Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend NOM's Options Regulatory Fee, 44455-44458 [2021-17177]
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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92600; File No. SR–
NASDAQ–2021–057]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
NOM’s Options Regulatory Fee
August 6, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 5,
2021, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend The
Nasdaq Options Market LLC’s (‘‘NOM’’)
Pricing Schedule at Options 7, Section
5 related to the Options Regulatory Fee
or ‘‘ORF’’.
While the changes proposed herein
are effective upon filing, the Exchange
has designated the amendments become
operative on October 1, 2021.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
dealers time to align their systems for
February 1, 2022, allowing for time after
the holiday period which traditionally
have year-end code freezes in place.
1. Purpose
Currently, NOM assesses an ORF of
$0.0020 per contract side as specified in
NOM’s Pricing Schedule at Options 7,
Section 5. The Exchange proposes to
waive its ORF from October 1, 2021 to
January 31, 2022, and then recommence
the ORF on February 1, 2022.
By way of background, the options
industry has experienced extremely
high options trading volumes and
volatility. This historical anomaly of
persistent increased options volumes
has impacted NOM’s ORF collection
which, in turn, has caused the Exchange
to continue to revisit its financial
forecast to reflect the sustained elevated
options volumes and volatility. As the
Exchange continues to monitor the
amount of revenue collected from the
ORF to ensure that our ORF collection,
in combination with other regulatory
fees and fines, does not exceed
regulatory costs, the Exchange has
found it difficult to determine when
volumes will return to more normal
levels. In order to avoid iterative rule
changes to amend its ORF, the Exchange
believes it is prudent to instead waive
its ORF from October 1, 2021 to January
31, 2022, to permit the Exchange to plan
future forecasts without the need to
account for any ORF collection during
that timeframe. This proposal would
ensure that revenue collected from the
ORF, in combination with other
regulatory fees and fines, would not
exceed the Exchange’s total regulatory
costs. NOM would recommence
assessing its current ORF rate of $0.0020
per contract side as of February 1, 2022.
Furthermore, prior to February 1, 2022,
NOM will examine its ORF rate to
determine if the $0.0020 per contract
side ORF is justified given the current
volumes in 2022 as well as the current
Exchange regulatory expenses at that
time. NOM would file a proposed rule
change to amend its per contract ORF if
changes are necessary to ensure an
equitable allocation of reasonable ORF,
if e.g., the Exchange believes that the
volumes NOM experiences in the
second half of 2021 are likely to persist
throughout 2022. Of note, NOM
proposes to continue to operate with the
ORF fee waived in January 2022 to
allow its Participants 3 and other broker
Collection of ORF
Currently, NOM assesses its ORF for
each customer option transaction that is
either: (1) Executed by a Participant on
NOM; or (2) cleared by a NOM
Participant at The Options Clearing
Corporation (‘‘OCC’’) in the customer
range,4 even if the transaction was
executed by a non-Participant of NOM,
regardless of the exchange on which the
transaction occurs.5
3 The term ‘‘Options Participant’’ or ‘‘Participant’’
mean a firm, or organization that is registered with
the Exchange pursuant to Options 2A of these Rules
for purposes of participating in options trading on
NOM as a ‘‘Nasdaq Options Order Entry Firm’’ or
‘‘Nasdaq Options Market Maker’’. See Options 1,
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
ORF Revenue and Monitoring of ORF
The Exchange monitors the amount of
revenue collected from the ORF to
ensure that it, in combination with other
regulatory fees and fines, does not
exceed regulatory costs. In determining
whether an expense is considered a
regulatory cost, the Exchange reviews
all costs and makes determinations if
there is a nexus between the expense
and a regulatory function. The Exchange
notes that fines collected by the
Exchange in connection with a
disciplinary matter offset ORF.
Revenue generated from ORF, when
combined with all of the Exchange’s
other regulatory fees and fines, is
designed to recover a material portion of
the regulatory costs to the Exchange of
the supervision and regulation of
Participant customer options business
including performing routine
surveillances, investigations,
examinations, financial monitoring, and
policy, rulemaking, interpretive, and
enforcement activities. Regulatory costs
include direct regulatory expenses and
certain indirect expenses in support of
the regulatory function. The direct
expenses include in-house and thirdparty service provider costs to support
the day-to-day regulatory work such as
surveillances, investigations and
examinations. The indirect expenses
include support from such areas as
Office of the General Counsel,
technology, and internal audit. Indirect
expenses are estimated to be
approximately 42% of the total
regulatory costs for 2021. Thus, direct
Section 1(a)(39). All NOM Participants must be an
existing member or become a member of the
Exchange, pursuant to the 1000 rules series, and
continue to abide by the requirements of the 1000
Series with respect to participation in NOM. See
Options 2A, Section 1(b)(3).
