Self-Regulatory Organizations; MEMX LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called MEMX Options, 49894-49907 [2022-17320]

Download as PDF 49894 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices The public may view background documentation for this information collection at the following website: >www.reginfo.gov<. Find this particular information collection by selecting ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. Written comments and recommendations for the proposed information collection should be sent by September 12, 2022 to (i) >MBX.OMB.OIRA.SEC_desk_officer@ omb.eop.gov< and (ii) David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/o John Pezzullo, 100 F Street NE, Washington, DC 20549, or by sending an email to: PRA_Mailbox@sec.gov. Dated: August 8, 2022. J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2022–17314 Filed 8–11–22; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [SEC File No. 270–447, OMB Control No. 3235–0504] jspears on DSK121TN23PROD with NOTICES Submission for OMB Review; Comment Request: Extension; Rule 19b–4(e) and Form 19b–4(e) Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736 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’’) has submitted to the Office of Management and Budget (‘‘OMB’’) a request for approval of extension of the previously approved collection of information provided for in Rule 19b–4(e) (17 CFR 240.19b–4(e)) under the Securities Exchange Act of 1934 (15 U.S.C 78a et seq.) (the ‘‘Act’’). Rule 19b–4(e) permits a selfregulatory organization (‘‘SRO’’) to list and trade a new derivative securities product without submitting a proposed rule change pursuant to Section 19(b) of the Act (15 U.S.C. 78s(b)), so long as such product meets the criteria of Rule 19b–4(e) under the Act. However, in order for the Commission to maintain an accurate record of all new derivative securities products traded on the SROs, Rule 19b–4(e) requires an SRO to file a summary form, Form 19b–4(e), to notify the Commission when the SRO begins trading a new derivative securities product that is not required to be submitted as a proposed rule change to VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 the Commission. Form 19b–4(e) should be submitted within five business days after an SRO begins trading a new derivative securities product that is not required to be submitted as a proposed rule change. In addition, Rule 19b–4(e) requires an SRO to maintain, on-site, a copy of Form 19b–4(e) for a prescribed period of time. This collection of information is designed to allow the Commission to maintain an accurate record of all new derivative securities products traded on the SROs that are not deemed to be proposed rule changes and to determine whether an SRO has properly availed itself of the permission granted by Rule 19b–4(e). The Commission reviews SRO compliance with Rule 19b–4(e) through its routine inspections of the SROs. The respondents to the collection of information are SROs (as defined by the Act), all of which are national securities exchanges. As of April 8, 2022 there were 24 entities registered as national securities exchanges with the Commission. The Commission receives an average total of 2,331 responses per year, which corresponds to an estimated annual hour burden of approximately 2,331 hours (2,331 responses × 1 hour per response). At an average hourly cost of $72, the aggregate related internal cost of compliance for Rule 19b–4(e) is approximately $167,832 per year (2,331 burden hours multiplied by $72/hour). Compliance with Rule 19b–4(e) is mandatory. Information received in response to Rule 19b–4(e) shall not be kept confidential; the information collected is public information. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information under the PRA unless it displays a currently valid OMB control number. The public may view background documentation for this information collection at the following website, www.reginfo.gov. Find this particular information collection by selecting ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. Written comments and recommendations for the proposed information collection should be sent by September 12, 2022 to (i) www.reginfo.gov/public/do/PRAMain and (ii) David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/o John Pezzullo, 100 F Street NE, Washington, DC 20549, or by sending an email to: PRA_Mailbox@sec.gov. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 Dated: August 8, 2022. J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2022–17308 Filed 8–11–22; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–95445; File No. SR–MEMX– 2022–10] Self-Regulatory Organizations; MEMX LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called MEMX Options August 8, 2022. I. Introduction On April 21, 2022, MEMX LLC (‘‘MEMX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules to establish a facility to trade options, which will be named MEMX Options. The proposed rule change was published for comment in the Federal Register on May 10, 2022.3 In its filing, MEMX consented to an extension of time for Commission action to ninety (90) days after the date of publication of the proposal.4 On August 8, 2022, the Exchange filed Amendment No. 1 to the proposed rule change.5 This order approves the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 94847 (May 4, 2022), 87 FR 28064 (‘‘Notice’’). The Commission received one comment letter on the proposed rule change. See Letter from Andrew Robinson, dated May 5, 2022, available at https:// www.sec.gov/comments/sr-memx-2022-10/ srmemx202210-289458.htm. The comments expressed by the commenter are not relevant to the proposed rule change. 4 See Item 6 of MEMX’s Rule 19b–4 filing. See also Notice, supra note 3, at 28076, n.37. 5 Amendment No. 1 superseded and replaced the original filing. In Amendment No. 1, the Exchange proposes non-material revisions to the proposed rule text and added additional detail to the filing. See infra Section VI. When it submitted Amendment No. 1, the Exchange also submitted it as a comment letter to the filing, available at: https://www.sec.gov/comments/sr-memx-2022-10/ srmemx202210.htm. 2 17 E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices II. Description of the Proposed Rule Change The Exchange proposes to adopt new Chapters 16–29 into its rulebook to govern MEMX Options. In addition, the Exchange proposes to add rule text to existing Chapters 2 (Members of the Exchange) and 8 (Discipline) so that those chapters take into account the new options rule set. MEMX Options will operate an electronic trading system for options (the ‘‘System’’) that will provide for the electronic display and execution of orders, which the Exchange intends to operate ‘‘in a manner similar to that of other options exchanges.’’ 6 As such, the proposed rules for MEMX Options are, for the most part, substantially similar to those of currently operating options exchanges, in particular Cboe BZX Exchange, Inc. (‘‘Cboe BZX’’ or ‘‘Cboe BZX Options’’). MEMX Options Members The proposed rules relating to qualification and participation on MEMX Options are set forth in proposed Chapters 17 and 22. These rules are substantively identical to the corresponding rules of Cboe BZX Options, with the only differences being internal references and other minor technical differences.7 A detailed summary of the provisions set forth in Chapters 17 and 22 is provided in the filing.8 MEMX will have only one type of member, referred to as an ‘‘Options Member,’’ which must be a registered broker-dealer.9 Only Options Members and their Sponsored Participants will be permitted to transact on the System.10 An Options Member must maintain membership in another registered options exchange that is not registered solely under Section 6(g) of the Act,11 or in the Financial Industry Regulatory Authority (‘‘FINRA’’).12 Every Options Member will be required to have at least one registered and licensed Options Principal that has responsibility for the overall oversight of the Options jspears on DSK121TN23PROD with NOTICES 6 See Notice, supra note 3, at 28064. See also Amendment No. 1 at 4. 7 See Cboe BZX Rules, Chapters XVII and XXII. 8 See Notice, supra note 3, at 28065. See also Amendment No. 1 at 5–8. 9 See MEMX Rule 2.3. 10 See MEMX Rule 17.1(a). Options Members can provide sponsored access to MEMX Options to a non-Member (i.e., a Sponsored Participant) pursuant to MEMX Rule 11.3, subject the conditions of that rule. MEMX Options will assign a unique Executing Firm ID (‘‘EFID’’) to identify a single User and a specific number. See MEMX Rule 21.1(j). A User may obtain one or more EFIDs from the Exchange. 11 15 U.S.C. 78f(g). 12 See MEMX Rule 17.2(f). VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 Member’s options related activities on the Exchange.13 An Options Member that represents customer orders as an agent on MEMX Options and those that conduct proprietary trading as principal other than in the capacity of a market maker are referred to as Options Order Entry Firms (‘‘OEFs’’). OEFs may only transact business with Public Customers if they are members of FINRA.14 In addition, an Options Member can seek to register with the Exchange as an Options Market Maker to make markets in specific classes of options it chooses in advance (‘‘appointed classes’’) where it would have certain rights and bear certain responsibilities beyond those of other Options Members.15 In particular, Options Market Makers commit to electronically engage in a course of dealings to enhance liquidity available on MEMX Options and to assist in the maintenance of fair and orderly markets.16 Among other things, an Options Market Maker must, at a minimum for its appointed classes subject to the provisions of MEMX’s rules, maintain a continuous two-sided quotation for 60% of time those classes are open for trading, excluding any adjusted series, any intraday add-on series on the day during which such series are added for trading, any Quarterly Option Series, and any series with an expiration of greater than 270 days.17 In their appointed classes, Options Market makers must also: (i) engage to a reasonable degree under the existing circumstances, in dealings for its own accounts when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the 13 See MEMX Rule 17.2(g). id. See also MEMX Rule 16.1 (defining ‘‘Public Customer’’ to means a person that is not a broker or dealer in securities). In addition, an OEF may only transact business with Public Customers if such Options Member also is an options member of another registered national securities exchange or association with which the Exchange has entered into an agreement under Rule 17d–2 under the Act pursuant to which such other exchange or association is the designated options examining authority for the OEF. See MEMX Rule 26.1. 15 See MEMX Rule 22.2. Market Makers are designated as specialists on MEMX Options for all purposes under the Act. See id. 16 See MEMX Rule 22.5. MEMX’s rules will not, at this time, limit the number of Market Makers that can register to make markets on MEMX Options or limit the number of class appointments a Market Maker can hold. MEMX Rule 22.2(c) allows the Exchange to file a proposed rule change to propose certain limitations based on system constraints, capacity restrictions, or other factors relevant to protecting the integrity of the System. In the absence of an effective rule, the Exchange cannot restrict access in any options class. 17 See MEMX Rule 22.6. 14 See PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 49895 price relationships between option contracts of the same class; (ii) compete with other market makers, (iii) maintain firm quotes; (iv) update their quotes in response to changed market conditions; and (v) maintain active markets.18 Substantial or continued failure by an Options Market Maker to meet any of its obligations and duties would subject the Options Market Maker to disciplinary action or suspension or revocation of registration as an Options Market Maker or its appointment in one or more appointed classes.19 Furthermore, existing Exchange Rules applicable to the MEMX equities market contained in Chapters 1 through 15 of the Exchange Rules will apply to Options Members unless a specific Exchange Rule applicable to MEMX Options (i.e., proposed Chapters 16 through 29 of the Exchange Rules) governs.20 Definitions Chapter 16.1 sets forth the defined terms used in Chapters 16 to 29 relating to the trading of options contracts on the Exchange. Each of the terms defined in Rule 16.1 is either identical or substantially similar to definitions in Cboe BZX Rule 16.1. A complete list of the defined terms is set forth in the filing.21 Options Trading System The Exchange states that MEMX Options will leverage the Exchange’s current technology, including its customer connectivity, messaging protocols, quotation and execution engine, order router, data feeds, and network infrastructure.22 According to the Exchange, MEMX Options will closely resemble the Exchange’s equities market, as well as other options markets, such as Cboe BZX Options.23 MEMX Options will not have a physical trading floor. All trading interest entered into the System will be automatically executable. Orders entered into the System will be displayed anonymously.24 18 See MEMX Rule 22.5(a). MEMX Rule 22.5(c). 20 See MEMX Rule 16.2(b). 21 See Notice, supra note 3, at 28065–67. See also Amendment No. 1 at 8–18. 22 See Notice, supra note 3, at 28067. See also Amendment No. 1 at 16. According to the Exchange, this will minimize the technical effort required for existing Exchange members to begin trading options on MEMX Options. See id. 23 See id. 24 However, aggregated and individual transaction reports produced by the System will indicate the details of a User’s transactions, including the contra party’s executing firm ID (‘‘EFID’’), capacity, and clearing firm account number. The Exchange also will reveal a User’s 19 See E:\FR\FM\12AUN1.SGM Continued 12AUN1 49896 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices jspears on DSK121TN23PROD with NOTICES Like the Exchange’s equities facility, MEMX Options will maintain a price/ time allocation model across all participants rather than differentiating between participants. As such, MEMX Options will execute all trading interest at the best price level within the System before executing trading interest at the next best price.25 At each price level, trading interest will be executed in time sequence, such that the order established as the first entered into the System at such price level will have priority up to its specific number of contracts.26 MEMX has not proposed any additional priority overlays. In addition, MEMX Options has not proposed to have non-displayed orders, and thus all interest will be displayable. MEMX will be a member of the Options Price Reporting Authority (‘‘OPRA’’) and will disseminate its quotations in accordance with Rule 602 of Regulation NMS.27 MEMX Options also will offer proprietary data feeds including ‘‘MEMOIR Options Depth’’ (depth of book quotations/orders and execution information), ‘‘MEMIR Options Top’’ (top of book quotations/ orders and execution information), ‘‘DROP’’ (regarding the trading activity of the User), and Historical Data.28 The Exchange will become an exchange member of the Options Clearing Corporation (‘‘OCC’’). The System will be linked to OCC for the Exchange to transmit locked-in trades for clearance and settlement. Hours of Operation. MEMX Options will accept orders from 9:30 a.m. until 4:00 p.m. Eastern Time, except that it will accept orders until 4:15 p.m. for option contracts on Fund Shares, exchange-traded notes, and broad-based indexes.29 Minimum Quotation and Trading Increments. The Exchange’s minimum quotation and trading increments will be the same as on other exchanges, including Cboe BZX Options.30 Specifically, the Exchange will have the following standard quotation increments: (i) if the options series is trading at less than $3.00, five (5) cents; (ii) if the options series is trading at $3.00 or higher, ten (10) cents; and (iii) if the options series is trading pursuant identity: (i) when a registered clearing agency ceases to act for a participant, or the User’s clearing firm, and the registered clearing agency determines not to guarantee the settlement of the User’s trades; and (ii) for regulatory purposes or to comply with an order of an arbitrator or court. See MEMX Rule 21.10. 25 See MEMX Rule 21.8(a). 26 See id. 27 See 17 CFR 242.602. 28 See MEMX Rule 21.15(b). 29 See MEMX Rule 21.2(a). 30 See Cboe BZX Rule 21.5(a) and (b). VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 to the Penny Interval Program, one (1) cent if the options series is trading at less than $3.00, or five (5) cents if the options series is trading at $3.00 or higher, unless for QQQ, SPY, or IWM where the minimum quoting increment will be one (1) cent for all series.31 In addition, the minimum trading increment will be one (1) cent for all series.32 Penny Interval Program. The Exchange’s Penny Interval Program is substantially similar to the penny programs of other exchanges, which includes minimum quoting requirements for option classes listed under the Penny Interval Program. However, eligibility for inclusion in the Penny Interval Program will be limited to those classes already operating under penny programs of other options exchanges at the time MEMX Options is launched.33 The list of option classes included in the Penny Interval Program will be announced by the Exchange via circular distributed to Options Members and published by the Exchange on its website.34 Order Types and Handling Instructions. MEMX Options will make available to Users two Order Types: Limit Orders 35 and Market Orders.36 MEMX Options also may make available to Users a few additional instructions that can be designated on an order (‘‘Handling Instructions’’).37 Those Handling Instructions include Book Only,38 Post Only,39 and Intermarket 31 See MEMX Rule 21.5(a). MEMX Rule 21.5(b). 33 See MEMX Rule 21.5(d)(1). 34 See MEMX Rule 21.5(d). 35 Limit Orders are orders (including bulk messages) to buy or sell an option at a specified price or better. A Limit Order is marketable when, for a Limit Order to buy, at the time it is entered into the System the order is priced at the current inside offer or higher, or for a Limit Order to sell, at the time it is entered into the System the order is priced at the current inside bid or lower. See MEMX Rule 21.1(d)(1). 36 Market Orders are orders to buy or sell at the best price available at the time of execution. Market Orders to buy or sell an option traded on MEMX Options will be rejected if they are received when the underlying security is subject to a ‘‘Limit State’’ or ‘‘Straddle State’’ as defined in the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the ‘‘Limit Up-Limit Down Plan’’). Bulk messages may not be Market Orders. See MEMX Rule 21.1(d)(2). 37 See MEMX Rule 21.1(e). A Handling Instruction applied to a bulk message applies to each bid and offer within that bulk message. See id. 38 See MEMX Rule 21.1(e)(1). Book Only is an instruction that an order is to be ranked and executed on the Exchange or cancelled, as appropriate, without routing away to another options exchange. See id. Users may designate bulk messages as Book Only as set forth in MEMX Rule 21.1(l). See id. 39 See MEMX Rule 21.1(e)(2). Post Only is an instruction that an order is to be ranked and executed on the Exchange or cancelled, as 32 See PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Sweep Order (‘‘ISO’’).40 The characteristics and functionality of each Order Type and Handling Instruction is substantially similar to what is used for the Exchange’s equities trading facility or on other options exchanges, including Cboe BZX Options, except where discussed in the amended filing or as relates to the display-price sliding process offered by Cboe BZX Options, which the Exchange is not proposing to adopt.41 Cboe BZX Options offers additional order types, such as reserve orders, minimum quantity orders, priceimproving orders, stop orders, and stop limit orders, none of which the Exchange proposes to adopt.42 Time-in-Force Designations. Users entering orders into the System may designate such orders to remain in force and available for display and/or potential execution for varying periods of time.43 Unless cancelled earlier, once these time periods expire, the order (or the unexecuted portion thereof) is returned to the entering party. The Time-in-Force designations available on appropriate, without routing away to another options exchange except that the order will not remove liquidity from the MEMX Options Book. A Market Order cannot be designated as Post Only. See id. Users may designate bulk messages as Post Only as set forth in MEMX Rule 21.1(l). See id. 40 See MEMX Rule 21.1(e)(3). ISO orders, defined in MEMX Rule 27.1(a)(10), may be executed at one or multiple price levels in the System without regard to Protected Quotations at other options exchanges (i.e., may trade through such quotations) because the User represents that it simultaneously has routed additional orders to execute against the full displayed size of any Protected Bid/Offer (as applicable). See id. The Exchange will rely on the marking of an order as an ISO order when handling such order. See id. ISOs are not eligible for routing pursuant to MEMX Rule 21.9. See id. Users may not designate a Market Order as an ISO. See id. Users may not designate bulk messages as ISOs. See id. 41 The Exchange explains that, in contrast to Cboe BZX Options, it proposes characterizing Book Only, Post Only, and ISO as Handling Instructions rather than Order Types, as each of these instructions represents an additional modifier that can be appended to an order rather than a unique Order Type. See Notice, supra note 3, at 28069. See also Amendment No. 1 at 23. Not all Handling Instructions can be applied to all Order Types (e.g., Market Orders cannot be designated ISO). See MEMX Rule 21.1(e)(3). The Exchange does not believe that this characterization changes anything with respect to the proposed operation of these order types and Handling Instructions. See Notice, supra note 3, at 28069. See also Amendment No. 1 at 23–24. 42 See Notice, supra note 3, at 28069. See also Amendment No. 1 at 24. 43 A Time-in-Force applied to a bulk message applies to each bid and offer within that bulk message. See MEMX Rule 21.1(g). E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices MEMX Options include Immediate or Cancel (‘‘IOC’’) 44 or Day.45 The Time-in-Force designations are identical to the same Time-in-Force designations available on Cboe BZX Options, except that Cboe BZX Options rules describe Time-in-Force designations as applicable only to limit orders on Cboe BZX Options, whereas the Exchange has proposed allowing such designations to be placed on both Limit Orders and Market Orders.46 Member Match Trade Prevention Modifiers. As with its equities market, the Exchange will allow Users to use certain Match Trade Prevention (‘‘MTP’’) modifiers.47 Any incoming order designated with an MTP modifier will be prevented from executing against a resting opposite side order also designated with an MTP modifier and originating from the same EFID, Exchange Member identifier, trading group identifier, or Exchange Sponsored Participant identifier. The Exchange will offer the following MTP modifiers: (i) MTP Cancel Newest; (ii) MTP Cancel Oldest; and (iii) MTP Cancel Both.48 The Exchange explains that each of the proposed MTP modifiers available on MEMX Options is identical to the same MTP modifier available on Cboe BZX Options.49 Re-Pricing Mechanism. MEMX Options will offer a re-pricing mechanism (‘‘Price Adjust’’) to comply with the order protection and trade through restrictions of the Linkage Options Order Protection and Locked/ Crossed Market Plan (‘‘Linkage Plan’’). This re-pricing mechanism is identical to the Price Adjust mechanism offered by Cboe BZX Options, with the exception of the handling of an order jspears on DSK121TN23PROD with NOTICES 44 See MEMX Rule 21.1(g)(1). IOC orders are to be executed in whole or in part as soon as such order is received. See id. The portion not so executed immediately on the Exchange or another options exchange is cancelled and is not posted to the MEMX Options Book. See id. IOC orders that are not designated as Book Only and that cannot be executed in accordance with MEMX Rule 21.8 on the System when reaching the Exchange will be eligible for routing away pursuant to proposed MEMX Rule 21.9. See id. Users may designate bulk messages as IOC. See id. 45 See MEMX Rule 21.1(g)(2). Day orders, if not executed, expire at market close. Users may designate bulk messages as Day. See id. 46 The Exchange notes that Cboe BZX Options offers additional Times-in-Force, such as good til cancelled, fill-or-kill, at the open, limit-on-close, and market-on-close, none of which the Exchange proposes to adopt. See Notice, supra note 3, at 28069. See also Amendment No. 1 at 25. 47 See MEMX Rule 21.1(h). 48 See MEMX Rule 21.1(h)(1)–(3). 49 See Notice, supra note 3, at 28069. See also Amendment No. 1 at 25. The Exchange notes that Cboe BZX Options offers additional MTP modifiers, such as MTP Decrement and Cancel and MTP Cancel Smallest, neither of which the Exchange proposes to adopt. See id. VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 with a Post Only instruction subject to the Price Adjust process.50 The Exchange explains that Cboe BZX Options applies the Price Adjust process when a Post Only Order locks or crosses a Protected Quotation displayed on Cboe BZX Options and re-prices such Post Only Order pursuant to Cboe BZX Rule 21.1(i)(4), but MEMX is not proposing to adopt this clause. Rather, the System will cancel a Post Only Order that locks or crosses a Protected Quotation displayed on MEMX Options. If a User elects to not subject an order (including bulk messages) to the Price Adjust process, it can use a ‘‘Cancel Back’’ instruction.51 The System will cancel or reject an order with a Cancel Back instruction if displaying it on the Book would create a violation of Rule 27.3 (Locked and Crossed Markets), or if the order cannot otherwise be executed or displayed in the Book at its limit price.52 Ports and Bulk Messages. MEMX Options will offer ‘‘physical ports’’ that provide a physical connection to the System and ‘‘logical ports’’ (or ‘‘application sessions’’) that provide Users with the ability within the System to accomplish a specific function through a connection, such as order entry, data receipt, or access to information.53 MEMX Options will offer ‘‘bulk message’’ functionality whereby Market Makers will be able to use a single electronic message to enter, modify, or cancel up to a specified number of bids and offers.54 Bulk messages are subject to the following conditions: (i) bulk messages must contain a Time-in-Force of Day or IOC; (ii) a Market Maker with an appointment in a class must designate a bulk message for that class as Post Only or Book Only, and a nonappointed Market Maker must designate a bulk message for that class as Post Only; (iii) the System cancels or rejects a Post Only bulk message bid (offer) with a price that locks or crosses the Exchange best offer (bid) or ABO (ABB); 55 and (iv) the System executes a 50 See MEMX Rule 21.1(i). See also Cboe BZX Rule 21.1(i). 51 See MEMX Rule 21.1(m). 52 See id. 53 A User is able to designate which of its EFIDs may be used for each of its ports. See MEMX Rule 21.1(j)(3). If a User submits an order or quote through a port with an EFID not enabled for that port, the System cancels or rejects the order or quote. See id. 54 Cboe BZX Options offers specific ports used for bulk messages whereas the Exchange is not proposing to offer bulk ports. See Notice, supra note 3, at 28070. See also Amendment No. 1 at 27. 55 The term ‘‘ABBO’’ means the best bid(s) or offer(s) disseminated by other Eligible Exchanges (as defined in MEMX Rule 27.1) and calculated by PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 49897 Book Only bulk message bid (offer) that locks or crosses the ABO (ABB) against offers (bids) resting in the Book at prices the same as or better than the ABO (ABB) and then cancels the unexecuted portion of that bid (offer).56 Market Opening Procedures. The Exchange is not proposing to have an opening cross or opening auction. Rather, for stock options, the System simply will open a class of options following the first regular hours (i.e., after 9:30 a.m. Eastern Time) transaction in the underlying security as reported on the first print disseminated pursuant to an effective national market system plan.57 In the event of a delay, the Exchange can determine in the interests of a fair and orderly market to open trading in the class.58 With respect to index options, the System will open a class for trading after a period following the first post-9:30 a.m. (Eastern Time) disseminated index value for the applicable index.59 Because the Exchange does not propose to adopt an opening cross or similar opening process, the opening trade that occurs on the Exchange will be a trade in the ordinary course of dealings on the Exchange. Accordingly, the System will ensure that the opening trade in an options series will not trade through a Protected Quotation at another options exchange, consistent with the general standard regarding trade throughs in MEMX Rule 21.6(e).60 Additionally, the Exchange may delay the commencement of trading in any class of options in the interests of a fair and orderly market.61 Orders received the Exchange based on market information the Exchange receives. See MEMX Rule 16.1. 56 See MEMX Rule 21.1(l)(1)–(4). 57 See MEMX Rule 21.7(a). The proposed market opening procedures for stock options are identical to the market opening procedures for such options that were initially adopted by Cboe BZX Options. See Securities Exchange Act Release No. 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (SR–BATS–2009–031) (Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Establish Rules Governing the Trading of Options on the BATS Options Exchange). 58 See MEMX Rule 21.7(b). 59 See MEMX Rule 21.7(a). The proposed opening procedures for index options are similar to Cboe BZX Options (Cboe BZX Rule 21.7(d)(2)), with a difference in that once the Cboe BZX Options system observes that an index value has been disseminated for the applicable index, Cboe BZX Options then commences an opening rotation (i.e., an opening process to match liquidity at a price determined by the Cboe BZX Options system) while the Exchange is not proposing to adopt an opening rotation. 60 See Notice, supra note 3, at 28070. See also Amendment No. 1 at 29. 61 See MEMX Rule 21.7(c). E:\FR\FM\12AUN1.SGM 12AUN1 49898 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices prior to the opening of the System will be cancelled.62 In the filing, the Exchange explains that it proposes a simplified opening procedures because for a successful opening process to function, MEMX believes an exchange needs a critical mass of liquidity from market participants in order to price and execute opening transactions.63 In turn, as a new options exchange, MEMX Options does not know the amount of pre-opening interest it will have, and it will have to gain market share in order to accumulate such interest.64 Routing. Users may designate orders as eligible for routing to another options exchange during regular trading hours when trading interest on MEMX Options is not available.65 An order that is designated as routable will be routed to other options exchanges to be executed at the National Best Bid and Offer (‘‘NBBO’’) when MEMX Options is not at the NBBO consistent with the Linkage Plan. Orders routed to other options exchanges do not retain time priority with respect to orders in the System, and the System will continue to execute orders while routed orders are away.66 If a routed order is returned to MEMX Options, in whole or in part, that order (or its remainder) will receive a new time stamp reflecting the time of its return to the System.67 Users whose orders are routed away will be obligated to honor trades executed on other options exchanges.68 Subject to the exceptions contained in Rule 27.2(b), the System will ensure that an order will not be executed at a price that trades through another options exchange. Any order entered with a price that would lock or cross a Protected Quotation that is not eligible for either routing or the price adjust process as defined in Rule 21.1(i) will be cancelled. The Exchange explains that the routing functionality for MEMX Options is designed to operate much like the routing functionality for the Exchange’s equities market, in that the Exchange ‘‘offers a simple routing service to facilitate compliance with applicable 62 See MEMX Rule 21.6(c). Notice, supra note 3, at 28070. See also Amendment No. 1 at 30. 64 See Notice, supra note 3, at 28070. See also Amendment No. 1 at 30. The Exchange states that it will re-evaluate its opening procedures over time and may propose to add an opening process through a proposed rule filing submitted to the Commission in the future. See id. 65 Bulk messages are not eligible for routing. See MEMX Rule 21.9(a). Alternatively, a User may designate an order as not eligible for routing. 66 See MEMX Rule 21.9(b). 67 See id. 68 See MEMX Rule 21.9(c). jspears on DSK121TN23PROD with NOTICES 63 See VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 regulations and does not currently offer other complex routing strategies.’’ 