
Although each Participant will adopt its own fee schedule regarding CAT
Fees, no CAT Fees or portion thereof will be collected by the
individual Participants. Each Industry Member will receive from the
Company one invoice for its applicable CAT fees, not separate invoices
from each Participant of which it is a member. The Industry Members
will pay the CAT Fees to the Company via the centralized system for the
collection of CAT fees established by the Company.\53\
---------------------------------------------------------------------------
\53\ Section 11.4 of the CAT NMS Plan.
---------------------------------------------------------------------------
Section 11.4 of the CAT NMS Plan also states that Participants
shall require each Industry Member to pay all applicable authorized CAT
Fees within thirty days after receipt of an invoice or other notice
indicating payment is due (unless a longer payment period is otherwise
indicated). Section 11.4 further states that, if an Industry Member
fails to pay any such fee when due, such Industry Member shall pay
interest on the outstanding balance from such due date until such fee
is paid at a per annum rate equal to the lesser of: (i) The Prime Rate
plus 300 basis points; or (ii) the maximum rate permitted by applicable
law. Therefore, in accordance with Section 11.4 of the CAT NMS Plan,
FINRA proposed to adopt paragraph (c)(2) of the proposed fee schedule.
Paragraph (c)(2) of the proposed fee schedule states that each Industry
Member shall pay CAT Fees within thirty days after receipt of an
invoice or other notice indicating payment is due (unless a longer
payment period is otherwise indicated). If an Industry Member fails to
pay any such fee when due, such Industry Member shall pay interest on
the outstanding balance from such due date until such fee is paid at a
per annum rate equal to the lesser of: (i) The Prime Rate plus 300
basis points; or (ii) the maximum rate permitted by applicable law.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\54\ which require, among
other things, that the FINRA rules must be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest, and not designed to permit unfair
discrimination between customers, issuers, brokers and dealer [sic],
and Section 15A(b)(5) of the Act,\55\ which requires that FINRA rules
provide for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility or system which the Participants operates or controls. As
discussed above, the SEC approved the bifurcated, tiered, fixed fee
funding model in the CAT NMS Plan, finding it was reasonable and that
it equitably allocated fees among Participants and Industry Members.
FINRA believes that the proposed tiered fees adopted pursuant to the
funding model approved by the SEC in the CAT NMS Plan are reasonable,
equitably allocated and not unfairly discriminatory.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78o-3(b)(6).
\55\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------
FINRA believes that this proposal is consistent with the Act
because it implements, interprets or clarifies the provisions of the
Plan, and is designed to assist FINRA and its Industry Members in
meeting regulatory obligations pursuant to the Plan. In approving the
Plan, the SEC noted that the Plan ``is necessary and appropriate in the
public interest, for the protection of investors and the maintenance of
fair and orderly markets, to remove impediments to, and perfect the
mechanism of a national market system, or is otherwise in furtherance
of the purposes of the Act.'' \56\ To the extent that this proposal
implements, interprets or clarifies the Plan and applies specific
requirements to Industry Members, FINRA believes that this proposal
furthers the objectives of the Plan, as identified by the SEC, and is
therefore consistent with the Act.
---------------------------------------------------------------------------
\56\ Approval Order at 84697.
---------------------------------------------------------------------------
FINRA believes that the proposed tiered fees are reasonable. First,
the total CAT Fees to be collected would be directly associated with
the costs of establishing and maintaining the CAT, where such costs
include Plan Processor costs and costs related to insurance, third
party services and the operational reserve. The CAT Fees would not
cover Participant services unrelated to the CAT. In addition, any
surplus CAT Fees cannot be distributed to the individual Participants;
such surpluses must be used as a reserve to offset future fees. Given
the direct relationship between the fees and the CAT costs, FINRA
believes that the total level of the CAT Fees is reasonable.
In addition, FINRA believes that the proposed CAT Fees are
reasonably designed to allocate the total costs of the CAT equitably
between and among the Participants and Industry Members, and are
therefore not unfairly discriminatory. As discussed in detail above,
the proposed tiered fees impose comparable fees on similarly situated
CAT Reporters. For example, those with a larger impact on the CAT
(measured via message traffic or market share) pay higher fees, whereas
CAT Reporters with a smaller impact pay lower fees. Correspondingly,
the tiered structure lessens the impact on smaller CAT Reporters by
imposing smaller fees on those CAT Reporters with less market share or
message traffic. In addition, the funding model takes into
consideration affiliations between CAT Reporters, imposing comparable
fees on such affiliated entities.
Moreover, FINRA believes that the division of the total CAT costs
between Industry Members and Execution Venues, and the division of the
Execution Venue portion of total costs between Equity and Options
Execution Venues, is reasonably designed to allocate CAT costs among
CAT Reporters. The 75/25 division between Industry Members and
Execution Venues maintains the greatest level of comparability across
the funding model, keeping in view that comparability should consider
affiliations among or between CAT Reporters (e.g., firms with multiple
Industry Members or exchange licenses). Similarly, the 75/25 division
between Equity and Options Execution Venues maintains elasticity across
the funding model as well as the greatest level of fee equitability and
comparability based on the current number of Equity and Options
Execution Venues.
Finally, FINRA believes that the proposed fees are reasonable
because they would provide ease of calculation, ease of billing and
other administrative functions, and predictability of a fixed fee. Such
factors are crucial to estimating a reliable revenue stream for the
Company and for permitting CAT Reporters to reasonably predict their
payment obligations for budgeting purposes.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA notes that the proposed
rule change implements provisions of the CAT NMS Plan approved by the
Commission, and is designed to assist FINRA in meeting its regulatory
obligations pursuant to the Plan. Similarly, all national securities
exchanges and FINRA are proposing this proposed fee schedule to
implement the requirements of the CAT
[[Page 23657]]
NMS Plan. Therefore, this is not a competitive fee filing and,
therefore, it does not raise competition issues between and among the
exchanges and FINRA.
Moreover, as previously described, FINRA believes that the proposed
rule change fairly and equitably allocates costs among CAT Reporters.
In particular, the proposed fee schedule is structured to impose
comparable fees on similarly situated CAT Reporters, and lessen the
impact on smaller CAT Reporters. CAT Reporters with similar levels of
CAT activity will pay similar fees. For example, Industry Members
(other than Execution Venue ATSs) with higher levels of message traffic
will pay higher fees, and those with lower levels of message traffic
will pay lower fees. Similarly, Execution Venue ATSs and other
Execution Venues with larger market share will pay higher fees, and
those with lower levels of market share will pay lower fees. Therefore,
given that there is generally a relationship between message traffic
and market share to the CAT Reporter's size, smaller CAT Reporters
generally pay less than larger CAT Reporters. Accordingly, FINRA does
not believe that the CAT Fees would have a disproportionate effect on
smaller or larger CAT Reporters. In addition, ATSs and exchanges will
pay the same fees based on market share. Therefore, FINRA does not
believe that the fees will impose any burden on the competition between
ATSs and exchanges. Accordingly, FINRA believes that the proposed fees
will minimize the potential for adverse effects on competition between
CAT Reporters in the market.
Furthermore, the tiered, fixed fee funding model limits the
disincentives to providing liquidity to the market. Therefore, the
proposed fees are structured to limit burdens on competitive quoting
and other liquidity provision in the market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act,\57\ and paragraph (f)(2) of Rule 19b-4
thereunder.\58\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78s(b)(3)(A).
\58\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2017-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2017-011. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2017-011, and should
be submitted on or before June 13, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
---------------------------------------------------------------------------
\59\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10466 Filed 5-22-17; 8:45 am]
BILLING CODE 8011-01-P
