Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the NYSE Arca Options Fee Schedule by Revising the Options Regulatory Fee, 35169-35172 [2019-15469]

Download as PDF Federal Register / Vol. 84, No. 140 / Monday, July 22, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES and Exchange Commission (the ‘‘Commission’’) is soliciting comments on the collections of information summarized below. The Commission plans to submit these existing collections of information to the Office of Management and Budget (‘‘OMB’’) for extension and approval. Section 12(d)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a) generally prohibits registered investment companies (‘‘funds’’), and companies controlled by funds, from purchasing securities issued by a registered investment adviser, broker, dealer, or underwriter (‘‘securitiesrelated businesses’’). Rule 12d3–1 (‘‘Exemption of acquisitions of securities issued by persons engaged in securities related businesses’’ (17 CFR 270.12d3–1)) permits a fund to invest up to five percent of its assets in securities of an issuer deriving more than fifteen percent of its gross revenues from securities-related businesses, but a fund may not rely on rule 12d3–1 to acquire securities of its own investment adviser or any affiliated person of its own investment adviser. A fund may, however, rely on an exemption in rule 12d3–1 to acquire securities issued by its subadvisers in circumstances in which the subadviser would have little ability to take advantage of the fund, because it is not in a position to direct the fund’s securities purchases. The exemption in rule 12d3–1(c)(3) is available if (i) the subadviser is not, and is not an affiliated person of, an investment adviser that provides advice with respect to the portion of the fund that is acquiring the securities, and (ii) the advisory contracts of the subadviser, and any subadviser that is advising the purchasing portion of the fund, prohibit them from consulting with each other concerning securities transactions of the fund, and limit their responsibility in providing advice to providing advice with respect to discrete portions of the fund’s portfolio. Based on an analysis of fund filings, the staff estimates that approximately 216 fund portfolios enter into subadvisory agreements each year.1 Based on discussions with industry representatives, the staff estimates that it will require approximately 3 attorney hours to draft and execute additional clauses in new subadvisory contracts in order for funds and subadvisers to be 1 Based on data from Morningstar Direct, as of December 31, 2018, there are 12,459 registered funds (open-end funds, closed-end funds, and exchange-traded funds), 4,615 of which have subadvisory relationships (approximately 37%). 583 new funds were established in 2018. 583 new funds × 37% = 216 funds. VerDate Sep<11>2014 19:11 Jul 19, 2019 Jkt 247001 able to rely on the exemptions in rule 12d3–1. Because these additional clauses are identical to the clauses that a fund would need to insert in their subadvisory contracts to rely on rules 10f–3, 17a–10, and 17e–1 and because we believe that funds that use one such rule generally use all of these rules, we apportion this 3 hour time burden equally to all four rules. Therefore, we estimate that the burden allocated to rule 12d3–1 for this contract change would be 0.75 hours.2 Assuming that all 216 funds that enter into new subadvisory contracts each year make the modification to their contract required by the rule, we estimate that the rule’s contract modification requirement will result in 162 burden hours annually.3 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to Charles Riddle, Acting Director/Chief Information Officer, Securities and Exchange Commission, C/O Candace Kenner, 100 F Street NE, Washington, DC 20549; or send an email to: PRA_ Mailbox@sec.gov. Dated: July 17, 2019. Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–15528 Filed 7–19–19; 8:45 am] BILLING CODE 8011–01–P 2 This estimate is based on the following calculation (3 hours ÷ 4 rules = .75 hours). 3 This estimate is based on the following calculation: (0.75 hours × 216 portfolios = 162 burden hours). PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 35169 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–86390; File No. SR– NYSEArca–2019–49] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the NYSE Arca Options Fee Schedule by Revising the Options Regulatory Fee July 16, 2019. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 2, 2019, NYSE Arca, Inc. (‘‘NYSE Arca’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the NYSE Arca Options Fee Schedule (‘‘Fee Schedule’’) by revising the Options Regulatory Fee (‘‘ORF’’), effective August 1, 2019. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 E:\FR\FM\22JYN1.SGM 22JYN1 35170 Federal Register / Vol. 84, No. 140 / Monday, July 22, 2019 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule to revise the amount of the ORF, effective August 1, 2019. Specifically, to respond to increased options transaction volumes in 2018, which reverted (in part) in the first half of 2019, the Exchange proposes to lower the ORF to $0.0054 (from $0.0055) per contract side for the remainder of 2019. Background jbell on DSK3GLQ082PROD with NOTICES As a general matter, the Exchange may only use regulatory funds such as ORF ‘‘to fund the legal, regulatory, and surveillance operations’’ of the Exchange.4 More specifically, the ORF is designed to recover a material portion, but not all, of the Exchange’s regulatory costs for the supervision and regulation of OTP Holders and OTP Firms (the ‘‘OTP Regulatory Costs’’). The majority of the OTP Regulatory Costs