69 The Exchange will use its existing affiliated routing broker-dealer, MEMX Execution Services LLC (‘‘MEMX Execution Services’’), to route orders solely on behalf of MEMX Options.70 MEMX Options will maintain a ‘‘System routing table’’ to determine the specific options exchanges to which the System will route orders and the order in which it will route them.71 MEMX Execution Services is subject to regulation as a facility of the Exchange, including the requirement to file proposed rule changes under Section 19 of the Act.72 69 See Notice, supra note 3, at 28071. See also Amendment No. 1 at 31. The Exchange notes that the proposed rules relating to the routing of orders on MEMX Options to away options markets are similar to the rules of Cboe BZX Options, except that the Exchange proposes to cancel any unexecuted portion of a Market Order after the System has routed to and received response from an away options market, whereas Cboe BZX Options offers additional handling instructions that may be chosen with respect to the unexecuted portion of an order after the System has routed to and received a response from an away options market, and Cboe BZX Options offers various additional routing options, such as routing to a specific destination or at specified price levels. See also Amendment No. 1 at 31–32. 70 See MEMX Rules 2.11 and 21.9. MEMX Options will also offer back-up routing services in conjunction with one or more routing brokers that are not affiliated with the Exchange in case it is not able to provide order routing services through its affiliated broker-dealer, subject to the certain conditions and limitations. See MEMX Rule 21.9(e). Among other things, the Exchange would control the routing logic and the routing broker would not have any discretion. See MEMX Rule 21.9(e)(5). In addition, the Exchange would enter into an agreement with each routing broker that would, among other things, restrict the use of any confidential and proprietary information that the routing broker receives. See MEMX Rule 21.9(e)(1). The Exchange also must have procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Exchange and the routing broker, and any other entity, including any affiliate of the routing broker, and, if the routing broker or any of its affiliates engages in any other business activities other than providing routing services to the Exchange. See MEMX Rule 21.9(e)(2). The Exchange may not use a routing broker for which the Exchange or any affiliate of the Exchange is the designated examining authority. See MEMX Rule 21.9(e)(3). 71 See MEMX Rule 21.9(a)(3). 72 See 15 U.S.C. 78s. MEMX Execution Services is required to be a member of a self-regulatory organization unaffiliated with the Exchange that is its designated examining authority, and the Exchange is required to establish and maintain procedures and internal controls reasonably designed to restrict the flow of confidential and proprietary information between MEMX and its facilities. See MEMX Rule 2.11(a)(2) and (5). In addition, the books, records, premises, officers, directors, agents, and employees of MEMX Execution Services, as a facility of the Exchange, are deemed to be those of the Exchange for purposes of and subject to oversight pursuant to the Act. See MEMX Rule 2.11(b). Further, the Exchange must provide its routing services in compliance with the provisions of the Act and the rules thereunder, including, but not limited to, the requirements in PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 Use of routing services, including routing using MEMX Execution Services, is optional. Users that do not want to use routing services provided by the Exchange must designate orders as not available for routing. To mitigate the financial and regulatory risks associated with providing Users with access to away options exchanges, MEMX has implemented certain tests to comply with market access requirements under Rule 15c3–5.73 Pursuant those policies and procedures, if an order or series of orders are deemed to be erroneous or duplicative, would cause the entering User’s credit exposure to exceed a preset credit threshold, or are non-compliant with applicable pre-trade regulatory requirements (as defined in Rule 15c3– 5), MEMX Execution Services will reject such orders prior to routing and/or seek to cancel any orders that have been routed. Risk Controls. Users of MEMX Options will have the ability to establish certain risk control parameters and limits that are intended to offer protection from entering orders outside of certain size and price parameters, as well as certain parameters based on order type and market conditions.74 The proposed risk controls are based, in part, on those of Cboe BZX Options, with certain additions and differences described below. Rule 21.16 sets forth a Risk Monitor Mechanism that will offer Users a choice between a ‘‘passive’’ risk counter 75 and an ‘‘active’’ risk counter.76 Users may configure risk Section 6(b)(4) and (5) of the Act that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. See MEMX Rule 21.9(e)(4). 73 17 CFR 240.15c3–5. See also MEMX Rule 21.9(f). The Exchange states that MEMX Rule 21.9(f) is substantively identical to Cboe BZX Rule 21.9(f). See Notice, supra note 3, at 28071. See also Amendment No. 1 at 33. 74 See MEMX Rules 21.16 and 21.17. 75 See MEMX Rule 21.16(a). In a ‘‘passive’’ risk counter, the Exchange counts a specific metric (e.g., number of contracts executed) over a specific time interval and takes a specific action based on a Userconfigured parameter. For example, once a User executes its pre-defined limit of 10,000 contracts, the User might have instructed the Exchange to cancel or reject pending and additional orders. 76 See MEMX Rule 21.16(b). In an ‘‘active’’ risk counter, the User can manage its risk limits by acknowledging its activity during the day. For example, if a User set a pre-defined limit of 10,000 contracts and then executes a series of trades exceeding 10,000 contracts, but with each execution the user submits an electronic instruction to the System acknowledging the execution and decrementing the counting program by a specific amount, then the System would decrement that value from the ongoing tally it maintains. In other E:\FR\FM\12AUN1.SGM 12AUN1 jspears on DSK121TN23PROD with NOTICES Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices limits for various parameters, including number of contracts executed (‘‘volume’’), notional value of executions (‘‘notional’’), number of executions (‘‘count’’), number of contracts executed as a percentage of number of contracts outstanding within an Exchange-designated time period or during the trading day (‘‘percentage’’), and the number of times the limits on any of the foregoing parameters are reached (‘‘risk trips’’).77 The System will track each of the parameters within an underlying for an EFID (‘‘underlying limit’’), across all underlyings for an EFID (‘‘EFID limit’’), across all underlyings for a group of EFIDs (‘‘EFID Group limit’’), and/or across a customized group of orders designated by the User (‘‘Custom Group Limit’’), over a User-established time period (‘‘interval’’) and on an absolute basis for a trading day (‘‘absolute limits’’).78 When the System determines that a specified parameter has reached the User’s pre-defined risk limit and instructions, the Risk Monitor Mechanism will effectuate a User’s predetermined action from among the following options: (i) cancel or reject such User’s orders or quotes in all series of the applicable underlying(s) and cancel or reject any additional orders or quotes from the User in the applicable underlying(s) until the counting program is reset; or (ii) suspend all of a User’s resting orders or quotes in all series of the applicable underlying(s) and cancel or reject any additional orders or quotes from the User in the applicable underlying(s) until the Exchange is instructed to reinstate such bids and offers. A User may also engage the Risk Monitor Mechanism to cancel resting bids and offers, as well as subsequent orders as set forth in Rule 22.10 (‘‘mass cancellation’’) or to suspend all resting bids and offers until the Exchange is instructed to reinstate such bids and offers (‘‘mass suspension’’). When a User’s resting orders or quotes have been suspended and the User instructs the Exchange to reinstate all such bids and offers, each reinstated order or quote shall receive a new timestamp reflecting the time it was re-posted to the MEMX Options Book.79 The Risk Monitor Mechanism’s ‘‘passive’’ functionality is substantially similar to that offered on Cboe BZX Options, except that Cboe BZX Options’ rule does not permit Users to designate words, only non-acknowledged trades would cause the pre-defined limit to be reached. 77 See MEMX Rule 21.16(a). 78 See MEMX Rule 21.16(a). 79 See MEMX Rule 21.16(e)(1). VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 a Custom Group Limit to track risk parameters across a customized group of orders, nor does Cboe BZX Options permit Users to choose to suspend, rather than cancel or reject, resting interest when a risk limit has been reached or to engage the Risk Monitor Mechanism for mass suspension as an alternative to mass cancellation.80 Cboe BZX Options rules do not presently contain a similar version of MEMX Option’s proposed ‘‘active’’ Risk Monitor Mechanism functionality. As described above, in the ‘‘active’’ version, the System will increment the active risk counter associated with a defined parameter when the relevant activity occurs, and the System will decrement the active risk counter upon positive confirmation from the User via an electronic instruction that the User has acknowledged a change in the active risk counter. The User will be able to specify the value by which each parameter increments and decrements in the active risk counter. The proposed active risk counter will therefore enable a User to interact with the Risk Monitor Mechanism dynamically such that the User may actively acknowledge executions and decrement the counting program by a specified amount as such executions occur (or at any time), rather than waiting until a risk limit is reached or the User otherwise sends a specific instruction to the Exchange to completely reset the counting program. In the filing, the Exchange provides several examples to demonstrate how both the passive and active risk counters will operate.81 In addition to the Risk Monitor Mechanism functionality, the Exchange also will offer additional price protection mechanisms and risk controls that relate to certain standard or Exchange-established parameters based on order type and market conditions.82 For example, MEMX Options will offer Market Order NBBO Width Protection, a Limit Order Fat Finger Check, a Buy Order Put Check, Drill-Through Price Protection, Protection for Market Orders in No-Bid Series, and a Bulk Message Fat Finger Check, each of which are described in the rule.83 The Exchange explains that the additional price protection mechanisms and risk controls are substantially similar to those offered on Cboe BZX Options pursuant to Cboe BZX Rule 21.17, with slight 80 See Notice, supra note 3, at 28072. See also Amendment No. 1 at 35–36. 81 See Notice, supra note 3, at 28072. See also Amendment No. 1 at 37–39. 82 See MEMX Rule 21.17. 83 See MEMX Rule 21.17(a)–(f). PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 49899 modifications to align with the Exchange’s proposed market opening procedures and available order types and instructions on MEMX Options, except that the Exchange is proposing a simplified version of the drill-through price protection mechanism described in proposed Rule 21.17(d).84 Whereas the drill-through price protection mechanism offered on Cboe BZX Options pursuant to Cboe BZX Rule 21.17(d) executes an incoming order to a determined ‘‘Drill-Through Price’’ and then displays the remainder of the order on Cboe BZX Options at that price for a brief period of time, the Exchange is proposing to simply cancel the remainder of an incoming order after executing the order to the Drill-Through Price.85 One Second Exposure Period. Similar to other exchanges, MEMX Options will prohibit Options Members from executing, as principal, orders they represent as agent unless the agency order is first exposed on the Exchange for at least one second or the Options Member has been bidding or offering on MEMX Options at the execution price for at least one second prior to receiving the executable agency order.86 During this one second exposure period, other Options Members will be able to enter orders to trade against the exposed order. Options Order Protection and Locked/ Crossed Market Plan Rules The Exchange represents that it will participate in the Linkage Plan, and therefore will be required to comply with the obligations of participants under the Plan.87 The Plan applies price-protection provisions to the options markets that are similar to those applicable to equities under Regulation NMS. Similar to Regulation NMS, the Plan requires the Plan Participants to adopt rules reasonably designed to prevent trade-throughs while exempting ISOs from that prohibition. The Exchange explains that Chapter 27 (Options Order Protection and Locked and Crossed Markets Rules) is designed to conform to the requirements of the Plan, and the rules in that chapter are substantively identical to the rules of Cboe BZX Options.88 Rule 27.2 84 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 40. 85 See MEMX Rule 21.17(d). 86 See MEMX Rule 22.11. See also, e.g., MIAX Rule 520(b). 87 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 41. 88 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 42–43. See also MEMX Rules 27.1 (definitions), 27.2 (order protection), and 27.3 (locked and crossed markets). E:\FR\FM\12AUN1.SGM 12AUN1 49900 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices prohibits trade-throughs and exempts ISOs from that prohibition, and also contains additional exceptions to the trade-through prohibition that track the exceptions under Regulation NMS or accommodate the unique aspects of the options market. Rule 27.3 sets forth the general prohibition against locking/ crossing other eligible exchanges as well as certain enumerated exceptions that permit locked markets in limited circumstances.89 violations; 94 (iv) doing business with the public; 95 and (v) margin.96 Securities Traded on MEMX Options General Listing Standards. The listing standards for options traded on MEMX Options are set forth in Chapter 19 (Securities Traded on MEMX Options), and the listing standards for index options are described in Chapter 29 (Index Rules). The Exchange explains that these rules are substantively identical to those of Cboe BZX Options.90 The Exchange also represents that it will join the Options Listings Procedures Plan, will list and trade options already listed on other options exchanges, and will gradually phase-in trading of option classes upon initial launch, beginning with a selection of actively traded options. The Exchange states that, initially, it does not plan to develop new options products or listing standards.91 Regulation jspears on DSK121TN23PROD with NOTICES Conduct and Operational Rules for Options Members The Exchange proposes to adopt operational and member conducts rules for MEMX Options that are substantively identical to the rules of Cboe BZX Options regarding: (i) exercises and deliveries; 92 (ii) records, reports and audits; 93 (iii) minor rule 89 See MEMX Rule 27.3(b). Specifically, the exceptions to the general prohibition on locking and crossing occur when: (1) the locking or crossing quotation was displayed at a time when the Exchange was experiencing a failure, material delay, or malfunction of its systems or equipment; (2) the locking or crossing quotation was displayed at a time when there is a crossed market; or (3) the Options Member simultaneously routed an ISO to execute against the full displayed size of any locked or crossed Protected Bid or Protected Offer. 90 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 41–42. With respect to index options, the Exchange notes that it is not proposing to include references to any specific index options products or indices at this time and therefore has included a placeholder with the rule text ‘‘(Reserved.)’’ where such references would otherwise be. The Exchange represents that it would file a proposed rule change with the Commission with respect to such products if it decides to list and trade index options in the future. See id. 91 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 43. 92 See MEMX Rules, Chapter 23. See also Cboe BZX Rules, Chapter XXIII. 93 See MEMX Rules, Chapter 24. See also Cboe BZX Rules, Chapter XXIV. VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 National Market System Before commencing operations, MEMX Options will become a member of the Options Price Reporting Authority (‘‘OPRA’’), the Options Linkage Authority (‘‘OLA’’), the Options Regulatory Surveillance Authority (‘‘ORSA’’), and the Options Listing Procedures Plan (‘‘OLPP’’).97 The Exchange represents that it will leverage many of the structures it established to operate a national securities exchange for trading equities in compliance with Section 6 of the Act.98 Specifically, the Exchange represents that there will be three elements of that regulation: (i) the Exchange will join the existing options industry agreements pursuant to Section 17(d) of the Act prior to commencing operations; 99 (ii) the Exchange’s Regulatory Services Agreement with FINRA will be amended as necessary prior to MEMX Options commencing operations and will govern many aspects of the regulation and discipline of members that participate in options trading, just as it does for equities regulation; 100 and (iii) the Exchange will perform options listing regulation, as well as authorize Options Members to trade on MEMX Options, and conduct surveillance of options trading as it does today for equities.101 Consistent with the Exchange’s existing regulatory structure, the 94 See MEMX Rules, Chapter 25. See also Cboe BZX Rules, Chapter XXV. 95 See MEMX Rules, Chapter 26. See also Cboe BZX Rules, Chapter XXVI. 96 See MEMX Rules, Chapter 27. See also Cboe BZX Rules, Chapter XXVII. 97 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 42. 98 15 U.S.C. 78f. See Notice, supra note 3, at 28074. See also Amendment No. 1 at 44. 99 15 U.S.C. 78q(d). The Exchange also explains that it is party to a bilateral Rule 17d–2 with FINRA, which will require minor modifications to accommodate the proposed launch of MEMX Options. The Exchange represents that it will seek to have the Commission declare effective those amendments to the bilateral Rule 17d–2 agreement prior to commencing operations for MEMX Options. See also Amendment No. 1 at 46. 100 The Exchange represents that it has entered into a Regulatory Services Agreement with FINRA, pursuant to which FINRA personnel operate as agents for the Exchange in performing certain functions. As is the case with the Exchange’s equities market, the Exchange represents that it will supervise FINRA personnel acting as agent and continue to bear ultimate regulatory responsibility for the MEMX Options Exchange. See Notice, supra note 3, at 28074. See also Amendment No. 1 at 46– 47. 101 See Notice, supra note 3, at 28074. See also Amendment No. 1 at 44–45. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 Exchange’s Chief Regulatory Officer will have general supervision of the regulatory operations of MEMX Options, including responsibility for overseeing the surveillance, examination, and enforcement functions and for administering all regulatory services agreements applicable to MEMX Options.102 Similarly, the Exchange’s existing Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of Exchange’s regulatory and self-regulatory organization responsibilities, including those applicable to MEMX Options.103 The Exchange’s existing rules governing members will apply to Options Members and their associated persons. The Exchange’s existing rules provide that members, a term that includes Options Members, agree to be regulated by the Exchange as a condition of effecting securities transactions on the Exchange’s trading facilities.104 The Exchange’s rules also permit it to sanction members, including Options Members, for violations of its rules and governing documents and of the federal securities laws by, among other things, expelling or suspending members, limiting members’ activities, functions, or operations, fining or censuring members, or suspending or barring a person from being associated with a member.105 As it does with equities trading, the Exchange will perform automated surveillance of trading on MEMX Options for the purpose of maintaining a fair and orderly market at all times, and it will monitor MEMX Options to identify unusual trading patterns and determine whether particular trading activity requires further regulatory investigation.106 Additionally, the Exchange will oversee the process for determining and implementing trade halts, identifying and responding to unusual market conditions, and administering the Exchange’s process for identifying and remediating ‘‘obvious errors’’ by and among its Options Members.107 The Exchange explains that Chapter 20 102 See Notice, supra note 3, at 28074. See also Amendment No. 1 at 47. 103 See Notice, supra note 3, at 28074. See also Amendment No. 1 at 47. 104 See MEMX Rule 2.2. See also Second Amended and Restated Limited Liability Company Agreement of MEMX LLC (May 19, 2020), Section 17.2 (providing the Exchange with disciplinary jurisdiction over its members). 105 See MEMX Rule 2.2. 106 See Notice, supra note 3, at 28074. See also Amendment No. 1 at 47. 107 See Notice, supra note 3, at 28074. See also Amendment No. 1 at 47–48. E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices (Regulation of Trading on MEMX Options) regarding halts, unusual market conditions, extraordinary market volatility, obvious errors, audit trail, and rules regarding prohibited and permissible transfers of options positions off the Exchange are substantively identical to the rules of Cboe BZX Options.108 Minor Rule Violation Plan The Commission approved the Exchange’s Minor Rule Violation Plan (‘‘MRVP’’) in 2020.109 The Exchange’s MRVP specifies those uncontested minor rule violations with sanctions not exceeding $2,500 that would not be subject to the provisions of Rule 19d– 1(c)(1) under the Act 110 requiring that an SRO promptly file notice with the Commission of any final disciplinary action taken with respect to any person or organization.111 The Exchange’s MRVP includes the policies and procedures included in Rule 8.15 (Imposition of Fines for Minor Violation(s) of Rules) and in Rule 8.15, Interpretation and Policy .01. In connection with MEMX Options, the Exchange is amending its MRVP and Exchange Rule 8.15, Interpretation and Policy .01, to include Rule 25.3 (Penalty for Minor Rule Violations). Rule 25.3 contains provisions addressing the following: (i) position limit and exercise limit violations; (ii) violations regarding the failure to accurately report position and account information; (iii) Market Maker quoting obligations; (iv) violations regarding expiring exercise declarations; (v) violations relating to the failure to respond to the Exchange’s requests for the submission of trade data; and (vi) violations relating to noncompliance with the Consolidated Audit Trail Compliance Rule requirements. The Exchange further states that the rules included in proposed Rule 25.3 are the same as the 108 See also Amendment No. 1 at 47–48. Securities Exchange Act Release No. 89836 (September 11, 2020), 85 FR 58081 (September 17, 2020) (Order Declaring Effective a Minor Rule Violation Plan) (‘‘MRVP Order’’). 110 17 CFR 240.19d–1(c)(1). 111 The Commission adopted amendments to paragraph (c) of Rule 19d–1 to allow SROs to submit for Commission approval plans for the abbreviated reporting of minor disciplinary infractions. See Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any disciplinary action taken by an SRO against any person for violation of a rule of the SRO which has been designated as a minor rule violation pursuant to such a plan filed with and declared effective by the Commission will not be considered ‘‘final’’ for purposes of Section 19(d)(1) of the Act if the sanction imposed consists of a fine not exceeding $2,500 and the sanctioned person has not sought an adjudication, including a hearing, or otherwise exhausted his administrative remedies. jspears on DSK121TN23PROD with NOTICES 109 See VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 rules included in the MRVPs of other options exchanges.112 The Exchange represents that, upon implementation, it will include the enumerated options trading rule violations in the Exchange’s standard quarterly report of actions taken on minor rule violations under the MRVP.113 The Exchange asserts that its amended MRVP is consistent with Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in part, that an exchange have the capacity to enforce compliance with, and provide appropriate discipline for, violations of the rules of the Commission and of the exchange.114 In addition, the Exchange states that it will provide a fair procedure for the disciplining of members and associated persons, consistent with Section 6(b)(7) of the Act,115 because amended Rule 8.15 will offer procedural rights to a person sanctioned for a violation listed in Rule 25.3.116 The Exchange represents that it will continue to conduct surveillance with due diligence and make a determination based on its finding, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate for a violation under the MRVP or whether a violation requires a formal disciplinary action.117 Amendments to Existing Exchange Rules In addition to the new rules for MEMX Options, the Exchange also proposes to amend certain of its existing rules in order to reflect the Exchange’s proposed operation of MEMX Options. First, the Exchange is amending paragraph (d) of Interpretations and Policies .01 to Rule 2.5 (Restrictions), which generally requires each member to register at least two Principals with the Exchange subject to certain exceptions described therein, to provide that such paragraph (d) shall not apply to a member that solely conducts business on the Exchange as an Options Member, however, Options Members 112 See Notice, supra note 3, at 28075. See also Amendment No. 1 at 49. 113 See Notice, supra note 3, at 28075. See also Amendment No. 1 at 49–50. The Exchange states that the quarterly report currently includes: the Exchange’s internal file number for the case, the name of the individual and/or organization, the nature of the violation, the specific rule provision violated, the fine imposed, the number of times the rule violation has occurred, and the date of disposition. See id. 114 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6). See also Notice, supra note 3, at 28075. See also Amendment No. 1 at 49–50. 115 15 U.S.C. 78f(b)(7). 116 See Notice, supra note 3, at 28075. See also Amendment No. 1 at 50. 117 See Notice, supra note 3, at 28075. See also Amendment No. 1 at 50. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 49901 must comply with the registration requirements set forth in proposed Rule 17.2(g).118 In connection with this change, the Exchange also is amending paragraph (i) of Interpretations and Policies .01 to Rule 2.5 to include Options Principal as a registration category and to set forth the Exchange’s qualification requirements for an Options Principal, which the Exchange states are the same as those for an Options Principal on Cboe BZX Options.119 The Exchange also is deleting the word ‘‘equities’’ in the first sentence of Rule 2.7 (Revocation of Membership or Association with a Member), which currently provides that members or associated persons of members may effect approved equities securities transactions on the Exchange’s trading facilities only so long as they possess all the qualifications set forth in the Exchange Rules. The Exchange proposes to modify Rule 2.11(a)(6), which states that MEMX Execution Services shall maintain an error account for the purpose of addressing positions that are the result of an execution or executions that are not clearly erroneous under Rule 11.15 and result from a technical or systems issue at MEMX Execution Services, the Exchange, a routing destination, or a non-affiliate third-party routing broker that affects one or more orders (‘‘Error Positions’’). The proposed change to Rule 2.11(a)(6) adds a reference to the comparable provision in Rule 20.6 that governs review and resolution of options transactions that may qualify as obvious errors. III. Discussion and Commission Findings After careful review, the Commission finds that the Exchange’s proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.120 In particular, the Commission finds that the proposed rule change is consistent with, among others, Sections 6(b)(1),121 6(b)(5),122 118 The Exchange notes that proposed MEMX Rule 17.2(g), which provides that every Options Member shall have at least one Options Principal and sets forth the Exchange’s Options Principal registration requirements, is identical to Cboe BZX Rule 17.2(g). See Notice, supra note 3, at 28075. See also Amendment No. 1 at 53. 119 See Notice, supra note 3, at 28075. See also Amendment No. 1 at 53. 120 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 121 15 U.S.C. 78f(b)(1). 122 15 U.S.C. 78f(b)(5). E:\FR\FM\12AUN1.SGM 12AUN1 49902 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices jspears on DSK121TN23PROD with NOTICES and 6(b)(8) 123 of the Act. Section 6(b)(1) of the Act requires that an exchange be so organized and have the capacity to be able to carry out the purposes of the Act and to comply and enforce compliance by its members and persons associated with its members with the provisions of the Act, the rules and regulations thereunder, and the rules of the Exchange. Section 6(b)(5) of the Act requires that the rules of a national securities exchange be designed, among other things, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act requires that the rules of a national securities exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. As detailed above, MEMX Options’ proposed rules are substantially similar to those of other exchanges, especially Cboe BZX, though the Exchange is not proposing to adopt certain optional features offered by other exchanges so that its trading platform at launch will, as the Exchange described it, have ‘‘a simplified suite of conventional order types and functionality that is designed to provide for an efficient, robust, and transparent order matching process.’’ 124 While some of these features may be available on other option exchanges, such as price improvement auctions, directed market makers, facilitation mechanisms, and price-sliding mechanisms, those features are optional and supplementary to the core exchange matching engine functionality, and they are not necessary for the Commission to find that the rules governing MEMX Options are consistent with the Act. Exchange Members As described above, only Options Members, and their Sponsored Participants,125 will be permitted to transact on the System. The Exchange also proposes to adopt rules governing member operations and member conduct, all of which are substantively identical to the rules of other exchanges, including Cboe BZX. Those rules include recordkeeping and reporting 123 15 U.S.C. 78f(b)(8). Notice, supra note 3, at 28064. See also Amendment No. 1 at 4. 125 See MEMX Rule 1.5(dd) (defining ‘‘Sponsored Participant’’ to mean ‘‘a person which has entered into a sponsorship arrangement with a Sponsoring Member pursuant to Rule 11.3’’). 124 See VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 requirements,126 discipline,127 margin requirements,128 and requirements applicable to doing business with the public.129 The Commission finds that the rules applicable to qualification, registration, member operations, and use of MEMX Options, which are substantially similar to those of other options exchanges, are consistent with the Act, including Sections 6(b)(1), (2), and (6) thereof, in that they provide the Exchange with the capacity to regulate access to and conduct on MEMX Options and enforce the federal securities laws among persons using its facilities, provide that registered broker-dealers can become members and have access to MEMX Options, and ensure that Options Members and their associated persons can be appropriately disciplined for violations of the Act, the rules and regulations thereunder, and Exchange rules. With respect to Market Maker members, the Commission finds that the proposed Market Maker qualification requirements, which also are substantially similar to those of other options exchanges, are consistent with the Act. The Commission further finds that the Options Market Maker participation requirements are consistent with the Act. Market makers receive certain benefits for carrying out their responsibilities. For example, a broker-dealer or other lender may extend ‘‘good faith’’ credit to a member of a national securities exchange or registered broker-dealer to finance its activities as a market maker or specialist.130 In addition, market makers are exempted from the prohibition in Section 11(a) of the Act.131 The Commission believes that a market maker must have sufficient affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify this favorable treatment. The Commission believes that the MEMX Options Market Maker participation requirements are consistent with the Act and are substantially similar to the participation requirements of other options exchanges 126 See MEMX Chapter 24 (Records, Reports and Audits). 127 See MEMX Chapter 25 (Discipline and Summary Suspensions). 128 See MEMX Chapter 28 (Margin Requirements). 129 See MEMX Chapter 26 (Doing Business with the Public). 130 See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 240.15c3–1(a)(6) (capital requirements for market makers). 