[Federal Register Volume 84, Number 202 (Friday, October 18, 2019)]
[Notices]
[Pages 56022-56055]
[FR Doc No: 2019-22699]

Vol. 84

Friday,

No. 202

October 18, 2019

Part II

Securities and Exchange Commission

-----------------------------------------------------------------------

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of
Proposed Rule Change Related To Adopt Rules To Govern the Trading of
Equity Securities on the Exchange Through a Facility of the Exchange
Known as the Boston Security Token Exchange LLC; Notice

Federal Register / Vol. 84 , No. 202 / Friday, October 18, 2019 /
Notices

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87287; File No. SR-BOX-2019-19]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change Related To Adopt Rules To Govern the Trading of
Equity Securities on the Exchange Through a Facility of the Exchange
Known as the Boston Security Token Exchange LLC

October 11, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 27, 2019, BOX Exchange LLC (the ``Exchange'') filed with
the Securities and Exchange Commission (``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.
---------------------------------------------------------------------------

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

I. The Exchange's Statement of the Terms of Substance of the Proposed
Rule Change

    Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 as amended (``Exchange Act''),\3\ BOX Exchange LLC
(``BOX or the ``Exchange'') is filing with the Securities and Exchange
Commission (``SEC'' or ``Commission'') a proposed rule change to adopt
rules to govern the trading of equity securities on the Exchange
through a facility of the Exchange known as Boston Security Token
Exchange LLC (``BSTX''). As described more fully below, BSTX would
operate a fully automated, price/time priority execution system for the
trading of ``security tokens,'' which would be equity securities that
meet BSTX listing standards and for which ancillary records of
ownership would be able to be created and maintained using distributed
ledger (or ``blockchain'') technology. The proposed additions to the
Exchange's Rules setting forth new Rule Series 17000-28000 are included
as Exhibit 5A. All text set forth in Exhibit 5A would be added to the
Exchange's rules and therefore underlining of the text is omitted to
improve readability. Forms proposed to be used in connection with the
proposed rule change, such as the application to become a BSTX
Participant, are included as Exhibits 3A through 3N.
---------------------------------------------------------------------------

    \3\ 15 U.S.C.k 78s(b)(1).
---------------------------------------------------------------------------

    In addition, the Exchange proposes to make certain amendments to
several existing BOX Rules to facilitate trading on BSTX. The proposed
changes to the existing BOX Rules would not change the core purpose of
the subject Rules or the functionality of other BOX trading systems and
facilities. Specifically, the Exchange is seeking to amend BOX Rules
100, 2020, 2060, 3180, 7130, 7150, 7230, 7245, IM-8050-3, 11010, 11030,
12030, and 12140. These proposed changes are set forth in Exhibit 5B.
Material proposed to be added to the Rule as currently in effect is
underlined and material proposed to be deleted is bracketed.
    All capitalized terms not defined herein have the same meaning as
set forth in the Exchange's Rules.\4\
---------------------------------------------------------------------------

    \4\ The Exchange's Rules can be found on the Exchange's public
website: https://boxoptions.com/regulatory/rulebook-filings/.
---------------------------------------------------------------------------

II. The Exchange'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
these statements.

(A) The Exchange's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

(1) Purpose
    The Exchange is proposing to adopt a series of rules to govern the
trading of equity securities through a facility of the Exchange known
as BSTX and make certain amendments to the existing BOX rules to
facilitate trading on BSTX. As described more fully below, BSTX would
operate a fully automated, price/time priority execution system (``BSTX
System'') for the trading of ``security tokens,'' which would be equity
securities that meet BSTX listing standards and for which ancillary
records of ownership would be able to be created and maintained using
distributed ledger technology. These ancillary records of ownership
that would be maintained using distributed ledger technology would not
be official records of security token ownership. Instead, as described
further herein, such records would be ancillary records that would
reflect certain end-of-day security token position balances as reported
by market participants. All BOX Participants would be eligible to
participate in BSTX provided that they become a BSTX Participant
pursuant to the proposed rules. Under the proposed rules, BSTX would
serve as the listing market for eligible companies that wish to issue
their registered securities as security tokens. Security tokens would
trade as NMS stock.\5\ A guide to the structure of the proposed rule
change is described immediately below.
---------------------------------------------------------------------------

    \5\ 17 CFR 242.600(b)(48).
---------------------------------------------------------------------------

I. Guide to the Scope of the Proposed Rule Change
    The proposal for trading of security tokens through BSTX generally
involves changes to existing BOX Rules and new BOX Rules pertaining
specifically to BSTX (``BSTX Rules''). In addition, BSTX corporate
governance documents as well as certain discrete changes to existing
BOX corporate governance documents are necessary, which the Exchange
plans to submit to the Commission through a separate proposed rule
change. To support the trading of security tokens through BSTX, certain
conforming changes are proposed to existing BOX Rules and entirely new
BSTX Rules are also proposed as Rule Series 17000 through 28000.\6\
Each of those new Rule Series and the provisions thereunder are
described in greater detail below. Where the BSTX Rules are based on
existing rules of another national securities exchange, the source rule
from the relevant exchange is noted along with a discussion of notable
differences between the source rule and the proposed BSTX Rule. The
proposed BSTX Rules are addressed in Section IV below and they
generally cover the following areas:
---------------------------------------------------------------------------

    \6\ The proposed changes to BOX Rules and the proposed BSTX
Rules are attached as Exhibit 5A.
---------------------------------------------------------------------------

     Section 17000--General Provisions of BSTX;
     Section 18000--Participation on BSTX;
     Section 19000--Business Conduct for BSTX Participants;
     Section 20000--Financial and Operational Rules for BSTX
Participants;
     Section 21000--Supervision;
     Section 22000--Miscellaneous Provisions;
     Section 23000--Trading Practice Rules;
     Section 24000--Discipline and Summary Suspension;
     Section 25000--Trading Rules;
     Section 25200--Market Making on BSTX;

     Section 26000--BSTX Listing Rules;
     Section 27000--Suspension and Delisting;
     Section 27100--Guide to Filing Requirements;
     Section 27200--Procedures for Review of Exchange Listing
Determinations; and
     Section 28000--Dues, Fees, Assessments and Other Charges.
II. Overview of BSTX and Considerations Related to the Listing, Trading
and Clearance and Settlement of Security Tokens
A. The Joint Venture and Ownership of BSTX
    On June 19, 2018, t0.com Inc. (``tZERO'') and BOX Digital Markets
LLC (``BOX Digital'') announced a joint venture to facilitate the
trading of security tokens on the Exchange.\7\ As part of the joint
venture, BOX Digital, which is a subsidiary of BOX Holdings Group LLC,
and tZERO each own 50% of BSTX LLC. Pursuant to the BSTX LLC Agreement,
BOX Digital and tZERO will perform certain specified functions with
respect to the operation of BSTX. As noted, these details, as well as
the proposed governance structure of the joint venture and accompanying
changes to the Exchange's current governance documents and bylaws, will
be the subject of a separate proposed rule change that the Exchange
plans to submit to the Commission.
---------------------------------------------------------------------------

    \7\ See tZERO and BOX Digital Markets Sign Deal to Create Joint
Venture, Business Wire (June 19, 2018), available at https://www.businesswire.com/news/home/20180619005897/en/tZERO-BOX-Digital-Markets-Sign-Deal-Create.
---------------------------------------------------------------------------

B. BSTX Is a Facility of BOX That Would Support Trading in the New
Asset Class of Security Tokens
    BSTX would operate as a facility \8\ of BOX, which is a national
securities exchange registered with the SEC. As a facility of BOX,
BSTX's operations would be subject to applicable requirements in
Sections 6 and 19 of the Exchange Act, among other applicable rules and
regulations.\9\ Currently, BOX functions as an exchange only for
standardized options. While BSTX may eventually support a wider variety
of securities, subject to Commission approval, at the time that BSTX
commences operations it would only support trading in security tokens
that are equity securities. Accordingly, this represents a new asset
class for BOX, and this proposal sets forth the changes and additions
to the Exchange's rules to support the trading of equity securities as
security tokens.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78c(a)(2). Section 3(a)(2) of the Exchange Act,
provides that ``the term `facility' when used with respect to an
exchange includes its premises, tangible or intangible property
whether on the premises or not, any right to the use of such
premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' Because BSTX will share certain systems of
the Exchange, BSTX is a facility of the Exchange.
    \9\ 15 U.S.C. 78f; 15 U.S.C. 78s.
---------------------------------------------------------------------------

    The Exchange proposes to use the term ``security token'' \10\ to
describe the BSTX-listed securities that would use blockchain
technology as an ancillary recordkeeping mechanism, as described in
further detail below. Ownership of security tokens would be able to be
transferred without regard to the blockchain-based ancillary
recordkeeping functionality (as also described further below).
Notwithstanding this, the Exchange believes that it is appropriate to
describe these securities as ``security tokens'' to distinguish them
from other securities that are not designed to use blockchain
technology as an ancillary recordkeeping mechanism and as a way of
indicating the additional proposed obligations of market participants
trading security tokens to obtain a wallet address and report end-of-
day security token balances to BSTX.\11\
---------------------------------------------------------------------------

    \10\ The Exchange proposes to define the term ``security token''
to mean a NMS stock, as defined in Rule 600(b)(47) of the Exchange
Act, trading on the BSTX System. References to a ``security'' or
``securities'' in the Rules include security tokens. See proposed
Rule 17000(a)(30).
    \11\ See Part II, Sections G and I for further description of
these obligations.
---------------------------------------------------------------------------

C. Security Tokens Would Be NMS Stocks
    The security tokens would qualify as NMS stocks pursuant to
Regulation NMS,\12\ which defines the term ``NMS security'' in relevant
part to mean ``any security or class of securities for which
transaction reports are collected, processed and made available
pursuant to an effective transaction reporting plan . . . .'' \13\ The
Exchange plans to join existing transaction reporting plans, as
discussed in Part VIII below, for the purposes of security token
quotation and transaction reporting.\14\ The term ``NMS stock'' means
``any NMS security other than an option'' \15\ and therefore security
tokens traded on BSTX that represent equity securities will be
classified as NMS stock.
---------------------------------------------------------------------------

    \12\ 17 CFR 242.600 through 613.
    \13\ 17 CFR 242.600(b)(47).
    \14\ 17 CFR 242.601(a)(1). The rule states in relevant part that
``every national securities exchange shall file [with the SEC] a
transaction reporting plan regarding transactions in listed equity
and Nasdaq securities executed through its facilities . . . .''
    \15\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

D. BSTX Would Support Trading of Registered Securities
    All security tokens traded on BSTX would generally be required to
be registered with the Commission under both Section 12 of the Exchange
Act \16\ and Section 6 of the Securities Act of 1933 (``Securities
Act'').\17\ BSTX would not support trading of security tokens offered
under an exemption from registration for public offerings, with the
exception of certain offerings under Regulation A that meet the
proposed BSTX listing standards.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78l.
    \17\ 15 U.S.C. 77f.
---------------------------------------------------------------------------

E. Clearance and Settlement of Security Tokens
    BSTX would maintain certain rules, as described below, to address
custody, clearance and settlement in connection with security tokens.
All transactions in security tokens would clear and settle in
accordance with the rules, policies and procedures of registered
clearing agencies. Specifically, BSTX anticipates that at the time that
it commences operations security tokens that are listed and traded on
BSTX would be securities that have been made eligible for services by
The Depository Trust Company (``DTC'') and that DTC would serve as the
securities depository \18\ for such security tokens. It is also
expected that confirmed trades in security tokens on BSTX would be
transmitted to National Securities Clearing Corporation (``NSCC'') for
clearing such that NSCC would clear the trades through its systems to
produce settlement obligations that would be due for settlement between
participants at DTC. BSTX believes that this custody, clearance and
settlement structure is the same general structure that exists today
for other exchange traded equity securities.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) of the
Exchange Act defines the term ``clearing agency'' to include ``any
person, such as a securities depository, who (i) acts as a custodian
of securities in connection with a system for the handling of
securities whereby all securities of a particular class or series of
any issuer deposited within the system are treated as fungible and
may be transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates.''
---------------------------------------------------------------------------

