Notice2021-17174
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fees Schedule Relating to the Options Regulatory Fee
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Published
August 12, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 153 (Thursday, August 12, 2021)</title>
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[Federal Register Volume 86, Number 153 (Thursday, August 12, 2021)]
[Notices]
[Pages 44461-44464]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17174]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92596; File No. SR-C2-2021-012]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fees Schedule Relating to the Options Regulatory Fee
August 6, 2021.
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 2, 2021, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2 Options'')
proposes to amend its Fees Schedule relating to the Options Regulatory
Fee. 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 (<a href="http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/">http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/</a>), 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 reduce the Options Regulatory Fee
(``ORF'') from $0.0004 per contract to $0.0003 per contract, effective
August 2, 2021, in order to help ensure that revenue collected from the
ORF, in combination with other regulatory fees and fines, does not
exceed the Exchange's total regulatory costs.
The ORF is assessed by C2 Options to each Trading Permit Holder
(``TPH'') for options transactions cleared by the TPH that are cleared
by the Options Clearing Corporation (``OCC'') in the customer range,
regardless of the exchange on which the transaction occurs.\3\ In other
words, the Exchange imposes the ORF on all customer-range transactions
cleared by a TPH, even if the transactions do not take place on the
Exchange. The ORF is collected by OCC on behalf of the Exchange from
the Clearing Trading Permit Holder (``CTPH'') or non-CTPH that
ultimately clears the transaction. With respect to linkage
transactions, C2 Options reimburses its routing broker providing
Routing Services pursuant to C2 Options Rule 5.36 for options
regulatory fees it incurs in connection with the Routing Services it
provides.
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\3\ The Exchange notes ORF also applies to customer-range
transactions executed during Global Trading Hours.
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Revenue generated from ORF, when combined with all of the
Exchange's other regulatory fees and fines, is designed to recover a
material portion of the regulatory costs to the Exchange of the
supervision and regulation of TPH customer options business including
performing routine surveillances, investigations, examinations,
financial monitoring, and policy, rulemaking, interpretive, and
enforcement activities. Regulatory costs include direct regulatory
expenses and certain indirect expenses for work allocated in support of
the regulatory function. The direct expenses include in-house and
third-party service provider costs to support the day-to-day regulatory
work such as surveillances, investigations and examinations. The
indirect expenses include support from such areas as human resources,
legal, information technology, facilities and accounting. These
indirect expenses are estimated to be approximately 20% of C2's total
regulatory costs for 2021. Thus, direct expenses are estimated to be
approximately 80% of total regulatory
[[Page 44462]]
costs for 2021. In addition, it is Cboe Options' [sic] practice that
revenue generated from ORF not exceed more than 75% of total annual
regulatory costs.
The Exchange monitors its regulatory costs and revenues at a
minimum on a semi-annual basis. If the Exchange determines regulatory
revenues exceed or are insufficient to cover a material portion of its
regulatory costs in a given year, the Exchange will adjust the ORF by
submitting a fee change filing to the Commission. The Exchange also
notifies TPHs of adjustments to the ORF via Exchange Notice.\4\ Based
on the Exchange's most recent semi-annual review, the Exchange is
proposing to reduce the amount of ORF that will be collected by the
Exchange from $0.0004 per contract side to $0.0003 per contract side.
The proposed decrease is based on the Exchange's estimated projections
for its regulatory costs, which have decreased, balanced with recent
options volumes, which has increased. For example, total options
contract volume in March 2021 was approximately 34% higher than the
total options contract volume in March 2020 and the total options
contract volume in June 2021 was approximately 25% higher than the
total options contract volume in June 2020.\5\ In fact, March 2021 was
the highest, and June 2021 was the second highest, options volume month
in the history of U.S. equity options industry.\6\ Below is also
industry data from OCC which illustrates the significant increase in
volume from January 2021 through March 2021.\7\ Moreover, the options
volume in the first quarter of 2021 was higher than the fourth quarter
of 2020.\8\ Also April and May 2021 volumes remain significantly high
as compared to 2020 options volume in general.\9\
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\4\ The Exchange endeavors to provide TPHs with such notice at
least 30 calendar days prior to the effective date of the change.
The Exchange notified TPHs of the proposed rate change for August 2,
2021 on July 1, 2021. See Exchange Notice, C2021070103 ``Cboe
Options Exchanges Regulatory Fee Update Effective August 2, 2021.''
\5\ See <a href="https://www.theocc.com/Newsroom/Press-Releases/2021/04-05-OCC-March-2021-Total-Volume-Up-34-8-Percent">https://www.theocc.com/Newsroom/Press-Releases/2021/04-05-OCC-March-2021-Total-Volume-Up-34-8-Percent</a> and <a href="https://www.theocc.com/Newsroom/Press-Releases/2021/07-02-OCC-June-2021-Total-Volume-Up-25-6-Percent-f">https://www.theocc.com/Newsroom/Press-Releases/2021/07-02-OCC-June-2021-Total-Volume-Up-25-6-Percent-f</a>.