4 Participants must record the appropriate
account origin code on all orders at the time of
entry of the order. The Exchange represents that it
has surveillances in place to verify that Participants
mark orders with the correct account origin code.
5 The Exchange uses reports from OCC when
assessing and collecting the ORF.
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Federal Register / Vol. 86, No. 153 / Thursday, August 12, 2021 / Notices
expenses are estimated to be
approximately 58% of total regulatory
costs for 2021.
The ORF is designed to recover a
material portion of the costs to the
Exchange of the supervision and
regulation of its members, including
performing routine surveillances,
investigations, examinations, financial
monitoring, and policy, rulemaking,
interpretive, and enforcement activities.
Proposal
Based on the Exchange’s most recent
review, the Exchange proposes to waive
ORF from October 1, 2021 to January 31,
2022, to help ensure that revenue
collected from the ORF, in combination
with other regulatory fees and fines,
does not exceed the Exchange’s total
regulatory costs. NOM would
recommence assessing its current ORF
rate of $0.0020 per contract side as of
February 1, 2022. The Exchange issued
an Options Trader Alert on July 2, 2021
indicating the proposed rate change for
October 1, 2021.6
The proposed waiver is based on
recent options volume which has
Volume
October 2020
Total .........................................................................................
Customer .................................................................................
Total ADV ................................................................................
Customer ADV .........................................................................
Below is industry data from OCC 9
which illustrates the significant increase
in volume from January 2021 through
Volume
838,339,790
784,399,878
44,123,146.84
41,284,204.11
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As a result of the historical anomaly
created by these high options volumes,
NOM has no assurance that the
Exchange’s final costs for 2021 will not
differ materially from these expectations
and prior practice, nor can the Exchange
predict with certainty whether options
volume will remain at the current level
going forward. The Exchange notes
however, that when combined with
regulatory fees and fines, the revenue
being generated utilizing the current
ORF rate may result in revenue in
excess of the Exchange’s estimated
regulatory costs for the year.
Particularly, as noted above, the options
market has seen a substantial increase in
volume in 2021 as compared to 2020,
due in large part to the continued
extreme volatility in the marketplace as
a result of the COVID–19 pandemic.
This unprecedented spike in volatility
resulted in significantly higher volume
than was originally projected by the
6 See
Options Trader Alert 2021–41.
data from OCC at: https://
www.businesswire.com/news/home/
20201202005584/en/OCC-November-2020-TotalVolume-Up-71-Percent-From-a-Year-Ago.
8 See data from OCC at: https://www.theocc.com/
Market-Data/Market-Data-Reports/Volume-andOpen-Interest/Volume-by-Account-Type.
9 Id.
7 See
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November 2020
673,660,858
630,297,252
33,683,042.90
31,514,862.60
March 2021. The options volume in the
first quarter of 2021 was higher than the
fourth quarter of 2020. Also, April and
January 2021
Total .......................................................
Customer ...............................................
Total ADV ..............................................
Customer ADV .......................................
633,365,184
587,707,301
28,789,326.55
26,713,968.23
February 2021
823,412,827
782,113,450
43,337,517.20
41,163,865.79
898,653,388
837,247,059
39,071,886.40
36,402,046.04
10 The Exchange notes that its regulatory
responsibilities with respect to Participant
compliance with options sales practice rules have
largely been allocated to FINRA under a 17d–2
agreement. The ORF is not designed to cover the
cost of that options sales practice regulation.
11 The Exchange will provide Participants with
such notice at least 30 calendar days prior to the
effective date of the change.
Frm 00125
Fmt 4703
Sfmt 4703
December 2020
753,568,354
708,037,956
34,253,107.00
32,183,543.45
Q4 2020
2,060,594,396
1,926,042,509
32,196,787.44
30,094,414.20
May 2021 volumes remain significantly
high as compared to 2020 options
volume in general.
March 2021
Exchange (thereby resulting in
substantially higher ORF revenue than
projected). The Exchange therefore
proposes to waive ORF from October 1,
2021 to January 31, 2022 to ensure it
does not exceed its regulatory costs for
2021. Particularly, the Exchange
believes that waiving ORF from October
1, 2021 to January 31, 2022 and
considering all of the Exchange’s other
regulatory fees and fines would allow
the Exchange to continue covering a
material portion of its regulatory costs,
while lessening the potential for
generating excess revenue that may
otherwise occur using the current rate.10
NOM would recommence assessing
its current ORF rate of $0.0020 per
contract side as of February 1, 2022.
Until October 1, 2021, the Exchange will
continue to monitor the amount of
revenue collected from the ORF to
ensure that it, in combination with its
other regulatory fees and fines, does not
exceed regulatory costs. The Exchange
PO 00000
remained at abnormally and
unexpectedly high levels. Options
volume in 2021 remains significantly
high when that volume is compared to
2019 and 2020 options volume. For
example, total options contract volume
in November 2020 was 71% higher than
the total options contract volume in
November 2019.7 Below is industry data
from OCC 8 which illustrates the
significant increase in volume during
the fourth quarter of 2020.