are direct expenses, such as the costs related to in-house staff, thirdparty service providers, and technology. The direct expenses support the day-today regulatory work relating to the OTP Holders or OTP Firms, including surveillance, investigation, examinations and enforcement. Such direct expenses represent approximately 91% of the Exchange’s total OTP Regulatory Costs. The indirect expenses include human resources and other administrative costs. The ORF is assessed on OTP Holders or OTP Firms for options transactions that are cleared by the OTP Holder or OTP Firm through the Options Clearing Corporation (‘‘OCC’’) in the Customer range regardless of the exchange on which the transaction occurs.5 All options transactions must clear via a clearing firm and such clearing firms can then choose to pass through all, a portion, or none of the cost of the ORF to its customers, i.e., the entering firms. Because the ORF is collected from OTP Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca,6 the 4 The Exchange considers surveillance operations part of regulatory operations. The limitation on the use of regulatory funds also provides that they shall not be distributed. See Bylaws of NYSE Arca, Inc., Art. II, Sec. 2.06. 5 See Fee Schedule, NYSE Arca GENERAL OPTIONS and TRADING PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee (‘‘ORF’’), available here, https://www.nyse.com/publicdocs/ nyse/markets/arca-options/NYSE_Arca_Options_ Fee_Schedule.pdf. 6 See id. The Exchange uses reports from OCC when assessing and collecting the ORF. The ORF is not assessed on outbound linkage trades. An OTP VerDate Sep<11>2014 19:11 Jul 19, 2019 Jkt 247001 Exchange believes that using options transactions in the Customer range serves as a proxy for how to apportion regulatory costs among such OTP Holders or OTP Firms. In addition, the Exchange notes that the regulatory costs relating to monitoring OTP Holders or OTP Firms with respect to Customer trading activity are generally higher than the regulatory costs associated with OTP Holders or OTP Firms that do not engage in Customer trading activity, which tends to be more automated and less labor-intensive. By contrast, regulating OTP Holders or OTP Firms that engage in Customer trading activity is generally more labor intensive and requires a greater expenditure of human and technical resources as the Exchange needs to review not only the trading activity on behalf of Customers, but also the OTP Holder’s or OTP Firm’s relationship with its Customers via more labor-intensive exam-based programs.7 As a result, the costs associated with administering the customer component of the Exchange’s overall regulatory program are materially higher than the costs associated with administering the noncustomer component (e.g., OTP Holder or OTP Firm proprietary transactions) of its regulatory program. ORF Revenue and Monitoring of ORF Exchange rules establish that the Exchange may only increase or decrease the ORF semi-annually, that any such fee change will be effective on the first business day of February or August, and that market participants must be notified of any such change via Trader Update at least 30 calendar days prior to the effective date of the change.8 Because the ORF is based on options transactions volume, ORF revenue to the Exchange is variable. For example, if options transactions reported to OCC in a given month increase, the ORF collected from OTP Holders or OTP Firms will increase as well. Similarly, if Holder or OTP Firm is not assessed the fee until it has satisfied applicable technological requirements necessary to commence operations on NYSE Arca. See id. 7 The Exchange notes that many of the Exchange’s market surveillance programs require the Exchange to look at and evaluate activity across all options markets, such as surveillance for position limit violations, manipulation, front-running and contrary exercise advice violations/expiring exercise declarations. The Exchange and other options SROs are parties to a 17d–2 agreement allocating among the SROs regulatory responsibilities relating to compliance by the common members with rules for expiring exercise declarations, position limits, OCC trade adjustments, and Large Option Position Report reviews. See, e.g., Securities Exchange Act Release No. 61588 (February 25, 2010). 8 See Fee Schedule, supra note 5. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 options transactions reported to OCC in a given month decrease, the ORF collected from OTP Holders or OTP Firms will decrease as well. Accordingly, the Exchange monitors the amount of revenue collected from the ORF to ensure that this revenue does not exceed regulatory costs. If the Exchange determines regulatory revenues exceed regulatory costs, the Exchange will adjust the ORF by submitting a fee change filing to the Securities and Exchange Commission (the ‘‘Commission’’). In addition, because Exchange rules establish that ORF may be adjusted only every six months, the Exchange does not believe it is appropriate to adjust ORF based on short-term changes in options transaction volume.9 For example, if options volume materially increases or decreases during a six-month period, the Exchange believes it is appropriate to wait an additional six-month period to assess whether such increase or decrease in options volume either continues, is sustained at that level, or reverses in such a way that the average reported options transaction volume in fact has remained stable year over year. Proposal The Exchange is proposing to decrease the amount of ORF that will be collected by the Exchange from $0.0055 per contract side to $0.0054 per contract side. The Exchange proposes this change