131 15 U.S.C. 78k(a)(1). PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 that the Commission has previously approved. MEMX Options Market Structure and Trading Operations The functionalities and features of MEMX Options’ market structure and trading system are based on functionalities and features currently used and previously approved for other options exchanges. Among other things, the rules are reasonably designed to provide for a simple, orderly opening process for an exchange that only trades multiply listed options, as well as an orderly re-opening process following the conclusion of a trading halt. Further, the rules provide for the electronic display and execution of orders in traditional price/time priority. MEMX Options will utilize only two order types (limit orders and market orders) and offer a limited suite of order handling instructions, all of which are wellestablished in both the equities and options markets. These proposed execution priority rules and order types are consistent with the Act, in particular Section 6(b)(5) of the Act, in that, among other things, they are designed to promote just and equitable principles of trade and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. MEMX also is requiring a one-second exposure period in order to execute as principal orders represented as agent, which is the same standard required by other exchanges. This exposure requirement should facilitate the prompt execution of orders while continuing to provide members with an opportunity to compete for exposed bids and offers. MEMX listing standards for options traded on MEMX Options are substantively identical to those currently utilized by other exchanges. MEMX will join the Options Listings Procedures Plan and will list and trade options already listed on other options exchanges. The Commission finds that the Exchange’s proposed listing standards are consistent with the Act, including Section 6(b)(5), in that they are designed to protect investors and the public interest and promote just and equitable principles of trade. As explained below, MEMX’s operation of MEMX Options is conditioned on MEMX joining and participating in the OLPP. The Exchange has represented that it will join the OLPP and will become an exchange member of OCC. Further, MEMX proposes operational rules that are substantively identical to the rules of other options exchanges, such as Cboe BZX, including rules E:\FR\FM\12AUN1.SGM 12AUN1 jspears on DSK121TN23PROD with NOTICES Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices applicable to exercise and deliveries.132 Those rules adopt the standard requirements applicable to exercise notices and applicable cut-off times for submission of exercise-related notices, the assignment of exercise notices, and delivery and payment requirements. The Commission finds that these rules are consistent with the Act, including Section 6(b)(5), in that they promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest. And, as described above, in those cases where MEMX Options’ proposed rules vary from current functionality on other options exchanges, many of those variations are because MEMX proposes a more streamlined system and is not proposing to introduce those optional features. As such, the Commission finds that the proposed functionalities and features of MEMX Options’ overall structure and trading operations are consistent with the Act, and in particular, with Section 6(b)(5) of the Act, which requires an exchange’s rules, among other things, be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest, and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Member as routable will be routed by MEMX in compliance with applicable trade-through restrictions, and any order entered with a price that would lock or cross a Protected Quotation that is not eligible for either routing or the price adjust process in Rule 21.1(i) will be cancelled. The Commission finds these order protection rules to be consistent with the Act. Further, in light of the protections discussed above that apply to the optional use of outbound routing services offered through MEMX Execution Services, which currently apply to the Exchange’s equities trading facility, as well as the back-up optional routing services through an unaffiliated routing broker, the Commission finds the routing rules to be consistent with the Act. Before commencing operations, MEMX represents that it will become a participant in the Linkage Plan.134 To meet their regulatory responsibilities under the Linkage Plan, including the requirement to avoid trading through better-priced protected quotations available on other markets, other options exchanges that are Linkage Plan participants must have sufficient notice of new protected quotations, as well as all necessary information (such as final technical specifications). Therefore, the Commission believes that it would be a reasonable policy and procedure under the Linkage Plan for industry participants to begin treating MEMX Options’ best bid and best offer as a protected quotation within the later of 60 days after the date of this order or such date as MEMX Options begins operation. Options Order Protection, Locked/ Crossed Market Plan, and Outbound Routing The MEMX Options rules are designed to comply with applicable federal securities laws and regulations and the obligations of the Linkage Plan. Specifically, the rules are designed to ensure that an order is not executed at a price that would trade through another options exchange. In this regard, the Commission notes that MEMX Options is required under Rule 608(c) of Regulation NMS 133 to comply with and enforce compliance by its members with the Linkage Plan, including the requirement to avoid trading through better prices available on other markets. Any order designated by an Options As discussed above, MEMX Options will offer Users an optional mechanism to establish certain risk control parameters and limits. The ‘‘passive’’ functionality is substantially similar to that offered on Cboe BZX Options, except that MEMX Options will permit Users to track risk parameters across a customized group of orders and will permit Users to choose to suspend, rather than cancel or reject, resting interest when a risk limit has been reached.135 The proposed ‘‘active’’ functionality is novel, as Cboe BZX Options rules do presently offer similar functionality. As described above, in the ‘‘active’’ version, a User can effectively interact with the Risk Monitor 132 See MEMX Chapter 23 (Exercises and Deliveries). 133 See 17 CFR 242.608(c). VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 Risk Monitoring and Protection 134 See Notice, supra note 3, at 28073. See also Amendment No. 1 at 41. 135 See Notice, supra note 3, at 28072. See also Amendment No. 1 at 34–36. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 49903 Mechanism to decrement the counting program as executions occur. In addition to the Risk Monitor Mechanism, the Exchange will offer additional price protection mechanisms and risk controls. These controls are substantially similar to those offered on Cboe BZX, with slight modifications to align with the Exchange’s proposed streamlined market opening procedures and fewer available order types and instructions on MEMX Options. Also, whereas the drill-through price protection mechanism offered on Cboe BZX executes an incoming order to a determined ‘‘Drill-Through Price’’ and then displays the remainder of the order on Cboe BZX Options at that price for a brief period of time, the Exchange proposes to cancel the remainder of an incoming order after executing the order. The Commission believes that the proposed risk protections for MEMX Options are reasonably designed to provide liquidity providers with protections to help them manage risk and efficiently use capital when trading options. These protections are in addition to, and do not take the place of, members’ required market access controls, vigilant oversight of trading and algorithms, and overall risk management. For example, these mechanisms are intended to provide market makers and other liquidity providers with optional supplemental tools as an additional layer of protection to assist them in managing risk and utilizing available capital in leveraged options securities. To the extent they achieve that intended objective, liquidity providers should be able to provide additional liquidity to the market at potentially improved prices, thus benefitting investors. While most of these protections are substantively similar to those available on other options markets, some of the differences discussed above are designed to offer market participants additional flexibility when using the Risk Monitor Mechanism in a manner consistent with the functionality and scope of protections that the Risk Monitor Mechanism provides. Accordingly, the Commission finds that the proposed risk controls for MEMX Options are consistent with the Act in that they are designed to, among other things, promote just and equitable principles of trade and protect investors and the public interest. Participation in Multiparty Options— Related Plans The Exchange represents that it will become a participant in the various applicable multiparty plans for options E:\FR\FM\12AUN1.SGM 12AUN1 49904 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices trading. Specifically, the Exchange represents that MEMX Options will become a member of OPRA, OLA, ORSA, and OLPP before commencing operations. Doing so will integrate MEMX Options into the national market system for standardized listed options. jspears on DSK121TN23PROD with NOTICES Regulation The Exchange represents that it will leverage the structures it currently maintains to operate and oversee its equities trading facility, which involve the following three elements: (i) the Exchange will join the existing options industry agreements pursuant to Section 17(d) of the Act,136 as it did with respect to equities; (ii) the Exchange’s Regulatory Services Agreement with FINRA will be amended to govern many aspects of the regulation and discipline of Options Members, just as it does for equities; 137 and (iii) the Exchange will perform options listing regulation, as well as authorize Options Members to trade on MEMX Options, and conduct surveillance of options trading as it does today for equities. Furthermore, MEMX proposes to amend its Minor Rule Violation Plan to encompass MEMX Options in a manner that is substantially similar to and consistent with the analogous rules and plans on other options exchanges. Also, as explained above, consistent with the Exchange’s existing regulatory structure, the Exchange’s Chief Regulatory Officer will have general supervision of the regulatory operations of MEMX Options, including responsibility for overseeing the surveillance, examination, and enforcement functions and for 136 See 15 U.S.C. 78q(d) and 17 CFR 240.17d–2. There are three 17d–2 plans that apply to options: the Options-Related Sales Practice Plan (File No. S7–966), the Options-Related Market Surveillance Plan (File No. 4–551), and the Regulation NMS Plan (File No. 4–566). MEMX already is a member of the Regulation NMS Plan. 137 Importantly, the Commission notes that unless relieved by the Commission of its responsibility pursuant to Rule 17d–2, the Exchange bears the responsibility for its self-regulatory obligations and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on the Exchange’s behalf. See Section 17(d)(1) of the Act and Rule 17d–2 thereunder (15 U.S.C. 78q(d)(1) and 17 CFR 240.17d–2). In performing these functions as agent for MEMX, however, FINRA may nonetheless bear liability for causing or aiding and abetting the failure of the Exchange to perform its regulatory functions. Accordingly, although FINRA will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for the Exchange relating to the operation of MEMX Options, FINRA also may have secondary liability if, for example, the Commission finds the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by the Exchange. See, e.g., Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131) (‘‘Nasdaq Exchange Registration Order’’). VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 administering all regulatory services agreements applicable to MEMX Options. Similarly, the Exchange’s existing Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of Exchange’s regulatory and self-regulatory organization responsibilities, including those applicable to MEMX Options. As it does with equities, the Exchange will perform automated surveillance of trading on MEMX Options for the purpose of maintaining a fair and orderly market at all times. As it does with its equities trading facility, the Exchange will monitor MEMX Options to identify unusual trading patterns and determine whether particular trading activity requires further regulatory investigation by FINRA. In addition, the Exchange will oversee the process for determining and implementing trade halts, identifying and responding to unusual market conditions, and administering the Exchange’s process for identifying and remediating ‘‘obvious errors’’ by and among its Options Members. The proposed rules in Chapter 20 (Regulation of Trading on MEMX Options) regarding halts, unusual market conditions, extraordinary market volatility, obvious errors, and audit trail are substantively identical to the rules of Cboe BZX Options. Based on the foregoing, the Commission finds that the Exchange’s proposed rules and regulatory structure with respect to MEMX Options are consistent with the requirements of the Act, in particular with Section 6(b)(1) of the Act, which requires an exchange to be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the Act and the rules and regulations thereunder, and the rules of the Exchange, and with Sections 6(b)(6) and 6(b)(7) of the Act, which require an Exchange to provide fair procedures for the disciplining of members and persons associated with members. The Commission further believes that it is consistent with the Act to allow the Exchange to contract with FINRA to perform functions relating to the regulation and discipline of members and the regulation of MEMX Options.138 138 See, e.g., Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998). See also, e.g., Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR–Amex–2004–32) (approving rule that allowed Amex to contract with another SRO for regulatory services). PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 These functions are fundamental elements to a regulatory program and constitute core self-regulatory functions. The Commission believes that FINRA has the expertise and experience to perform these functions on behalf of the Exchange.139 The Commission finds that the amended MRVP is consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act, which require, in part, that an exchange have the capacity to enforce compliance with, and provide appropriate discipline for, violations of the rules of the Exchange and the federal securities laws. As existing MEMX Rule 8.15 will continue to offer procedural rights to a person sanctioned for a violation listed in proposed MEMX Options Rule 25.3, the Commission believes that the Exchange’s rules provide a fair procedure for the disciplining of members and associated persons, consistent with Section 6(b)(7) of the Act.140 The Commission also finds that the MRVP changes are consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act, as required by Rule 19d–1(c)(2) under the Act,141 because they should strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as an SRO in cases where full disciplinary proceedings are unsuitable in view of the minor nature of the particular violation. In approving the proposed change to the Exchange’s MRVP, the Commission in no way minimizes the importance of compliance with the Exchange’s rules and all other rules subject to the imposition of fines under the Exchange’s MRVP. The Commission believes that the violation of any SRO rules, as well as the federal securities laws, is a serious matter. However, the Exchange’s MRVP provides a reasonable means of addressing rule violations that do not rise to the level of requiring formal disciplinary proceedings, while providing flexibility in handling certain violations. The Commission expects that the Exchange will continue to conduct surveillance with due diligence and make a determination based on its findings, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate for a violation under the Exchange’s MRVP or whether a violation requires a formal disciplinary action. 139 The Commission notes that the RSA is not before the Commission and, therefore, the Commission is not acting on it. 140 15 U.S.C. 78f(b)(7). 141 17 CFR 240.19d–1(c)(2). E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices Section 11(a) of the Act Act 142 Section 11(a)(1) of the prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ‘‘covered accounts’’) unless an exception applies. Rule 11a2– 2(T) under the Act,143 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2– 2(T)’s conditions, a member: (i) must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 144 (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. In a letter to the Commission, the Exchange requests that the Commission concur with the Exchange’s conclusion that Options Members that enter orders into the System satisfy the requirements of Rule 11a2–2(T).145 For the reasons set forth below, the Commission believes that Options Members entering orders into the System could satisfy the requirements of Rule 11a2–2(T). The Rule’s first requirement is that orders for covered accounts be transmitted from off the exchange floor. In the context of automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.146 MEMX has 142 15 U.S.C. 78k(a)(1). CFR 240.11a2–2(T). 144 This prohibition also applies to associated persons. The member may, however, participate in clearing and settling the transaction. 145 See Letter from Anders Franzon, General Counsel, MEMX, to Vanessa Countryman, Secretary, Commission, dated August 8, 2022 (‘‘MEMX 11(a) Letter’’). 146 See, e.g., Securities Exchange Act Release Nos. 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019) (registration of Long-Term Stock Exchange); 75760 (August 7, 2015) 80 FR 48600 (August 13, 2015) jspears on DSK121TN23PROD with NOTICES 143 17 VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 represented that MEMX Options does not have a physical trading floor, and the MEMX Options trading system will receive orders from members electronically through remote terminals or computer-to-computer interfaces.147 The Commission believes that the MEMX Options trading system satisfies this off-floor transmission requirement. Second, the Rule requires that the member and any associated person not participate in the execution of its order after the order has been transmitted. MEMX represented that at no time following the submission of an order is an Options Member or an associated person of the Options Member able to acquire control or influence over the result or timing of the order’s execution.148 According to the Exchange, the execution of a member’s order is determined solely by what quotes and orders are present in the System at the time the member submits the order, and the order priority based on the MEMX Options rules.149 Accordingly, the Commission believes that an Options Member and its (SR–EDGX–2015–18); 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (SR–BATS–2009–031) (approving BATS options trading); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48) (approving equity securities listing and trading on BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR– NASDAQ–2007–004 and SR–NASDAQ–2007–080) (approving NOM options trading); 53128 (January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No. 10–131) (granting the exchange registration of Nasdaq Stock Market, Inc.); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR–PCX– 00–25) (approving Archipelago Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR– NYSE–90–52 and SR–NYSE–90–53) (approving NYSE’s Off-Hours Trading Facility); and 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (‘‘1979 Release’’). 147 See MEMX 11(a) Letter, supra note 145, at 5– 6. 148 See MEMX 11(a) Letter, supra note 145, at 6– 7. MEMX notes that a member may cancel or modify the order, or modify the instructions for executing the order, after the order has been transmitted, provided that such cancellations or modifications are transmitted from off an exchange floor. See id. at 6. The Commission has stated that the non-participation requirement is satisfied under such circumstances so long as such modifications or cancellations are also transmitted from off the floor. See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (‘‘1978 Release’’) (stating that the ‘‘nonparticipation requirement does not prevent initiating members from canceling or modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 149 See MEMX 11(a) Letter, supra note 145, at 2. The Commission notes that MEMX proposes rules for the registration, obligations, and operation of market makers on MEMX Options. MEMX has represented that market makers, if any, will submit quotes in the form of orders in their assigned symbols. See id. at n. 4. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 49905 associated persons do not participate in the execution of an order submitted to the MEMX Options System.150 Third, Rule 11a2–2(T) requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that this requirement is satisfied when automated exchange facilities, such as the MEMX Options trading system are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange.151 The Exchange has represented that the design of the MEMX Options trading system ensures that no Options Member has any special or unique trading advantages in the handling of its orders after transmitting its orders to the Exchange.152 Based on the Exchange’s representation, the Commission believes that the MEMX Options trading system satisfies this requirement. Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T) thereunder.153 MEMX 150 See, e.g., Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498, 49505 (August 21, 2008) (File No. 10–182) (order granting the registration of BATS Exchange) (‘‘Bats Order’’) and 61698 (March 12, 2010), 75 FR 13151, 13164 (March 18, 2010) (File Nos. 10–194 and 10–196) (order approving DirectEdge exchanges) (‘‘DirectEdge Order’’). 151 See, e.g., Bats Order, supra note 150, at 49505 and DirectEdge Order, supra note 150, at 13164. In considering the operation of automated execution systems operated by an exchange, the Commission noted that, while there is not an independent executing exchange member, the execution of an order is automatic once it has been transmitted into the system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See 1979 Release, supra note 146. 152 See MEMX 11(a) Letter, supra note 145, at 7. 153 See Bats Order, supra note 150, at 49505 and DirectEdge Order, supra note 150, at 13164. In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated persons thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the E:\FR\FM\12AUN1.SGM Continued 12AUN1 49906 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices Options Members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule’s exemption.154 jspears on DSK121TN23PROD with NOTICES IV. Exemption From Section 19(b) of the Act With Regard to Cboe, NYSE, and FINRA Rules Incorporated by Reference The Exchange proposes to incorporate by reference as MEMX Options Rules certain rules of Cboe Exchange (‘‘Cboe’’), the New York Stock Exchange (‘‘NYSE’’), and FINRA.155 Thus, for certain MEMX Options rules, Exchange members will comply with a MEMX Options rule by complying with the Cboe, NYSE, or FINRA rule referenced. In connection with its proposal to incorporate Cboe, NYSE, and FINRA rules by reference, the Exchange requests, pursuant to Rule 240.0–12 under the Act,156 an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to those MEMX Options rules that are effected solely by virtue of a change to a cross-referenced Cboe, NYSE, or FINRA rule.157 The Exchange proposes to incorporate by reference categories of rules (rather than individual rules within a category) that are not trading rules. The Exchange agrees to provide written notice to Options Member prior to the launch of MEMX Options of the specific Cboe, NYSE, and FINRA rules that it is incorporating by reference.158 In account a statement setting forth the total amount of compensation retained by the member or any associated person thereof in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 148 (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). 154 See MEMX 11(a) Letter, supra note 145, at 3. The Exchange represented that it will advise its membership through the issuance of a Regulatory Circular that those members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule’s exemption. See id. 155 Specifically, MEMX Rule 26.16 proposes to incorporate by reference the applicable rules of FINRA with respect to Communications with Public Customers; MEMX Rule 28.3 proposes to incorporate by reference initial and maintenance margin requirements of either Cboe or NYSE; MEMX Rule 29.5 proposes to incorporate by reference the applicable rules of Cboe with respect to position limits for broad based index options; and MEMX Rule 29.7 proposes to incorporate by reference the applicable rules of Cboe with respect to position limits for narrow-based and micronarrow based index options traded on MEMX Options and also on Cboe. 156 17 CFR 240.0–12. 157 See Amendment No. 1 at 51–53. 158 See Amendment No. 1 at 52. VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 addition, the Exchange will notify Options Members whenever Cboe, NYSE, or FINRA proposes a change to a cross-referenced Cboe, NYSE, or FINRA rule.159 Using its authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act.160 Each such exempt SRO agreed to be governed by the incorporated rules, as amended from time to time, but is not required to file a separate proposed rule change with the Commission each time the SRO whose rules are incorporated by reference seeks to modify its rules. In addition, each SRO incorporated by reference only regulatory rules (e.g., margin, suitability, arbitration), not trading rules, and incorporated by reference whole categories of rules (i.e., did not ‘‘cherry-pick’’ certain individual rules within a category). Each exempt SRO had procedures in place to provide written notice to its members each time a change is proposed to the incorporated rules of another SRO in order to provide its members with notice of a proposed rule change that affects their interests, so that they would have an opportunity to comment on it. The Commission is granting the Exchange’s request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that the Exchange proposes to incorporate by reference into MEMX Options Rules. The Commission believes that this exemption is appropriate in the public interest and consistent with the protection of investors because it will promote more efficient use of Commission and SRO resources by avoiding duplicative rule 159 The Exchange represents that it will provide such notice through a posting on the same website location where the Exchange will post its own rule filings pursuant to Rule 19b–4(l) under Act, within the time frame required by that rule. The website posting will include a link to the location on the Cboe, NYSE, or FINRA website where the proposed rule change is posted. See id. at n. 38. 160 See Securities Exchange Act Release No. 49260 (February 17, 2004), 69 FR 8500 (February 24, 2004) (granting application for exemptions pursuant to Section 36(a) under the Act by the American Stock Exchange LLC, the International Securities Exchange, Inc., the Municipal Securities Rulemaking Board, the Pacific Exchange, Inc., the Philadelphia Stock Exchange, Inc., and the Boston Stock Exchange, Inc.). See also, e.g., Securities Exchange Act Release Nos.); 75760 (August 7, 2015) 80 FR 48600 (August 13, 2015) (SR–EDGX–2015– 18) (approving the operations of EDGX Options Exchange, which included exemptive relief pursuant to Section 36(a) under the Act); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (order approving SR–NASDAQ–2007–004 and SR– NASDAQ–2007–080, which included exemptive relief pursuant to Section 36(a) under the Act) and 53128 (January 13, 2006). PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 filings based on simultaneous changes to identical rule text sought by more than one SRO. Consequently, the Commission grants the Exchange’s exemption request for MEMX Options. This exemption is conditioned upon the Exchange providing written notice to Options Members whenever Cboe, NYSE, or FINRA proposes to change a rule that MEMX Options has incorporated by reference. V. Solicitation of Comments on Amendment No. 1 Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MEMX–2022–10 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–MEMX–2022–10. 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 this filing will also 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 E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 / Notices comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MEMX–2022–10 and should be submitted on or before September 2, 2022. jspears on DSK121TN23PROD with NOTICES VI. Accelerated Approval of Proposed Rule Change The Commission finds good cause to approve the proposed rule change prior to the 30th day after the date of publication of Amendment No. 1 in the Federal Register. Amendment No.1 does not include any material changes to the proposed rules for MEMX Options or the descriptions of those rules in the original filing. In Amendment No. 1, the Exchange, among other items, provides additional detail about how some of the proposed MEMX Options rules will function, revises other existing MEMX rules to reference and accommodate MEMX Options, provides representations about how MEMX will inform Users about certain parameters or variables set forth in the MEMX Options Rules, requests exemptive relief under Section 36 of the Act from Section 19 of the Act for rules incorporated by reference, and makes other minor technical changes to the filing. The Commission finds that Amendment No.1 raises no novel regulatory issues and is reasonably designed to perfect the mechanism of a free and open market and the national market system, protect investors and the public interest, and not be unfairly discriminatory, or impose an unnecessary or inappropriate burden on competition. The Amendment makes minor and non-material clarifying and conforming changes and makes additional representations that each provide more clarity on the application of the MEMX Options rules and the commencement of operation of MEMX Options. Accordingly, pursuant to Section 19(b)(2) of the Act,161 the Commission finds good cause to approve the proposed rule change on an accelerated basis. VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,162 that the proposed rule change (SR–MEMX– 2022–10), as modified by Amendment No. 1, be, and it hereby is, approved on an accelerated basis. Although the Commission’s approval of the proposed rule change is final, and the proposed rules are therefore 161 15 U.S.C. 78s(b)(2). 162 Id. VerDate Sep<11>2014 17:38 Aug 11, 2022 Jkt 256001 effective, it is further ordered that the operation of MEMX Options is conditioned on the satisfaction of the requirements below: A. Participation in Plans Relating to Options Trading. MEMX must join: (i) the OPRA Plan; (ii) the OLPP; (iii) the Linkage Plan; and (iv) the Plan of the Options Regulatory Surveillance Authority. B. RSA and Rule 17d–2 Agreements. MEMX must ensure that all necessary changes are made to its Regulatory Services Agreement and bilateral Rule 17d–2 agreement with FINRA, and it must be a party to the multiparty Rule 17d–2 agreements concerning optionsrelated sales practice matters and options-related market surveillance. C. Participation in the Options Clearing Corporation. MEMX must join the Options Clearing Corporation. D. Participation in the Intermarket Surveillance Group. MEMX must be a member of the Intermarket Surveillance Group. It is further ordered, pursuant to Section 36 of the Act,163 that MEMX shall be exempted from the rule filing requirements of Section 19(b) of the Act 164 with respect to the Cboe, FINRA, and NYSE rules that MEMX proposes to incorporate by reference in MEMX Rules 26.16, 28.3, 29.5, and 29.7, subject to the conditions specified in this Order. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.165 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2022–17320 Filed 8–11–22; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–95444; File No. SR– CboeBYX–2022–018] Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule August 8, 2022. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 1, 2022 Cboe BYX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BYX’’) filed with the 163 See 15 U.S.C. 78mm. U.S.C. 78s(b). 165 17 CFR 200.30–3(a)(12) and 17 CFR 200.30– 3(a)(76). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 164 15 PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 49907 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 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 Cboe BYX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BYX’’) proposes to amend its fee schedule. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/byx/), at the Exchange’s Office of the Secretary, 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 The Exchange proposes to amend its Fee Schedule by (i) introducing a NonDisplayed Add Volume Tier under Footnote 1 (Add/Remove Volume Tiers) and (ii) amending the criteria of the Step-Up Tier under Footnote 2. The Exchange proposes to implement these changes effective August 1, 2022. The Exchange first notes that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues if they deem fee levels at a particular venue to be excessive or incentives to be insufficient. More specifically, the Exchange is only one of 16 registered equities exchanges, as well as a number of alternative trading systems and other off-exchange venues that do not have similar self-regulatory responsibilities under the Securities E:\FR\FM\12AUN1.SGM 12AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 155 (Friday, August 12, 2022)]
[Notices]
[Pages 49894-49907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17320]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95445; File No. SR-MEMX-2022-10]