1. Issuance of Equity Securities Eligible To Become a Security Token
    BSTX expects that a security issuer's process for issuing a class
of security that may be eligible for listing on BSTX

as a security token would follow the same general process for issuing
securities that BSTX believes is followed by issuers in the U.S. today.
That is, issuers would issue securities pursuant to governing state law
and the organizational documents for the entity. At the commencement of
BSTX's operations, only equity securities would be eligible for listing
as security tokens. This would be addressed by BSTX Rules 26102 (Equity
Issues), 26103 (Preferred Security Tokens) and 26105 (Warrant Security
Tokens), which would be part of BSTX's listing rules and would
contemplate that only those specified types of equity securities would
be eligible for listing.
2. Securities Depository Eligibility
    BSTX would maintain rules that would promote a structure in which
security tokens would be held in ``street name'' with DTC.\19\ BSTX
Rule 26136 would require that for an equity security to be eligible to
be a security token BSTX must have received a representation from the
issuer that a CUSIP number that identifies the security is included in
a file of eligible issues maintained by a securities depository that is
registered with the SEC as a clearing agency. This is based on rules
that are currently maintained by other equities exchanges.\20\ In
practice, BSTX Rule 26136 requires the security token to have a CUSIP
number that is included in a file of eligible securities that is
maintained by DTC because the Exchange believes that DTC currently is
the only clearing agency registered with the SEC that provides
securities depository services.\21\
---------------------------------------------------------------------------

    \19\ The term ``street name'' refers to a securities holding
structure in which DTC, through its nominee Cede & Co., would be the
registered holder of the securities and, in turn, DTC would grant
security entitlements in such securities to relevant accounts of its
participants. Proposed BSTX Rule 26135 would also provide, with
certain exceptions, that securities listed on BSTX must be eligible
for a direct registration program operated by a clearing agency
registered under Section 17A of the Exchange Act. DTC operates the
only such program today, known as the Direct Registration System,
which permits an investor to hold a security as the registered owner
in electronic form on the books of the issuer.
    \20\ Proposed BSTX Rule 26136 is based on current NYSE Rule 777.
    \21\ See Exchange Act Release No. 78963 (September 28, 2016), 81
FR 70744, 70748 (October 13, 2016) (footnote 46 and the accompanying
text acknowledge that DTC is the only registered clearing agency
that provides securities depository services for the U.S. securities
markets).
---------------------------------------------------------------------------

3. Book-Entry Settlement at a Securities Depository
    BSTX would also maintain Proposed BSTX Rule 26137 regarding uniform
book-entry settlement. The rule would require each BSTX Participant to
use the facilities of a securities depository for the book-entry
settlement of all transactions in depository eligible securities with
another BSTX Participant or a member of a national securities exchange
that is not BSTX or a member of a national securities association.\22\
Proposed BSTX Rule 26137 is based on the depository eligibility rules
of other equities exchanges and Financial Industry Regulatory Authority
(``FINRA'').\23\ Those rules were first adopted as part of a
coordinated industry effort in 1995 to promote book-entry settlement
for the vast majority of initial public offerings and ``thereby reduce
settlement risk'' in the U.S. national market system.\24\
---------------------------------------------------------------------------

    \22\ FINRA is currently the only national securities association
registered with the SEC.
    \23\ See e.g., FINRA Rule 11310. Book-Entry Settlement and NYSE
Rule 776. Book-Entry Settlement of Transactions.
    \24\ These coordinated depository eligibility rules resulted
from proposed listing rules amendments developed by the Legal and
Regulatory Subgroup of the U.S. Working Committee, Group of Thirty
Clearance and Settlement Project. See Securities Exchange Act
Release Nos. 35774 (May 26, 1995) (SR-NASD-95-24), 60 FR 28813 (June
2, 1995); 35773 (May 26, 1995), 60 FR 28817 (June 2, 1995) (SR-NYSE-
95-19).
---------------------------------------------------------------------------

4. Participation in a Registered Clearing Agency That Uses a Continuous
Net Settlement System
    Under proposed BSTX Rule 25140, each BSTX Participant would be
required to either (i) be a member of a registered clearing agency that
uses a continuous net settlement (``CNS'') system, or (ii) clear
transactions executed on BSTX through a member of such a registered
clearing agency. The Exchange believes that today NSCC is the only
registered clearing agency that uses a CNS system to clear equity
securities, and proposed BSTX Rule 25140 further specifies that BSTX
will maintain connectivity and access to the Universal Trade Capture
system of NSCC to transmit confirmed trade details to NSCC regarding
trades executed on BSTX. The proposed rule would also address the
following: (i) A requirement that each security token transaction
executed through BSTX must be executed on a locked-in basis for
automatic clearance and settlement processing; (ii) the circumstances
under which the identity of contra parties to a security token
transaction that is executed through BSTX would be required to remain
anonymous or may be revealed; and (iii) certain circumstances under
which a security token transaction may be cleared through arrangements
with a member of a foreign clearing agency. Proposed BSTX Rule 25140 is
based on a substantially identical rule of the Investor's Exchange, LLC
(``IEX''), which, in turn, is consistent with the rules of other
equities exchanges.\25\
---------------------------------------------------------------------------

    \25\ See IEX Rule 11.250 (Clearance and Settlement; Anonymity),
which was approved by the Commission in 2016 as part of its approval
of IEX's application for registration as a national securities
exchange. Exchange Act Release No. 78101 (June 17, 2016); 81 FR
41142 (June 23, 2016); see also Cboe BZX Rule 11.14 (Clearance and
Settlement; Anonymity).
---------------------------------------------------------------------------

    BSTX believes that the operation of its depository eligibility rule
and its book-entry services rule would promote a framework in which
security tokens that would be eligible to be listed and traded on BSTX
would be equity securities that have been made eligible for services by
a registered clearing agency that operates as a securities depository
and that are settled through the facilities of the securities
depository by book-entry. The Exchange believes that because DTC
currently is the only clearing agency registered with the SEC that
provides securities depository services, at the commencement of BSTX's
operations, security tokens would be securities that have been made
eligible for services by DTC, including book-entry settlement services.
5. Settlement Cycle
    Proposed BSTX Rule 25100(d) would address settlement cycle
considerations regarding trades in security tokens. Security token
trades that result from orders matched against the electronic order
book of BSTX would be required to clear and settle pursuant to the
rules, policies and procedures of a registered clearing agency.
Additionally, Rule 25100(d) would provide that such security token
transactions occurring through BSTX would settle one business day after
the trade date (i.e., T+1) where that settlement cycle timing is
permitted under the rules, policies and procedures of the relevant
registered clearing agency. This creates a presumption of T+1
settlement for security token trades in such circumstances. However,
the BSTX participants that are parties to a security token trade would
have the ability to agree to a shorter or longer settlement cycle for
the trade as may be permitted by the relevant registered clearing
agency. The BSTX participants would also be required to notify BSTX of
the shorter or longer settlement cycle timing in a manner consistent
with related procedures that BSTX would maintain from time to time.
    As noted above in connection with the description of proposed BSTX
Rule 25140, BSTX expects at the commencement of its operations that it

would transmit confirmed trade details to NSCC regarding security token
trades that occur on BSTX and that NSCC would be the registered
clearing agency that clears security token trades. BESTX believes that
NSCC already has authority under its rules, policies and procedures to
clear certain trades on a T+1 or T+0 basis, which are shorter
settlement cycles than the longest settlement cycle of T+2 that is
generally permitted under SEC Rule 15c6-1 for a security trade that
involves a broker-dealer.\26\ As described above regarding BSTX Rules
26136 and 26137, all security token trades occurring on BSTX that are
cleared by NSCC, including those for which the T+1 settlement
presumption would apply, would be settled through book-entry settlement
at DTC pursuant to its rules, policies and procedures.
---------------------------------------------------------------------------

    \26\ 17 CFR 240.15c6-1. Under SEC Rule 15c6-1, with certain
exceptions, a broker-dealer is not permitted to enter a contract for
the purchase or sale of security that provides for payment of funds
and delivery of securities later than the second business day after
the date of the contract unless otherwise expressly agreed to by the
parties at the time of the transaction.
---------------------------------------------------------------------------

    In adopting amendments to SEC Rule 15c6-1 in 2017 to shorten the
standard settlement cycle for most broker-dealer transactions in
securities from T+3 to T+2, the Commission stated its belief that the
shorter settlement cycle would have positive effects regarding the
liquidity risks and costs faced by members in a clearing agency, like
NSCC, that performs central counterparty \27\ (``CCP'') services, and
that it would also have positive effects for other market participants.
Specifically, the Commission stated its belief that the resulting
``reduction in the amount of unsettled trades and the period of time
during which the CCP is exposed to risk would reduce the amount of
financial resources that the CCP members may have to provide to support
the CCP's risk management process . . . '' and that ``[t]his reduction
in the potential need for financial resources should, in turn, reduce
the liquidity costs and capital demands clearing broker-dealers face .
. . and allow for improved capital utilization.'' \28\ The Commission
went on to state its belief that shortening the settlement cycle
``would also lead to benefits to other market participants, including
introducing broker-dealers, institutional investors, and retail
investors'' such as ``quicker access to funds and securities following
trade execution'' and ``reduced margin charges and other fees that
clearing broker-dealers may pass down to other market participants[.]''
\29\ The Commission also ``noted that a move to a T+1 standard
settlement cycle could have similar qualitative benefits of market,
credit, and liquidity risk reduction for market participants[.]'' \30\
BSTX agrees with these statements by the Commission and has therefore
proposed BSTX Rule 25100(d) in a form that would promote the benefits
of a T+1 settlement cycle regarding security token trades where T+1
settlement is already permitted pursuant to the rules, policies and
procedures of NSCC and DTC today.
---------------------------------------------------------------------------

    \27\ See 17 CFR 240.17Ad-22(a)(2) (defining the term ``central
counterparty'' to mean ``a clearing agency that interposes itself
between the counterparties to securities transactions, acting
functionally as the buyer to every seller and the seller to every
buyer'').
    \28\ Exchange Act Release No. 80295 (March 22, 2017), 82 FR
15564, 15570-71 (March 29, 2017).
    \29\ Id. at 15571.
    \30\ Id. at 15582.
---------------------------------------------------------------------------

F. Compatibility With the BSTX Security Token Protocol for BSTX-Listed
Security Tokens To Facilitate Ancillary Recordkeeping
    BSTX would maintain listing standards that would enable security
tokens to have an ancillary record of ownership recorded on the
Ethereum blockchain using a protocol standard determined by BSTX (the
``BSTX Security Token Protocol'' or the ``Protocol'').\31\ In this way,
the Ethereum blockchain would serve as a complementary recordkeeping
mechanism to official records of security token ownership maintained by
market participants.
---------------------------------------------------------------------------

    \31\ While BSTX initially intends to support only the trading of
eligible security tokens that are compatible with the Ethereum
public blockchain, BSTX may support tokens compatible with other
blockchains that support smart contract functionality in the future.
---------------------------------------------------------------------------

1. Background on Blockchain Technology
    In general, a blockchain is an open, decentralized ledger that can
maintain digital records of assets and transactions that are accessible
to anyone running the same protocol.\32\ The blockchain's central
function is to encode transitions or changes to the ledger, such as the
movement of an asset from one person to another person. Whenever one
change to the blockchain ledger occurs to record a state transition,
the entire blockchain is immutably changed to reflect the state
transition. The purpose of requiring security tokens to adopt the BSTX
Security Token Protocol is to enable security token ownership to be
recorded on the public Ethereum blockchain as an ancillary
recordkeeping mechanism and to ensure uniformity among security tokens
rather than permitting each security token to have its own unique
specifications that might complicate updates to the blockchain and add
unnecessary complexity.
---------------------------------------------------------------------------

    \32\ A ``protocol'' for this purpose is a set of rules governing
the format of messages that are exchanged between the participants.
---------------------------------------------------------------------------

2. Background on the Ethereum Blockchain
    The Ethereum blockchain is an open-source, public blockchain that
operates as a computing platform and operating system that supports
smart contract functionality.\33\ Smart contracts are computer
protocols designed to digitally facilitate, verify, and enforce the
performance of a contract. Ethereum-based smart contracts are executed
on the Ethereum Virtual Machine, which can be thought of as a global
computer network upon which the smart contracts run. Ether is the
digital currency used to pay fees associated with operating smart
contracts (known as ``gas'') on the Ethereum networks. This is because
there are costs involved in performing the computations necessary to
execute a smart contract and to record any state transitions onto the
Ethereum blockchain.\34\ Thus, moving tokens from one address to
another address (i.e., a state transition) requires some amount of
Ether to pay the fee (i.e., ``gas'') associated with recording the
movement of tokens to the Ethereum blockchain. Parties to a transaction
in Ethereum-based smart contracts can determine what those gas costs
are depending on how quickly they would like the transaction to be
reflected on the Ethereum blockchain.
---------------------------------------------------------------------------

