Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase the Options Regulatory Fee and To Revise the Circumstances Under Which NYSE Arca, Inc. Will Collect the Options Regulatory Fee
Federal Register, Volume 77 Issue 220 (Wednesday, November 14, 2012)
Federal Register Volume 77, Number 220 (Wednesday, November 14, 2012)
Notices
Pages 67845-67847
From the Federal Register Online via the Government Printing Office www.gpo.gov
FR Doc No: 2012-27597
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-68174; File No. SR-NYSEArca-2012-118
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase the Options Regulatory Fee and To Revise the Circumstances Under Which NYSE Arca, Inc. Will Collect the Options Regulatory Fee
November 7, 2012.
Pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 1934 (the ``Act'')\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on November 1, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange Commission (the ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change
The Exchange proposes to increase its Options Regulatory Fee (``ORF'') and to revise the circumstances under which the Exchange will collect the ORF. The text of the proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
The Exchange proposes to increase its ORF and to revise the circumstances under which the Exchange will collect the ORF.
Background
The ORF, which is currently $0.004 per contract, is assessed by the Exchange on each OTP Holder or OTP Firm for all options transactions executed or cleared by the OTP Holder or OTP Firm that are cleared by The Options Clearing Corporation (``OCC'') in the customer range, i.e., transactions that clear in the customer account of the OTP Holder's or OTP Firm's clearing firm at OCC, regardless of the marketplace of execution.\4\ In other words, the Exchange imposes the ORF on all customer-range transactions executed by an OTP Holder or OTP Firm even if the transactions do not take place on the Exchange. In the case where an OTP Holder or OTP Firm executes a transaction and a different OTP Holder or OTP Firm clears the transaction, the ORF is assessed to the OTP Holder or OTP Firm who executes the transaction. In the case where a non-OTP Holder or non-OTP Firm executes a transaction and an OTP Holder or OTP Firm clears the transaction, the ORF is assessed to the OTP Holder or OTP Firm who clears the transaction.
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\4\ See Securities Exchange Act Release No. 64399 (May 4, 2011), 76 FR 27114 (May 10, 2011) (SR-NYSEArca-2011-20).
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The dues and fees paid by OTP Holders and OTP Firms go into the general funds of the Exchange, a portion of which is used to help pay the costs of regulation. In particular, the ORF is designed to recover a material portion of the costs to the Exchange of the supervision and regulation of OTP Holder and OTP Firms, including performing routine surveillance and investigations, as well as policy, rulemaking, interpretive and enforcement activities. The Exchange monitors the amount of revenue collected from the ORF so that, in combination with other regulatory fees and fines, it does not exceed regulatory costs. The ORF is collected indirectly from OTP Holders and OTP Firms through their clearing firms by OCC on behalf of the Exchange.
Proposed Change
The Exchange proposes to (1) increase the ORF from $0.004 per contract to
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$0.005 per contract in order to recoup increased regulatory expenses while also monitoring the revenue collected so that the ORF will not exceed such expenses, and (2) revise the circumstances in which the Exchange will collect the ORF from OTP Holders and OTP Firms. Transaction volumes across the industry have declined, thereby reducing ORF revenue, but the Exchange's regulatory expenses have not declined. The Exchange believes that revenue generated from the proposed ORF, when combined with all of the Exchange's other regulatory fees, will cover a material portion, but not all, of the Exchange's regulatory costs. The Exchange will continue to monitor the amount of revenue collected from the ORF so that, in combination with the Exchange's other regulatory fees and fines, it does not exceed regulatory costs. If the Exchange determines that regulatory revenues exceed regulatory costs, the Exchange will adjust the ORF by submitting a proposed rule change to the Commission.\5\
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\5\ The Exchange notes that its regulatory responsibilities with respect to member compliance with options sales practice rules have been allocated to the Financial Industry Regulatory Authority, Inc. (``FINRA'') under an SEC Rule 17d-2 agreement. The ORF is not designed to cover the cost of options sales practice regulation. See supra note 4.
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Additionally, the Exchange proposes to revise the manner in which it assesses the ORF. Currently, upon becoming an OTP Holder or OTP Firm, a participant immediately becomes liable for the ORF. In certain instances, particularly at the outset of becoming an OTP Holder or OTP Firm, a participant may be registered with the Exchange prior to obtaining the requisite technological certification needed to act as a Floor Broker, Market Maker, Clearing Member or Order Flow Provider. The Exchange believes that it is not equitable to assess the ORF on an OTP Holder or OTP Firm that, prior to initially satisfying certain technology requirements, is not capable of availing itself of the benefits of its status as an OTP Holder or OTP Firm.\6\ The Exchange does not desire to assess the ORF on such OTP Holders or OTP Firms until they have satisfied applicable technological requirements necessary to commence operations on the Exchange. The proposed change will have no effect on the assessment of fees for current OTP Holders or OTP Firms that are fully certified to transact business on the Exchange, as described above. The Exchange notes that at least one other exchange has such a provision for assessing the options regulatory fee after satisfaction of applicable technology requirements.\7\
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\6\ The Exchange anticipates that any delay in satisfying applicable technological requirements necessary to commence operations on the Exchange would be brief.