because from 2017 to 2018, options transaction volume increased to a level that if the ORF is not adjusted, the ORF revenue to the Exchange yearover-year could exceed a material portion of the Exchange’s regulatory costs. The last time the Exchange changed the ORF fee was February 2014.10 Over that time, options transaction volumes fluctuated with a slight increase beginning in 2017. But prior to the 2018 increases in options transaction volume, any prior options transaction volume increases did not result in the ORF revenue to the Exchange increasing to levels such that the Exchange recovered via the ORF more than a material portion of the Exchange’s regulatory costs. The Exchange believes that 2018 was a unique year because, from 2017 to 2018, there was a 23.95% year-over9 In 2013, in response to feedback from participants requesting greater certainty as to when ORF changes may occur, the Exchange modified its Fee Schedule to specify that it may only increase or decrease the ORF semi-annually. See Securities Exchange Act Release No. 70500 (September 25, 2013), 78 FR 60361 (October 1, 2013) (SR– NYSEArca–2013–91). 10 See Securities Exchange Act Release No. 71007 (January 24, 2014), 79 FR 5499 (January 31, 2014) (SR–NYSEArca–2014–06). E:\FR\FM\22JYN1.SGM 22JYN1 Federal Register / Vol. 84, No. 140 / Monday, July 22, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES year increase in Total Industry Customer equity and ETF option average daily volume (‘‘TCADV’’).11 By contrast, the year-over-year TCADV in prior years was down between 2014 and 2016. For example, TCADV decreased 3.1% from 2014 to 2015 and 2.3% from 2015 to 2016. The year-over-year options volume experienced a slight uptick from 2016 to 2017, when TCADV increased 2.0%, which was followed in 2018 by the 23.95% spike in volume. In 2019, options volume has declined yearover-year by 4.5%—which is the largest drop in year-over-year options volume since 2011 to 2012. Thus, options volumes for the first five months of 2019 have not sustained the 2018 volume level and have in fact declined from that level. To determine whether ORF fees should be adjusted, the Exchange has reviewed not only the increase in options transaction volume in 2018, but also options transaction volume in the first five months of 2019. Based on 2019 transaction volumes, which are down by 4.5%, the Exchange projects that for the remainder of 2019, options transaction volume likely will continue to decline from the 2018 high. The Exchange believes that is has sufficient information based both on the 2018 options transaction volume and the trend in options transaction volume in 2019 to determine how to adjust the ORF for the second half of 2019. Taking into consideration both the increase in options transaction volume in 2018— which translated to increased ORF revenue to the Exchange—and the reduced options transaction volume in 2019, which results in reduced ORF revenue to the Exchange, the Exchange proposes to decrease the ORF from $0.0055 to $0.0054 per contract side, effective August 1, 2019.12 The proposed decrease is based on the Exchange’s estimated projections for its regulatory costs, balanced with the recent increase in options volumes. The Exchange cannot predict whether options volume will remain at the 2018 level going forward and projections for future regulatory costs are estimated, preliminary and may change. However, the Exchange believes that revenue 11 TCADV includes OCC calculated Customer volume of all types, including Complex Order transactions and QCC transactions, in equity and ETF options. The Exchange believes that TCADV is a proxy for how to measure trends in options transaction volume. See supra note 5, Fee Schedule, Endnote 8. 12 See proposed Fee Schedule, NYSE Arca GENERAL OPTIONS and TRADING PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee (‘‘ORF’’). The Exchange proposes to make clear that the current fee would be in effect until the end of July. See id. VerDate Sep<11>2014 19:11 Jul 19, 2019 Jkt 247001 generated from the ORF (as modified) will continue to cover a material portion, but not all, of the Exchange’s regulatory costs. Consistent with the Fee Schedule, the Exchange has notified OTP Holders or OTP Firms of the proposed change to the ORF via Trader Update at least of the thirty (30) calendar days prior to the proposed operative date, August 1, 2019.13 The Exchange believes that this will ensure that market participants are prepared to configure their systems to account properly for the revised ORF. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) 14 of the Act, in general, and Section 6(b)(4) and (5) 15 of the Act, in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities and does not unfairly discriminate between customers, issuers, brokers, or dealers. The Proposal Is Reasonable The Exchange believes the proposed fee change is reasonable because it would help ensure that revenue collected from the ORF does not exceed a material portion of the Exchange’s regulatory costs. The Exchange has designed the ORF to generate revenues that would be less than or equal to the Exchange’s regulatory costs, which is consistent with the view of the Commission that regulatory fees be used for regulatory purposes and not to support the Exchange’s business side. As noted above, the Exchange may only use regulatory funds such as ORF ‘‘to fund the legal, regulatory, and surveillance operations’’ of the Exchange.16 In this regard, the ORF is designed to recover a material portion, but not all, of the Exchange’s regulatory costs for the supervision and regulation of OTP Regulatory Costs. To determine whether ORF fees should be adjusted, the Exchange considered not only the increase in options transaction volume in 2018, but also options transaction volume in the first five months of 2019, which is down. Based on 2019 options transaction volume (to date), which is 13 See current (and proposed) Fee Schedule, Fee Schedule, NYSE Arca GENERAL OPTIONS and TRADING PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee (‘‘ORF’’). See also Trader Update, dated June 25, 2018, NYSE Options— Options Regulatory Fee (ORF) Modifications, available here: https://www.nyse.com/traderupdate/history#110000139057. 