April 2021
May 2021
711,388,828
667,208,963
33,875,658.50
31,771,855.38
718,368,993
659,913,862
35,918,449.70
32,995,693.10
would also continue monitoring the
amount of revenue collected from the
ORF when it recommences assessing
ORF on February 1, 2022. If the
Exchange determines regulatory
revenues exceed regulatory costs, the
Exchange will adjust the ORF by
submitting a fee change filing to the
Commission and notifying 11 its
Participants via an Options Trader
Alert.12
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act. 13 Specifically,
the Exchange believes the proposed rule
change is consistent with Section 6(b)(4)
of the Act, 14 which provides that
Exchange rules may provide for the
equitable allocation of reasonable dues,
12 The Exchange notes that in connection with
this proposal, it provided the Commission
confidential details regarding the Exchange’s
projected regulatory revenue, including projected
revenue from ORF, along with a projected
regulatory expenses.
13 15 U.S.C. 78f(b).
14 15 U.S.C. 78f(b)(4).
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fees, and other charges among its
members, and other persons using its
facilities. Additionally, the Exchange
believes the proposed rule change is
consistent with the Section 6(b)(5) 15
requirement that the rules of an
exchange not be designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes the proposed
fee waiver is reasonable because
customer transactions will be subject to
no ORF from October 1, 2021 to January
31, 2022. Moreover, the proposed
waiver is necessary, so the Exchange
does not collect revenue in excess of its
anticipated regulatory costs, in
combination with other regulatory fees
and fines, which is consistent with the
Exchange’s practices.
The Exchange designed the ORF to
generate revenues that would be less
than the amount of the Exchange’s
regulatory costs to ensure that it, in
combination with its other regulatory
fees and fines, does not exceed
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 operations. As
discussed above, however, after review
of its regulatory costs and regulatory
revenues, which includes revenues from
ORF and other regulatory fees and fines,
the Exchange determined that absent a
reduction in ORF, it may be collecting
revenue in excess of its regulatory costs.
Indeed, the Exchange notes that when
considering the recent options volume,
which included an increase in customer
options transactions, it estimates the
ORF may generate revenues that may
cover more than the approximated
Exchange’s projected regulatory costs.
As such, the Exchange believes it’s
reasonable and appropriate to waive
ORF from October 1, 2021 to January 31,
2022 and recommence assessing ORF on
February 1, 2022.
The Exchange also believes the
proposed fee change is equitable and
not unfairly discriminatory as no
Participant would be assessed an ORF
from October 1, 2021 to January 31,
2022. While the Exchange has assessed
and collected ORF from January through
September, 2021, but will not collect
ORF, with this proposal, from October
2021 through January 2022, the
Exchange does not believe that it is
unfairly discriminatory to not assess the
ORF from October 2021 through January
2022 because the ORF is designed and
intended to recover a portion of the
Exchange’s regulatory costs without
collecting in excess of those costs.
15 15
U.S.C. 78f(b)(5).
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Unexpectedly high and sustained
customer volume has resulted in higher
revenues from the ORF that, if not
suspended, will likely result in overcollection of ORF, which would be
inconsistent with the Exchange’s prior
representations and undertaking to not
collect ORF in excess of regulatory
expenses. The Exchange did not
decrease the amount of the ORF earlier
in 2021 because it did not expect, based
on its prior experience, that customer
volume would remain abnormally high.
Also, it is equitable and not unfairly
discriminatory to recommence the
assessment of the ORF on February 1,
2022 because assessing the ORF to each
Participant for options transactions
cleared by OCC in the customer range
where the execution occurs on another
exchange and is cleared by aa NOM
Participant is an equitable allocation of
reasonable dues, fees, and other charges
among its members and issuers and
other persons using its facilities.16
The Exchange believes recommencing
the ORF on February 1, 2022 at the same
rate, unless options volumes at that time
warrant a proposed rule change,
continues to ensure fairness by
assessing higher fees to those
Participants that require more Exchange
regulatory services based on the amount
of customer options business they
conduct. As noted in prior ORF rule
changes which set the current ORF rate
of $0.0020 per contract side, regulating
customer trading activity is much more
labor intensive and requires greater
expenditure of human and technical
resources than regulating non-customer
trading activity, which tends to be more
automated and less labor-intensive. For
example, there are costs associated with
main office and branch office
examinations (e.g., staff expenses), as
well as investigations into customer
complaints and the terminations of
registered persons.17
16 If the OCC clearing member is a NOM
Participant, ORF is assessed and collected on all
cleared customer contracts (after adjustment for
CMTA); and (2) if the OCC clearing member is not
a NOM Participant, ORF is collected only on the
cleared customer contracts executed at NOM, taking
into account any CMTA instructions which may
result in collecting the ORF from a non-member.