Self-Regulatory Organizations; MEMX LLC; Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1, To Adopt Rules To Govern 
the Trading of Options on the Exchange for a New Facility Called MEMX 
Options

August 8, 2022.

I. Introduction

    On April 21, 2022, MEMX LLC (``MEMX'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt rules 
to establish a facility to trade options, which will be named MEMX 
Options. The proposed rule change was published for comment in the 
Federal Register on May 10, 2022.\3\ In its filing, MEMX consented to 
an extension of time for Commission action to ninety (90) days after 
the date of publication of the proposal.\4\ On August 8, 2022, the 
Exchange filed Amendment No. 1 to the proposed rule change.\5\ This 
order approves the proposed rule change, as modified by Amendment No. 
1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 94847 (May 4, 2022), 
87 FR 28064 (``Notice''). The Commission received one comment letter 
on the proposed rule change. See Letter from Andrew Robinson, dated 
May 5, 2022, available at https://www.sec.gov/comments/sr-memx-2022-10/srmemx202210-289458.htm. The comments expressed by the commenter 
are not relevant to the proposed rule change.
    \4\ See Item 6 of MEMX's Rule 19b-4 filing. See also Notice, 
supra note 3, at 28076, n.37.
    \5\ Amendment No. 1 superseded and replaced the original filing. 
In Amendment No. 1, the Exchange proposes non-material revisions to 
the proposed rule text and added additional detail to the filing. 
See infra Section VI. When it submitted Amendment No. 1, the 
Exchange also submitted it as a comment letter to the filing, 
available at: https://www.sec.gov/comments/sr-memx-2022-10/srmemx202210.htm.