\7\ See Securities Exchange Act Release No. 62804 (August 31, 2010), 75 FR 54688 (September 8, 2010) (SR-BX-2010-060).
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The Exchange notes that the proposed change is not otherwise intended to address any other issues surrounding the ORF and that the Exchange is not aware of any problems that OTP Holders and OTP Firms would have in complying with the proposed change. The Exchange proposes to implement these changes on December 1, 2012.
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Statutory Basis
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act''),\8\ in general, and furthers the objectives of Section 6(b)(4) of the Act,\9\ in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposal is reasonable because the Exchange's revenue from the collection of the ORF has declined due to a decrease in industry volume, but the Exchange's regulatory expenses have not declined. As described above, through the ORF the Exchange seeks to recover the costs of supervising and regulating OTP Holders and OTP Firms, including performing routine surveillance and investigations, as well as policy, rulemaking, interpretive and enforcement activities. The proposed ORF increase will help to maintain the total revenue collected to offset these regulatory expenses, but would not exceed those regulatory costs. The Exchange further notes that another options exchange has raised its options regulatory fee to $0.0065 per contract, so the Exchange's proposed ORF of $0.005 per contract will still be below that level.\10\
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\10\ See Securities Exchange Act Release No. 67597 (August 6, 2012), 77 FR 47887 (August 10, 2012) (SR-CBOE-2012-065).
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The Exchange believes that the proposed ORF increase is equitable and not unfairly discriminatory because it is objectively allocated to all OTP Holder and OTP Firms on all of their transactions that clear in the customer range at OCC. Moreover, the Exchange believes that the ORF is equitable and not unfairly discriminatory because it results in fees being charged to those OTP Holder and OTP Firms that require more Exchange regulatory services based on the amount of customer options business they conduct. In this regard, regulating customer trading activity is more labor intensive and requires greater expenditure of human and technical resources than regulating non-customer trading activity. Surveillance and regulation of non-customer trading activity generally tends to be more automated and less labor intensive. As a result, the costs associated with administering the customer component of the Exchange's overall regulatory program are anticipated to be higher than the costs associated with administering the non-customer component of its regulatory program. As such, the Exchange proposes to continue to assess the ORF to those OTP Holder and OTP Firms that will require more Exchange regulatory services based on the amount of customer options business they conduct.\11\
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\11\ The ORF is not charged for orders that clear in categories other than the customer range (e.g., market maker orders) because OTP Holders or OTP Firms incur the costs of acquiring trading permits and through these permits are charged transaction fees, dues and other fees that go into the general funds of the Exchange, a portion of which is used to help pay the costs of regulation.
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The Exchange believes that the ORF will continue to be equitable and not unfairly discriminatory because the fee increase is objectively allocated to all OTP Holders and OTP Firms. The only OTP Holders or OTP Firms that would not pay the fee will be those that have not yet achieved the technical certifications that are needed to actually begin acting as a Floor Broker, Market Maker, Clearing Member or Order Flow Provider on the Exchange. The Exchange believes that this exception is reasonable, equitable and not unfairly discriminatory. Not assessing the ORF on an OTP Holder or OTP Firm that is not yet able to act in the capacity for which it is attempting to obtain certification is reasonable because the OTP Holder or OTP Firm is not yet able to generate the revenue associated with serving in that capacity. In this respect, it is equitable and not unfairly discriminatory to not begin charging the ORF until the OTP Holder or OTP Firm can generate the revenue to pay the fee. It is also equitable and not unfairly discriminatory because it will apply in an objective manner to all similarly situated OTP Holders and OTP Firms.
As noted above, the Exchange will continue to monitor the amount of revenue collected from the ORF so that, in combination with its other regulatory fees and fines, it does not exceed regulatory costs. If the Exchange determines that regulatory revenues
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exceed regulatory costs, the Exchange will adjust the ORF by submitting a proposed rule change to the Commission.
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Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
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Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the proposed rule change.
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Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A)\12\ of the Act and subparagraph (f)(2) of Rule 19b-
4 \13\ thereunder, because it establishes a due, fee, or other charge imposed by the NYSE Arca.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
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Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include File Number SR-NYSEArca-2012-118 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-118. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2012-118, and should be submitted on or before December 5, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
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\14\ 17 CFR 200.30-3(a)(12).
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FR Doc. 2012-27597 Filed 11-13-12; 8:45 am
BILLING CODE 8011-01-P