\6\ Id.
\7\ See data from OCC at: <a href="https://www.theocc.com/Market-Data/Market-DataReports/Volume-and-Open-Interest/Volume-by-Account-Type">https://www.theocc.com/Market-Data/Market-DataReports/Volume-and-Open-Interest/Volume-by-Account-Type</a>.
\8\ Id.
\9\ Id.
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Volume January 2021 February 2021 March 2021 April 2021 May 2021
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Total.................................................... 838,339,790 823,412,827 898,653,388 711,388,828 718,368,993
Customer................................................. 784,399,878 782,113,450 837,247,059 667,208,963 659,913,862
Total ADV................................................ 44,123,146.84 43,337,517.20 39,071,886.40 33,875,658.50 35,918,449.70
Customer ADV............................................. 41,284,204.11 41,163,865.79 36,402,046.04 36,402,046.04 32,995,693.10
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These expectations are estimated, preliminary and may change. There
can be no assurance that the Exchange's final costs for 2021 will not
differ materially from these expectations and prior practice, nor can
the Exchange predict with certainty whether options volume will remain
at the current level going forward. The Exchange notes however, that
when combined with the Exchange's other non-ORF regulatory fees and
fines, the revenue being generated by ORF using the current rate
results in revenue that is running in excess of the Exchange's
estimated regulatory costs for the year.\10\ Particularly, as discussed
above, the options market has seen a substantial increase in volume
over the first half of the year, up even from last year's unprecedented
spike in volatility and volume. This increase resulted in higher volume
than was originally projected by the Exchange (thereby resulting in
higher ORF revenue than projected). Moreover, in addition to projected
reductions in regulatory expenses, the Exchange experienced further
unanticipated reductions in costs, in connection with the continuing
COVID-19 pandemic (e.g., continued reduction in travel expenses).\11\
Accordingly, because revenue generated by the current ORF rates, when
combined with the Exchange's other non-ORF regulatory fees and fines,
is expected to exceed the Exchange's regulatory costs for the year, the
Exchange proposes to decrease its ORF rate. Particularly, the Exchange
believes that by decreasing the ORF, as amended, when combined with all
of the Exchange's other regulatory fees and fines, would allow the
Exchange to continue covering a material portion of its regulatory
costs, while lessening the potential for generating excess revenue that
may otherwise occur using the current rate.\12\
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\10\ Consistent with Rule 2.2 (Regulatory Revenue), the Exchange
notes that notwithstanding the excess ORF revenue collected to date,
it has not used such revenue for nonregulatory purposes.
\11\ The Exchange notes that in connection with proposed ORF
rate changes, it provides the Commission confidential details
regarding the Exchange's projected regulatory revenue, including
projected revenue from ORF, along with a breakout of its projected
regulatory expenses, including both direct and indirect allocations.
\12\ The Exchange notes that its regulatory responsibilities
with respect to TPH compliance with options sales practice rules
have largely been allocated to FINRA under a 17d-2 agreement. The
ORF is not designed to cover the cost of that options sales practice
regulation.
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The Exchange will continue to monitor the amount of revenue
collected from the ORF to ensure that it, in combination with its other
regulatory fees and fines, does not exceed the Exchange's total
regulatory costs.
The Exchange lastly proposes to update two outdated rule references
in the notes under the Options Regulatory Fee section of the Fees
Schedule (i.e., C2 Options Rule 6.15 and Cboe Options Rule 15.1).
First, the Exchange notes that it recently updated various rule numbers
in its Rulebook to better align with the Rulebook of its affiliate Cboe
Exchange, Inc. (``Cboe Options''), including former C2 Options Rule
6.15 which was renumbered to C2 Options Rule 5.36.\13\ Similarly, Cboe
Options had reorganized its Rulebook during its technology migration
which resulted in a number of rules being relocated to different rule
numbers, including Cboe Options Rule 15.1 which was renumbered to Cboe
Options Rule 7.1.\14\ The Exchange inadvertently did not update these
corresponding rule references in the Fees Schedule when those updates
were first made and seeks to do so now. As such, the Exchange proposes
to (i) update the rule reference to C2 Options Rule 6.15 to C2 Options
Rule 5.36 and (ii) update the rule reference to Cboe Options Rule 15.1
to Cboe Options Rule 7.1 in the Fees Schedule.
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\13\ See Exchange Act Release No. 92051 (May 27, 2021), 86 FR
29852 (June 3, 2021) (SR-C2-2021-009).