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[[Page 49895]]

II. Description of the Proposed Rule Change

    The Exchange proposes to adopt new Chapters 16-29 into its rulebook 
to govern MEMX Options. In addition, the Exchange proposes to add rule 
text to existing Chapters 2 (Members of the Exchange) and 8 
(Discipline) so that those chapters take into account the new options 
rule set. MEMX Options will operate an electronic trading system for 
options (the ``System'') that will provide for the electronic display 
and execution of orders, which the Exchange intends to operate ``in a 
manner similar to that of other options exchanges.'' \6\ As such, the 
proposed rules for MEMX Options are, for the most part, substantially 
similar to those of currently operating options exchanges, in 
particular Cboe BZX Exchange, Inc. (``Cboe BZX'' or ``Cboe BZX 
Options'').
---------------------------------------------------------------------------

    \6\ See Notice, supra note 3, at 28064. See also Amendment No. 1 
at 4.
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MEMX Options Members

    The proposed rules relating to qualification and participation on 
MEMX Options are set forth in proposed Chapters 17 and 22. These rules 
are substantively identical to the corresponding rules of Cboe BZX 
Options, with the only differences being internal references and other 
minor technical differences.\7\ A detailed summary of the provisions 
set forth in Chapters 17 and 22 is provided in the filing.\8\
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    \7\ See Cboe BZX Rules, Chapters XVII and XXII.
    \8\ See Notice, supra note 3, at 28065. See also Amendment No. 1 
at 5-8.
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    MEMX will have only one type of member, referred to as an ``Options 
Member,'' which must be a registered broker-dealer.\9\ Only Options 
Members and their Sponsored Participants will be permitted to transact 
on the System.\10\ An Options Member must maintain membership in 
another registered options exchange that is not registered solely under 
Section 6(g) of the Act,\11\ or in the Financial Industry Regulatory 
Authority (``FINRA'').\12\ Every Options Member will be required to 
have at least one registered and licensed Options Principal that has 
responsibility for the overall oversight of the Options Member's 
options related activities on the Exchange.\13\
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    \9\ See MEMX Rule 2.3.
    \10\ See MEMX Rule 17.1(a). Options Members can provide 
sponsored access to MEMX Options to a non-Member (i.e., a Sponsored 
Participant) pursuant to MEMX Rule 11.3, subject the conditions of 
that rule. MEMX Options will assign a unique Executing Firm ID 
(``EFID'') to identify a single User and a specific number. See MEMX 
Rule 21.1(j). A User may obtain one or more EFIDs from the Exchange.
    \11\ 15 U.S.C. 78f(g).
    \12\ See MEMX Rule 17.2(f).
    \13\ See MEMX Rule 17.2(g).
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    An Options Member that represents customer orders as an agent on 
MEMX Options and those that conduct proprietary trading as principal 
other than in the capacity of a market maker are referred to as Options 
Order Entry Firms (``OEFs''). OEFs may only transact business with 
Public Customers if they are members of FINRA.\14\
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    \14\ See id. See also MEMX Rule 16.1 (defining ``Public 
Customer'' to means a person that is not a broker or dealer in 
securities). In addition, an OEF may only transact business with 
Public Customers if such Options Member also is an options member of 
another registered national securities exchange or association with 
which the Exchange has entered into an agreement under Rule 17d-2 
under the Act pursuant to which such other exchange or association 
is the designated options examining authority for the OEF. See MEMX 
Rule 26.1.
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    In addition, an Options Member can seek to register with the 
Exchange as an Options Market Maker to make markets in specific classes 
of options it chooses in advance (``appointed classes'') where it would 
have certain rights and bear certain responsibilities beyond those of 
other Options Members.\15\ In particular, Options Market Makers commit 
to electronically engage in a course of dealings to enhance liquidity 
available on MEMX Options and to assist in the maintenance of fair and 
orderly markets.\16\ Among other things, an Options Market Maker must, 
at a minimum for its appointed classes subject to the provisions of 
MEMX's rules, maintain a continuous two-sided quotation for 60% of time 
those classes are open for trading, excluding any adjusted series, any 
intraday add-on series on the day during which such series are added 
for trading, any Quarterly Option Series, and any series with an 
expiration of greater than 270 days.\17\ In their appointed classes, 
Options Market makers must also: (i) engage to a reasonable degree 
under the existing circumstances, in dealings for its own accounts when 
there exists, or it is reasonably anticipated that there will exist, a 
lack of price continuity, a temporary disparity between the supply of 
(or demand for) a particular option contract, or a temporary distortion 
of the price relationships between option contracts of the same class; 
(ii) compete with other market makers, (iii) maintain firm quotes; (iv) 
update their quotes in response to changed market conditions; and (v) 
maintain active markets.\18\ Substantial or continued failure by an 
Options Market Maker to meet any of its obligations and duties would 
subject the Options Market Maker to disciplinary action or suspension 
or revocation of registration as an Options Market Maker or its 
appointment in one or more appointed classes.\19\
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    \15\ See MEMX Rule 22.2. Market Makers are designated as 
specialists on MEMX Options for all purposes under the Act. See id.
    \16\ See MEMX Rule 22.5. MEMX's rules will not, at this time, 
limit the number of Market Makers that can register to make markets 
on MEMX Options or limit the number of class appointments a Market 
Maker can hold. MEMX Rule 22.2(c) allows the Exchange to file a 
proposed rule change to propose certain limitations based on system 
constraints, capacity restrictions, or other factors relevant to 
protecting the integrity of the System. In the absence of an 
effective rule, the Exchange cannot restrict access in any options 
class.
    \17\ See MEMX Rule 22.6.
    \18\ See MEMX Rule 22.5(a).
    \19\ See MEMX Rule 22.5(c).
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    Furthermore, existing Exchange Rules applicable to the MEMX 
equities market contained in Chapters 1 through 15 of the Exchange 
Rules will apply to Options Members unless a specific Exchange Rule 
applicable to MEMX Options (i.e., proposed Chapters 16 through 29 of 
the Exchange Rules) governs.\20\
---------------------------------------------------------------------------

    \20\ See MEMX Rule 16.2(b).
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Definitions

    Chapter 16.1 sets forth the defined terms used in Chapters 16 to 29 
relating to the trading of options contracts on the Exchange. Each of 
the terms defined in Rule 16.1 is either identical or substantially 
similar to definitions in Cboe BZX Rule 16.1. A complete list of the 
defined terms is set forth in the filing.\21\
---------------------------------------------------------------------------

    \21\ See Notice, supra note 3, at 28065-67. See also Amendment 
No. 1 at 8-18.
---------------------------------------------------------------------------

Options Trading System

    The Exchange states that MEMX Options will leverage the Exchange's 
current technology, including its customer connectivity, messaging 
protocols, quotation and execution engine, order router, data feeds, 
and network infrastructure.\22\ According to the Exchange, MEMX Options 
will closely resemble the Exchange's equities market, as well as other 
options markets, such as Cboe BZX Options.\23\
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    \22\ See Notice, supra note 3, at 28067. See also Amendment No. 
1 at 16. According to the Exchange, this will minimize the technical 
effort required for existing Exchange members to begin trading 
options on MEMX Options. See id.
    \23\ See id.
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    MEMX Options will not have a physical trading floor. All trading 
interest entered into the System will be automatically executable. 
Orders entered into the System will be displayed anonymously.\24\
---------------------------------------------------------------------------

    \24\ However, aggregated and individual transaction reports 
produced by the System will indicate the details of a User's 
transactions, including the contra party's executing firm ID 
(``EFID''), capacity, and clearing firm account number. The Exchange 
also will reveal a User's identity: (i) when a registered clearing 
agency ceases to act for a participant, or the User's clearing firm, 
and the registered clearing agency determines not to guarantee the 
settlement of the User's trades; and (ii) for regulatory purposes or 
to comply with an order of an arbitrator or court. See MEMX Rule 
21.10.

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[[Page 49896]]

    Like the Exchange's equities facility, MEMX Options will maintain a 
price/time allocation model across all participants rather than 
differentiating between participants. As such, MEMX Options will 
execute all trading interest at the best price level within the System 
before executing trading interest at the next best price.\25\ At each 
price level, trading interest will be executed in time sequence, such 
that the order established as the first entered into the System at such 
price level will have priority up to its specific number of 
contracts.\26\ MEMX has not proposed any additional priority overlays. 
In addition, MEMX Options has not proposed to have non-displayed 
orders, and thus all interest will be displayable.
---------------------------------------------------------------------------

    \25\ See MEMX Rule 21.8(a).
    \26\ See id.
---------------------------------------------------------------------------

    MEMX will be a member of the Options Price Reporting Authority 
(``OPRA'') and will disseminate its quotations in accordance with Rule 
602 of Regulation NMS.\27\ MEMX Options also will offer proprietary 
data feeds including ``MEMOIR Options Depth'' (depth of book 
quotations/orders and execution information), ``MEMIR Options Top'' 
(top of book quotations/orders and execution information), ``DROP'' 
(regarding the trading activity of the User), and Historical Data.\28\
---------------------------------------------------------------------------

    \27\ See 17 CFR 242.602.
    \28\ See MEMX Rule 21.15(b).
---------------------------------------------------------------------------

    The Exchange will become an exchange member of the Options Clearing 
Corporation (``OCC''). The System will be linked to OCC for the 
Exchange to transmit locked-in trades for clearance and settlement.
    Hours of Operation. MEMX Options will accept orders from 9:30 a.m. 
until 4:00 p.m. Eastern Time, except that it will accept orders until 
4:15 p.m. for option contracts on Fund Shares, exchange-traded notes, 
and broad-based indexes.\29\
---------------------------------------------------------------------------

    \29\ See MEMX Rule 21.2(a).
---------------------------------------------------------------------------

    Minimum Quotation and Trading Increments. The Exchange's minimum 
quotation and trading increments will be the same as on other 
exchanges, including Cboe BZX Options.\30\ Specifically, the Exchange 
will have the following standard quotation increments: (i) if the 
options series is trading at less than $3.00, five (5) cents; (ii) if 
the options series is trading at $3.00 or higher, ten (10) cents; and 
(iii) if the options series is trading pursuant to the Penny Interval 
Program, one (1) cent if the options series is trading at less than 
$3.00, or five (5) cents if the options series is trading at $3.00 or 
higher, unless for QQQ, SPY, or IWM where the minimum quoting increment 
will be one (1) cent for all series.\31\ In addition, the minimum 
trading increment will be one (1) cent for all series.\32\
---------------------------------------------------------------------------

    \30\ See Cboe BZX Rule 21.5(a) and (b).
    \31\ See MEMX Rule 21.5(a).
    \32\ See MEMX Rule 21.5(b).
---------------------------------------------------------------------------

    Penny Interval Program. The Exchange's Penny Interval Program is 
substantially similar to the penny programs of other exchanges, which 
includes minimum quoting requirements for option classes listed under 
the Penny Interval Program. However, eligibility for inclusion in the 
Penny Interval Program will be limited to those classes already 
operating under penny programs of other options exchanges at the time 
MEMX Options is launched.\33\ The list of option classes included in 
the Penny Interval Program will be announced by the Exchange via 
circular distributed to Options Members and published by the Exchange 
on its website.\34\
---------------------------------------------------------------------------

    \33\ See MEMX Rule 21.5(d)(1).
    \34\ See MEMX Rule 21.5(d).
---------------------------------------------------------------------------

    Order Types and Handling Instructions. MEMX Options will make 
available to Users two Order Types: Limit Orders \35\ and Market 
Orders.\36\ MEMX Options also may make available to Users a few 
additional instructions that can be designated on an order (``Handling 
Instructions'').\37\ Those Handling Instructions include Book Only,\38\ 
Post Only,\39\ and Intermarket Sweep Order (``ISO'').\40\ The 
characteristics and functionality of each Order Type and Handling 
Instruction is substantially similar to what is used for the Exchange's 
equities trading facility or on other options exchanges, including Cboe 
BZX Options, except where discussed in the amended filing or as relates 
to the display-price sliding process offered by Cboe BZX Options, which 
the Exchange is not proposing to adopt.\41\ Cboe BZX Options offers 
additional order types, such as reserve orders, minimum quantity 
orders, price-improving orders, stop orders, and stop limit orders, 
none of which the Exchange proposes to adopt.\42\
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    \35\ Limit Orders are orders (including bulk messages) to buy or 
sell an option at a specified price or better. A Limit Order is 
marketable when, for a Limit Order to buy, at the time it is entered 
into the System the order is priced at the current inside offer or 
higher, or for a Limit Order to sell, at the time it is entered into 
the System the order is priced at the current inside bid or lower. 
See MEMX Rule 21.1(d)(1).
    \36\ Market Orders are orders to buy or sell at the best price 
available at the time of execution. Market Orders to buy or sell an 
option traded on MEMX Options will be rejected if they are received 
when the underlying security is subject to a ``Limit State'' or 
``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the 
Act (the ``Limit Up-Limit Down Plan''). Bulk messages may not be 
Market Orders. See MEMX Rule 21.1(d)(2).
    \37\ See MEMX Rule 21.1(e). A Handling Instruction applied to a 
bulk message applies to each bid and offer within that bulk message. 
See id.
    \38\ See MEMX Rule 21.1(e)(1). Book Only is an instruction that 
an order is to be ranked and executed on the Exchange or cancelled, 
as appropriate, without routing away to another options exchange. 
See id. Users may designate bulk messages as Book Only as set forth 
in MEMX Rule 21.1(l). See id.
    \39\ See MEMX Rule 21.1(e)(2). Post Only is an instruction that 
an order is to be ranked and executed on the Exchange or cancelled, 
as appropriate, without routing away to another options exchange 
except that the order will not remove liquidity from the MEMX 
Options Book. A Market Order cannot be designated as Post Only. See 
id. Users may designate bulk messages as Post Only as set forth in 
MEMX Rule 21.1(l). See id.
    \40\ See MEMX Rule 21.1(e)(3). ISO orders, defined in MEMX Rule 
27.1(a)(10), may be executed at one or multiple price levels in the 
System without regard to Protected Quotations at other options 
exchanges (i.e., may trade through such quotations) because the User 
represents that it simultaneously has routed additional orders to 
execute against the full displayed size of any Protected Bid/Offer 
(as applicable). See id. The Exchange will rely on the marking of an 
order as an ISO order when handling such order. See id. ISOs are not 
eligible for routing pursuant to MEMX Rule 21.9. See id. Users may 
not designate a Market Order as an ISO. See id. Users may not 
designate bulk messages as ISOs. See id.
    \41\ The Exchange explains that, in contrast to Cboe BZX 
Options, it proposes characterizing Book Only, Post Only, and ISO as 
Handling Instructions rather than Order Types, as each of these 
instructions represents an additional modifier that can be appended 
to an order rather than a unique Order Type. See Notice, supra note 
3, at 28069. See also Amendment No. 1 at 23. Not all Handling 
Instructions can be applied to all Order Types (e.g., Market Orders 
cannot be designated ISO). See MEMX Rule 21.1(e)(3). The Exchange 
does not believe that this characterization changes anything with 
respect to the proposed operation of these order types and Handling 
Instructions. See Notice, supra note 3, at 28069. See also Amendment 
No. 1 at 23-24.
    \42\ See Notice, supra note 3, at 28069. See also Amendment No. 
1 at 24.
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    Time-in-Force Designations. Users entering orders into the System 
may designate such orders to remain in force and available for display 
and/or potential execution for varying periods of time.\43\ Unless 
cancelled earlier, once these time periods expire, the order (or the 
unexecuted portion thereof) is returned to the entering party. The 
Time-in-Force designations available on

[[Page 49897]]

MEMX Options include Immediate or Cancel (``IOC'') \44\ or Day.\45\
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    \43\ A Time-in-Force applied to a bulk message applies to each 
bid and offer within that bulk message. See MEMX Rule 21.1(g).
    \44\ See MEMX Rule 21.1(g)(1). IOC orders are to be executed in 
whole or in part as soon as such order is received. See id. The 
portion not so executed immediately on the Exchange or another 
options exchange is cancelled and is not posted to the MEMX Options 
Book. See id. IOC orders that are not designated as Book Only and 
that cannot be executed in accordance with MEMX Rule 21.8 on the 
System when reaching the Exchange will be eligible for routing away 
pursuant to proposed MEMX Rule 21.9. See id. Users may designate 
bulk messages as IOC. See id.
    \45\ See MEMX Rule 21.1(g)(2). Day orders, if not executed, 
expire at market close. Users may designate bulk messages as Day. 
See id.
---------------------------------------------------------------------------

    The Time-in-Force designations are identical to the same Time-in-
Force designations available on Cboe BZX Options, except that Cboe BZX 
Options rules describe Time-in-Force designations as applicable only to 
limit orders on Cboe BZX Options, whereas the Exchange has proposed 
allowing such designations to be placed on both Limit Orders and Market 
Orders.\46\
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    \46\ The Exchange notes that Cboe BZX Options offers additional 
Times-in-Force, such as good til cancelled, fill-or-kill, at the 
open, limit-on-close, and market-on-close, none of which the 
Exchange proposes to adopt. See Notice, supra note 3, at 28069. See 
also Amendment No. 1 at 25.
---------------------------------------------------------------------------

    Member Match Trade Prevention Modifiers. As with its equities 
market, the Exchange will allow Users to use certain Match Trade 
Prevention (``MTP'') modifiers.\47\ Any incoming order designated with 
an MTP modifier will be prevented from executing against a resting 
opposite side order also designated with an MTP modifier and 
originating from the same EFID, Exchange Member identifier, trading 
group identifier, or Exchange Sponsored Participant identifier. The 
Exchange will offer the following MTP modifiers: (i) MTP Cancel Newest; 
(ii) MTP Cancel Oldest; and (iii) MTP Cancel Both.\48\ The Exchange 
explains that each of the proposed MTP modifiers available on MEMX 
Options is identical to the same MTP modifier available on Cboe BZX 
Options.\49\
---------------------------------------------------------------------------

    \47\ See MEMX Rule 21.1(h).
    \48\ See MEMX Rule 21.1(h)(1)-(3).
    \49\ See Notice, supra note 3, at 28069. See also Amendment No. 
1 at 25. The Exchange notes that Cboe BZX Options offers additional 
MTP modifiers, such as MTP Decrement and Cancel and MTP Cancel 
Smallest, neither of which the Exchange proposes to adopt. See id.
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    Re-Pricing Mechanism. MEMX Options will offer a re-pricing 
mechanism (``Price Adjust'') to comply with the order protection and 
trade through restrictions of the Linkage Options Order Protection and 
Locked/Crossed Market Plan (``Linkage Plan''). This re-pricing 
mechanism is identical to the Price Adjust mechanism offered by Cboe 
BZX Options, with the exception of the handling of an order with a Post 
Only instruction subject to the Price Adjust process.\50\ The Exchange 
explains that Cboe BZX Options applies the Price Adjust process when a 
Post Only Order locks or crosses a Protected Quotation displayed on 
Cboe BZX Options and re-prices such Post Only Order pursuant to Cboe 
BZX Rule 21.1(i)(4), but MEMX is not proposing to adopt this clause. 
Rather, the System will cancel a Post Only Order that locks or crosses 
a Protected Quotation displayed on MEMX Options. If a User elects to 
not subject an order (including bulk messages) to the Price Adjust 
process, it can use a ``Cancel Back'' instruction.\51\ The System will 
cancel or reject an order with a Cancel Back instruction if displaying 
it on the Book would create a violation of Rule 27.3 (Locked and 
Crossed Markets), or if the order cannot otherwise be executed or 
displayed in the Book at its limit price.\52\
---------------------------------------------------------------------------

    \50\ See MEMX Rule 21.1(i). See also Cboe BZX Rule 21.1(i).
    \51\ See MEMX Rule 21.1(m).
    \52\ See id.
---------------------------------------------------------------------------

    Ports and Bulk Messages. MEMX Options will offer ``physical ports'' 
that provide a physical connection to the System and ``logical ports'' 
(or ``application sessions'') that provide Users with the ability 
within the System to accomplish a specific function through a 
connection, such as order entry, data receipt, or access to 
information.\53\
---------------------------------------------------------------------------

    \53\ A User is able to designate which of its EFIDs may be used 
for each of its ports. See MEMX Rule 21.1(j)(3). If a User submits 
an order or quote through a port with an EFID not enabled for that 
port, the System cancels or rejects the order or quote. See id.
---------------------------------------------------------------------------

    MEMX Options will offer ``bulk message'' functionality whereby 
Market Makers will be able to use a single electronic message to enter, 
modify, or cancel up to a specified number of bids and offers.\54\ Bulk 
messages are subject to the following conditions: (i) bulk messages 
must contain a Time-in-Force of Day or IOC; (ii) a Market Maker with an 
appointment in a class must designate a bulk message for that class as 
Post Only or Book Only, and a non-appointed Market Maker must designate 
a bulk message for that class as Post Only; (iii) the System cancels or 
rejects a Post Only bulk message bid (offer) with a price that locks or 
crosses the Exchange best offer (bid) or ABO (ABB); \55\ and (iv) the 
System executes a Book Only bulk message bid (offer) that locks or 
crosses the ABO (ABB) against offers (bids) resting in the Book at 
prices the same as or better than the ABO (ABB) and then cancels the 
unexecuted portion of that bid (offer).\56\
---------------------------------------------------------------------------

    \54\ Cboe BZX Options offers specific ports used for bulk 
messages whereas the Exchange is not proposing to offer bulk ports. 
See Notice, supra note 3, at 28070. See also Amendment No. 1 at 27.
    \55\ The term ``ABBO'' means the best bid(s) or offer(s) 
disseminated by other Eligible Exchanges (as defined in MEMX Rule 
27.1) and calculated by the Exchange based on market information the 
Exchange receives. See MEMX Rule 16.1.
    \56\ See MEMX Rule 21.1(l)(1)-(4).
---------------------------------------------------------------------------