    \33\ See Ethereum White Paper (last updated Aug. 1, 2018)
available at https://github.com/ethereum/wiki/wiki/White-Paper.
    \34\ See What Is Gas, MyEtherWallet (2018) available at https://kb.myetherwallet.com/posts/transactions/what-is-gas/.
---------------------------------------------------------------------------

3. Background on Smart Contracts
    The term ``smart contract'' is commonly used to describe computer-
coded functions in connection with the Ethereum blockchain. An Ethereum
smart contract is neither ``smart'' nor a legal contract in the
traditional sense. Smart contracts in this context refer to immutable
\35\ computer programs that run deterministically \36\ in the context
of the Ethereum Virtual Machine. Smart contracts operate within a very
limited

execution context. They can access their own state, the context of the
transaction that called them, and some information about the most
recent blocks (i.e., the most recent recording of transactions and
other events recorded to the Ethereum blockchain).
---------------------------------------------------------------------------

    \35\ Smart contracts are immutable in that, once deployed, the
code of a smart contract cannot change. Unlike with traditional
software, the only way to modify a smart contract is to deploy a new
instance.
    \36\ Deterministic in this context means that the outcome of the
execution of a smart contract is the same for everyone who runs it,
given the context of the transaction that initiated its execution.
---------------------------------------------------------------------------

    In the context of security tokens, smart contracts generally may
have three components: (i) Functions, (ii) configurations; (iii) and
events.\37\ Functions describe the basic operations of a smart
contract, such as the ability to query a particular address to
determine how many tokens belong to that address.\38\ Configurations
are attributes of a smart contract that are typically set at the launch
of a smart contract, such as designating the name of the smart contract
(e.g., as XYZ security token). Events describe the functions of a smart
contract that, when executed, result in a log or record being recorded
to the Ethereum blockchain, such as the transfer of tokens from one
address to another. Not all functions of a smart contract result in a
log or record being recorded to the Ethereum blockchain. Smart
contracts only run if they are called by a transaction.\39\
---------------------------------------------------------------------------

    \37\ However, a smart contract need not necessarily have each of
these components. Some smart contracts may simply be used to support
the functioning of other smart contracts and may not itself result
in events being recorded to the Ethereum blockchain.
    \38\ An ``address'' in this context refers to a number that is
associated with a particular market participant within the smart
contract that can updated to reflect changes in ownership of tokens.
    \39\ The term ``transaction'' in this context refer not to an
actual execution or transaction occurring on BSTX or in the
marketplace, but rather to an operation triggering a smart contract
to carry out its specified function, which must ultimately originate
from a human source.
---------------------------------------------------------------------------

    Smart contracts can call another smart contract, which can call
another contract, and so on. Smart contracts never run ``on their own''
or ``in the background,'' but rather lie dormant until a transaction
triggers them to carry out a specified operation pursuant to the
protocol on which they operate. All transactions execute in their
entirety or not at all, regardless of how many smart contracts they
call or what those smart contracts do. Only if a transaction
successfully executes in its entirety is there an ``event''
representing a change to the state of the blockchain with respect that
transaction. If an execution of a smart contract's operation fails due
to an error, all of its effects (e.g., events) are rolled back as if
the transaction never ran.
4. Background on Tokens
    Tokens historically referred to privately issued, special-purpose
coin-like items (e.g., laundry tokens or arcade game tokens). In the
context of blockchain technology, tokens generally mean blockchain-
based abstractions that can be owned and that represent assets,
currency, or access rights. A security token on the blockchain used for
ancillary recordkeeping of ownership can be thought of as a digital
representation of shareholder equity in a legal entity organized under
the authority of state or federal law and that meet BSTX's listing
standards. Having a security token attributed to a particular address,
however, would not convey ownership of shareholder equity in the issuer
because the official records of ownership would be maintained by
participants at DTC.\40\
---------------------------------------------------------------------------

    \40\ Rather, a digital representation of a security token
associated with a particular address reflects an ancillary record of
security token ownership based on data provided to BSTX by market
participants. The records reflected on the Ethereum blockchain
regarding security tokens may not be current to reflect the most
recent transactions in the marketplace and may not reflect ownership
by all market participants.
---------------------------------------------------------------------------

    To create a new token on Ethereum, including for purposes of
facilitating ancillary recordkeeping of security token ownership, one
must create a new smart contract. The smart contract would be
configured to detail, among other things, the name of the issuer and
the total supply of the tokens. Smart contracts can be designed to
carry out any event that one wants, but using a set standard or
protocol allows for participants transacting in those smart contracts
to have uniform expectations and functionality with respect to the
tokens.
5. Background on Protocols
    A protocol (also sometimes referred to as a ``standard'' or
``protocol standard'') defines the functions, events, configurations,
and other features of a given smart contract. The most common protocol
used with Ethereum is the ERC-20 protocol, which describes the minimum
functions that are necessary to be considered an ERC-20 token.\41\ The
ERC-20 protocol offers basic functionalities to transfer tokens, obtain
account balances, and query the total supply of tokens, among other
features. The BSTX Security Token Protocol is compliant with the ERC-20
protocol but adds additional requirements and functionality, as
described below.
---------------------------------------------------------------------------

    \41\ See e.g., Jesus Najera, Understanding ERC20, Coin Central
(Jan. 8, 2018), available at https://coincentral.com/understanding-erc20/; Alfonso de la Rocha, Anatomy of an ERC: An Exhaustive
Survey, Medium (May 7, 2018) https://medium.com/coinmonks/anatomy-of-an-erc-an-exhaustive-survey-8bc1a323b541.
---------------------------------------------------------------------------

    As noted above, Ether is the digital currency used to pay fees
associated with operating smart contracts (known as ``gas'') on the
Ethereum network. Payment of gas is required to operate smart contracts
because there are costs involved in performing the computations
necessary to execute a smart contract and to record any state
transitions onto the Ethereum blockchain.
    There is an important conceptual distinction between ERC-20 tokens,
including security tokens, and Ether itself. Where Ether is transferred
by a transaction that has a recipient address as its destination, token
transfers occur within the specific token contract state and have the
token smart contract as their destination, not the recipient's address.
The token smart contract tracks balances and issues events to the
Ethereum blockchain. In a token transfer,\42\ no transaction is
actually sent to the recipient of the token. Instead, the recipient's
address is added to a map within the token smart contract itself. In
contrast, a transaction sending Ether to an address changes the state
of an address. A transaction transferring a token to an address only
changes the state of the token contract, not the state of the recipient
address. Thus, an address is not really full of tokens; rather it is
the token smart contract that has the addresses and balances associated
with each address in it.
---------------------------------------------------------------------------

    \42\ A ``transfer'' in the context of the BSTX Security Token
Protocol regarding a security token refers to a reallocation of the
digital representation of a security token on the Ethereum
blockchain as an ancillary recordkeeping mechanism to reflect
corresponding changes in ownership of the security token.
---------------------------------------------------------------------------

6. BSTX Security Token Protocol
    BSTX Rule 26138 requires that a BSTX listed company's security
tokens must comply with the Protocol to trade on BSTX. The purpose of
this requirement is to ensure that all security tokens are governed by
the same set of specifications and controls that allow for ownership of
security tokens to be recorded to the Ethereum blockchain as an
ancillary recordkeeping mechanism.
    The Protocol involves three smart contracts. The Asset Smart
Contract is the primary smart contract that contains the balances of
security tokens associated with each address and carries out the
functions necessary to reflect changes in ownership. There are two
ancillary smart contracts that are called by the Asset Smart Contract
in executing transactions. The first of these is the Registry Smart
Contract (``Registry''), which contains the list of permissioned (or
``whitelisted'') addresses, and the second is the Compliance Smart
Contract, which includes a variable list of additional

compliance related rules that the Asset Smart Contract must comply with
in executing a transaction. Each of these three smart contracts are
described in greater detail below:
    (1) Asset Smart Contract--The Asset Smart Contract defines and
establishes the security tokens (e.g., the maximum number of security
tokens available for a particular issuance) for purposes of the
Ethereum blockchain ancillary recordkeeping function and records a list
of market participant addresses and the security tokens associated with
each address.
    (2) Registry Smart Contract--The Registry Smart Contract (or
``Registry'') defines the permissions available to different types of
market participants to perform certain functions. Under the Protocol,
there are five different types of market participants connected with
the Registry, each with different abilities and permissions (as
detailed below): \43\ (1) Contract Owner, (2) Custodian, (3) Broker
Dealer, (4) Custodial-Account, and (5) Investor. The Registry also
contains the list of whitelisted addresses to which security tokens may
be sent and additional information associated with each address (e.g.,
whether an address has been suspended).
---------------------------------------------------------------------------

    \43\ There are additional roles that are not technically part of
the Registry and are instead specific to certain smart contracts.
For example, an ``Issuer'' is an Asset Smart Contract-specific role.
Also, an ``Administrator'' is a Compliance Smart Contract-specific
role that allows such a user to, for example, freeze the transfer of
tokens for purposes of the ancillary recordkeeping function under
certain circumstances and modify or add compliance rules to govern a
security token.
---------------------------------------------------------------------------

    (3) Compliance Smart Contract--The Compliance Smart Contract is the
set of rules held in a separate smart contract that a security token
can be configured to abide by to ensure compliance with applicable laws
and regulations (e.g., by restricting a movement of security tokens to
an address that has not been added to the Registry for purposes of the
Ethereum blockchain ancillary recordkeeping mechanism). The Compliance
Smart Contract can be modified to add or remove applicable rules in
light of changes to applicable regulatory requirements.
    Each of these three smart contracts work together to facilitate the
ancillary recordkeeping mechanism for Security Tokens using the
Ethereum blockchain. The details of the specific functions,
configurations, and events under the Protocol are set forth in greater
detail in Exhibit 3N.
G. Obtaining a Whitelisted Wallet Address
    Pursuant to proposed Rule 17020(a), a BSTX Participant must, either
directly or through its carrying firm, establish a wallet address to
which its end-of-day security token balances may be recorded by either
contacting BSTX or a Wallet Manager.\44\ A BSTX Participant that is a
carrying broker-dealer for other BSTX Participants would be assigned
the wallet address with the status of a Custodian, which would allow
that BSTX Participant to request wallet addresses on behalf of other
BSTX Participants (for which it serves as the carrying broker-dealer)
as either a Custodial Account or Broker-Dealer wallet address, as
described above. A BSTX Participant that is not a carrying broker-
dealer could request a Broker-Dealer wallet address, a Custodial
Account wallet address in coordination with its carrying firm, and an
Investor wallet address on behalf of a customer that would like its
ownership of security tokens to be reflected at its own address for
purposes of the Ethereum blockchain as an ancillary recordkeeping
mechanism.\45\
---------------------------------------------------------------------------

    \44\ A ``Wallet Manager'' is defined as a party approved by BSTX
to operate software compatible with the BSTX Protocol. See proposed
Rule 17000(a)(31). A Wallet Manager would be a third-party service
provider for the Exchange that will help facilitate establishing
wallet addresses for BSTX Participants and other market participants
and facilitate updates to the Ethereum blockchain as an ancillary
recordkeeping mechanism regarding changes in ownership resulting
from trading. Approved Wallet Managers that market participants may
contact to obtain a wallet address will be listed on the Exchange's
website.
    \45\ A BSTX Participant that is a carrying broker-dealer, and
which therefore has a Custodial Account address, could also request
Investor wallet addresses on behalf of customers.
---------------------------------------------------------------------------

    Once a BSTX Participant has been assigned to a particular wallet
address, the only further obligation of that BSTX Participant is to
report its end-of-day security token balances to BSTX, as described
below. The Exchange believes that the proposed requirement in Rule
17020(a) to obtain a wallet address is consistent with the Exchange Act
and Section 6(b)(5) \46\ in particular because it would help foster
cooperation and coordination with persons engaged in regulating and
facilitating transactions in security tokens by setting forth a process
through which BSTX Participants may obtain a wallet address to which
their end-of-day security token balances may be recorded to the
Ethereum blockchain as an ancillary recordkeeping mechanism. The
Exchange believes that the proposed requirement is similar to obtaining
a market participant identifier (``MPID'') in that it establishes an
identifier that can be attributed to a particular BSTX Participant for
reporting purposes. The proposed requirement to obtain a wallet address
is the same for all BSTX Participants, and is therefore not unfairly
discriminatory, and the Exchange and Wallet Manager do not propose to
charge a fee for obtaining a wallet address.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