17 See Securities Exchange Act Release No. 81344
(August 8, 2017), 82 FR 37955 (August 14, 2017)
(SR–NASDAQ–2017–068) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Revise the NASDAQ Options Market LLC Rules
Regarding the Options Regulatory Fee). The
Exchange also noted in this rule change that, ‘‘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 Customer
component of the Exchange’s overall regulatory
program are materially higher than the costs
associated with administering the non-Customer
component (e.g. Participant proprietary
PO 00000
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44457
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that this
proposal creates an unnecessary or
inappropriate intra-market or intermarket burden on competition for
several reasons. First, ORF has been
amended several times since its
inception in 2011.18 For example, NOM
amended its ORF rate from $0.0021 to
$0.0027 per contract side as of August
1, 2017. Participants who either
executed a transaction on NOM or
cleared a transaction at OCC in the
customer range would have been
assessed a higher ORF for a transaction
executed on NOM on August 1, 2017
($0.0027 per contract side) as compared
to July 31, 2017 ($0.0021 per contract
side). There have been ORF
amendments which have caused NOM
to assess different ORF rates to
Participants for different time periods
causing Participants to have paid
different ORFs since 2011. For example,
if NOM received payment of a fine from
a disciplinary action, that fine would
offset regulatory costs and would cause
NOM to require less regulatory revenue
for a particular period. The changing
regulatory costs would impact the ORF
assessed by NOM to Participants. In the
past, the Exchange has amended ORF to
be higher or lower,19 thereby impacting
the amount paid by Participants in a
calendar year. Third, options markets
assess ORF at different rates. For
transactions) of its regulatory program.’’ See 82 FR
37956. Further, the Exchange notes that it has broad
regulatory responsibilities with respect to activities
of its Participants, irrespective of where their
transactions take place. Many of the Exchange’s
surveillance programs for customer trading activity
may require the Exchange to look at activity across
all markets, such as reviews related to position limit
violations and manipulation. Indeed, the Exchange
cannot effectively review for such conduct without
looking at and evaluating activity regardless of
where it transpires. In addition to its own
surveillance programs, the Exchange also works
with other SROs and exchanges on intermarket
surveillance related issues. Through its
participation in the Intermarket Surveillance Group
(‘‘ISG’’) the Exchange shares information and
coordinates inquiries and investigations with other
exchanges designed to address potential
intermarket manipulation and trading abuses.
Accordingly, there is a strong nexus between the
ORF and the Exchange’s regulatory activities with
respect to customer trading activity of its
Participants.
18 See Securities Exchange Act Release Nos.
81344 (August 8, 2017), 82 FR 37955 (August 14,
2017) (SR–NASDAQ–2017–068); 78360 (July 19,
2016), 81 FR 48475 (July 25, 2016) (SR–NASDAQ–
2016–096); and 76950 (January 21, 2016), 81 FR
4687 (January 27, 2016) (SR–NASDAQ–2016–003).
19 Id.
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instance, today, Nasdaq MRX, LLC
(‘‘MRX’’) assesses a lower ORF of
$0.0004 per contract side.20 MRX has
assessed this rate since February 1,
2019.21 Depending on where a customer
order is executed, a Participant could be
assessed a much different ORF. For
example, in the case where a customer
order is sent to NOM and routed to
MRX, and a non-Participant cleared that
transaction, the NOM ORF of $0.0020
would not be assessed to the Participant
who executed the transaction or cleared
the transaction, rather the MRX rate of
$0.0004 per contract side would be
assessed. In that same scenario
presuming a non-Participant cleared the
transaction, if the customer order could
have executed on NOM instead of
routing away the Participant would
have been assessed the NOM ORF of
$0.0020 per contract side. The customer,
in that instance, would have no
knowledge of where the order could be
executed, as the liquidity profile of each
exchange may differ at that exact
moment. Therefore, Participants could
be assessed a different ORF on the same
day on the same transaction based on
routing decisions, and in those cases the
Participant would continue to benefit
from the regulatory program available
on each market and discover where the
liquidity is available, irrespective of any
ORF rate differentials across markets.
The Exchange believes recommencing
the ORF on February 1, 2022 at the same
rate, unless options volumes or the
Exchange’s regulatory expenses at that
time warrant a proposed rule change,
does not create an undue burden on
competition because the ORF applies to
all customer activity, thereby raising
regulatory revenue to offset regulatory
expenses. It also supplements the
regulatory revenue derived from noncustomer activity. Recommencing the
assessment of the current ORF does not
create an unnecessary or inappropriate
inter-market burden on competition
because it is a regulatory fee that
supports regulation in furtherance of the
purposes of the Act. The Exchange is
obligated to ensure that the amount of
regulatory revenue collected from the
ORF, in combination with its other
regulatory fees and fines, does not
exceed regulatory costs.