    Market Opening Procedures. The Exchange is not proposing to have an 
opening cross or opening auction. Rather, for stock options, the System 
simply will open a class of options following the first regular hours 
(i.e., after 9:30 a.m. Eastern Time) transaction in the underlying 
security as reported on the first print disseminated pursuant to an 
effective national market system plan.\57\ In the event of a delay, the 
Exchange can determine in the interests of a fair and orderly market to 
open trading in the class.\58\ With respect to index options, the 
System will open a class for trading after a period following the first 
post-9:30 a.m. (Eastern Time) disseminated index value for the 
applicable index.\59\ Because the Exchange does not propose to adopt an 
opening cross or similar opening process, the opening trade that occurs 
on the Exchange will be a trade in the ordinary course of dealings on 
the Exchange. Accordingly, the System will ensure that the opening 
trade in an options series will not trade through a Protected Quotation 
at another options exchange, consistent with the general standard 
regarding trade throughs in MEMX Rule 21.6(e).\60\
---------------------------------------------------------------------------

    \57\ See MEMX Rule 21.7(a). The proposed market opening 
procedures for stock options are identical to the market opening 
procedures for such options that were initially adopted by Cboe BZX 
Options. See Securities Exchange Act Release No. 61419 (January 26, 
2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Establish Rules Governing the Trading of Options on the BATS Options 
Exchange).
    \58\ See MEMX Rule 21.7(b).
    \59\ See MEMX Rule 21.7(a). The proposed opening procedures for 
index options are similar to Cboe BZX Options (Cboe BZX Rule 
21.7(d)(2)), with a difference in that once the Cboe BZX Options 
system observes that an index value has been disseminated for the 
applicable index, Cboe BZX Options then commences an opening 
rotation (i.e., an opening process to match liquidity at a price 
determined by the Cboe BZX Options system) while the Exchange is not 
proposing to adopt an opening rotation.
    \60\ See Notice, supra note 3, at 28070. See also Amendment No. 
1 at 29.
---------------------------------------------------------------------------

    Additionally, the Exchange may delay the commencement of trading in 
any class of options in the interests of a fair and orderly market.\61\ 
Orders received

[[Page 49898]]

prior to the opening of the System will be cancelled.\62\
---------------------------------------------------------------------------

    \61\ See MEMX Rule 21.7(c).
    \62\ See MEMX Rule 21.6(c).
---------------------------------------------------------------------------

    In the filing, the Exchange explains that it proposes a simplified 
opening procedures because for a successful opening process to 
function, MEMX believes an exchange needs a critical mass of liquidity 
from market participants in order to price and execute opening 
transactions.\63\ In turn, as a new options exchange, MEMX Options does 
not know the amount of pre-opening interest it will have, and it will 
have to gain market share in order to accumulate such interest.\64\
---------------------------------------------------------------------------

    \63\ See Notice, supra note 3, at 28070. See also Amendment No. 
1 at 30.
    \64\ See Notice, supra note 3, at 28070. See also Amendment No. 
1 at 30. The Exchange states that it will re-evaluate its opening 
procedures over time and may propose to add an opening process 
through a proposed rule filing submitted to the Commission in the 
future. See id.
---------------------------------------------------------------------------

    Routing. Users may designate orders as eligible for routing to 
another options exchange during regular trading hours when trading 
interest on MEMX Options is not available.\65\ An order that is 
designated as routable will be routed to other options exchanges to be 
executed at the National Best Bid and Offer (``NBBO'') when MEMX 
Options is not at the NBBO consistent with the Linkage Plan. Orders 
routed to other options exchanges do not retain time priority with 
respect to orders in the System, and the System will continue to 
execute orders while routed orders are away.\66\ If a routed order is 
returned to MEMX Options, in whole or in part, that order (or its 
remainder) will receive a new time stamp reflecting the time of its 
return to the System.\67\ Users whose orders are routed away will be 
obligated to honor trades executed on other options exchanges.\68\
---------------------------------------------------------------------------

    \65\ Bulk messages are not eligible for routing. See MEMX Rule 
21.9(a). Alternatively, a User may designate an order as not 
eligible for routing.
    \66\ See MEMX Rule 21.9(b).
    \67\ See id.
    \68\ See MEMX Rule 21.9(c).
---------------------------------------------------------------------------

    Subject to the exceptions contained in Rule 27.2(b), the System 
will ensure that an order will not be executed at a price that trades 
through another options exchange. Any order entered with a price that 
would lock or cross a Protected Quotation that is not eligible for 
either routing or the price adjust process as defined in Rule 21.1(i) 
will be cancelled.
    The Exchange explains that the routing functionality for MEMX 
Options is designed to operate much like the routing functionality for 
the Exchange's equities market, in that the Exchange ``offers a simple 
routing service to facilitate compliance with applicable regulations 
and does not currently offer other complex routing strategies.'' \69\
---------------------------------------------------------------------------

    \69\ See Notice, supra note 3, at 28071. See also Amendment No. 
1 at 31. The Exchange notes that the proposed rules relating to the 
routing of orders on MEMX Options to away options markets are 
similar to the rules of Cboe BZX Options, except that the Exchange 
proposes to cancel any unexecuted portion of a Market Order after 
the System has routed to and received response from an away options 
market, whereas Cboe BZX Options offers additional handling 
instructions that may be chosen with respect to the unexecuted 
portion of an order after the System has routed to and received a 
response from an away options market, and Cboe BZX Options offers 
various additional routing options, such as routing to a specific 
destination or at specified price levels. See also Amendment No. 1 
at 31-32.
---------------------------------------------------------------------------

    The Exchange will use its existing affiliated routing broker-
dealer, MEMX Execution Services LLC (``MEMX Execution Services''), to 
route orders solely on behalf of MEMX Options.\70\ MEMX Options will 
maintain a ``System routing table'' to determine the specific options 
exchanges to which the System will route orders and the order in which 
it will route them.\71\ MEMX Execution Services is subject to 
regulation as a facility of the Exchange, including the requirement to 
file proposed rule changes under Section 19 of the Act.\72\
---------------------------------------------------------------------------

    \70\ See MEMX Rules 2.11 and 21.9. MEMX Options will also offer 
back-up routing services in conjunction with one or more routing 
brokers that are not affiliated with the Exchange in case it is not 
able to provide order routing services through its affiliated 
broker-dealer, subject to the certain conditions and limitations. 
See MEMX Rule 21.9(e). Among other things, the Exchange would 
control the routing logic and the routing broker would not have any 
discretion. See MEMX Rule 21.9(e)(5). In addition, the Exchange 
would enter into an agreement with each routing broker that would, 
among other things, restrict the use of any confidential and 
proprietary information that the routing broker receives. See MEMX 
Rule 21.9(e)(1). The Exchange also must have procedures and internal 
controls reasonably designed to adequately restrict the flow of 
confidential and proprietary information between the Exchange and 
the routing broker, and any other entity, including any affiliate of 
the routing broker, and, if the routing broker or any of its 
affiliates engages in any other business activities other than 
providing routing services to the Exchange. See MEMX Rule 
21.9(e)(2). The Exchange may not use a routing broker for which the 
Exchange or any affiliate of the Exchange is the designated 
examining authority. See MEMX Rule 21.9(e)(3).
    \71\ See MEMX Rule 21.9(a)(3).
    \72\ See 15 U.S.C. 78s. MEMX Execution Services is required to 
be a member of a self-regulatory organization unaffiliated with the 
Exchange that is its designated examining authority, and the 
Exchange is required to establish and maintain procedures and 
internal controls reasonably designed to restrict the flow of 
confidential and proprietary information between MEMX and its 
facilities. See MEMX Rule 2.11(a)(2) and (5). In addition, the 
books, records, premises, officers, directors, agents, and employees 
of MEMX Execution Services, as a facility of the Exchange, are 
deemed to be those of the Exchange for purposes of and subject to 
oversight pursuant to the Act. See MEMX Rule 2.11(b). Further, the 
Exchange must provide its routing services in compliance with the 
provisions of the Act and the rules thereunder, including, but not 
limited to, the requirements in Section 6(b)(4) and (5) of the Act 
that the rules of a national securities exchange provide for the 
equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons using its 
facilities, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. See MEMX Rule 
21.9(e)(4).
---------------------------------------------------------------------------

    Use of routing services, including routing using MEMX Execution 
Services, is optional. Users that do not want to use routing services 
provided by the Exchange must designate orders as not available for 
routing.
    To mitigate the financial and regulatory risks associated with 
providing Users with access to away options exchanges, MEMX has 
implemented certain tests to comply with market access requirements 
under Rule 15c3-5.\73\ Pursuant those policies and procedures, if an 
order or series of orders are deemed to be erroneous or duplicative, 
would cause the entering User's credit exposure to exceed a preset 
credit threshold, or are non-compliant with applicable pre-trade 
regulatory requirements (as defined in Rule 15c3-5), MEMX Execution 
Services will reject such orders prior to routing and/or seek to cancel 
any orders that have been routed.
---------------------------------------------------------------------------

    \73\ 17 CFR 240.15c3-5. See also MEMX Rule 21.9(f). The Exchange 
states that MEMX Rule 21.9(f) is substantively identical to Cboe BZX 
Rule 21.9(f). See Notice, supra note 3, at 28071. See also Amendment 
No. 1 at 33.
---------------------------------------------------------------------------

    Risk Controls. Users of MEMX Options will have the ability to 
establish certain risk control parameters and limits that are intended 
to offer protection from entering orders outside of certain size and 
price parameters, as well as certain parameters based on order type and 
market conditions.\74\ The proposed risk controls are based, in part, 
on those of Cboe BZX Options, with certain additions and differences 
described below.
---------------------------------------------------------------------------

    \74\ See MEMX Rules 21.16 and 21.17.
---------------------------------------------------------------------------

    Rule 21.16 sets forth a Risk Monitor Mechanism that will offer 
Users a choice between a ``passive'' risk counter \75\ and an 
``active'' risk counter.\76\ Users may configure risk

[[Page 49899]]

limits for various parameters, including number of contracts executed 
(``volume''), notional value of executions (``notional''), number of 
executions (``count''), number of contracts executed as a percentage of 
number of contracts outstanding within an Exchange-designated time 
period or during the trading day (``percentage''), and the number of 
times the limits on any of the foregoing parameters are reached (``risk 
trips'').\77\ The System will track each of the parameters within an 
underlying for an EFID (``underlying limit''), across all underlyings 
for an EFID (``EFID limit''), across all underlyings for a group of 
EFIDs (``EFID Group limit''), and/or across a customized group of 
orders designated by the User (``Custom Group Limit''), over a User-
established time period (``interval'') and on an absolute basis for a 
trading day (``absolute limits'').\78\
---------------------------------------------------------------------------

    \75\ See MEMX Rule 21.16(a). In a ``passive'' risk counter, the 
Exchange counts a specific metric (e.g., number of contracts 
executed) over a specific time interval and takes a specific action 
based on a User-configured parameter. For example, once a User 
executes its pre-defined limit of 10,000 contracts, the User might 
have instructed the Exchange to cancel or reject pending and 
additional orders.
    \76\ See MEMX Rule 21.16(b). In an ``active'' risk counter, the 
User can manage its risk limits by acknowledging its activity during 
the day. For example, if a User set a pre-defined limit of 10,000 
contracts and then executes a series of trades exceeding 10,000 
contracts, but with each execution the user submits an electronic 
instruction to the System acknowledging the execution and 
decrementing the counting program by a specific amount, then the 
System would decrement that value from the ongoing tally it 
maintains. In other words, only non-acknowledged trades would cause 
the pre-defined limit to be reached.
    \77\ See MEMX Rule 21.16(a).
    \78\ See MEMX Rule 21.16(a).
---------------------------------------------------------------------------

    When the System determines that a specified parameter has reached 
the User's pre-defined risk limit and instructions, the Risk Monitor 
Mechanism will effectuate a User's pre-determined action from among the 
following options: (i) cancel or reject such User's orders or quotes in 
all series of the applicable underlying(s) and cancel or reject any 
additional orders or quotes from the User in the applicable 
underlying(s) until the counting program is reset; or (ii) suspend all 
of a User's resting orders or quotes in all series of the applicable 
underlying(s) and cancel or reject any additional orders or quotes from 
the User in the applicable underlying(s) until the Exchange is 
instructed to reinstate such bids and offers. A User may also engage 
the Risk Monitor Mechanism to cancel resting bids and offers, as well 
as subsequent orders as set forth in Rule 22.10 (``mass cancellation'') 
or to suspend all resting bids and offers until the Exchange is 
instructed to reinstate such bids and offers (``mass suspension''). 
When a User's resting orders or quotes have been suspended and the User 
instructs the Exchange to reinstate all such bids and offers, each 
reinstated order or quote shall receive a new timestamp reflecting the 
time it was re-posted to the MEMX Options Book.\79\
---------------------------------------------------------------------------

    \79\ See MEMX Rule 21.16(e)(1).
---------------------------------------------------------------------------

    The Risk Monitor Mechanism's ``passive'' functionality is 
substantially similar to that offered on Cboe BZX Options, except that 
Cboe BZX Options' rule does not permit Users to designate a Custom 
Group Limit to track risk parameters across a customized group of 
orders, nor does Cboe BZX Options permit Users to choose to suspend, 
rather than cancel or reject, resting interest when a risk limit has 
been reached or to engage the Risk Monitor Mechanism for mass 
suspension as an alternative to mass cancellation.\80\
---------------------------------------------------------------------------

    \80\ See Notice, supra note 3, at 28072. See also Amendment No. 
1 at 35-36.
---------------------------------------------------------------------------

    Cboe BZX Options rules do not presently contain a similar version 
of MEMX Option's proposed ``active'' Risk Monitor Mechanism 
functionality. As described above, in the ``active'' version, the 
System will increment the active risk counter associated with a defined 
parameter when the relevant activity occurs, and the System will 
decrement the active risk counter upon positive confirmation from the 
User via an electronic instruction that the User has acknowledged a 
change in the active risk counter. The User will be able to specify the 
value by which each parameter increments and decrements in the active 
risk counter. The proposed active risk counter will therefore enable a 
User to interact with the Risk Monitor Mechanism dynamically such that 
the User may actively acknowledge executions and decrement the counting 
program by a specified amount as such executions occur (or at any 
time), rather than waiting until a risk limit is reached or the User 
otherwise sends a specific instruction to the Exchange to completely 
reset the counting program. In the filing, the Exchange provides 
several examples to demonstrate how both the passive and active risk 
counters will operate.\81\
---------------------------------------------------------------------------

    \81\ See Notice, supra note 3, at 28072. See also Amendment No. 
1 at 37-39.
---------------------------------------------------------------------------

    In addition to the Risk Monitor Mechanism functionality, the 
Exchange also will offer additional price protection mechanisms and 
risk controls that relate to certain standard or Exchange-established 
parameters based on order type and market conditions.\82\ For example, 
MEMX Options will offer Market Order NBBO Width Protection, a Limit 
Order Fat Finger Check, a Buy Order Put Check, Drill-Through Price 
Protection, Protection for Market Orders in No-Bid Series, and a Bulk 
Message Fat Finger Check, each of which are described in the rule.\83\ 
The Exchange explains that the additional price protection mechanisms 
and risk controls are substantially similar to those offered on Cboe 
BZX Options pursuant to Cboe BZX Rule 21.17, with slight modifications 
to align with the Exchange's proposed market opening procedures and 
available order types and instructions on MEMX Options, except that the 
Exchange is proposing a simplified version of the drill-through price 
protection mechanism described in proposed Rule 21.17(d).\84\ Whereas 
the drill-through price protection mechanism offered on Cboe BZX 
Options pursuant to Cboe BZX Rule 21.17(d) executes an incoming order 
to a determined ``Drill-Through Price'' and then displays the remainder 
of the order on Cboe BZX Options at that price for a brief period of 
time, the Exchange is proposing to simply cancel the remainder of an 
incoming order after executing the order to the Drill-Through 
Price.\85\
---------------------------------------------------------------------------

    \82\ See MEMX Rule 21.17.
    \83\ See MEMX Rule 21.17(a)-(f).
    \84\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 40.
    \85\ See MEMX Rule 21.17(d).
---------------------------------------------------------------------------

    One Second Exposure Period. Similar to other exchanges, MEMX 
Options will prohibit Options Members from executing, as principal, 
orders they represent as agent unless the agency order is first exposed 
on the Exchange for at least one second or the Options Member has been 
bidding or offering on MEMX Options at the execution price for at least 
one second prior to receiving the executable agency order.\86\ During 
this one second exposure period, other Options Members will be able to 
enter orders to trade against the exposed order.
---------------------------------------------------------------------------

    \86\ See MEMX Rule 22.11. See also, e.g., MIAX Rule 520(b).
---------------------------------------------------------------------------

Options Order Protection and Locked/Crossed Market Plan Rules

    The Exchange represents that it will participate in the Linkage 
Plan, and therefore will be required to comply with the obligations of 
participants under the Plan.\87\ The Plan applies price-protection 
provisions to the options markets that are similar to those applicable 
to equities under Regulation NMS. Similar to Regulation NMS, the Plan 
requires the Plan Participants to adopt rules reasonably designed to 
prevent trade-throughs while exempting ISOs from that prohibition.
---------------------------------------------------------------------------

    \87\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 41.
---------------------------------------------------------------------------

    The Exchange explains that Chapter 27 (Options Order Protection and 
Locked and Crossed Markets Rules) is designed to conform to the 
requirements of the Plan, and the rules in that chapter are 
substantively identical to the rules of Cboe BZX Options.\88\ Rule 27.2

[[Page 49900]]

prohibits trade-throughs and exempts ISOs from that prohibition, and 
also contains additional exceptions to the trade-through prohibition 
that track the exceptions under Regulation NMS or accommodate the 
unique aspects of the options market. Rule 27.3 sets forth the general 
prohibition against locking/crossing other eligible exchanges as well 
as certain enumerated exceptions that permit locked markets in limited 
circumstances.\89\
---------------------------------------------------------------------------

    \88\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 42-43. See also MEMX Rules 27.1 (definitions), 27.2 (order 
protection), and 27.3 (locked and crossed markets).
    \89\ See MEMX Rule 27.3(b). Specifically, the exceptions to the 
general prohibition on locking and crossing occur when: (1) the 
locking or crossing quotation was displayed at a time when the 
Exchange was experiencing a failure, material delay, or malfunction 
of its systems or equipment; (2) the locking or crossing quotation 
was displayed at a time when there is a crossed market; or (3) the 
Options Member simultaneously routed an ISO to execute against the 
full displayed size of any locked or crossed Protected Bid or 
Protected Offer.
---------------------------------------------------------------------------

Securities Traded on MEMX Options

    General Listing Standards. The listing standards for options traded 
on MEMX Options are set forth in Chapter 19 (Securities Traded on MEMX 
Options), and the listing standards for index options are described in 
Chapter 29 (Index Rules). The Exchange explains that these rules are 
substantively identical to those of Cboe BZX Options.\90\ The Exchange 
also represents that it will join the Options Listings Procedures Plan, 
will list and trade options already listed on other options exchanges, 
and will gradually phase-in trading of option classes upon initial 
launch, beginning with a selection of actively traded options. The 
Exchange states that, initially, it does not plan to develop new 
options products or listing standards.\91\
---------------------------------------------------------------------------

    \90\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 41-42. With respect to index options, the Exchange notes that 
it is not proposing to include references to any specific index 
options products or indices at this time and therefore has included 
a placeholder with the rule text ``(Reserved.)'' where such 
references would otherwise be. The Exchange represents that it would 
file a proposed rule change with the Commission with respect to such 
products if it decides to list and trade index options in the 
future. See id.
    \91\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 43.
---------------------------------------------------------------------------

Conduct and Operational Rules for Options Members

    The Exchange proposes to adopt operational and member conducts 
rules for MEMX Options that are substantively identical to the rules of 
Cboe BZX Options regarding: (i) exercises and deliveries; \92\ (ii) 
records, reports and audits; \93\ (iii) minor rule violations; \94\ 
(iv) doing business with the public; \95\ and (v) margin.\96\
---------------------------------------------------------------------------

    \92\ See MEMX Rules, Chapter 23. See also Cboe BZX Rules, 
Chapter XXIII.
    \93\ See MEMX Rules, Chapter 24. See also Cboe BZX Rules, 
Chapter XXIV.
    \94\ See MEMX Rules, Chapter 25. See also Cboe BZX Rules, 
Chapter XXV.
    \95\ See MEMX Rules, Chapter 26. See also Cboe BZX Rules, 
Chapter XXVI.
    \96\ See MEMX Rules, Chapter 27. See also Cboe BZX Rules, 
Chapter XXVII.
---------------------------------------------------------------------------