H. Coordination Between BSTX, Registered Clearing Agencies, and Wallet
Managers
    Upon the occurrence of a transaction on BSTX due to the completion
of its order matching process,\47\ BSTX would generate an execution
report, and it would deliver drop copies to its own front-end systems
to update the BSTX Participants and to NSCC.\48\ Where a BSTX
transaction creates a settlement obligation to transfer registered
ownership of a security token, clearance and settlement would be
performed in accordance with the rules, policies and procedures of a
registered clearing agency as described in Section II.E. above. The
Wallet Manager would be provided with information necessary to update
the Ethereum blockchain through the end of day reporting mechanism
discussed below.
---------------------------------------------------------------------------

    \47\ Order matching would occur through a price-time priority
model, as discussed in greater detail below.
    \48\ The last sale transaction data would also be publicly
disseminated pursuant to the transaction reporting plan, which would
occur before delivery of drop copies to these parties.
---------------------------------------------------------------------------

I. Reporting End-of-Day Security Token Balances To Facilitate Ancillary
Recordkeeping
    To update the Ethereum blockchain to reflect ownership of security
tokens as an ancillary recordkeeping mechanism, the Exchange proposes
to require that each BSTX Participant, either directly or through its
carrying firm, report each business day to BSTX certain end-of-day
security token balances in a manner and form acceptable to BSTX.\49\ A
BSTX Participant that is a participant at DTC the total number of
security tokens for each class of security token that are credited to
each DTC account of the BSTX Participant.\50\ For a BSTX Participant
that is not a DTC participant, the BSTX Participant would be required
to report the total number of security tokens for each class of
security token that are credited to the BSTX Participant by its
carrying firm.\51\ Upon receipt of the end-of-day security token
balances of each BSTX Participant, the Exchange would, in coordination
with a Wallet Manager, cause the Ethereum

blockchain to be updated as an ancillary recordkeeping mechanism to
reflect changes in ownership of a security tokens.\52\ The Exchange
proposes that these end-of-day security token balance reports would be
required each business day when DTC is also open for business, but
after such time as DTC has completed its end-of-day settlement
process.\53\ The Exchange believes that once DTC has completed its end-
of-day settlement process, DTC participants would be able to determine
the number of security tokens credited to their DTC account(s) and to
other market participants that settle through that DTC participant.
Thereafter, BSTX Participants, or their carrying firms, would be able
to obtain their security token balance information and report it to
BSTX by the end of the day.
---------------------------------------------------------------------------

    \49\ See Proposed Rule 17020(b).
    \50\ See Proposed Rule 17020(b)(1). As described above in
Section II.E., BSTX would maintain rules that would promote a
structure in which security tokens would be held in ``street name''
with DTC.
    \51\ See Proposed Rule 17020(b)(2).
    \52\ Notably, because the Ethereum blockchain is updated each
day using the end-of-day security token balance reports, and is, in
any case, only functioning at this time as an ancillary
recordkeeping function, concerns regarding a loss of private keys or
disruption to the Ethereum blockchain are fully mitigated. For
example, assume a BSTX Participant owns 100 security tokens of XYZ
at the end of Day 1 and, as a result of trading on Day 2, ends DAY 2
with a balance of 200 security tokens of XYZ. If the BSTX
Participant's wallet address were somehow compromised during the
trading day on Day 2 and the 100 security tokens were moved to
another address (which could only be moved to another whitelisted
address), this would not substantively impact the functioning of the
blockchain as an ancillary recordkeeping tool. At the end of trading
on Day 2, the BSTX Participant would report its ownership of 200
security tokens of XYZ to BSTX, which would then update the Ethereum
blockchain to reflect this end of day balance.
    \53\ See Proposed Rule 17020(c).
---------------------------------------------------------------------------

    The Exchange would set forth via Regulatory Circular the precise
manner in which security tokens should be reported. In general, the
report would simply require certain identifying information regarding
the BSTX Participant (e.g., name, carrying firm, MPID) and a list of
each security token trading on BSTX for which the BSTX Participant, or
its carrying firm, would indicate the amount of security tokens held by
the BSTX Participant at the end of a given trading day.
    The Exchange believes that the proposed end-of-day security token
balance reporting requirement is consistent with the Exchange Act, and
Section 6(b)(5) \54\ in particular, because it is designed to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect to
transactions in security tokens and would not unfairly discriminate
among BSTX Participants, all of whom are subject to the same reporting
requirement. This reporting obligation would be used to update the
Ethereum blockchain as an ancillary recordkeeping mechanism. Without
this information, the Exchange would not be able to fully update the
Ethereum blockchain, which would degrade the accuracy of the blockchain
as an ancillary record of security token ownership. The Exchange notes
that under the existing authority of other equity exchanges, the
exchange is able to request that exchange members/participants furnish
to the exchange records pertaining to transactions executed on or
through the exchange in a time and manner required by such
exchange.\55\ Accordingly, BSTX believes that the proposed end-of-day
security token balance reporting requirement would be consistent with
authority that the Commission has already approved regarding
furnishment of records by members of exchanges.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b)(5).
    \55\ See e.g., BOX Rule 10000(a) and (b), Cboe BZX Rule 4.2, and
IEX Rule 4.540. Broker-dealers are also subject to daily or real-
time reporting obligations in a variety of other contexts. For
example, pursuant to the FINRA Rule 7000 Series. See e.g., FINRA
Rule 7230A(b) (noting that ``Participants shall transmit trade
reports to the System for transactions in Reportable Securities as
soon as practicable but no later than 10 seconds after execution . .
.). Trades in municipal securities are generally required within 15
minutes of the time of trade. See MSRB Rule G-14(a)(ii).
---------------------------------------------------------------------------

J. Pilot Program
    To facilitate the integrity of the Ethereum blockchain as an
ancillary recordkeeping mechanism that reflects ownership of security
tokens, the Exchange would also needs to account for changes in
ownership that result from transactions away from BSTX. To obtain
sufficient information regarding security token ownership to be able to
update the blockchain for security token transactions that occur away
from BSTX, the Exchange proposes in Rule 17020(d) that, for a time-
limited period of one year from the commencement of trading in security
tokens on BSTX, trades occurring otherwise than on a national
securities exchange may only occur among market participants who obtain
a wallet address from the Exchange in a manner consistent with proposed
Rule 17020(a) and agree to report their end-of-day security token
balances to BSTX in a manner consistent with proposed Rule 17020(b) and
(c) (the ``Pilot''). During the duration of the Pilot, the Exchange
would work with FINRA on adoption of a rule(s) by FINRA that would
require FINRA members to obtain a wallet address and for end-of-day
security token balance reports to be reported in a manner that would
facilitate updates to the Ethereum blockchain to reflect ancillary
records of security token ownership.
    The Exchange believes that FINRA, as the only national securities
association that regulates SEC registered broker-dealers, is best
positioned to implement a rule that would require end-of-day reporting
of security token balances. However, until such time as FINRA adopts
such a rule and in the absence of an Exchange requirement, the Exchange
would only be able to ensure its ability to fully update the Ethereum
blockchain as an ancillary recordkeeping mechanism by restricting over-
the-counter (``OTC'') trading. The Exchange is not proposing to limit
the ability of market participants to trade security tokens OTC,\56\
and therefore the Exchange is instead proposing BSTX Rule 17020(d) on a
pilot basis to establish a temporary mechanism that would facilitate
more comprehensive updates to the Ethereum blockchain as an ancillary
recordkeeping mechanism.\57\
---------------------------------------------------------------------------

    \56\ Discussion of trading security tokens on other exchanges is
described in Part II.K below.
    \57\ The Exchange acknowledges that it is possible that there
may be OTC trades that occur between two non-FINRA members, as
currently occurs today, which could result in a reporting gap with
respect to security tokens. See Exchange Act Release No. 74581, 80
FR 18036, 18043 (April 2, 2015) (noting that non-FINRA member firms
``that engage in off-exchange transactions are not required to
submit audit trail data to FINRA.''). In an OTC trade between two
non-FINRA members, it is possible that even in the presence of a
FINRA rule requiring its members to obtain a wallet address and
report their end of day balances in a manner to facilitate updates
to the Ethereum blockchain, there could still be reporting gaps in
the end-of-day security token balance information for OTC trades
between two non-FINRA members (e.g., if the non-FINRA members were
not otherwise subject to an end-of-day security token balance
reporting rule on exchanges of which they are a member and declined
to voluntarily report such information). The Exchange notes that
non-FINRA member broker-dealers would remain subject to the rules of
each exchange of which they are a member. To the extent the rules of
these exchanges (i.e., the exchanges of which the non-FINRA member
is a member) require their members to obtain a wallet address and
report their end of day security token positions, as discussed
further below in Part II, Section K, the end-of-day security token
position reporting data would be required to be reported. If these
exchanges did not have such rules in place (e.g., if they did not
extend unlisted trading privileges to security tokens and adopt
rules requiring members to obtain a wallet address and report end-
of-day security token balances), there would be no requirement
obligating the non-FINRA member to report its end-of-day security
token balance information.
---------------------------------------------------------------------------

    The Exchange believes that the one-time requirement to acquire a
wallet address from the Exchange and the on-going reporting obligation
regarding a market participant's end-of-day security token balance to
BSTX would impose a relatively minimal burden on market participants
trading security tokens OTC. Currently, transactions in NMS

stocks occurring OTC must be reported on a trade-by-trade basis to the
one of three trade reporting facilities (``TRF'')--the FINRA/Nasdaq TRF
Carteret, FINRA/Nasdaq TRF Chicago, or the FINRA/NYSE TRF.\58\ The TRFs
are facilities of FINRA but operated by Nasdaq and NYSE respectively,
and in order to use the services of the TRFs, participants must enter
into an agreement with the exchanges.\59\ As a result, even where a
firm is not a member of Nasdaq or NYSE, in order to report OTC trades
in NMS stocks to the TRFs, one must enter into an agreement with the
exchanges.
---------------------------------------------------------------------------

    \58\ OTC trades in NMS stocks may also be reported to FINRA's
Alternative Display Facility (``ADF'') pursuant to the FINRA Rule
6200 series. However, nearly all trades are reported to the TRFs as
the ADF presently has only three participants who may only use the
ADF as a back-up reporting facility. See FINRA, Active ADF
Participants, available at https://www.finra.org/industry/adf/participants.
    \59\ Participants in the FINRA/NYSE TRF must complete the
Subscriber Service Agreement, which is submitted directly to NYSE.
See FINRA/NYSE Trade Reporting Facility Subscriber Service Agreement
at 1, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/FINRA_NYSE_TRF_Subscriber_Service_Agreement.pdf. Participants
in the FINRA/Nasdaq TRF must, at a minimum, complete the Nasdaq U.S.
Services Agreement. See FINRA/Nasdaq Trade Reporting Facility FAQ at
2, available at https://www.nasdaqtrader.com/content/ProductsServices/Trading/TradeReporting/trf_faqs.pdf.
---------------------------------------------------------------------------

    Reporting end-of-day security token balances to BSTX would operate
in a similar fashion whereby a non-BSTX Participant interested in
trading security tokens OTC would be given a wallet address and would
agree to report its end-of-day security token balances to the Exchange.
This obligation would last only until the conclusion of the Pilot, and
during the Pilot the Exchange would coordinate with FINRA to promote
FINRA's adoption of a rule to codify the end-of-day security token
balance reporting requirement.\60\
---------------------------------------------------------------------------

    \60\ OTC trades in security tokens would also have to be
reported to the TRFs or ADF consistent with FINRA's rules.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Pilot is consistent with
the Exchange Act and Section 6(b)(5) \61\ in particular, because it is
designed to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, and processing information with respect
to transactions in security tokens by ensuring that BSTX has sufficient
information to be able to update the Ethereum blockchain to reflect
ownership of security tokens as an ancillary recordkeeping mechanism
and first step toward potential integration of blockchain technology to
securities transactions. The Exchange believes that the proposed
requirements of obtaining a wallet address from BSTX and providing end-
of-day security token balance reports to the Exchange would impose a
minimal burden and that these requirements would be similar to existing
OTC reporting obligations of market participants, as described above.
The Pilot would also be time limited to one year from the commencement
of trading security tokens on BSTX, which the Exchange believes would
provide sufficient time for the Exchange to coordinate with FINRA for
FINRA to propose and adopt a rule that would provide BSTX with
sufficient end-of-day security token balance information to update the
Ethereum blockchain as an ancillary recordkeeping mechanism.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    For the same reasons, the Exchange also believes that the Pilot is
consistent with Exchange Act Rules 19c-1 \62\ and 19c-3,\63\ which
generally prohibit the rules, policies, or practices of a national
securities exchange from prohibiting, conditioning or otherwise
limiting, directly or indirectly, the ability of member from
transacting in a security listed on the exchange (or a security to
which unlisted trading privileges on the exchange have been granted)
otherwise than on the exchange. During the Pilot, market participants
would not be limited in their ability to trade security tokens
otherwise than on BSTX because security tokens could be traded OTC and
would be cleared and settled in the same manner as other NMS stocks
through the facilities of a registered clearing agency. During the
limited duration of the Pilot, proposed BSTX Rule 17020(d) would only
require market participants, including non-BSTX Participants, to obtain
a wallet address and agree to report their end-of-day security token
balances to BSTX. As noted above, BSTX's ability to enforce the terms
of the Pilot on non-BSTX Participants is limited, but BSTX nonetheless
wants to encourage market participants trading security tokens OTC to
report their end-of-day security token balances to the Exchange in
order to facilitate the use of the Ethereum blockchain as an ancillary
recordkeeping mechanism. The Exchange further notes that the Pilot
would have a limited duration and that it intends to work with FINRA to
provide for a similar requirement that would facilitate the collection
of information necessary to update the Ethereum blockchain.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.19c-1.
    \63\ 17 CFR 240.19c-3.
---------------------------------------------------------------------------