20 See Securities Exchange Act Release Nos.
85127 (February 13, 2019), 84 FR 5173 (February
20, 2019) (SR–MRX–2019–03).
21 Of note, prior to February 1, 2019, MRX
assessed no ORF thereby creating a calendar year
where Participants were assessed no ORF for a
period similar to what is proposed.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 22 of the Act and
subparagraph (f)(2) of Rule 19b–4 23
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) 24 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
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–
NASDAQ–2021–057 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–NASDAQ–2021–057. 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
22 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
24 15 U.S.C. 78s(b)(2)(B).
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–NASDAQ–2021–057, and should be
submitted on or before September 2,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–17177 Filed 8–11–21; 8:45 am]
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Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
provided for in Rule 17a–6 (17 CFR
240.17a–6) under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.). The Commission plans to submit
this existing collection of information to
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[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Notices]
[Pages 44455-44458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17177]
[[Page 44455]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92600; File No. SR-NASDAQ-2021-057]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend NOM's Options Regulatory Fee
August 6, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 5, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend The Nasdaq Options Market LLC's
(``NOM'') Pricing Schedule at Options 7, Section 5 related to the
Options Regulatory Fee or ``ORF''.
While the changes proposed herein are effective upon filing, the
Exchange has designated the amendments become operative on October 1,
2021.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Currently, NOM assesses an ORF of $0.0020 per contract side as
specified in NOM's Pricing Schedule at Options 7, Section 5. The
Exchange proposes to waive its ORF from October 1, 2021 to January 31,
2022, and then recommence the ORF on February 1, 2022.
By way of background, the options industry has experienced
extremely high options trading volumes and volatility. This historical
anomaly of persistent increased options volumes has impacted NOM's ORF
collection which, in turn, has caused the Exchange to continue to
revisit its financial forecast to reflect the sustained elevated
options volumes and volatility. As the Exchange continues to monitor
the amount of revenue collected from the ORF to ensure that our ORF
collection, in combination with other regulatory fees and fines, does
not exceed regulatory costs, the Exchange has found it difficult to
determine when volumes will return to more normal levels. In order to
avoid iterative rule changes to amend its ORF, the Exchange believes it
is prudent to instead waive its ORF from October 1, 2021 to January 31,
2022, to permit the Exchange to plan future forecasts without the need
to account for any ORF collection during that timeframe. This proposal
would ensure that revenue collected from the ORF, in combination with
other regulatory fees and fines, would not exceed the Exchange's total
regulatory costs. NOM would recommence assessing its current ORF rate
of $0.0020 per contract side as of February 1, 2022. Furthermore, prior
to February 1, 2022, NOM will examine its ORF rate to determine if the
$0.0020 per contract side ORF is justified given the current volumes in
2022 as well as the current Exchange regulatory expenses at that time.
NOM would file a proposed rule change to amend its per contract ORF if
changes are necessary to ensure an equitable allocation of reasonable
ORF, if e.g., the Exchange believes that the volumes NOM experiences in
the second half of 2021 are likely to persist throughout 2022. Of note,
NOM proposes to continue to operate with the ORF fee waived in January
2022 to allow its Participants \3\ and other broker dealers time to
align their systems for February 1, 2022, allowing for time after the
holiday period which traditionally have year-end code freezes in place.
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\3\ The term ``Options Participant'' or ``Participant'' mean a
firm, or organization that is registered with the Exchange pursuant
to Options 2A of these Rules for purposes of participating in
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or
``Nasdaq Options Market Maker''. See Options 1, Section 1(a)(39).
All NOM Participants must be an existing member or become a member
of the Exchange, pursuant to the 1000 rules series, and continue to
abide by the requirements of the 1000 Series with respect to
participation in NOM. See Options 2A, Section 1(b)(3).
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Collection of ORF
Currently, NOM assesses its ORF for each customer option
transaction that is either: (1) Executed by a Participant on NOM; or
(2) cleared by a NOM Participant at The Options Clearing Corporation
(``OCC'') in the customer range,\4\ even if the transaction was
executed by a non-Participant of NOM, regardless of the exchange on
which the transaction occurs.\5\
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\4\ Participants must record the appropriate account origin code
on all orders at the time of entry of the order. The Exchange
represents that it has surveillances in place to verify that
Participants mark orders with the correct account origin code.
\5\ The Exchange uses reports from OCC when assessing and
collecting the ORF.
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ORF Revenue and Monitoring of ORF
The Exchange monitors the amount of revenue collected from the ORF
to ensure that it, in combination with other regulatory fees and fines,
does not exceed regulatory costs. In determining whether an expense is
considered a regulatory cost, the Exchange reviews all costs and makes
determinations if there is a nexus between the expense and a regulatory
function. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset ORF.