National Market System

    Before commencing operations, MEMX Options will become a member of 
the Options Price Reporting Authority (``OPRA''), the Options Linkage 
Authority (``OLA''), the Options Regulatory Surveillance Authority 
(``ORSA''), and the Options Listing Procedures Plan (``OLPP'').\97\
---------------------------------------------------------------------------

    \97\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 42.
---------------------------------------------------------------------------

Regulation

    The Exchange represents that it will leverage many of the 
structures it established to operate a national securities exchange for 
trading equities in compliance with Section 6 of the Act.\98\ 
Specifically, the Exchange represents that there will be three elements 
of that regulation: (i) the Exchange will join the existing options 
industry agreements pursuant to Section 17(d) of the Act prior to 
commencing operations; \99\ (ii) the Exchange's Regulatory Services 
Agreement with FINRA will be amended as necessary prior to MEMX Options 
commencing operations and will govern many aspects of the regulation 
and discipline of members that participate in options trading, just as 
it does for equities regulation; \100\ and (iii) the Exchange will 
perform options listing regulation, as well as authorize Options 
Members to trade on MEMX Options, and conduct surveillance of options 
trading as it does today for equities.\101\
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78f. See Notice, supra note 3, at 28074. See also 
Amendment No. 1 at 44.
    \99\ 15 U.S.C. 78q(d). The Exchange also explains that it is 
party to a bilateral Rule 17d-2 with FINRA, which will require minor 
modifications to accommodate the proposed launch of MEMX Options. 
The Exchange represents that it will seek to have the Commission 
declare effective those amendments to the bilateral Rule 17d-2 
agreement prior to commencing operations for MEMX Options. See also 
Amendment No. 1 at 46.
    \100\ The Exchange represents that it has entered into a 
Regulatory Services Agreement with FINRA, pursuant to which FINRA 
personnel operate as agents for the Exchange in performing certain 
functions. As is the case with the Exchange's equities market, the 
Exchange represents that it will supervise FINRA personnel acting as 
agent and continue to bear ultimate regulatory responsibility for 
the MEMX Options Exchange. See Notice, supra note 3, at 28074. See 
also Amendment No. 1 at 46-47.
    \101\ See Notice, supra note 3, at 28074. See also Amendment No. 
1 at 44-45.
---------------------------------------------------------------------------

    Consistent with the Exchange's existing regulatory structure, the 
Exchange's Chief Regulatory Officer will have general supervision of 
the regulatory operations of MEMX Options, including responsibility for 
overseeing the surveillance, examination, and enforcement functions and 
for administering all regulatory services agreements applicable to MEMX 
Options.\102\ Similarly, the Exchange's existing Regulatory Oversight 
Committee will be responsible for overseeing the adequacy and 
effectiveness of Exchange's regulatory and self-regulatory organization 
responsibilities, including those applicable to MEMX Options.\103\
---------------------------------------------------------------------------

    \102\ See Notice, supra note 3, at 28074. See also Amendment No. 
1 at 47.
    \103\ See Notice, supra note 3, at 28074. See also Amendment No. 
1 at 47.
---------------------------------------------------------------------------

    The Exchange's existing rules governing members will apply to 
Options Members and their associated persons. The Exchange's existing 
rules provide that members, a term that includes Options Members, agree 
to be regulated by the Exchange as a condition of effecting securities 
transactions on the Exchange's trading facilities.\104\ The Exchange's 
rules also permit it to sanction members, including Options Members, 
for violations of its rules and governing documents and of the federal 
securities laws by, among other things, expelling or suspending 
members, limiting members' activities, functions, or operations, fining 
or censuring members, or suspending or barring a person from being 
associated with a member.\105\
---------------------------------------------------------------------------

    \104\ See MEMX Rule 2.2. See also Second Amended and Restated 
Limited Liability Company Agreement of MEMX LLC (May 19, 2020), 
Section 17.2 (providing the Exchange with disciplinary jurisdiction 
over its members).
    \105\ See MEMX Rule 2.2.
---------------------------------------------------------------------------

    As it does with equities trading, the Exchange will perform 
automated surveillance of trading on MEMX Options for the purpose of 
maintaining a fair and orderly market at all times, and it will monitor 
MEMX Options to identify unusual trading patterns and determine whether 
particular trading activity requires further regulatory 
investigation.\106\
---------------------------------------------------------------------------

    \106\ See Notice, supra note 3, at 28074. See also Amendment No. 
1 at 47.
---------------------------------------------------------------------------

    Additionally, the Exchange will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Members.\107\ The Exchange explains that Chapter 20

[[Page 49901]]

(Regulation of Trading on MEMX Options) regarding halts, unusual market 
conditions, extraordinary market volatility, obvious errors, audit 
trail, and rules regarding prohibited and permissible transfers of 
options positions off the Exchange are substantively identical to the 
rules of Cboe BZX Options.\108\
---------------------------------------------------------------------------

    \107\ See Notice, supra note 3, at 28074. See also Amendment No. 
1 at 47-48.
    \108\ See also Amendment No. 1 at 47-48.
---------------------------------------------------------------------------

Minor Rule Violation Plan

    The Commission approved the Exchange's Minor Rule Violation Plan 
(``MRVP'') in 2020.\109\ The Exchange's MRVP specifies those 
uncontested minor rule violations with sanctions not exceeding $2,500 
that would not be subject to the provisions of Rule 19d-1(c)(1) under 
the Act \110\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\111\ The Exchange's MRVP includes the policies 
and procedures included in Rule 8.15 (Imposition of Fines for Minor 
Violation(s) of Rules) and in Rule 8.15, Interpretation and Policy .01.
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    \109\ See Securities Exchange Act Release No. 89836 (September 
11, 2020), 85 FR 58081 (September 17, 2020) (Order Declaring 
Effective a Minor Rule Violation Plan) (``MRVP Order'').
    \110\ 17 CFR 240.19d-1(c)(1).
    \111\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See 
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (June 8, 1984). Any disciplinary action taken by an SRO 
against any person for violation of a rule of the SRO which has been 
designated as a minor rule violation pursuant to such a plan filed 
with and declared effective by the Commission will not be considered 
``final'' for purposes of Section 19(d)(1) of the Act if the 
sanction imposed consists of a fine not exceeding $2,500 and the 
sanctioned person has not sought an adjudication, including a 
hearing, or otherwise exhausted his administrative remedies.
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    In connection with MEMX Options, the Exchange is amending its MRVP 
and Exchange Rule 8.15, Interpretation and Policy .01, to include Rule 
25.3 (Penalty for Minor Rule Violations). Rule 25.3 contains provisions 
addressing the following: (i) position limit and exercise limit 
violations; (ii) violations regarding the failure to accurately report 
position and account information; (iii) Market Maker quoting 
obligations; (iv) violations regarding expiring exercise declarations; 
(v) violations relating to the failure to respond to the Exchange's 
requests for the submission of trade data; and (vi) violations relating 
to noncompliance with the Consolidated Audit Trail Compliance Rule 
requirements. The Exchange further states that the rules included in 
proposed Rule 25.3 are the same as the rules included in the MRVPs of 
other options exchanges.\112\
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    \112\ See Notice, supra note 3, at 28075. See also Amendment No. 
1 at 49.
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    The Exchange represents that, upon implementation, it will include 
the enumerated options trading rule violations in the Exchange's 
standard quarterly report of actions taken on minor rule violations 
under the MRVP.\113\ The Exchange asserts that its amended MRVP is 
consistent with Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which 
require, in part, that an exchange have the capacity to enforce 
compliance with, and provide appropriate discipline for, violations of 
the rules of the Commission and of the exchange.\114\ In addition, the 
Exchange states that it will provide a fair procedure for the 
disciplining of members and associated persons, consistent with Section 
6(b)(7) of the Act,\115\ because amended Rule 8.15 will offer 
procedural rights to a person sanctioned for a violation listed in Rule 
25.3.\116\ The Exchange represents that it will continue to conduct 
surveillance with due diligence and make a determination based on its 
finding, on a case-by-case basis, whether a fine of more or less than 
the recommended amount is appropriate for a violation under the MRVP or 
whether a violation requires a formal disciplinary action.\117\
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    \113\ See Notice, supra note 3, at 28075. See also Amendment No. 
1 at 49-50. The Exchange states that the quarterly report currently 
includes: the Exchange's internal file number for the case, the name 
of the individual and/or organization, the nature of the violation, 
the specific rule provision violated, the fine imposed, the number 
of times the rule violation has occurred, and the date of 
disposition. See id.
    \114\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6). See also 
Notice, supra note 3, at 28075. See also Amendment No. 1 at 49-50.
    \115\ 15 U.S.C. 78f(b)(7).
    \116\ See Notice, supra note 3, at 28075. See also Amendment No. 
1 at 50.
    \117\ See Notice, supra note 3, at 28075. See also Amendment No. 
1 at 50.
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Amendments to Existing Exchange Rules

    In addition to the new rules for MEMX Options, the Exchange also 
proposes to amend certain of its existing rules in order to reflect the 
Exchange's proposed operation of MEMX Options. First, the Exchange is 
amending paragraph (d) of Interpretations and Policies .01 to Rule 2.5 
(Restrictions), which generally requires each member to register at 
least two Principals with the Exchange subject to certain exceptions 
described therein, to provide that such paragraph (d) shall not apply 
to a member that solely conducts business on the Exchange as an Options 
Member, however, Options Members must comply with the registration 
requirements set forth in proposed Rule 17.2(g).\118\ In connection 
with this change, the Exchange also is amending paragraph (i) of 
Interpretations and Policies .01 to Rule 2.5 to include Options 
Principal as a registration category and to set forth the Exchange's 
qualification requirements for an Options Principal, which the Exchange 
states are the same as those for an Options Principal on Cboe BZX 
Options.\119\
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    \118\ The Exchange notes that proposed MEMX Rule 17.2(g), which 
provides that every Options Member shall have at least one Options 
Principal and sets forth the Exchange's Options Principal 
registration requirements, is identical to Cboe BZX Rule 17.2(g). 
See Notice, supra note 3, at 28075. See also Amendment No. 1 at 53.
    \119\ See Notice, supra note 3, at 28075. See also Amendment No. 
1 at 53.
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    The Exchange also is deleting the word ``equities'' in the first 
sentence of Rule 2.7 (Revocation of Membership or Association with a 
Member), which currently provides that members or associated persons of 
members may effect approved equities securities transactions on the 
Exchange's trading facilities only so long as they possess all the 
qualifications set forth in the Exchange Rules.
    The Exchange proposes to modify Rule 2.11(a)(6), which states that 
MEMX Execution Services shall maintain an error account for the purpose 
of addressing positions that are the result of an execution or 
executions that are not clearly erroneous under Rule 11.15 and result 
from a technical or systems issue at MEMX Execution Services, the 
Exchange, a routing destination, or a non-affiliate third-party routing 
broker that affects one or more orders (``Error Positions''). The 
proposed change to Rule 2.11(a)(6) adds a reference to the comparable 
provision in Rule 20.6 that governs review and resolution of options 
transactions that may qualify as obvious errors.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\120\ In particular, the Commission finds that the proposed 
rule change is consistent with, among others, Sections 6(b)(1),\121\ 
6(b)(5),\122\

[[Page 49902]]

and 6(b)(8) \123\ of the Act. Section 6(b)(1) of the Act requires that 
an exchange be so organized and have the capacity to be able to carry 
out the purposes of the Act and to comply and enforce compliance by its 
members and persons associated with its members with the provisions of 
the Act, the rules and regulations thereunder, and the rules of the 
Exchange. Section 6(b)(5) of the Act requires that the rules of a 
national securities exchange be designed, among other things, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act 
requires that the rules of a national securities exchange not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \120\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \121\ 15 U.S.C. 78f(b)(1).
    \122\ 15 U.S.C. 78f(b)(5).
    \123\ 15 U.S.C. 78f(b)(8).
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    As detailed above, MEMX Options' proposed rules are substantially 
similar to those of other exchanges, especially Cboe BZX, though the 
Exchange is not proposing to adopt certain optional features offered by 
other exchanges so that its trading platform at launch will, as the 
Exchange described it, have ``a simplified suite of conventional order 
types and functionality that is designed to provide for an efficient, 
robust, and transparent order matching process.'' \124\ While some of 
these features may be available on other option exchanges, such as 
price improvement auctions, directed market makers, facilitation 
mechanisms, and price-sliding mechanisms, those features are optional 
and supplementary to the core exchange matching engine functionality, 
and they are not necessary for the Commission to find that the rules 
governing MEMX Options are consistent with the Act.
---------------------------------------------------------------------------

    \124\ See Notice, supra note 3, at 28064. See also Amendment No. 
1 at 4.
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Exchange Members

    As described above, only Options Members, and their Sponsored 
Participants,\125\ will be permitted to transact on the System. The 
Exchange also proposes to adopt rules governing member operations and 
member conduct, all of which are substantively identical to the rules 
of other exchanges, including Cboe BZX. Those rules include 
recordkeeping and reporting requirements,\126\ discipline,\127\ margin 
requirements,\128\ and requirements applicable to doing business with 
the public.\129\
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    \125\ See MEMX Rule 1.5(dd) (defining ``Sponsored Participant'' 
to mean ``a person which has entered into a sponsorship arrangement 
with a Sponsoring Member pursuant to Rule 11.3'').
    \126\ See MEMX Chapter 24 (Records, Reports and Audits).
    \127\ See MEMX Chapter 25 (Discipline and Summary Suspensions).
    \128\ See MEMX Chapter 28 (Margin Requirements).
    \129\ See MEMX Chapter 26 (Doing Business with the Public).
---------------------------------------------------------------------------

    The Commission finds that the rules applicable to qualification, 
registration, member operations, and use of MEMX Options, which are 
substantially similar to those of other options exchanges, are 
consistent with the Act, including Sections 6(b)(1), (2), and (6) 
thereof, in that they provide the Exchange with the capacity to 
regulate access to and conduct on MEMX Options and enforce the federal 
securities laws among persons using its facilities, provide that 
registered broker-dealers can become members and have access to MEMX 
Options, and ensure that Options Members and their associated persons 
can be appropriately disciplined for violations of the Act, the rules 
and regulations thereunder, and Exchange rules.
    With respect to Market Maker members, the Commission finds that the 
proposed Market Maker qualification requirements, which also are 
substantially similar to those of other options exchanges, are 
consistent with the Act. The Commission further finds that the Options 
Market Maker participation requirements are consistent with the Act. 
Market makers receive certain benefits for carrying out their 
responsibilities. For example, a broker-dealer or other lender may 
extend ``good faith'' credit to a member of a national securities 
exchange or registered broker-dealer to finance its activities as a 
market maker or specialist.\130\ In addition, market makers are 
exempted from the prohibition in Section 11(a) of the Act.\131\ The 
Commission believes that a market maker must have sufficient 
affirmative obligations, including the obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis, to justify this favorable treatment. The Commission 
believes that the MEMX Options Market Maker participation requirements 
are consistent with the Act and are substantially similar to the 
participation requirements of other options exchanges that the 
Commission has previously approved.
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    \130\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \131\ 15 U.S.C. 78k(a)(1).
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MEMX Options Market Structure and Trading Operations

    The functionalities and features of MEMX Options' market structure 
and trading system are based on functionalities and features currently 
used and previously approved for other options exchanges. Among other 
things, the rules are reasonably designed to provide for a simple, 
orderly opening process for an exchange that only trades multiply 
listed options, as well as an orderly re-opening process following the 
conclusion of a trading halt. Further, the rules provide for the 
electronic display and execution of orders in traditional price/time 
priority. MEMX Options will utilize only two order types (limit orders 
and market orders) and offer a limited suite of order handling 
instructions, all of which are well-established in both the equities 
and options markets. These proposed execution priority rules and order 
types are consistent with the Act, in particular Section 6(b)(5) of the 
Act, in that, among other things, they are designed to promote just and 
equitable principles of trade and are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
    MEMX also is requiring a one-second exposure period in order to 
execute as principal orders represented as agent, which is the same 
standard required by other exchanges. This exposure requirement should 
facilitate the prompt execution of orders while continuing to provide 
members with an opportunity to compete for exposed bids and offers.
    MEMX listing standards for options traded on MEMX Options are 
substantively identical to those currently utilized by other exchanges. 
MEMX will join the Options Listings Procedures Plan and will list and 
trade options already listed on other options exchanges. The Commission 
finds that the Exchange's proposed listing standards are consistent 
with the Act, including Section 6(b)(5), in that they are designed to 
protect investors and the public interest and promote just and 
equitable principles of trade. As explained below, MEMX's operation of 
MEMX Options is conditioned on MEMX joining and participating in the 
OLPP. The Exchange has represented that it will join the OLPP and will 
become an exchange member of OCC.
    Further, MEMX proposes operational rules that are substantively 
identical to the rules of other options exchanges, such as Cboe BZX, 
including rules

[[Page 49903]]

applicable to exercise and deliveries.\132\ Those rules adopt the 
standard requirements applicable to exercise notices and applicable 
cut-off times for submission of exercise-related notices, the 
assignment of exercise notices, and delivery and payment requirements. 
The Commission finds that these rules are consistent with the Act, 
including Section 6(b)(5), in that they promote just and equitable 
principles of trade, foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest.
---------------------------------------------------------------------------

    \132\ See MEMX Chapter 23 (Exercises and Deliveries).
---------------------------------------------------------------------------

    And, as described above, in those cases where MEMX Options' 
proposed rules vary from current functionality on other options 
exchanges, many of those variations are because MEMX proposes a more 
streamlined system and is not proposing to introduce those optional 
features.
    As such, the Commission finds that the proposed functionalities and 
features of MEMX Options' overall structure and trading operations are 
consistent with the Act, and in particular, with Section 6(b)(5) of the 
Act, which requires an exchange's rules, among other things, be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest, and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.

Options Order Protection, Locked/Crossed Market Plan, and Outbound 
Routing

    The MEMX Options rules are designed to comply with applicable 
federal securities laws and regulations and the obligations of the 
Linkage Plan. Specifically, the rules are designed to ensure that an 
order is not executed at a price that would trade through another 
options exchange. In this regard, the Commission notes that MEMX 
Options is required under Rule 608(c) of Regulation NMS \133\ to comply 
with and enforce compliance by its members with the Linkage Plan, 
including the requirement to avoid trading through better prices 
available on other markets. Any order designated by an Options Member 
as routable will be routed by MEMX in compliance with applicable trade-
through restrictions, and any order entered with a price that would 
lock or cross a Protected Quotation that is not eligible for either 
routing or the price adjust process in Rule 21.1(i) will be cancelled. 
The Commission finds these order protection rules to be consistent with 
the Act. Further, in light of the protections discussed above that 
apply to the optional use of outbound routing services offered through 
MEMX Execution Services, which currently apply to the Exchange's 
equities trading facility, as well as the back-up optional routing 
services through an unaffiliated routing broker, the Commission finds 
the routing rules to be consistent with the Act.
---------------------------------------------------------------------------

    \133\ See 17 CFR 242.608(c).
---------------------------------------------------------------------------

    Before commencing operations, MEMX represents that it will become a 
participant in the Linkage Plan.\134\ To meet their regulatory 
responsibilities under the Linkage Plan, including the requirement to 
avoid trading through better-priced protected quotations available on 
other markets, other options exchanges that are Linkage Plan 
participants must have sufficient notice of new protected quotations, 
as well as all necessary information (such as final technical 
specifications). Therefore, the Commission believes that it would be a 
reasonable policy and procedure under the Linkage Plan for industry 
participants to begin treating MEMX Options' best bid and best offer as 
a protected quotation within the later of 60 days after the date of 
this order or such date as MEMX Options begins operation.
---------------------------------------------------------------------------

    \134\ See Notice, supra note 3, at 28073. See also Amendment No. 
1 at 41.
---------------------------------------------------------------------------

Risk Monitoring and Protection

    As discussed above, MEMX Options will offer Users an optional 
mechanism to establish certain risk control parameters and limits. The 
``passive'' functionality is substantially similar to that offered on 
Cboe BZX Options, except that MEMX Options will permit Users to track 
risk parameters across a customized group of orders and will permit 
Users to choose to suspend, rather than cancel or reject, resting 
interest when a risk limit has been reached.\135\ The proposed 
``active'' functionality is novel, as Cboe BZX Options rules do 
presently offer similar functionality. As described above, in the 
``active'' version, a User can effectively interact with the Risk 
Monitor Mechanism to decrement the counting program as executions 
occur.
---------------------------------------------------------------------------

    \135\ See Notice, supra note 3, at 28072. See also Amendment No. 
1 at 34-36.
---------------------------------------------------------------------------

    In addition to the Risk Monitor Mechanism, the Exchange will offer 
additional price protection mechanisms and risk controls. These 
controls are substantially similar to those offered on Cboe BZX, with 
slight modifications to align with the Exchange's proposed streamlined 
market opening procedures and fewer available order types and 
instructions on MEMX Options. Also, whereas the drill-through price 
protection mechanism offered on Cboe BZX executes an incoming order to 
a determined ``Drill-Through Price'' and then displays the remainder of 
the order on Cboe BZX Options at that price for a brief period of time, 
the Exchange proposes to cancel the remainder of an incoming order 
after executing the order.
    The Commission believes that the proposed risk protections for MEMX 
Options are reasonably designed to provide liquidity providers with 
protections to help them manage risk and efficiently use capital when 
trading options. These protections are in addition to, and do not take 
the place of, members' required market access controls, vigilant 
oversight of trading and algorithms, and overall risk management. For 
example, these mechanisms are intended to provide market makers and 
other liquidity providers with optional supplemental tools as an 
additional layer of protection to assist them in managing risk and 
utilizing available capital in leveraged options securities. To the 
extent they achieve that intended objective, liquidity providers should 
be able to provide additional liquidity to the market at potentially 
improved prices, thus benefitting investors.
    While most of these protections are substantively similar to those 
available on other options markets, some of the differences discussed 
above are designed to offer market participants additional flexibility 
when using the Risk Monitor Mechanism in a manner consistent with the 
functionality and scope of protections that the Risk Monitor Mechanism 
provides. Accordingly, the Commission finds that the proposed risk 
controls for MEMX Options are consistent with the Act in that they are 
designed to, among other things, promote just and equitable principles 
of trade and protect investors and the public interest.