K. Trading Security Tokens on Other National Securities Exchanges
    Security tokens would be eligible for trading on another national
securities exchange that is able to support trading in security tokens.
Pursuant to Rule 12f-5 under the Exchange Act,\64\ an exchange may not
extend unlisted trading privileges to any security unless the national
securities exchange has in effect rules providing for transactions in
the class or type of security to which the exchange extends unlisted
trading privileges. In the context of BSTX-listed security tokens, the
additional rules that would be necessary for another exchange to extend
unlisted trading privileges include: (i) Requiring that exchange
members obtain a wallet address compatible with the BSTX Security Token
Protocol in order to attribute security token balances with that
exchange member; and (ii) adopting some mechanism to report end-of-day
security token balances to BSTX in order to facilitate updates of
ownership to the Ethereum blockchain as an ancillary recordkeeping
mechanism. There are numerous ways in which another exchange could meet
these requirements, such as by having the exchange establish a direct
relationship with a Wallet Manager or similar entity through which the
exchange might provide its members with wallet addresses and provide
end-of-day security token balance reports. An exchange could
alternatively coordinate with BSTX to facilitate these requirements.
The Exchange views obtaining a wallet address and reporting of end-of-
day security token balances as an important part of the blockchain-
based ancillary recordkeeping process regarding security tokens.
---------------------------------------------------------------------------

    \64\ 17 CFR 240.12f-5.
---------------------------------------------------------------------------

    The Exchange proposes to include certain rules that contemplate the
trading of security tokens that may be listed on other national
securities exchanges.\65\ Since there are currently no other national
securities exchanges trading security tokens, these rules would be
implemented in anticipation of other exchanges eventually listing and
trading their own security tokens. BSTX recognizes that another
exchange trading security tokens, or the equivalent thereof, may
require BSTX to adopt certain rules specific to such other exchange in
order to extend unlisted trading privileges to the other exchange's
security tokens consistent with Rule 12f-5.\66\
---------------------------------------------------------------------------

    \65\ See e.g., proposed Rule 25040(e).
    \66\ 17 CFR 240.12f-5.

---------------------------------------------------------------------------

III. Proposed BSTX Rules
    The discussion in this Section IV addresses the proposed BSTX Rules
that would be adopted as Rule Series 17000 through 28000.
A. General Provisions of BSTX and Definitions (Rule 17000 Series)
    The Exchange proposes to adopt as its Rule 17000 Series (General
Provisions of BSTX) a set of general provisions relating to the trading
of security tokens and other rules governing participation on BSTX.
Proposed Rule 17000 sets forth the defined terms used throughout the
BSTX Rules. The majority of the proposed definitions are substantially
similar to defined terms used in other equities exchange rulebooks,
such as with respect to the term ``customer.'' \67\ The Exchange
proposes to set forth new definitions for certain terms to specifically
identify systems, agreements, or persons as they relate to BSTX and as
distinct from other Exchange systems, agreements, or persons that may
be used in connection with the trading of other options on the
Exchange.\68\ The Exchange also proposes to define certain unique terms
relating to the trading of security tokens, including ``security
token,'' \69\ and ``Wallet Manager.'' \70\ The term ``Wallet Manager''
is defined to provide context to the wallet address whitelisting and
end-of-day security token balance reporting processes used to update
the Ethereum blockchain as an ancillary recordkeeping mechanism.\71\
---------------------------------------------------------------------------

    \67\ Proposed Rule 17000(a)(16) defines the term ``customer'' to
not include a broker or dealer, which parallels the same definition
in other exchange rulebooks. See e.g., IEX Rule 1.160(j). Similarly,
the Exchange proposes to define the term ``Regular Trading Hours''
as the time between 9:30 a.m. and 4:00 p.m. Eastern Time. See
proposed Rule 17000(a)(28) cf. IEX Rule 1.160(gg) (defining
``Regular Market Hours'' in the same manner).
    \68\ For example, the Exchange proposes to define the term
``BSTX'' to mean the facility of the Exchange for executing
transaction in security tokens, the term ``BSTX Participant'' to
mean a Participant or Options Participant (as those terms are
defined in the Exchange's Rule 100 Series) that is authorized to
trade security tokens, and the term ``BSTX System'' to mean the
automated trading system used by BSTX for the trading of security
tokens. See proposed Rule 17000(a)(8), (11), and (14).
    \69\ Proposed Rule 17000(a)(30) provides that the term
``security token'' means a NMS stock, as defined in Rule 600(b)(47)
of the Exchange Act, trading on the BSTX System. The proposed
definition further specifies that references to a ``security'' or
``securities'' in the Rules include security tokens.
    \70\ Proposed Rule 17000(a)(31) defines the term ``Wallet
Manager'' as a party approved by BSTX to operate software compatible
with the BSTX Protocol. See also supra Sections II.G and H. for a
discussion of the role of a Wallet Manager.
    \71\ See supra note 42.
---------------------------------------------------------------------------

    In addition to setting forth proposed definitions used throughout
the proposed Rules, the Exchange proposes to specify in proposed Rule
17010 (Applicability) that the Rules set forth in the Rule 17000 Series
to Rule 28000 Series apply to the trading, listing, and related matters
pertaining to the trading of security tokens. Proposed Rule 17010(b)
provides that, unless specific Rules relating to security tokens govern
or unless the context otherwise requires, the provisions of any
Exchange Rule (i.e., including Exchange Rules in the Rule 100 through
16000 Series) shall be applicable to BSTX Participants.\72\ This is
intended to make clear that BSTX Participants are subject to all of the
Exchange's Rules that may be applicable to them, notwithstanding that
their trading activity may be limited solely to trading security
tokens. The Exchange believes that the proposed definitions set forth
in Rule 17000 are consistent with Section 6(b)(5) of the Exchange Act
\73\ [sic] because they protect investors and the public interest by
setting forth clear definitions that help BSTX Participants understand
and apply Exchange Rules. Without defining terms used in the Exchanges
Rules clearly and providing clarity as to the Exchange Rules that may
apply, market participants could be confused as to the application of
certain rules, which could cause harm to investors.
---------------------------------------------------------------------------

    \72\ Proposed Rule 17010 further specifies that to the extent
the provisions of the Rules relating to the trading of security
tokens contained in Rule 17000 Series to Rule 28000 Series are
inconsistent with any other provisions of the Exchange Rules, the
Rules relating to security token trading shall control.
---------------------------------------------------------------------------

    Proposed Rule 17020 sets forth the requirements to obtain a
whitelisted wallet address from BSTX or a Wallet Manager, the end-of-
day security token balance reporting, and the Pilot, which are
discussed in greater detail above in Parts II.G through J.
B. Participation on BSTX (Rule 18000 Series)
    The Exchange proposes to adopt as its Rule 18000 Series
(Participation on BSTX), three rules setting forth certain requirements
relating to participation on BSTX. Proposed Rule 18000 (BSTX
Participation) establishes ``BSTX Participants'' as a new category of
Exchange participation for effecting transactions on the BSTX System,
provided they: (i) Complete the BSTX Participant Application,
Participation Agreement, and User Agreement; \74\ (ii) be an existing
Options Participant or become a Participant of the Exchange pursuant to
the Rule 2000 Series; and (iii) provide such other information as
required by the Exchange.\75\ Proposed Rule 18010 (Requirements for
BSTX Participants) sets forth certain requirements for BSTX
Participants including requirements that each BSTX Participant comply
with Rule 15c3-1 under the Exchange Act, comply with applicable books
and records requirements, and be member of a registered clearing agency
or clear security token transactions through another BSTX Participant
that is a member/participant of a registered clearing agency.\76\
Finally, proposed Rule 18020 (Associated Persons) provides that
associated persons of a BSTX Participant are bound by the Rules of the
Exchange to the same extent as each BSTX Participant.
---------------------------------------------------------------------------

    \74\ The BSTX Participant Application, Participation Agreement,
and User Agreement are attached as Exhibits 3A, 3B, and 3C
respectively.
    \75\ Proposed Rule 18000 also sets forth the Exchange's review
process regarding BSTX Participation Agreements and certain
limitations on the ability to transfer BSTX Participant status
(e.g., in the case of a change of control). In addition proposed
Rule 18000(b)(2) provides that a BSTX Participant shall continue to
abide by all applicable requirements of the Rule 2000 Series, which
would include, for example, IM-2040-5, which specifies continuing
education requirements of Exchange Participants and their associated
persons.
    \76\ Proposed Rule 18010(b) is similar to the rules of existing
exchanges. See e.g., IEX Rule 2.160(c). Proposed Rule 18010(a) is
also similar to the rules of existing exchanges. See e.g., IEX Rule
1.160(s) and Cboe BZX Rule 17.2(a).
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 18000 Series
(Participation on BSTX) is consistent with Section 6(b)(5) of the
Exchange Act \77\ because these proposed rules are designed to promote
just and equitable principles of trade, and protect investors and the
public interest by setting forth the requirements to become a BSTX
Participant and specifying that associated persons of a BSTX
Participant are bound by Exchange Rules. Under Proposed Rule 18000, a
BSTX Participant must first become an Exchange Participant pursuant to
the Exchange Rule 2000 Series which the Exchange believes would help
assure that BSTX Participants meet the appropriate standards for
trading on BSTX in furtherance of the protection of investors.\78\
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b)(5).
    \78\ The Exchange notes that the approach of requiring members
of a facility of an exchange to first become members of the exchange
is consistent with the approach used by another national securities
exchange. See Cboe BZX Rule 17.1(b)(3) (requiring that a Cboe BZX
options member be an existing member or become a member of the Cboe
BZX equities exchange pursuant to the Cboe BZX Chapter II Series).
---------------------------------------------------------------------------

C. Business Conduct for BSTX Participants (Rule 19000 Series)
    The Exchange proposes to adopt as its Rule 19000 Series (Business
Conduct for BSTX Participants), twenty two rules relating to business
conduct

requirements for BSTX Participants that are substantially similar to
business conduct rules of other exchanges.\79\ The proposed Rule 19000
Series would specify business conduct requirements with respect to: (i)
Just and equitable principles of trade; \80\ (ii) adherence to law;
\81\ (iii) use of fraudulent devices; \82\ (iv) false statements; \83\
(v) know your customer; \84\ (vi) fair dealing with customers; \85\
(vii) suitability; \86\ (viii) the prompt receipt and delivery of
securities; \87\ (ix) charges for services performed; \88\ (x) use of
information obtained in a fiduciary capacity; \89\ (xi) publication of
transactions and quotations; \90\ (xii) offers at stated prices; \91\
(xiii) payments involving publications that influence the market price
of a security; \92\ (xiv) customer confirmations; \93\ (xv) disclosure
of a control relationship with an issuer of security tokens; \94\ (xvi)
discretionary accounts; \95\ (xvii) improper use of customers'
securities or funds and a prohibition against guarantees and sharing in
accounts; \96\ (xviii) the extent to which sharing in accounts is
permissible; \97\ (xix) communications with customers and the public;
\98\ (xx) gratuities; \99\ (xxi) telemarketing; \100\ and (xxii)
mandatory systems testing.\101\ The Exchange notes that the proposed
financial responsibility rules are virtually identical to those of
other national securities exchanges other than changes to defined terms
and certain other provisions that would not apply to the trading of
security tokens on the BSTX System.\102\
---------------------------------------------------------------------------