Revenue generated from ORF, when combined with all of the
Exchange's other regulatory fees and fines, is designed to recover a
material portion of the regulatory costs to the Exchange of the
supervision and regulation of Participant customer options business
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. Regulatory costs include
direct regulatory expenses and certain indirect expenses in support of
the regulatory function. The direct expenses include in-house and
third-party service provider costs to support the day-to-day regulatory
work such as surveillances, investigations and examinations. The
indirect expenses include support from such areas as Office of the
General Counsel, technology, and internal audit. Indirect expenses are
estimated to be approximately 42% of the total regulatory costs for
2021. Thus, direct
[[Page 44456]]
expenses are estimated to be approximately 58% of total regulatory
costs for 2021.
The ORF is designed to recover a material portion of the costs to
the Exchange of the supervision and regulation of its members,
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities.
Proposal
Based on the Exchange's most recent review, the Exchange proposes
to waive ORF from October 1, 2021 to January 31, 2022, to help ensure
that revenue collected from the ORF, in combination with other
regulatory fees and fines, does not exceed the Exchange's total
regulatory costs. NOM would recommence assessing its current ORF rate
of $0.0020 per contract side as of February 1, 2022. The Exchange
issued an Options Trader Alert on July 2, 2021 indicating the proposed
rate change for October 1, 2021.\6\
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\6\ See Options Trader Alert 2021-41.
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The proposed waiver is based on recent options volume which has
remained at abnormally and unexpectedly high levels. Options volume in
2021 remains significantly high when that volume is compared to 2019
and 2020 options volume. For example, total options contract volume in
November 2020 was 71% higher than the total options contract volume in
November 2019.\7\ Below is industry data from OCC \8\ which illustrates
the significant increase in volume during the fourth quarter of 2020.
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\7\ See data from OCC at: https://www.businesswire.com/news/home/20201202005584/en/OCC-November-2020-Total-Volume-Up-71-Percent-From-a-Year-Ago.
\8\ See data from OCC at: https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Volume-by-Account-Type.
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Volume October 2020 November 2020 December 2020 Q4 2020
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Total............................... 633,365,184 673,660,858 753,568,354 2,060,594,396
Customer............................ 587,707,301 630,297,252 708,037,956 1,926,042,509
Total ADV........................... 28,789,326.55 33,683,042.90 34,253,107.00 32,196,787.44
Customer ADV........................ 26,713,968.23 31,514,862.60 32,183,543.45 30,094,414.20
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Below is industry data from OCC \9\ which illustrates the
significant increase in volume from January 2021 through March 2021.
The options volume in the first quarter of 2021 was higher than the
fourth quarter of 2020. Also, April and May 2021 volumes remain
significantly high as compared to 2020 options volume in general.
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\9\ Id.
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Volume January 2021 February 2021 March 2021 April 2021 May 2021
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Total.................................................... 838,339,790 823,412,827 898,653,388 711,388,828 718,368,993
Customer................................................. 784,399,878 782,113,450 837,247,059 667,208,963 659,913,862
Total ADV................................................ 44,123,146.84 43,337,517.20 39,071,886.40 33,875,658.50 35,918,449.70
Customer ADV............................................. 41,284,204.11 41,163,865.79 36,402,046.04 31,771,855.38 32,995,693.10
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As a result of the historical anomaly created by these high options
volumes, NOM has no assurance that the Exchange's final costs for 2021
will not differ materially from these expectations and prior practice,
nor can the Exchange predict with certainty whether options volume will
remain at the current level going forward. The Exchange notes however,
that when combined with regulatory fees and fines, the revenue being
generated utilizing the current ORF rate may result in revenue in
excess of the Exchange's estimated regulatory costs for the year.
Particularly, as noted above, the options market has seen a substantial
increase in volume in 2021 as compared to 2020, due in large part to
the continued extreme volatility in the marketplace as a result of the
COVID-19 pandemic. This unprecedented spike in volatility resulted in
significantly higher volume than was originally projected by the
Exchange (thereby resulting in substantially higher ORF revenue than
projected). The Exchange therefore proposes to waive ORF from October
1, 2021 to January 31, 2022 to ensure it does not exceed its regulatory
costs for 2021. Particularly, the Exchange believes that waiving ORF
from October 1, 2021 to January 31, 2022 and considering all of the
Exchange's other regulatory fees and fines would allow the Exchange to
continue covering a material portion of its regulatory costs, while
lessening the potential for generating excess revenue that may
otherwise occur using the current rate.\10\
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\10\ The Exchange notes that its regulatory responsibilities
with respect to Participant compliance with options sales practice
rules have largely been allocated to FINRA under a 17d-2 agreement.
The ORF is not designed to cover the cost of that options sales
practice regulation.