Participation in Multiparty Options--Related Plans

    The Exchange represents that it will become a participant in the 
various applicable multiparty plans for options

[[Page 49904]]

trading. Specifically, the Exchange represents that MEMX Options will 
become a member of OPRA, OLA, ORSA, and OLPP before commencing 
operations. Doing so will integrate MEMX Options into the national 
market system for standardized listed options.

Regulation

    The Exchange represents that it will leverage the structures it 
currently maintains to operate and oversee its equities trading 
facility, which involve the following three elements: (i) the Exchange 
will join the existing options industry agreements pursuant to Section 
17(d) of the Act,\136\ as it did with respect to equities; (ii) the 
Exchange's Regulatory Services Agreement with FINRA will be amended to 
govern many aspects of the regulation and discipline of Options 
Members, just as it does for equities; \137\ and (iii) the Exchange 
will perform options listing regulation, as well as authorize Options 
Members to trade on MEMX Options, and conduct surveillance of options 
trading as it does today for equities. Furthermore, MEMX proposes to 
amend its Minor Rule Violation Plan to encompass MEMX Options in a 
manner that is substantially similar to and consistent with the 
analogous rules and plans on other options exchanges.
---------------------------------------------------------------------------

    \136\ See 15 U.S.C. 78q(d) and 17 CFR 240.17d-2. There are three 
17d-2 plans that apply to options: the Options-Related Sales 
Practice Plan (File No. S7-966), the Options-Related Market 
Surveillance Plan (File No. 4-551), and the Regulation NMS Plan 
(File No. 4-566). MEMX already is a member of the Regulation NMS 
Plan.
    \137\ Importantly, the Commission notes that unless relieved by 
the Commission of its responsibility pursuant to Rule 17d-2, the 
Exchange bears the responsibility for its self-regulatory 
obligations and primary liability for self-regulatory failures, not 
the SRO retained to perform regulatory functions on the Exchange's 
behalf. See Section 17(d)(1) of the Act and Rule 17d-2 thereunder 
(15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2). In performing these 
functions as agent for MEMX, however, FINRA may nonetheless bear 
liability for causing or aiding and abetting the failure of the 
Exchange to perform its regulatory functions. Accordingly, although 
FINRA will not act on its own behalf under its SRO responsibilities 
in carrying out these regulatory services for the Exchange relating 
to the operation of MEMX Options, FINRA also may have secondary 
liability if, for example, the Commission finds the contracted 
functions are being performed so inadequately as to cause a 
violation of the federal securities laws by the Exchange. See, e.g., 
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 
3550 (January 23, 2006) (File No. 10-131) (``Nasdaq Exchange 
Registration Order'').
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    Also, as explained above, consistent with the Exchange's existing 
regulatory structure, the Exchange's Chief Regulatory Officer will have 
general supervision of the regulatory operations of MEMX Options, 
including responsibility for overseeing the surveillance, examination, 
and enforcement functions and for administering all regulatory services 
agreements applicable to MEMX Options. Similarly, the Exchange's 
existing Regulatory Oversight Committee will be responsible for 
overseeing the adequacy and effectiveness of Exchange's regulatory and 
self-regulatory organization responsibilities, including those 
applicable to MEMX Options.
    As it does with equities, the Exchange will perform automated 
surveillance of trading on MEMX Options for the purpose of maintaining 
a fair and orderly market at all times. As it does with its equities 
trading facility, the Exchange will monitor MEMX Options to identify 
unusual trading patterns and determine whether particular trading 
activity requires further regulatory investigation by FINRA.
    In addition, the Exchange will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Members. The proposed rules in Chapter 20 (Regulation of Trading on 
MEMX Options) regarding halts, unusual market conditions, extraordinary 
market volatility, obvious errors, and audit trail are substantively 
identical to the rules of Cboe BZX Options.
    Based on the foregoing, the Commission finds that the Exchange's 
proposed rules and regulatory structure with respect to MEMX Options 
are consistent with the requirements of the Act, in particular with 
Section 6(b)(1) of the Act, which requires an exchange to be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply, and to enforce compliance by its members and 
persons associated with its members, with the Act and the rules and 
regulations thereunder, and the rules of the Exchange, and with 
Sections 6(b)(6) and 6(b)(7) of the Act, which require an Exchange to 
provide fair procedures for the disciplining of members and persons 
associated with members. The Commission further believes that it is 
consistent with the Act to allow the Exchange to contract with FINRA to 
perform functions relating to the regulation and discipline of members 
and the regulation of MEMX Options.\138\ These functions are 
fundamental elements to a regulatory program and constitute core self-
regulatory functions. The Commission believes that FINRA has the 
expertise and experience to perform these functions on behalf of the 
Exchange.\139\
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    \138\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998). See also, e.g., Securities 
Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 
6, 2004) (SR-Amex-2004-32) (approving rule that allowed Amex to 
contract with another SRO for regulatory services).
    \139\ The Commission notes that the RSA is not before the 
Commission and, therefore, the Commission is not acting on it.
---------------------------------------------------------------------------

    The Commission finds that the amended MRVP is consistent with 
Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Exchange and the federal securities laws. As existing MEMX Rule 8.15 
will continue to offer procedural rights to a person sanctioned for a 
violation listed in proposed MEMX Options Rule 25.3, the Commission 
believes that the Exchange's rules provide a fair procedure for the 
disciplining of members and associated persons, consistent with Section 
6(b)(7) of the Act.\140\ The Commission also finds that the MRVP 
changes are consistent with the public interest, the protection of 
investors, or otherwise in furtherance of the purposes of the Act, as 
required by Rule 19d-1(c)(2) under the Act,\141\ because they should 
strengthen the Exchange's ability to carry out its oversight and 
enforcement responsibilities as an SRO in cases where full disciplinary 
proceedings are unsuitable in view of the minor nature of the 
particular violation.
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78f(b)(7).
    \141\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    In approving the proposed change to the Exchange's MRVP, the 
Commission in no way minimizes the importance of compliance with the 
Exchange's rules and all other rules subject to the imposition of fines 
under the Exchange's MRVP. The Commission believes that the violation 
of any SRO rules, as well as the federal securities laws, is a serious 
matter. However, the Exchange's MRVP provides a reasonable means of 
addressing rule violations that do not rise to the level of requiring 
formal disciplinary proceedings, while providing flexibility in 
handling certain violations. The Commission expects that the Exchange 
will continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate for a 
violation under the Exchange's MRVP or whether a violation requires a 
formal disciplinary action.

[[Page 49905]]

Section 11(a) of the Act

    Section 11(a)(1) of the Act \142\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\143\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\144\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule.
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    \142\ 15 U.S.C. 78k(a)(1).
    \143\ 17 CFR 240.11a2-2(T).
    \144\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
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    In a letter to the Commission, the Exchange requests that the 
Commission concur with the Exchange's conclusion that Options Members 
that enter orders into the System satisfy the requirements of Rule 
11a2-2(T).\145\ For the reasons set forth below, the Commission 
believes that Options Members entering orders into the System could 
satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \145\ See Letter from Anders Franzon, General Counsel, MEMX, to 
Vanessa Countryman, Secretary, Commission, dated August 8, 2022 
(``MEMX 11(a) Letter'').
---------------------------------------------------------------------------

    The Rule's first requirement is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\146\ MEMX has represented that MEMX Options does not 
have a physical trading floor, and the MEMX Options trading system will 
receive orders from members electronically through remote terminals or 
computer-to-computer interfaces.\147\ The Commission believes that the 
MEMX Options trading system satisfies this off-floor transmission 
requirement.
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    \146\ See, e.g., Securities Exchange Act Release Nos. 85828 (May 
10, 2019), 84 FR 21841 (May 15, 2019) (registration of Long-Term 
Stock Exchange); 75760 (August 7, 2015) 80 FR 48600 (August 13, 
2015) (SR-EDGX-2015-18); 61419 (January 26, 2010), 75 FR 5157 
(February 1, 2010) (SR-BATS-2009-031) (approving BATS options 
trading); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) 
(SR-BSE-2008-48) (approving equity securities listing and trading on 
BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-
NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving NOM options 
trading); 53128 (January 13, 2006), 71 FR 3550, 3553 (January 23, 
2006) (File No. 10-131) (granting the exchange registration of 
Nasdaq Stock Market, Inc.); 44983 (October 25, 2001), 66 FR 55225 
(November 1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and 
SR-NYSE-90-53) (approving NYSE's Off-Hours Trading Facility); and 
15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \147\ See MEMX 11(a) Letter, supra note 145, at 5-6.
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    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. MEMX represented that at no time following the submission 
of an order is an Options Member or an associated person of the Options 
Member able to acquire control or influence over the result or timing 
of the order's execution.\148\ According to the Exchange, the execution 
of a member's order is determined solely by what quotes and orders are 
present in the System at the time the member submits the order, and the 
order priority based on the MEMX Options rules.\149\ Accordingly, the 
Commission believes that an Options Member and its associated persons 
do not participate in the execution of an order submitted to the MEMX 
Options System.\150\
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    \148\ See MEMX 11(a) Letter, supra note 145, at 6-7. MEMX notes 
that a member may cancel or modify the order, or modify the 
instructions for executing the order, after the order has been 
transmitted, provided that such cancellations or modifications are 
transmitted from off an exchange floor. See id. at 6. The Commission 
has stated that the non-participation requirement is satisfied under 
such circumstances so long as such modifications or cancellations 
are also transmitted from off the floor. See Securities Exchange Act 
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(``1978 Release'') (stating that the ``non-participation requirement 
does not prevent initiating members from canceling or modifying 
orders (or the instructions pursuant to which the initiating member 
wishes orders to be executed) after the orders have been transmitted 
to the executing member, provided that any such instructions are 
also transmitted from off the floor'').
    \149\ See MEMX 11(a) Letter, supra note 145, at 2. The 
Commission notes that MEMX proposes rules for the registration, 
obligations, and operation of market makers on MEMX Options. MEMX 
has represented that market makers, if any, will submit quotes in 
the form of orders in their assigned symbols. See id. at n. 4.
    \150\ See, e.g., Securities Exchange Act Release No. 58375 
(August 18, 2008), 73 FR 49498, 49505 (August 21, 2008) (File No. 
10-182) (order granting the registration of BATS Exchange) (``Bats 
Order'') and 61698 (March 12, 2010), 75 FR 13151, 13164 (March 18, 
2010) (File Nos. 10-194 and 10-196) (order approving DirectEdge 
exchanges) (``DirectEdge Order'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the MEMX Options trading 
system are used, as long as the design of these systems ensures that 
members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange.\151\ The 
Exchange has represented that the design of the MEMX Options trading 
system ensures that no Options Member has any special or unique trading 
advantages in the handling of its orders after transmitting its orders 
to the Exchange.\152\ Based on the Exchange's representation, the 
Commission believes that the MEMX Options trading system satisfies this 
requirement.
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    \151\ See, e.g., Bats Order, supra note 150, at 49505 and 
DirectEdge Order, supra note 150, at 13164. In considering the 
operation of automated execution systems operated by an exchange, 
the Commission noted that, while there is not an independent 
executing exchange member, the execution of an order is automatic 
once it has been transmitted into the system. Because the design of 
these systems ensures that members do not possess any special or 
unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See 1979 Release, supra 
note 146.
    \152\ See MEMX 11(a) Letter, supra note 145, at 7.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\153\ MEMX

[[Page 49906]]

Options Members trading for covered accounts over which they exercise 
investment discretion must comply with this condition in order to rely 
on the rule's exemption.\154\
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    \153\ See Bats Order, supra note 150, at 49505 and DirectEdge 
Order, supra note 150, at 13164. In addition, Rule 11a2-2(T)(d) 
requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 148 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
    \154\ See MEMX 11(a) Letter, supra note 145, at 3. The Exchange 
represented that it will advise its membership through the issuance 
of a Regulatory Circular that those members trading for covered 
accounts over which they exercise investment discretion must comply 
with this condition in order to rely on the rule's exemption. See 
id.
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IV. Exemption From Section 19(b) of the Act With Regard to Cboe, NYSE, 
and FINRA Rules Incorporated by Reference

    The Exchange proposes to incorporate by reference as MEMX Options 
Rules certain rules of Cboe Exchange (``Cboe''), the New York Stock 
Exchange (``NYSE''), and FINRA.\155\ Thus, for certain MEMX Options 
rules, Exchange members will comply with a MEMX Options rule by 
complying with the Cboe, NYSE, or FINRA rule referenced. In connection 
with its proposal to incorporate Cboe, NYSE, and FINRA rules by 
reference, the Exchange requests, pursuant to Rule 240.0-12 under the 
Act,\156\ an exemption under Section 36 of the Act from the rule filing 
requirements of Section 19(b) of the Act for changes to those MEMX 
Options rules that are effected solely by virtue of a change to a 
cross-referenced Cboe, NYSE, or FINRA rule.\157\ The Exchange proposes 
to incorporate by reference categories of rules (rather than individual 
rules within a category) that are not trading rules. The Exchange 
agrees to provide written notice to Options Member prior to the launch 
of MEMX Options of the specific Cboe, NYSE, and FINRA rules that it is 
incorporating by reference.\158\ In addition, the Exchange will notify 
Options Members whenever Cboe, NYSE, or FINRA proposes a change to a 
cross-referenced Cboe, NYSE, or FINRA rule.\159\
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    \155\ Specifically, MEMX Rule 26.16 proposes to incorporate by 
reference the applicable rules of FINRA with respect to 
Communications with Public Customers; MEMX Rule 28.3 proposes to 
incorporate by reference initial and maintenance margin requirements 
of either Cboe or NYSE; MEMX Rule 29.5 proposes to incorporate by 
reference the applicable rules of Cboe with respect to position 
limits for broad based index options; and MEMX Rule 29.7 proposes to 
incorporate by reference the applicable rules of Cboe with respect 
to position limits for narrow-based and micro-narrow based index 
options traded on MEMX Options and also on Cboe.
    \156\ 17 CFR 240.0-12.
    \157\ See Amendment No. 1 at 51-53.
    \158\ See Amendment No. 1 at 52.
    \159\ The Exchange represents that it will provide such notice 
through a posting on the same website location where the Exchange 
will post its own rule filings pursuant to Rule 19b-4(l) under Act, 
within the time frame required by that rule. The website posting 
will include a link to the location on the Cboe, NYSE, or FINRA 
website where the proposed rule change is posted. See id. at n. 38.
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    Using its authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\160\ Each such exempt SRO 
agreed to be governed by the incorporated rules, as amended from time 
to time, but is not required to file a separate proposed rule change 
with the Commission each time the SRO whose rules are incorporated by 
reference seeks to modify its rules. In addition, each SRO incorporated 
by reference only regulatory rules (e.g., margin, suitability, 
arbitration), not trading rules, and incorporated by reference whole 
categories of rules (i.e., did not ``cherry-pick'' certain individual 
rules within a category). Each exempt SRO had procedures in place to 
provide written notice to its members each time a change is proposed to 
the incorporated rules of another SRO in order to provide its members 
with notice of a proposed rule change that affects their interests, so 
that they would have an opportunity to comment on it.
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    \160\ See Securities Exchange Act Release No. 49260 (February 
17, 2004), 69 FR 8500 (February 24, 2004) (granting application for 
exemptions pursuant to Section 36(a) under the Act by the American 
Stock Exchange LLC, the International Securities Exchange, Inc., the 
Municipal Securities Rulemaking Board, the Pacific Exchange, Inc., 
the Philadelphia Stock Exchange, Inc., and the Boston Stock 
Exchange, Inc.). See also, e.g., Securities Exchange Act Release 
Nos.); 75760 (August 7, 2015) 80 FR 48600 (August 13, 2015) (SR-
EDGX-2015-18) (approving the operations of EDGX Options Exchange, 
which included exemptive relief pursuant to Section 36(a) under the 
Act); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (order 
approving SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080, which included 
exemptive relief pursuant to Section 36(a) under the Act) and 53128 
(January 13, 2006).
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    The Commission is granting the Exchange's request for exemption, 
pursuant to Section 36 of the Act, from the rule filing requirements of 
Section 19(b) of the Act with respect to the rules that the Exchange 
proposes to incorporate by reference into MEMX Options Rules. The 
Commission believes that this exemption is appropriate in the public 
interest and consistent with the protection of investors because it 
will promote more efficient use of Commission and SRO resources by 
avoiding duplicative rule filings based on simultaneous changes to 
identical rule text sought by more than one SRO. Consequently, the 
Commission grants the Exchange's exemption request for MEMX Options. 
This exemption is conditioned upon the Exchange providing written 
notice to Options Members whenever Cboe, NYSE, or FINRA proposes to 
change a rule that MEMX Options has incorporated by reference.

V. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 Number SR-MEMX-2022-10 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MEMX-2022-10. 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 this filing will also 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

[[Page 49907]]

comment submissions. You should submit only information that you wish 
to make available publicly. All submissions should refer to File Number 
SR-MEMX-2022-10 and should be submitted on or before September 2, 2022.

VI. Accelerated Approval of Proposed Rule Change

    The Commission finds good cause to approve the proposed rule change 
prior to the 30th day after the date of publication of Amendment No. 1 
in the Federal Register. Amendment No.1 does not include any material 
changes to the proposed rules for MEMX Options or the descriptions of 
those rules in the original filing. In Amendment No. 1, the Exchange, 
among other items, provides additional detail about how some of the 
proposed MEMX Options rules will function, revises other existing MEMX 
rules to reference and accommodate MEMX Options, provides 
representations about how MEMX will inform Users about certain 
parameters or variables set forth in the MEMX Options Rules, requests 
exemptive relief under Section 36 of the Act from Section 19 of the Act 
for rules incorporated by reference, and makes other minor technical 
changes to the filing.
    The Commission finds that Amendment No.1 raises no novel regulatory 
issues and is reasonably designed to perfect the mechanism of a free 
and open market and the national market system, protect investors and 
the public interest, and not be unfairly discriminatory, or impose an 
unnecessary or inappropriate burden on competition. The Amendment makes 
minor and non-material clarifying and conforming changes and makes 
additional representations that each provide more clarity on the 
application of the MEMX Options rules and the commencement of operation 
of MEMX Options. Accordingly, pursuant to Section 19(b)(2) of the 
Act,\161\ the Commission finds good cause to approve the proposed rule 
change on an accelerated basis.
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    \161\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\162\ that the proposed rule change (SR-MEMX-2022-10), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \162\ Id.
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    Although the Commission's approval of the proposed rule change is 
final, and the proposed rules are therefore effective, it is further 
ordered that the operation of MEMX Options is conditioned on the 
satisfaction of the requirements below:
    A. Participation in Plans Relating to Options Trading. MEMX must 
join: (i) the OPRA Plan; (ii) the OLPP; (iii) the Linkage Plan; and 
(iv) the Plan of the Options Regulatory Surveillance Authority.
    B. RSA and Rule 17d-2 Agreements. MEMX must ensure that all 
necessary changes are made to its Regulatory Services Agreement and 
bilateral Rule 17d-2 agreement with FINRA, and it must be a party to 
the multiparty Rule 17d-2 agreements concerning options-related sales 
practice matters and options-related market surveillance.
    C. Participation in the Options Clearing Corporation. MEMX must 
join the Options Clearing Corporation.
    D. Participation in the Intermarket Surveillance Group. MEMX must 
be a member of the Intermarket Surveillance Group.
    It is further ordered, pursuant to Section 36 of the Act,\163\ that 
MEMX shall be exempted from the rule filing requirements of Section 
19(b) of the Act \164\ with respect to the Cboe, FINRA, and NYSE rules 
that MEMX proposes to incorporate by reference in MEMX Rules 26.16, 
28.3, 29.5, and 29.7, subject to the conditions specified in this 
Order.
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    \163\ See 15 U.S.C. 78mm.
    \164\ 15 U.S.C. 78s(b).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\165\
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    \165\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(76).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17320 Filed 8-11-22; 8:45 am]
BILLING CODE 8011-01-P

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