14 15 U.S.C. 78f(b). 15 15 U.S.C. 78f(b)(4) and (5). 16 See supra note 4. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 35171 down by 4.5%, and the Exchange’s projection that such volumes will remain stable at best and continue to decline at worse, the Exchange believes it is reasonable to decrease the amount of ORF collected by the Exchange from $0.0055 per contract side to $0.0054 per contract side. The Proposal Is an Equitable Allocation of Fees The Exchange believes its proposal is an equitable allocation of fees among its market participants. The Exchange believes that the proposed ORF would not place certain market participants at an unfair disadvantage because all options transactions must clear via a clearing firm. Such clearing firms can then choose to pass through all, a portion, or none of the cost of the ORF to its customers, i.e., the entering firms. Because the ORF is collected from OTP Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange believes that using options transactions in the Customer range serves as a proxy for how to apportion regulatory costs among such OTP Holders or OTP Firms. In addition, the Exchange notes that the regulatory costs relating to monitoring OTP Holders or OTP Firms with respect to Customer trading activity are generally higher than the regulatory costs associated with OTP Holders or OTP Firms that do not engage in Customer trading activity, which tends to be more automated and less labor-intensive. By contrast, regulating OTP Holders or OTP Firms that engage in Customer trading activity is generally more labor intensive and requires a greater expenditure of human and technical resources as the Exchange needs to review not only the trading activity on behalf of Customers, but also the OTP Holder’s or OTP Firm’s relationship with its Customers via more labor-intensive exam-based programs. As a result, the costs associated with administering the customer component of the Exchange’s overall regulatory program are materially higher than the costs associated with administering the noncustomer component (e.g., OTP Holder or OTP Firm proprietary transactions) of its regulatory program. Thus, the Exchange believes the modified ORF would be equitably allocated in that it is charged to all OTP Holders or OTP Firms on all their transactions that clear in the Customer range at the OCC. The Proposed Fee Is Not Unfairly Discriminatory The Exchange believes that the proposal is not unfairly discriminatory. The Exchange believes that the E:\FR\FM\22JYN1.SGM 22JYN1 35172 Federal Register / Vol. 84, No. 140 / Monday, July 22, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES proposed ORF would not place certain market participants at an unfair disadvantage because all options transactions must clear via a clearing firm. Such clearing firms can then choose to pass through all, a portion, or none of the cost of the ORF to its customers, i.e., the entering firms. Because the ORF is collected from OTP Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange believes that using options transactions in the Customer range serves as a proxy for how to apportion regulatory costs among such OTP Holders or OTP Firms. In addition, the Exchange notes that the regulatory costs relating to monitoring OTP Holders or OTP Firms with respect to Customer trading activity are generally higher than the regulatory costs associated with OTP Holders or OTP Firms that do not engage in Customer trading activity, which tends to be more automated and less labor-intensive. By contrast, regulating OTP Holders or OTP Firms that engage in Customer trading activity is generally more labor intensive and requires a greater expenditure of human and technical resources as the Exchange needs to review not only the trading activity on behalf of Customers, but also the OTP Holder’s or OTP Firm’s relationship with its Customers via more labor-intensive exam-based programs. As a result, the costs associated with administering the customer component of the Exchange’s overall regulatory program are materially higher than the costs associated with administering the noncustomer component (e.g., OTP Holder or OTP Firm proprietary transactions) of its regulatory program. Thus, the Exchange believes the modified ORF is not unfairly discriminatory because it is charged to all OTP Holders or OTP Firms on all their transactions that clear in the Customer range at the OCC. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 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. Intramarket Competition. The Exchange believes the proposed fee change would not impose an undue burden on competition as it is charged to all OTP Holders or OTP Firms on all their transactions that clear in the Customer range at the OCC; thus, the VerDate Sep<11>2014 19:11 Jul 19, 2019 Jkt 247001 amount of ORF imposed is based on the amount of Customer volume transacted. The Exchange believes that the proposed ORF would not place certain market participants at an unfair disadvantage because all options transactions must clear via a clearing firm. Such clearing firms can then choose to pass through all, a portion, or none of the cost of the ORF to its customers, i.e., the entering firms. In addition, because the ORF is collected from OTP Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange believes that using options transactions in the Customer range serves as a proxy for how to apportion regulatory costs among such OTP Holders or OTP Firms. Intermarket Competition. The proposed fee change is not designed to address any competitive issues. Rather, the proposed change is designed to help the Exchange adequately fund its regulatory activities while seeking to ensure that total regulatory revenues do not exceed total regulatory costs. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A) 17 of the Act and subparagraph (f)(2) of Rule 19b–4 18 thereunder, because it establishes a due, fee, or other charge imposed by the Exchange. At any time within 60 days of the filing of such 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 under Section 19(b)(2)(B) 19 of the Act to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and PO 00000 17 15 U.S.C. 78s(b)(3)(A). 18 17 CFR 240.19b–4(f)(2). 19 15 U.S.C. 78s(b)(2)(B). Frm 00105 Fmt 4703 Sfmt 9990 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–2019–49 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File No. SR–NYSEArca–2019–49. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–NYSEArca–2019–49, and should be submitted on or before August 12, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–15469 Filed 7–19–19; 8:45 am] BILLING CODE 8011–01–P 20 17 E:\FR\FM\22JYN1.SGM CFR 200.30–3(a)(12). 22JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Notices]
[Pages 35169-35172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15469]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86390; File No. SR-NYSEArca-2019-49]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the NYSE 
Arca Options Fee Schedule by Revising the Options Regulatory Fee

July 16, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on July 2, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the NYSE Arca Options Fee Schedule 
(``Fee Schedule'') by revising the Options Regulatory Fee (``ORF''), 
effective August 1, 2019. The proposed rule change is available on the 
Exchange's website at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

[[Page 35170]]

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to revise the 
amount of the ORF, effective August 1, 2019. Specifically, to respond 
to increased options transaction volumes in 2018, which reverted (in 
part) in the first half of 2019, the Exchange proposes to lower the ORF 
to $0.0054 (from $0.0055) per contract side for the remainder of 2019.
Background
    As a general matter, the Exchange may only use regulatory funds 
such as ORF ``to fund the legal, regulatory, and surveillance 
operations'' of the Exchange.\4\ More specifically, the ORF is designed 
to recover a material portion, but not all, of the Exchange's 
regulatory costs for the supervision and regulation of OTP Holders and 
OTP Firms (the ``OTP Regulatory Costs''). The majority of the OTP 
Regulatory Costs are direct expenses, such as the costs related to in-
house staff, third-party service providers, and technology. The direct 
expenses support the day-to-day regulatory work relating to the OTP 
Holders or OTP Firms, including surveillance, investigation, 
examinations and enforcement. Such direct expenses represent 
approximately 91% of the Exchange's total OTP Regulatory Costs. The 
indirect expenses include human resources and other administrative 
costs.
---------------------------------------------------------------------------

    \4\ The Exchange considers surveillance operations part of 
regulatory operations. The limitation on the use of regulatory funds 
also provides that they shall not be distributed. See Bylaws of NYSE 
Arca, Inc., Art. II, Sec. 2.06.
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    The ORF is assessed on OTP Holders or OTP Firms for options 
transactions that are cleared by the OTP Holder or OTP Firm through the 
Options Clearing Corporation (``OCC'') in the Customer range regardless 
of the exchange on which the transaction occurs.\5\ All options 
transactions must clear via a clearing firm and such clearing firms can 
then choose to pass through all, a portion, or none of the cost of the 
ORF to its customers, i.e., the entering firms. Because the ORF is 
collected from OTP Holder or OTP Firm clearing firms by the OCC on 
behalf of NYSE Arca,\6\ the Exchange believes that using options 
transactions in the Customer range serves as a proxy for how to 
apportion regulatory costs among such OTP Holders or OTP Firms. In 
addition, the Exchange notes that the regulatory costs relating to 
monitoring OTP Holders or OTP Firms with respect to Customer trading 
activity are generally higher than the regulatory costs associated with 
OTP Holders or OTP Firms that do not engage in Customer trading 
activity, which tends to be more automated and less labor-intensive. By 
contrast, regulating OTP Holders or OTP Firms that engage in Customer 
trading activity is generally more labor intensive and requires a 
greater expenditure of human and technical resources as the Exchange 
needs to review not only the trading activity on behalf of Customers, 
but also the OTP Holder's or OTP Firm's relationship with its Customers 
via more labor-intensive exam-based programs.\7\ As a result, the costs 
associated with administering the customer component of the Exchange's 
overall regulatory program are materially higher than the costs 
associated with administering the non-customer component (e.g., OTP 
Holder or OTP Firm proprietary transactions) of its regulatory program.