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NOM would recommence assessing its current ORF rate of $0.0020 per
contract side as of February 1, 2022. Until October 1, 2021, the
Exchange will continue to monitor the amount of revenue collected from
the ORF to ensure that it, in combination with its other regulatory
fees and fines, does not exceed regulatory costs. The Exchange would
also continue monitoring the amount of revenue collected from the ORF
when it recommences assessing ORF on February 1, 2022. If the Exchange
determines regulatory revenues exceed regulatory costs, the Exchange
will adjust the ORF by submitting a fee change filing to the Commission
and notifying \11\ its Participants via an Options Trader Alert.\12\
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\11\ The Exchange will provide Participants with such notice at
least 30 calendar days prior to the effective date of the change.
\12\ The Exchange notes that in connection with this proposal,
it provided the Commission confidential details regarding the
Exchange's projected regulatory revenue, including projected revenue
from ORF, along with a projected regulatory expenses.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act. \13\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act, \14\ which provides that Exchange rules may provide
for the equitable allocation of reasonable dues,
[[Page 44457]]
fees, and other charges among its members, and other persons using its
facilities. Additionally, the Exchange believes the proposed rule
change is consistent with the Section 6(b)(5) \15\ requirement that the
rules of an exchange not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(4).
\15\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed fee waiver is reasonable because
customer transactions will be subject to no ORF from October 1, 2021 to
January 31, 2022. Moreover, the proposed waiver is necessary, so the
Exchange does not collect revenue in excess of its anticipated
regulatory costs, in combination with other regulatory fees and fines,
which is consistent with the Exchange's practices.
The Exchange designed the ORF to generate revenues that would be
less than the amount of the Exchange's regulatory costs to ensure that
it, in combination with its other regulatory fees and fines, does not
exceed 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 operations. As discussed above,
however, after review of its regulatory costs and regulatory revenues,
which includes revenues from ORF and other regulatory fees and fines,
the Exchange determined that absent a reduction in ORF, it may be
collecting revenue in excess of its regulatory costs. Indeed, the
Exchange notes that when considering the recent options volume, which
included an increase in customer options transactions, it estimates the
ORF may generate revenues that may cover more than the approximated
Exchange's projected regulatory costs. As such, the Exchange believes
it's reasonable and appropriate to waive ORF from October 1, 2021 to
January 31, 2022 and recommence assessing ORF on February 1, 2022.
The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory as no Participant would be assessed an ORF
from October 1, 2021 to January 31, 2022. While the Exchange has
assessed and collected ORF from January through September, 2021, but
will not collect ORF, with this proposal, from October 2021 through
January 2022, the Exchange does not believe that it is unfairly
discriminatory to not assess the ORF from October 2021 through January
2022 because the ORF is designed and intended to recover a portion of
the Exchange's regulatory costs without collecting in excess of those
costs. Unexpectedly high and sustained customer volume has resulted in
higher revenues from the ORF that, if not suspended, will likely result
in over-collection of ORF, which would be inconsistent with the
Exchange's prior representations and undertaking to not collect ORF in
excess of regulatory expenses. The Exchange did not decrease the amount
of the ORF earlier in 2021 because it did not expect, based on its
prior experience, that customer volume would remain abnormally high.
Also, it is equitable and not unfairly discriminatory to recommence the
assessment of the ORF on February 1, 2022 because assessing the ORF to
each Participant for options transactions cleared by OCC in the
customer range where the execution occurs on another exchange and is
cleared by aa NOM Participant is an equitable allocation of reasonable
dues, fees, and other charges among its members and issuers and other
persons using its facilities.\16\
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\16\ If the OCC clearing member is a NOM Participant, ORF is
assessed and collected on all cleared customer contracts (after
adjustment for CMTA); and (2) if the OCC clearing member is not a
NOM Participant, ORF is collected only on the cleared customer
contracts executed at NOM, taking into account any CMTA instructions
which may result in collecting the ORF from a non-member.
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The Exchange believes recommencing the ORF on February 1, 2022 at
the same rate, unless options volumes at that time warrant a proposed
rule change, continues to ensure fairness by assessing higher fees to
those Participants that require more Exchange regulatory services based
on the amount of customer options business they conduct. As noted in
prior ORF rule changes which set the current ORF rate of $0.0020 per
contract side, regulating customer trading activity is much more labor
intensive and requires greater expenditure of human and technical
resources than regulating non-customer trading activity, which tends to
be more automated and less labor-intensive. For example, there are
costs associated with main office and branch office examinations (e.g.,
staff expenses), as well as investigations into customer complaints and
the terminations of registered persons.\17\
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\17\ See Securities Exchange Act Release No. 81344 (August 8,
2017), 82 FR 37955 (August 14, 2017) (SR-NASDAQ-2017-068) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Revise
the NASDAQ Options Market LLC Rules Regarding the Options Regulatory
Fee). The Exchange also noted in this rule change that, ``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
Customer component of the Exchange's overall regulatory program are
materially higher than the costs associated with administering the
non-Customer component (e.g. Participant proprietary transactions)
of its regulatory program.'' See 82 FR 37956. Further, the Exchange
notes that it has broad regulatory responsibilities with respect to
activities of its Participants, irrespective of where their
transactions take place. Many of the Exchange's surveillance
programs for customer trading activity may require the Exchange to
look at activity across all markets, such as reviews related to
position limit violations and manipulation. Indeed, the Exchange
cannot effectively review for such conduct without looking at and
evaluating activity regardless of where it transpires. In addition
to its own surveillance programs, the Exchange also works with other
SROs and exchanges on intermarket surveillance related issues.