    \79\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
    \80\ Proposed Rule 19000 (Just and Equitable Principles of
Trade) provides that no BSTX Participant, including its associated
persons, shall engage in acts or practices inconsistent with just
and equitable principles of trade.
    \81\ Proposed Rule 19010 (Adherence to Law) generally requires
BSTX Participants to adhere to applicable laws and regulatory
requirements.
    \82\ Proposed Rule 19020 (Use of Fraudulent Devices) generally
prohibits BSTX Participants from effecting a transaction in any
security by means of a manipulative, deceptive or other fraudulent
device or contrivance.
    \83\ Proposed Rule 19030 (False Statements) generally prohibits
BSTX Participants and their associated persons from making false
statements or misrepresentations in communications with the
Exchange.
    \84\ Proposed Rule 19040 (Know Your Customer) requires BSTX
Participants to comply with FINRA Rule 2090 as if such rule were
part of the Exchange Rules.
    \85\ Proposed Rule 19050 (Fair Dealing with Customers) generally
requires BSTX Participants to deal fairly with customers and
specifies certain activities that would violate the duty of fair
dealing (e.g., churning or overtrading in relation to the objectives
and financial situation of a customer).
    \86\ Proposed Rule 19060 (Suitability) provides that BSTX
Participants and their associated persons shall comply with FINRA
Rule 2111 as if such rule were part of the Exchange Rules.
    \87\ Proposed Rule 19070 (Prompt Receipt and Delivery of
Securities) would generally prohibit a BSTX Participant from
accepting a customer's purchase order for a security until it can
determine that the customer agrees to receive the securities against
payment.
    \88\ Proposed Rule 19080 (Charges for Services Performed)
generally requires that charges imposed on customers by broker-
dealers shall be reasonable and not unfairly discriminatory.
    \89\ Proposed Rule 19090 (Use of Information Obtained in a
Fiduciary Capacity) generally restricts the use of information as to
the ownership of securities when acting in certain capacities (e.g.,
as a trustee).
    \90\ Proposed Rule 19100 (Publication of Transactions and
Quotations) generally prohibits a BSTX Participant from
disseminating a transaction or quotation information unless the BSTX
Participant believes it to be bona fide.
    \91\ Proposed Rule 19110 (Offers at Stated Prices) generally
prohibits a BSTX Participant from offering to transact in a security
at a stated price unless it is in fact prepared to do so.
    \92\ Proposed Rule 19120 (Payments Involving Publications that
Influence the Market Price of a Security) generally prohibits direct
or indirect payments with the aim of disseminating information that
is intended to effect the price of a security.
    \93\ Proposed Rule 19130 (Customer Confirmations) requires that
BSTX Participants comply with Rule 10b-10 of the Exchange Act. 17
CFR 240.10b-10.
    \94\ Proposed Rule 19140 (Disclosure of Control Relationship
with Issuer) generally requires BSTX Participants to disclose any
control relationship with an issuer of a security before effecting a
transaction in that security for the customer.
    \95\ Proposed Rule 19150 (Discretionary Accounts) generally
provides certain restrictions on BSTX Participants handling of
discretionary accounts, such as by effecting excessive transactions
or obtained authorization to exercise discretionary powers.
    \96\ Proposed Rule 19160 (Improper Use of Customers' Securities
or Funds and Prohibition against Guarantees and Sharing in Accounts)
generally prohibits BSTX Participants from making improper use of
customers securities or funds and prohibits guarantees to customers
against losses.
    \97\ Proposed Rule 19170 (Sharing in Accounts; Extent
Permissible) generally prohibits BSTX Participants and their
associated persons from sharing directly or indirectly in the profit
or losses of the account of a customer unless certain exceptions
apply such as where an associated person receives prior written
authorization from the BSTX Participant with which he or she is
associated.
    \98\ Proposed Rule 19180 (Communications with Customers and the
Public) generally provides that BSTX Participants and their
associated persons shall comply with FINRA Rule 2210 as if such rule
were part of the Exchange Rules.
    \99\ Proposed Rule 19200 (Gratuities) requires BSTX Participants
to comply with the requirements set forth in BOX Exchange Rule 3060
(Gratuities).
    \100\ Proposed Rule 19210 (Telemarketing) requires that BSTX
Participants and their associated persons comply with FINRA Rule
3230 as if such rule were part of the Exchange's Rules.
    \101\ Proposed Rule 19220 (Mandatory Systems Testing) requires
that BSTX Participants comply with Exchange Rule 3180 (Mandatory
Systems Testing).
    \102\ For example, the Exchange is not proposing to adopt a rule
contained in other exchanges' business conduct rules relating to
disclosures that broker-dealers give to their customers regarding
the risks of effecting securities transactions during times other
than during regular trading hours (e.g., higher volatility, possibly
lower liquidity) because executions may only occur during regular
trading hours on the BSTX System. See e.g., IEX Rule 3.290, Cboe BZX
Rule 3.21.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 19000 Series (Business
Conduct) is consistent with Section 6(b)(5) of the Exchange Act \103\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by setting
forth appropriate standards of conduct applicable to BSTX Participants
in carrying out their business activities. For example, proposed Rule
19000 (Just and Equitable Principles of Trade) and 19010 (Adherence to
Law) would prohibit BSTX Participants from engaging in acts or
practices inconsistent with just and equitable principles of trade or
that would violate applicable laws and regulations. Similarly, proposed
Rule 19050 (Fair Dealing with Customers) would require that BSTX
Participants deal fairly with their customers and proposed Rule 19030
(False Statements) would generally prohibit BSTX Participants, or their
associated persons) from making false statements or misrepresentations
to the Exchange. The Exchange believes that requiring that BSTX
Participants comply with the proposed business conduct rules in the
Rule 19000 Series would further the protection of investors and the
public interest by promoting high standards of commercial honor and
integrity. In addition, each of the rules in the proposed Rule 19000
Series (Business Conduct) is substantially similar to supervisory rules
of other exchanges.\104\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78f(b)(5).
    \104\ See supra n.79.
---------------------------------------------------------------------------

D. Financial and Operational Rules for BSTX Participants (Rule 20000
Series)
    The Exchange proposes to adopt as its Rule 20000 Series (Financial
and Operational Rules), ten rules relating to financial and operational
requirements for BSTX Participants that are substantially similar to
financial and operational rules of other exchanges.\105\ The proposed
Rule 20000 Series would specify financial and operational requirements
with respect to: (i) Maintenance and furnishing of books

and records; \106\ (ii) financial reports; \107\ (iii) net capital
compliance; \108\ (iv) early warning notifications pursuant to Rule
17a-11 under the Exchange Act; \109\ (v) authority of the Chief
Regulatory Officer to impose certain restrictions; \110\ (vi) margin;
\111\ (vii) day-trading margin; \112\ (viii) customer account
information; \113\ (ix) maintaining records of customer complaints;
\114\ and (x) disclosure of financial condition.\115\
---------------------------------------------------------------------------

    \105\ See Cboe BZX Chapter 6 rules and IEX Chapter 5 rules.
    \106\ Proposed Rule 20000 (Maintenance, Retention and Furnishing
of Books, Records and Other Information) requires that BSTX
Participants comply with current Exchange Rule 1000 (Maintenance,
Retention and Furnishing of Books, Records and Other Information)
and that BSTX Participants shall submit to the Exchange order,
market and transaction data as the Exchange may specify by
Information Circular.
    \107\ Proposed Rule 20010 (Financial Reports) provides that BSTX
Participants shall comply with the requirements of current Exchange
Rule 10020 (Financial Reports).
    \108\ Proposed Rule 20020 (Capital Compliance) provides that
each BSTX Participant subject to Rule 15c3-1 under the Exchange Act
(17 CFR 240.15c3-1) shall comply with such rule and other financial
and operational rules contained in the proposed Rule 20000 series.
    \109\ 17 CFR 240.17a-11. Proposed Rule 20030 (``Early Warning''
Notification) provides that BSTX Participants subject to the
reporting or notifications requirements of Rule 17a-11 under the
Exchange Act (17 CFR 240.17a-11) or similar ``early warning''
requirements imposed by other regulators shall provide the Exchange
with certain reports and financial statements).
    \110\ Proposed Rule 20040 (Power of CRO to Impose Restrictions)
generally provides that the Exchange's Chief Regulatory Officer may
impose restrictions and conditions on a BSTX Participant subject to
the early warning notification requirements under certain
circumstances).
    \111\ Proposed Rule 20050 (Margin) sets forth the required
margin amounts for certain securities held in a customer's margin
account.
    \112\ Proposed Rule 20060 (Day Trading Margin) sets forth
additional requirements with respect to customers that engage in day
trading.
    \113\ Proposed Rule 20070 (Customer Account Information)
requires that BSTX Participants comply with FINRA Rule 4512 as if
such rule were part of the Exchange Rules and further clarifies
certain cross-references within FINRA Rule 4512.
    \114\ Proposed Rule 20080 (Record of Written Customer
Complaints) requires that BSTX Participants comply with FINRA Rule
4513 as if such rule were part of the Exchange Rules.
    \115\ Proposed Rule 20090 (Disclosure of Financial Condition)
generally requires that BSTX Participants make available certain
information regarding the BSTX Participant's financial condition
upon request of a customer.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 20000 (Financial and
Operational Rules) Series is consistent with Section 6(b)(5) of the
Exchange Act \116\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, and protect investors and the public
interest by subjecting BSTX Participants to certain recordkeeping,
disclosure, and related requirements designed to ensure that BSTX
Participants conduct themselves in a financially responsible manner.
For example, proposed Rule 20000 would require BSTX Participants to
comply with existing Exchange Rule 1000, which sets forth certain
recordkeeping responsibilities and the obligation to furnish these to
the Exchange upon request so that the Exchange can appropriately
monitor the financial condition of a BSTX Participant and its
compliance with applicable regulatory requirements. Similarly, proposed
Rule 20050 would set forth the margin requirements that BSTX
Participants must retain with respect to customers trading in a margin
account to ensure that BSTX Participants are not extending credit to
customers in a manner that might put the financial condition of the
BSTX Participant in jeopardy. Each of the proposed rules in the Rule
20000 Series (Financial and Operational Rules) is substantially similar
to existing rules of other exchanges or incorporates an existing rule
of the Exchange or another self-regulatory organization (``SRO'') by
reference.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

E. Supervision (Rule 21000 Series)
    The Exchange proposes to adopt as its Rule 21000 Series
(Supervision), six rules relating to certain supervisory requirements
for BSTX Participants that are substantially similar to supervisory
rules of other exchanges.\117\ The Proposed Rule 21000 Series would
specify supervisory requirements with respect to: (i) Enforcing written
procedures to appropriately supervise the BSTX Participant's conduct
and compliance with applicable regulatory requirements; \118\ (ii)
designation of an individual to carry out written supervisory
procedures; \119\ (iii) maintenance and keeping of records carrying out
the BSTX Participant's written supervisory procedures; \120\ (iv)
review of activities of each of a BSTX Participant's offices, including
periodic examination of customer accounts to detect and prevent
irregularities or abuses; \121\ (v) the prevention of the misuse of
material non-public information; \122\ and (vi) implementation of an
anti-money laundering (``AML'') compliance program.\123\ These rules
are designed to ensure that BSTX Participants are able to appropriately
supervise their business activities, review and maintain records with
respect to such supervision, and enforce specific procedures relating
insider-trading and AML.
---------------------------------------------------------------------------

    \117\ See Cboe BZX Chapter 5 rules. See also IEX Rule 5.150 with
respect to proposed Rule 21040 (Prevention of the Misuse of
Material, Non-Public Information).
    \118\ Proposed Rule 21000 (Written Procedures).
    \119\ Proposed Rule 21010 (Responsibility of BSTX Participants)
would also require that a copy of a BSTX's written supervisory
procedures be kept in each office and makes clear that final
responsibility for proper supervision rests with the BSTX
Participant.
    \120\ Proposed Rule 21020 (Records).
    \121\ Proposed Rule 21030 (Review of Activities).
    \122\ Proposed Rule 21040 (Prevention of the Misuse of Material,
Non-Public Information) generally requires BSTX Participants to
enforce written procedures designed to prevent misuse of material
non-public information and sets forth examples of conduct that would
constitute a misuse of material, non-public information.
    \123\ Proposed Rule 21050 (Anti-Money Laundering Compliance
Program). The Exchange already has rules with respect to Exchange
Participants enforcing an AML compliance program set forth in
Exchange Rule 10070 (Anti-Money Laundering Compliance Program), so
proposed Rule 21050 specifies that BSTX Participants shall comply
with the requirements of that pre-existing rule.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 21000 (Supervision)
Series is consistent with Section 6(b)(5) of the Exchange Act \124\
because these proposed rules are designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest by ensuring
that BSTX Participant have appropriate supervisory controls in place to
carry out their business activities in compliance with applicable
regulatory requirements. For example, proposed Rule 21000 (Written
Procedures) would require BSTX Participants to enforce written
procedures which enable them to supervise the activities of their
associated persons and proposed Rule 21010 (Responsibility of BSTX
Participants) would require a BSTX Participant to designate a person in
each office to carry out written supervisory procedures. Requiring
appropriate supervision of a BSTX Participant's business activities and
associated persons would promote compliance with the federal securities
laws and other applicable regulatory requirements in furtherance of the
protection of investors and the public interest.\125\ In addition, each
of the rules in the proposed Rule 21000 Series (Supervision) is
substantially similar to supervisory rules of other exchanges.\126\
---------------------------------------------------------------------------