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    \5\ See Fee Schedule, NYSE Arca GENERAL OPTIONS and TRADING 
PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee 
(``ORF''), available here, https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf.
    \6\ See id. The Exchange uses reports from OCC when assessing 
and collecting the ORF. The ORF is not assessed on outbound linkage 
trades. An OTP Holder or OTP Firm is not assessed the fee until it 
has satisfied applicable technological requirements necessary to 
commence operations on NYSE Arca. See id.
    \7\ The Exchange notes that many of the Exchange's market 
surveillance programs require the Exchange to look at and evaluate 
activity across all options markets, such as surveillance for 
position limit violations, manipulation, front-running and contrary 
exercise advice violations/expiring exercise declarations. The 
Exchange and other options SROs are parties to a 17d-2 agreement 
allocating among the SROs regulatory responsibilities relating to 
compliance by the common members with rules for expiring exercise 
declarations, position limits, OCC trade adjustments, and Large 
Option Position Report reviews. See, e.g., Securities Exchange Act 
Release No. 61588 (February 25, 2010).
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ORF Revenue and Monitoring of ORF
    Exchange rules establish that the Exchange may only increase or 
decrease the ORF semi-annually, that any such fee change will be 
effective on the first business day of February or August, and that 
market participants must be notified of any such change via Trader 
Update at least 30 calendar days prior to the effective date of the 
change.\8\
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    \8\ See Fee Schedule, supra note 5.
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    Because the ORF is based on options transactions volume, ORF 
revenue to the Exchange is variable. For example, if options 
transactions reported to OCC in a given month increase, the ORF 
collected from OTP Holders or OTP Firms will increase as well. 
Similarly, if options transactions reported to OCC in a given month 
decrease, the ORF collected from OTP Holders or OTP Firms will decrease 
as well. Accordingly, the Exchange monitors the amount of revenue 
collected from the ORF to ensure that this revenue does not exceed 
regulatory costs. If the Exchange determines regulatory revenues exceed 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Securities and Exchange Commission (the 
``Commission'').
    In addition, because Exchange rules establish that ORF may be 
adjusted only every six months, the Exchange does not believe it is 
appropriate to adjust ORF based on short-term changes in options 
transaction volume.\9\ For example, if options volume materially 
increases or decreases during a six-month period, the Exchange believes 
it is appropriate to wait an additional six-month period to assess 
whether such increase or decrease in options volume either continues, 
is sustained at that level, or reverses in such a way that the average 
reported options transaction volume in fact has remained stable year 
over year.
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    \9\ In 2013, in response to feedback from participants 
requesting greater certainty as to when ORF changes may occur, the 
Exchange modified its Fee Schedule to specify that it may only 
increase or decrease the ORF semi-annually. See Securities Exchange 
Act Release No. 70500 (September 25, 2013), 78 FR 60361 (October 1, 
2013) (SR-NYSEArca-2013-91).
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Proposal
    The Exchange is proposing to decrease the amount of ORF that will 
be collected by the Exchange from $0.0055 per contract side to $0.0054 
per contract side. The Exchange proposes this change because from 2017 
to 2018, options transaction volume increased to a level that if the 
ORF is not adjusted, the ORF revenue to the Exchange year-over-year 
could exceed a material portion of the Exchange's regulatory costs.
    The last time the Exchange changed the ORF fee was February 
2014.\10\ Over that time, options transaction volumes fluctuated with a 
slight increase beginning in 2017. But prior to the 2018 increases in 
options transaction volume, any prior options transaction volume 
increases did not result in the ORF revenue to the Exchange increasing 
to levels such that the Exchange recovered via the ORF more than a 
material portion of the Exchange's regulatory costs. The Exchange 
believes that 2018 was a unique year because, from 2017 to 2018, there 
was a 23.95% year-over-

[[Page 35171]]

year increase in Total Industry Customer equity and ETF option average 
daily volume (``TCADV'').\11\ By contrast, the year-over-year TCADV in 
prior years was down between 2014 and 2016. For example, TCADV 
decreased 3.1% from 2014 to 2015 and 2.3% from 2015 to 2016. The year-
over-year options volume experienced a slight uptick from 2016 to 2017, 
when TCADV increased 2.0%, which was followed in 2018 by the 23.95% 
spike in volume. In 2019, options volume has declined year-over-year by 
4.5%--which is the largest drop in year-over-year options volume since 
2011 to 2012. Thus, options volumes for the first five months of 2019 
have not sustained the 2018 volume level and have in fact declined from 
that level.