\14\ See Exchange Act Release No. 87216 (October 3, 2019), 84 FR
54234 (October 9, 2019) (SR-CBOE-2019-073).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of
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Section 6(b) of the Act.\15\ Specifically, the Exchange believes the
proposed rule change is consistent with Section 6(b)(4) of the Act,\16\
which provides that Exchange rules may provide for the equitable
allocation of reasonable dues, fees, and other charges among its TPHs
and other persons using its facilities. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \17\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(4).
\17\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed fee change is reasonable because
customer transactions will be subject to a lower ORF fee than the
current rate. Moreover, the proposed reduction is necessary in order to
lessen the potential that the Exchange collects revenue in excess of
its anticipated regulatory costs, in combination with other regulatory
fees and fines, which is consistent with the Exchange's practices. The
Exchange had designed the ORF to generate revenues that would be less
than or equal to 75% of the Exchange's regulatory costs, which is
consistent with the view of the Commission that regulatory fees be used
for regulatory purposes and not to support the Exchange's business
operations. As discussed above, however, after its semi-annual review
of its regulatory costs and regulatory revenues, which includes
revenues from ORF and other regulatory fees and fines, the Exchange
determined that absent a reduction in ORF, it would be collecting
revenue in excess of 75% of its regulatory costs. Indeed, the Exchange
notes that when taking into account the recent options volume, coupled
with the projected reduction in regulatory costs, it estimates the ORF
will generate revenues that would cover more than the approximated 75%
of the Exchange's projected regulatory costs. Moreover, when coupled
with the Exchange's other regulatory fees and revenues, the Exchange
estimates ORF to generate over 100% of the Exchange's projected
regulatory costs. As such, the Exchange believes it's reasonable and
appropriate to decrease the ORF amount from $0.0004 to $0.0003 per
contract side.
The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory in that it is charged to all TPHs on all
their transactions that clear in the customer range at the OCC. The
Exchange believes the ORF ensures fairness by assessing higher fees to
those TPHs that require more Exchange regulatory services based on the
amount of customer options business they conduct. Regulating customer
trading activity is much more labor intensive and requires greater
expenditure of human and technical resources than regulating non-
customer trading activity, which tends to be more automated and less
labor-intensive. For example, there are costs associated with main
office and branch office examinations (e.g., staff and travel
expenses), as well as investigations into customer complaints and the
terminations of Registered persons. As a result, the costs associated
with administering the customer component of the Exchange's overall
regulatory program are materially higher than the costs associated with
administering the non-customer component (e.g., TPH proprietary
transactions) of its regulatory program.\18\ Moreover, the Exchange
notes that it has broad regulatory responsibilities with respect to its
TPHs' activities, irrespective of where their transactions take place.
Many of the Exchange's surveillance programs for customer trading
activity may require the Exchange to look at activity across all
markets, such as reviews related to position limit violations and
manipulation. Indeed, the Exchange cannot effectively review for such
conduct without looking at and evaluating activity irregardless of
where it transpires. In addition to its own surveillance programs, the
Exchange also works with other SROs and exchanges on intermarket
surveillance related issues. Through its participation in the
Intermarket Surveillance Group (``ISG'') \19\ the Exchange shares
information and coordinates inquiries and investigations with other
exchanges designed to address potential intermarket manipulation and
trading abuses. Accordingly, there is a strong nexus between the ORF
and the Exchange's regulatory activities with respect to its TPH's
customer trading activity.
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\18\ If the Exchange changes its method of funding regulation or
if circumstances otherwise change in the future, the Exchange may
decide to modify the ORF or assess a separate regulatory fee on TPH
proprietary transactions if the Exchange deems it advisable.
\19\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
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Lastly, the Exchange believes updating outdated rulebook cross-
references in the Fees Schedule to reflect current rule numbers
maintains clarity in the Fees Schedule, as well as reduces potential
confusion, thereby removing impediments to and perfecting the mechanism
of a free and open market and a national market system, and, in
general, protecting investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. This proposal does not create
an unnecessary or inappropriate intra-market burden on competition
because the ORF applies to all customer activity, thereby raising
regulatory revenue to offset regulatory expenses. It also supplements
the regulatory revenue derived from non-customer activity. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. Indeed, this proposal does not create an
unnecessary or inappropriate inter-market burden on competition because
it is a regulatory fee that supports regulation in furtherance of the
purposes of the Act. The Exchange is obligated to ensure that the
amount of regulatory revenue collected from the ORF, in combination
with its other regulatory fees and fines, does not exceed regulatory
costs.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \20\ and paragraph (f) of Rule 19b-4 \21\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule
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change should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ef9d9a838ac28c8082828a819b9caf9c8a8cc1888099"><span class="__cf_email__" data-cfemail="6f1d1a030a420c0002020a011b1c2f1c0a0c41080019">[email protected]</span></a>. Please include
File No. SR-C2-2021-012 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File No. SR-C2-2021-012. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-C2-2021-012, and should be submitted on or
before September 2, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17174 Filed 8-11-21; 8:45 am]
BILLING CODE 8011-01-P
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