    \124\ 15 U.S.C. 78f(b)(5).
    \125\ Id.
    \126\ See supra n.117.
---------------------------------------------------------------------------

F. Miscellaneous Provisions (Rule 22000 Series)
    The Exchange proposes to adopt as its Rule 22000 Series
(Miscellaneous Provisions), six rules relating to a variety of
miscellaneous requirements applicable to BSTX Participants that are

substantially similar to rules of other exchanges.\127\ These
miscellaneous provisions relate to: (i) Comparison and settlement
requirements; \128\ (ii) failures to deliver and failures to receive;
\129\ (iii) forwarding of proxy and other issuer-related materials;
\130\ (iv) commissions; \131\ (v) regulatory services agreements; \132\
and (vi) transactions involving Exchange employees.\133\ These rules
are designed to capture additional regulatory requirements applicable
to BSTX Participants, such as setting forth their obligation to deliver
proxy materials at the request of an issuer and to incorporate by
reference Rule 200-203 of Regulation SHO.\134\
---------------------------------------------------------------------------

    \127\ See Cboe BZX Chapter 13 rules. See also IEX Rule 6.180
with respect to proposed Rule 22050 (Transactions Involving BOX
Employees).
    \128\ Proposed Rule 22000 (Comparison and Settlement
Requirements) provides that a BSTX Participants that is a member of
a registered clearing agency shall implement comparison and
settlement procedures as may be required under the rules of such
entity. The proposed rule would further provide that,
notwithstanding this general provision, the Board may extend or
postpone the time of delivery of a BSTX transaction whenever the
Board determines that it is called for by the public interest, just
and equitable principles of trade or to address unusual conditions.
In such a case, delivery will occur as directed by the Board.
    \129\ Proposed Rule 22010 (Failure to Deliver and Failure to
Receive) provides that borrowing and deliveries must be effected in
accordance with Rule 203 of Regulation SHO (17 CFR 242.203) and
incorporates Rules 200--203 of Regulation SHO by reference into the
rule (17 CFR Sec. Sec.  242.200-203).
    \130\ Proposed Rule 22020 (Forwarding of Proxy and Other
Information; Proxy Voting) generally provides that BSTX Participants
shall forward proxy materials when requested by an issuer and sets
forth certain conditions and limitations for BSTX Participants to
give a proxy to vote stock that is registered in its name.
    \131\ Proposed Rule 22030 (Commissions) provides that the
Exchange Rules or practices shall not be construed to allow a BSTX
Participant or its associated persons to agree or arrange for the
charging of fixed rates commissions for transactions on the
Exchange.
    \132\ Proposed Rule 22040 (Regulatory Service Agreement)
provides that the Exchange may enter into regulatory services
agreements with other SROs to assist in carrying out regulatory
functions, but the Exchange shall retain ultimate legal
responsibility for, and control of, its SRO responsibilities.
    \133\ Proposed Rule 22040 (Transactions Involving Exchange
Employees) sets forth conditions and limitations on a BSTX
Participant provide loans or supporting the account of an Exchange
employee (e.g., promptly obtaining and implementing an instruction
from the employee to provide duplicate account statement to the
Exchange) in order to mitigate any potential conflicts of interest
that might arise from such a relationship.
    \134\ 17 CFR Sec. Sec.  242.200-203.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 22000 (Miscellaneous
Provisions) Series is consistent with Section 6(b)(5) of the Exchange
Act \135\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, and protect investors and the public
interest by ensuring that BSTX Participants comply with additional
regulatory requirements, such as Rule 203 of Regulation SHO \136\ as
provided in proposed Rule 22010 (Failure to Deliver and Failure to
Receive), in connection with their participation on BSTX. For example,
proposed Rule 22030 (Commissions) prohibits BSTX Participants from
charging fixed rates of commissions for transactions on the Exchange
consistent with Section 6(e)(1) of the Exchange Act.\137\ Similarly,
Proposed Rule 22050 (Transactions involving Exchange Employees) sets
forth certain requirements and prohibitions relating to a BSTX
Participant providing certain financial services to an Exchange
employee, which the Exchange believes helps prevent potentially
fraudulent and manipulative acts and practices and furthers the
protection of investors and the public interest.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78f(b)(5).
    \136\ 17 CFR 242.203.
    \137\ 15 U.S.C. 78f(e)(1).
---------------------------------------------------------------------------

G. Trading Practice Rules (Rule 23000 Series)
    The Exchange proposes to adopt as its Rule 23000 Series (Trading
Practice Rules), fourteen rules relating to trading practice
requirements for BSTX Participants that are substantially similar to
trading practice rules of other exchanges.\138\ The proposed Rule 23000
series would specify trading practice requirements related to: (i)
Market manipulation; (ii) fictitious transactions; (iii) excessive
sales by a BSTX Participant; (iv) manipulative transactions; (v)
dissemination of false information; (vi) prohibition against trading
ahead of customer orders; (vii) joint activity; (viii) influencing data
feeds; (ix) trade shredding; (x) best execution; (xi) publication of
transactions and changes; (xii) trading ahead of research reports;
(xiii) front running of block transactions; and (xiv) a prohibition
against disruptive quoting and trading activity. The purpose of the
trading practice rules is to set forth standards and rules relating to
the trading conduct of BSTX Participants, primarily with respect to
prohibiting forms of market manipulation and specifying certain
obligations broker-dealers have to their customers, such as the duty of
best execution. For example, proposed Rule 23000 (Market Manipulation)
sets forth a general prohibition against a BSTX Participant purchasing
a security at successively higher prices or sales of a security at
successively lower prices, or to otherwise engage in activity for the
purpose of creating or inducing a false, misleading or artificial
appearance of activity in such security.\139\ Proposed Rule 23010
(Fictitious Transactions) similarly prohibits BSTX Participants from
fictitious transaction activity, such as executing a transaction which
involves no beneficial change in ownership, and proposed Rule 23020
(Excessive Sales by a BSTX Participant) prohibits a BSTX Participant
from executing purchases or sales in any security trading on the
Exchange for any account in which it has an interest, which are
excessive in view of the BSTX Participant's financial resources or in
view of the market for such security.\140\ Proposed Rule 23060 (Joint
Activity) prohibits a BSTX Participants from directly or indirectly
holding any interest or participation in any joint account for buying
or selling a security traded on the Exchange unless reported to the
Exchange with certain information provided and proposed Rule 23090
(Best Execution) reaffirms BSTX Participants best execution obligations
to their customers.\141\
---------------------------------------------------------------------------

    \138\ See Cboe BZX Chapter 12 rules.
    \139\ Proposed Rule 23030 (Manipulative Transactions) specifies
further prohibitions relating to potential manipulation by
prohibiting BSTX Participants from, among other things,
participating or having any direct or indirect interest in the
profits of a manipulative operation or knowingly manage or finance a
manipulative operation.
    \140\ Other proposed rules relating to potential manipulation
include: (i) Rule 23040 (Dissemination of False Information), which
generally prohibits, consistent with Exchange Rule 3080, BSTX
Participants from spreading information that is false or misleading;
(ii) Rule 23070 (Influencing Data Feeds), which generally prohibits
transactions to influence data feeds; (iii) Rule 23080 (Trade
Shredding), which generally prohibits conduct that has the intent or
effect of splitting any order into multiple smaller orders for the
primary purpose of maximizing remuneration to the BSTX participant;
(iv) Rule 23110 (Trading Ahead of Research Reports), which generally
prohibits BSTX Participants from trading based on non-public advance
knowledge of a research report and requires BSTX Participants to
enforce policies and procedures to limit information flow from
research personnel from trading personnel that might trade on such
information; (v) Rule 23120 (Front Running Block Transactions),
which incorporates FINRA Rule 5270 as though it were part of the
Exchange's Rules; and (vi) Rule 23130 (Disruptive Quoting and
Trading Activity Prohibited), which incorporates Exchange Rule 3220
by reference.
    \141\ In addition proposed Rule 23100 (Publication of
Transactions and Changes) provides that the Exchange will
disseminate transaction information to appropriate data feeds, BSTX
participants must provide information necessary to facilitate the
dissemination of such information, and that an Exchange official
shall be responsible for approving corrections to any reports
transmitted over data feeds.`
---------------------------------------------------------------------------

    Proposed Rule 23050 (Prohibition against Trading Ahead of Customer
Orders) is substantially similar to FINRA 5320 and rules adopted by
other

exchanges,\142\ and generally prohibits BSTX Participants from trading
ahead of customer orders unless certain enumerated exceptions are
available and requires BSTX Participants to have a written methodology
in place governing execution priority to ensure compliance with the
Rule. The Exchange proposes to adopt each of the exceptions to the
prohibition against trading ahead of customer orders as provided in
FINRA Rule 5320 other than the exception related to trading outside of
normal market hours, since trading on the Exchange would be limited to
regular trading hours.
---------------------------------------------------------------------------

    \142\ See e.g., Cboe BZX Rule 12.6.
---------------------------------------------------------------------------

    The Exchange proposes to adopt the order handling procedures
requirement in proposed Rule 23050(i) consistent with the rules of
other exchanges.\143\ Specifically, proposed Rule 23050(i) would
provide that a BSTX Participant must make every effort to execute a
marketable customer order that it receives fully and promptly and must
cross customer orders when they are marketable against each other
consistent with the proposed Rule.
---------------------------------------------------------------------------

    \143\ See e.g., Cboe BZX Rule 12.6.07.
---------------------------------------------------------------------------

    The Exchange proposes to adopt a modified version of the exception
set forth in FINRA Rule 5320.06 relating to minimum price improvement
standards as proposed Rule 23050(h). Under proposed Rule 23050(h), BSTX
Participants would be permitted to execute an order on a proprietary
basis when holding an unexecuted limit order in that same security
without being required to execute the held limit order provided that
they give price improvement of $0.01 to the unexecuted held limit
order. While FINRA Rule 5320.06 sets forth alternate, lower price
improvement standards for securities priced below $1, the Exchange
proposes to adopt a uniform price improvement requirement of $0.01 for
a securities traded on the BSTX System consistent with the Exchange's
proposed uniform minimum price variant of $0.01 set forth in proposed
Rule 25030.
    In addition, the Exchange proposes to adopt an exception for bona
fide error transactions as proposed Rule 25030(g) which would allow a
BSTX Participant to trade ahead of a customer order if the trade is to
correct a bona fide error, as defined in the rule. This proposed
exception is nearly identical to similar exceptions of other exchanges
\144\ except that other exchange rules also provide an exception
whereby firms may submit a proprietary order ahead of a customer order
to offset a customer order that is in an amount other than a round lot
(i.e., 100 shares). The Exchange is not adopting an exception for odd-
lot orders under these circumstances because the minimum unit of
trading for security tokens pursuant to proposed Rule 25020 is one
security token. The Exchange believes that there may be a notable
amount of trading in amounts of less than 100 security tokens (i.e.,
trading in odd-lot amounts), and the Exchange accordingly does not
believe that it is appropriate to allow BSTX Participants to trade
ahead of customer orders just to offset an odd-lot customer order.
---------------------------------------------------------------------------

    \144\ See e.g., Cboe BZX Rule 12.5.05.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule 23000 Series relating
to trading practice rules is consistent with Section 6(b)(5) of the
Exchange Act \145\ because these proposed rules are designed to prevent
fraudulent and manipulative acts and practices that could harm
investors and to promote just and equitable principles of trade. The
proposed rules in the Rule 23000 Series are substantially similar to
the rules of other exchanges and generally include a variety of
prohibitions against types of trading activity or other conduct that
could potentially be manipulative, such as prohibitions against market
manipulation, fictitious transactions, and the dissemination of false
information. The Exchange has proposed to exclude certain provisions
from, or make certain modifications to, comparable rules of other SROs,
as detailed above, in order to account for certain unique aspects
related to the proposed trading of security tokens. The Exchange
believes that it is consistent with applicable requirements under the
Exchange Act to exclude these provisions and exceptions because they
set forth requirements that would not apply to BSTX Participants
trading in security tokens and that are not necessary for the Exchange
to carry out its functions of facilitating security token transactions
and regulating BSTX Participants.
---------------------------------------------------------------------------