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    \10\ See Securities Exchange Act Release No. 71007 (January 24, 
2014), 79 FR 5499 (January 31, 2014) (SR-NYSEArca-2014-06).
    \11\ TCADV includes OCC calculated Customer volume of all types, 
including Complex Order transactions and QCC transactions, in equity 
and ETF options. The Exchange believes that TCADV is a proxy for how 
to measure trends in options transaction volume. See supra note 5, 
Fee Schedule, Endnote 8.
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    To determine whether ORF fees should be adjusted, the Exchange has 
reviewed not only the increase in options transaction volume in 2018, 
but also options transaction volume in the first five months of 2019. 
Based on 2019 transaction volumes, which are down by 4.5%, the Exchange 
projects that for the remainder of 2019, options transaction volume 
likely will continue to decline from the 2018 high.
    The Exchange believes that is has sufficient information based both 
on the 2018 options transaction volume and the trend in options 
transaction volume in 2019 to determine how to adjust the ORF for the 
second half of 2019. Taking into consideration both the increase in 
options transaction volume in 2018--which translated to increased ORF 
revenue to the Exchange--and the reduced options transaction volume in 
2019, which results in reduced ORF revenue to the Exchange, the 
Exchange proposes to decrease the ORF from $0.0055 to $0.0054 per 
contract side, effective August 1, 2019.\12\ The proposed decrease is 
based on the Exchange's estimated projections for its regulatory costs, 
balanced with the recent increase in options volumes. The Exchange 
cannot predict whether options volume will remain at the 2018 level 
going forward and projections for future regulatory costs are 
estimated, preliminary and may change. However, the Exchange believes 
that revenue generated from the ORF (as modified) will continue to 
cover a material portion, but not all, of the Exchange's regulatory 
costs.
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    \12\ See proposed Fee Schedule, NYSE Arca GENERAL OPTIONS and 
TRADING PERMIT (OTP) FEES, Regulatory Fees, Options Regulatory Fee 
(``ORF''). The Exchange proposes to make clear that the current fee 
would be in effect until the end of July. See id.
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    Consistent with the Fee Schedule, the Exchange has notified OTP 
Holders or OTP Firms of the proposed change to the ORF via Trader 
Update at least of the thirty (30) calendar days prior to the proposed 
operative date, August 1, 2019.\13\ The Exchange believes that this 
will ensure that market participants are prepared to configure their 
systems to account properly for the revised ORF.
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    \13\ See current (and proposed) Fee Schedule, Fee Schedule, NYSE 
Arca GENERAL OPTIONS and TRADING PERMIT (OTP) FEES, Regulatory Fees, 
Options Regulatory Fee (``ORF''). See also Trader Update, dated June 
25, 2018, NYSE Options--Options Regulatory Fee (ORF) Modifications, 
available here: https://www.nyse.com/trader-update/history#110000139057.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) \14\ of the Act, in general, and 
Section 6(b)(4) and (5) \15\ of the Act, in particular, in that it is 
designed to provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and other persons using its 
facilities and does not unfairly discriminate between customers, 
issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

The Proposal Is Reasonable
    The Exchange believes the proposed fee change is reasonable because 
it would help ensure that revenue collected from the ORF does not 
exceed a material portion of the Exchange's regulatory costs. The 
Exchange has designed the ORF to generate revenues that would be less 
than or equal to the Exchange's regulatory costs, which is consistent 
with the view of the Commission that regulatory fees be used for 
regulatory purposes and not to support the Exchange's business side. As 
noted above, the Exchange may only use regulatory funds such as ORF 
``to fund the legal, regulatory, and surveillance operations'' of the 
Exchange.\16\ In this regard, the ORF is designed to recover a material 
portion, but not all, of the Exchange's regulatory costs for the 
supervision and regulation of OTP Regulatory Costs.
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    \16\ See supra note 4.
---------------------------------------------------------------------------

    To determine whether ORF fees should be adjusted, the Exchange 
considered not only the increase in options transaction volume in 2018, 
but also options transaction volume in the first five months of 2019, 
which is down. Based on 2019 options transaction volume (to date), 
which is down by 4.5%, and the Exchange's projection that such volumes 
will remain stable at best and continue to decline at worse, the 
Exchange believes it is reasonable to decrease the amount of ORF 
collected by the Exchange from $0.0055 per contract side to $0.0054 per 
contract side.