Through its participation in the Intermarket Surveillance Group
(``ISG'') the Exchange shares information and coordinates inquiries
and investigations with other exchanges designed to address
potential intermarket manipulation and trading abuses. Accordingly,
there is a strong nexus between the ORF and the Exchange's
regulatory activities with respect to customer trading activity of
its Participants.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that this proposal creates an unnecessary or inappropriate intra-market
or inter-market burden on competition for several reasons. First, ORF
has been amended several times since its inception in 2011.\18\ For
example, NOM amended its ORF rate from $0.0021 to $0.0027 per contract
side as of August 1, 2017. Participants who either executed a
transaction on NOM or cleared a transaction at OCC in the customer
range would have been assessed a higher ORF for a transaction executed
on NOM on August 1, 2017 ($0.0027 per contract side) as compared to
July 31, 2017 ($0.0021 per contract side). There have been ORF
amendments which have caused NOM to assess different ORF rates to
Participants for different time periods causing Participants to have
paid different ORFs since 2011. For example, if NOM received payment of
a fine from a disciplinary action, that fine would offset regulatory
costs and would cause NOM to require less regulatory revenue for a
particular period. The changing regulatory costs would impact the ORF
assessed by NOM to Participants. In the past, the Exchange has amended
ORF to be higher or lower,\19\ thereby impacting the amount paid by
Participants in a calendar year. Third, options markets assess ORF at
different rates. For
[[Page 44458]]
instance, today, Nasdaq MRX, LLC (``MRX'') assesses a lower ORF of
$0.0004 per contract side.\20\ MRX has assessed this rate since
February 1, 2019.\21\ Depending on where a customer order is executed,
a Participant could be assessed a much different ORF. For example, in
the case where a customer order is sent to NOM and routed to MRX, and a
non-Participant cleared that transaction, the NOM ORF of $0.0020 would
not be assessed to the Participant who executed the transaction or
cleared the transaction, rather the MRX rate of $0.0004 per contract
side would be assessed. In that same scenario presuming a non-
Participant cleared the transaction, if the customer order could have
executed on NOM instead of routing away the Participant would have been
assessed the NOM ORF of $0.0020 per contract side. The customer, in
that instance, would have no knowledge of where the order could be
executed, as the liquidity profile of each exchange may differ at that
exact moment. Therefore, Participants could be assessed a different ORF
on the same day on the same transaction based on routing decisions, and
in those cases the Participant would continue to benefit from the
regulatory program available on each market and discover where the
liquidity is available, irrespective of any ORF rate differentials
across markets.
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\18\ See Securities Exchange Act Release Nos. 81344 (August 8,
2017), 82 FR 37955 (August 14, 2017) (SR-NASDAQ-2017-068); 78360
(July 19, 2016), 81 FR 48475 (July 25, 2016) (SR-NASDAQ-2016-096);
and 76950 (January 21, 2016), 81 FR 4687 (January 27, 2016) (SR-
NASDAQ-2016-003).
\19\ Id.
\20\ See Securities Exchange Act Release Nos. 85127 (February
13, 2019), 84 FR 5173 (February 20, 2019) (SR-MRX-2019-03).
\21\ Of note, prior to February 1, 2019, MRX assessed no ORF
thereby creating a calendar year where Participants were assessed no
ORF for a period similar to what is proposed.
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The Exchange believes recommencing the ORF on February 1, 2022 at
the same rate, unless options volumes or the Exchange's regulatory
expenses at that time warrant a proposed rule change, does not create
an undue burden on competition because the ORF applies to all customer
activity, thereby raising regulatory revenue to offset regulatory
expenses. It also supplements the regulatory revenue derived from non-
customer activity. Recommencing the assessment of the current ORF does
not create an unnecessary or inappropriate inter-market burden on
competition because it is a regulatory fee that supports regulation in
furtherance of the purposes of the Act. The Exchange is obligated to
ensure that the amount of regulatory revenue collected from the ORF, in
combination with its other regulatory fees and fines, does not exceed
regulatory costs.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \22\ of the Act and subparagraph (f)(2) of Rule
19b-4 \23\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(2).
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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) \24\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\24\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-NASDAQ-2021-057 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-NASDAQ-2021-057. 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-NASDAQ-2021-057, and should be submitted on
or before September 2, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17177 Filed 8-11-21; 8:45 am]
BILLING CODE 8011-01-P