    \145\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

H. Disciplinary Rules (Rule 24000 Series)
    With respect to disciplinary matters, the Exchange proposes to
adopt Rule 24000 (Discipline and Summary Suspension), which provides
that the provisions of the Exchange Rule 11000 Series (Summary
Suspension), 12000 Series (Discipline), 13000 Series (Review of Certain
Exchange Actions), and 14000 Series (Arbitration) of the Exchange Rules
shall be applicable to BSTX Participants and trading on the BSTX
System. The Exchange already has Rules pertaining to discipline and
suspension of Exchange Participants that it proposes to extend to BSTX
Participants and trading on the BSTX System. The Exchange also proposes
to adopt as Rule 24010 a minor rule violation plan with respect to
transactions on BSTX.\146\
---------------------------------------------------------------------------

    \146\ The proposed additions to the Exchange's minor rule
violation plan pursuant to proposed Rule 25010 are discussed below
in Part V.
---------------------------------------------------------------------------

    Proposed Rule 24000 incorporates by reference existing rules that
have already been approved by the Commission.
I. Trading Rules and the BSTX System (Rule 25000 Series)
1. Rule 25000--Access to and Conduct on the BSTX Marketplace)
    The Exchange proposes to adopt Rule 25000 (Access to and Conduct on
the BSTX Marketplace) to set forth rules relating to access to the BSTX
System and certain conduct requirements applicable to BSTX
Participants. Specifically, proposed Rule 25000 provides that only BSTX
Participants, including their associated persons, that are approved for
trading on the BSTX System shall effect any transaction on the BSTX
System. Proposed Rule 25000(b) generally requires that a BSTX
Participant maintain a list of authorized traders that may obtain
access to the BSTX System on behalf of the BSTX Participant, have
procedures in place reasonably designed to ensure that all authorized
traders comply with Exchange Rules and to prevent unauthorized access
to the BSTX System, and to provide the list of authorized traders to
the Exchange upon request. Proposed Rule 25000(c) and (d) restates
provisions that are already set forth in Exchange Rule 7000, generally
providing that BSX Participants shall not engage in conduct that is
inconsistent with the maintenance of a fair and orderly market or the
ordinary and efficient conduct of business, as well as conduct that is
likely to impair public confidence in the operations of the Exchange.
Examples of such prohibited conduct include failure to abide by a
determination of the Exchange, refusal to provide information requested
by the Exchange, and failure to adequately supervise employees.
Proposed Rule 25000(f) provides the Exchange with authority to suspend
or terminate access to the BSTX System under certain circumstances.
    The Exchange believes that proposed Rule 25000 is consistent with
Section 6(b)(5) of the Exchange Act \147\ because it is designed to
protect investors and the public interest and promote just and

equitable principles of trade by ensuring that BSTX Participants would
not allow for unauthorized access to the BSTX System and would not
engage in conduct detrimental to the maintenance of fair and orderly
markets.
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. Rule 25010--Days/Hours
    Proposed Rule 25010 sets forth the days and hours during which BSTX
would be open for business and during which transactions may be
effected on the BSTX System. Under the proposed rule, transactions may
be executed on the BSTX System between 9:30 a.m. and 4:00 p.m. Eastern
Time. The proposed rule also specifies certain holidays BSTX would be
not be open (e.g., New Year's Day) and provides that the Chief
Executive Officer, President, or Chief Regulatory Officer of the
Exchange, or such person's designee who is a senior officer of the
Exchange, shall have the power to halt or suspend trading in any
security tokens, close some or all of BSTX's facilities, and determine
the duration of any such halt, suspension, or closing, when such person
deems the action necessary for the maintenance of fair and orderly
markets, the protection of investors, or otherwise in the public
interest.
    The Exchange believes that proposed Rule 25010 is designed to
protect investors and the public interest, consistent with Section
6(b)(5) of the Exchange Act,\148\ by setting forth the days and hours
that trades may be effected on the BSTX System and by providing
officers of the Exchange with the authority to halt or suspend trading
when such officers believe that such action is necessary or appropriate
to maintain fair and orderly markets or to protect investors or in the
public interest.
---------------------------------------------------------------------------

    \148\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

3. Rule 25020--Units of Trading
    Proposed Rule 25020 sets forth the minimum unit of trading on the
BSTX System, which shall be one security token. The Exchange believes
that proposed Rule 25020 is consistent with Section 6(b)(5) of the
Exchange Act \149\ because it fosters cooperation and coordination of
persons engaged in facilitating transactions in securities by
specifying the minimum unit of trading of security tokens on the BSTX
System. In addition, other exchanges similarly provide that the minimum
unit of trading is one share for their market and/or for certain
securities.\150\
---------------------------------------------------------------------------

    \149\ 15 U.S.C. 78f(b)(5).
    \150\ See e.g., IEX Rule 11.180.
---------------------------------------------------------------------------

4. Rule 25030--Minimum Price Variant
    Proposed Rule 25030 provides the minimum price variant for security
tokens shall be $0.01. The Exchange believes that proposed Rule 25030
is consistent with Section 6(b)(5) of the Exchange Act because it
fosters cooperation and coordination of persons engaged in facilitating
transactions in securities by specifying the minimum price variant for
security tokens and promotes compliance with Rule 612 of Regulation
NMS.\151\ Under Rule 612 of Regulation NMS, the Exchange is, among
other things, prohibited from displaying, ranking or accepting from any
person a bid or offer or order in an NMS stock in an increment smaller
than $0.01 if that bid or offer or order is priced equal to or greater
than $1.00 per share. Where a bid or offer or order is priced less than
or equal to $1.00 per share, the minimum acceptable increment is
$0.0001. Proposed Rule 25030 sets a uniform minimum price variant for
all security tokens of $0.01 irrespective of whether the security token
is trading below $1.00.
---------------------------------------------------------------------------

    \151\ 17 CFR 242.611.
---------------------------------------------------------------------------

5. Rule 25040--Opening the Marketplace
    Proposed Rule 25040 sets forth the opening process for the BSTX
System for BSTX-listed security tokens and non-BSTX-listed security
tokens. For BSTX-listed security tokens, the Exchange proposes to allow
for order entry to commence at 8:30 a.m. ET during the Pre-Opening
Phase. Proposed Rule 25040(a) provides that orders will not execute
during the Pre-Opening Phase, which lasts until regular trading hours
begins at 9:30 a.m. ET.\152\ Similar to how the Exchange's opening
process works for options trading, BSTX would disseminate a theoretical
opening price (``TOP'') to BSTX Participants, which is the price at
which the opening match would occur at a given moment in time.\153\
Under the proposed rule, the Exchange will also broadcast other
information during the Pre-Opening Phase. Specifically, in addition to
the TOP, the Exchange would disseminate pursuant to proposed Rule
25040(a)(3): (i) ``Paired Tokens,'' which is the quantity of security
tokens that would execute at the TOP; (ii) the ``Imbalance Quantity,''
which is the number of security tokens that may not be matched with
other orders at the TOP at the time of dissemination; and (iii) the
``Imbalance Side,'' which is the buy/sell direction of any imbalance at
the time of dissemination (collectively, with the TOP, ``Broadcast
Information'').\154\ Broadcast Information will be recalculated and
disseminated every time a new order is received or cancelled and where
such event causes the TOP or Paired Tokens to change. With respect to
priority during the opening match for all security tokens, consistent
with proposed Rule 25080 (Execution and Price/Time Priority), among
multiple orders at the same price, execution priority during the
opening match is determined based on the time the order was received by
the BSTX System.
---------------------------------------------------------------------------

    \152\ As a result, order marked IOC submitted during the Pre-
Opening Phase will be rejected by the BSTX System. See proposed Rule
25040(a)(7).
    \153\ The TOP can only be calculated where the BSTX Book is
crossed during the Pre-Opening Phase. See proposed Rule 25040(a)(2).
    \154\ Pursuant to proposed Rule 25040(a)(3), any orders which
are at a better price (i.e., bid higher or offer lower) than the TOP
will be shown only as a total quantity on the BSTX Book at a price
equal to the TOP.
---------------------------------------------------------------------------

    Consistent with the manner in which the Exchange opens options
trading, the BSTX System would determine a single price at which a
BSTX-listed security token will be opened by calculating the optimum
number of security tokens that could be matched at a price, taking into
consideration all the orders on the BSTX Book.\155\ Proposed Rule
25040(a)(5) provides that the opening match price is the price which
results in the matching of the highest number of security tokens. If
two or more prices would satisfy this maximum quantity criteria, the
price leaving the fewest resting security tokens in the BSTX Book will
be selected at the opening price and where two or more prices would
satisfy the maximum quantity criteria and leave the fewest security
tokens in the BSTX Book, the price closest to the previous day's
closing price will be selected.\156\ Unexecuted trading interest during
the opening match will move to the BSTX Book and will preserve price
time priority.\157\ When the BSTX System cannot determine an opening
price of a BSTX-listed security token at the start of regular trading
hours, BSTX would nevertheless open the security token for trading and
move all trading interest received during the Pre-Opening Phase to the
BSTX Book.\158\
---------------------------------------------------------------------------

    \155\ See proposed Rule 25040(a)(4)(ii).
    \156\ With respect to initial security token offerings where
there is no previous day's closing price, the opening price will be
the price assigned to the security token by the underwriter for the
offering, referred to as the ``ISTO Reference Price.'' See Proposed
Rule 25040(a)(5)(ii)(3).
    \157\ See proposed Rule 25040(a)(6).
    \158\ Id.
---------------------------------------------------------------------------

    For Initial Security Token Offerings (``ISTOs''), the process will
be generally the same as regular market openings.

However, in advance of an ISTO auction (``ISTO Auction''), the Exchange
shall announce a ``Quote-Only Period'' that shall be between fifteen
(15) and thirty (30) minutes plus a short random period prior to the
ISTO Auction.\159\ The Quote-Only Period may be extended in certain
cases.\160\ As with regular market openings the Exchange would
disseminate Broadcast Information at the commencement of the Quote Only
Period, and Broadcast Information would be re-calculated and
disseminated every time a new order is received or cancelled and where
such event causes the TOP price or Paired Tokens to change.\161\ In the
event of any extension to the Quote-Only Period or a trading pause, the
Exchange will notify market participants regarding the circumstances
and length of the extension.\162\ Orders will be matched and executed
at the conclusion of the Quote-Only Period, rather than at 9:30 a.m.
Eastern Time.\163\ Following the initial cross at the end of the Quote-
Only Period wherein orders will execute based on price/time priority
consistent with proposed Rule 25080, the Exchange will transition to
normal trading pursuant to proposed Rule 25040(a)(6).\164\
---------------------------------------------------------------------------

    \159\ See proposed Rule 25040(b)(1).
    \160\ Such cases are when: (i) There is no TOP; (ii) the
underwriter requests an extension; (iii) the TOP moves the greater
of 10% or fifty (50) cents in the fifteen (15) seconds prior to the
initial cross; or (iv) in the event of a technical or systems issue
at the Exchange that may impair the ability of BSTX Participants to
participate in the ISTO or of the Exchange to complete the ISTO. See
proposed Rule 25040(b)(2).
    \161\ See proposed Rule 25040(b)(3).
    \162\ See proposed Rule 25040(b)(4). The Exchange also proposes
that if a trading pause is triggered by the Exchange or if the
Exchange is unable to reopen trading at the end of the trading pause
due to a systems or technology issue, the Exchange will immediately
notify the single plan processor responsible for consolidation of
information for the security pursuant to Rule 603 of Regulation NMS
under the Securities Exchange Act of 1934. Id.
    \163\ See proposed Rule 25040(b)(5).
    \164\ As with the regular opening process, orders marked IOC
submitted during the Pre-Opening Phase of an ISTO Auction would be
rejected. See proposed Rule 25040(b)(6).
---------------------------------------------------------------------------

    The Exchange also proposes a process for reopening trading
following a Limit Up-Limit Down Halt or trading pause (``Halt
Auctions''). For Halt Auctions, the Exchange proposes that in advance
of reopening, the Exchange shall announce a Quote-Only Period that
shall be five (5) minutes prior to the Halt Auction.\165\ This Quote-
Only Period may be extended in certain circumstances.\166\ The Exchange
proposes to disseminate the same Broadcast Information as it does for
an ISTO Auction and would similarly provide notification of any
extension to the quote-only period as with an ISTO Auction.\167\ The
transition to normal trading would also occur in the same manner as