The Proposal Is an Equitable Allocation of Fees
    The Exchange believes its proposal is an equitable allocation of 
fees among its market participants. The Exchange believes that the 
proposed ORF would not place certain market participants at an unfair 
disadvantage because all options transactions must clear via a clearing 
firm. Such clearing firms can then choose to pass through all, a 
portion, or none of the cost of the ORF to its customers, i.e., the 
entering firms. Because the ORF is collected from OTP Holder or OTP 
Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange 
believes that using options transactions in the Customer range serves 
as a proxy for how to apportion regulatory costs among such OTP Holders 
or OTP Firms. In addition, the Exchange notes that the regulatory costs 
relating to monitoring OTP Holders or OTP Firms with respect to 
Customer trading activity are generally higher than the regulatory 
costs associated with OTP Holders or OTP Firms that do not engage in 
Customer trading activity, which tends to be more automated and less 
labor-intensive. By contrast, regulating OTP Holders or OTP Firms that 
engage in Customer trading activity is generally more labor intensive 
and requires a greater expenditure of human and technical resources as 
the Exchange needs to review not only the trading activity on behalf of 
Customers, but also the OTP Holder's or OTP Firm's relationship with 
its Customers via more labor-intensive exam-based programs. As a 
result, the costs associated with administering the customer component 
of the Exchange's overall regulatory program are materially higher than 
the costs associated with administering the non-customer component 
(e.g., OTP Holder or OTP Firm proprietary transactions) of its 
regulatory program. Thus, the Exchange believes the modified ORF would 
be equitably allocated in that it is charged to all OTP Holders or OTP 
Firms on all their transactions that clear in the Customer range at the 
OCC.
The Proposed Fee Is Not Unfairly Discriminatory
    The Exchange believes that the proposal is not unfairly 
discriminatory. The Exchange believes that the

[[Page 35172]]

proposed ORF would not place certain market participants at an unfair 
disadvantage because all options transactions must clear via a clearing 
firm. Such clearing firms can then choose to pass through all, a 
portion, or none of the cost of the ORF to its customers, i.e., the 
entering firms. Because the ORF is collected from OTP Holder or OTP 
Firm clearing firms by the OCC on behalf of NYSE Arca, the Exchange 
believes that using options transactions in the Customer range serves 
as a proxy for how to apportion regulatory costs among such OTP Holders 
or OTP Firms. In addition, the Exchange notes that the regulatory costs 
relating to monitoring OTP Holders or OTP Firms with respect to 
Customer trading activity are generally higher than the regulatory 
costs associated with OTP Holders or OTP Firms that do not engage in 
Customer trading activity, which tends to be more automated and less 
labor-intensive. By contrast, regulating OTP Holders or OTP Firms that 
engage in Customer trading activity is generally more labor intensive 
and requires a greater expenditure of human and technical resources as 
the Exchange needs to review not only the trading activity on behalf of 
Customers, but also the OTP Holder's or OTP Firm's relationship with 
its Customers via more labor-intensive exam-based programs. As a 
result, the costs associated with administering the customer component 
of the Exchange's overall regulatory program are materially higher than 
the costs associated with administering the non-customer component 
(e.g., OTP Holder or OTP Firm proprietary transactions) of its 
regulatory program. Thus, the Exchange believes the modified ORF is not 
unfairly discriminatory because it is charged to all OTP Holders or OTP 
Firms on all their transactions that clear in the Customer range at the 
OCC.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. 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.
    Intramarket Competition. The Exchange believes the proposed fee 
change would not impose an undue burden on competition as it is charged 
to all OTP Holders or OTP Firms on all their transactions that clear in 
the Customer range at the OCC; thus, the amount of ORF imposed is based 
on the amount of Customer volume transacted. The Exchange believes that 
the proposed ORF would not place certain market participants at an 
unfair disadvantage because all options transactions must clear via a 
clearing firm. Such clearing firms can then choose to pass through all, 
a portion, or none of the cost of the ORF to its customers, i.e., the 
entering firms. In addition, because the ORF is collected from OTP 
Holder or OTP Firm clearing firms by the OCC on behalf of NYSE Arca, 
the Exchange believes that using options transactions in the Customer 
range serves as a proxy for how to apportion regulatory costs among 
such OTP Holders or OTP Firms.
    Intermarket Competition. The proposed fee change is not designed to 
address any competitive issues. Rather, the proposed change is designed 
to help the Exchange adequately fund its regulatory activities while 
seeking to ensure that total regulatory revenues do not exceed total 
regulatory costs.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \17\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \18\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \19\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File No. SR-NYSEArca-2019-49 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-NYSEArca-2019-49. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-NYSEArca-2019-49, and should be submitted 
on or before August 12, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15469 Filed 7-19-19; 8:45 am]
 BILLING CODE 8011-01-P

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