[Federal Register Volume 85, Number 154 (Monday, August 10, 2020)]
[Notices]
[Pages 48312-48315]
[FR Doc No: 2020-17351]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89470; File No. SR-C2-2020-008]

Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the Options Regulatory Fee

August 4, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 21, 2020, Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2 Options'')
proposes to amend its Fees Schedule relating to the Options Regulatory
Fee. The text of the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to reduce the Options Regulatory Fee
(``ORF'') from $0.0012 per contract to $0.0004 per contract, effective
August 3, 2020, in order to help ensure that revenue collected from the
ORF, in combination with other regulatory fees and fines, does not
exceed the Exchange's total regulatory costs.
    The ORF is assessed by C2 Options to each Trading Permit Holder
(``TPH'') for options transactions cleared by the TPH that are cleared
by the Options Clearing Corporation (``OCC'') in the customer range,
regardless of the exchange on which the transaction occurs.\3\ In other
words, the Exchange imposes the ORF on all customer-range transactions
cleared by a TPH, even if the transactions do not take place on the
Exchange. The ORF is collected by OCC on behalf of the Exchange from
the Clearing Trading Permit Holder (``CTPH'') or non-CTPH that
ultimately clears the transaction. With respect to linkage
transactions, C2 Options reimburses its routing broker providing
Routing Services pursuant to C2 Options Rule 6.15 for options
regulatory fees it incurs in connection with the Routing Services it
provides.
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    \3\ The Exchange notes ORF also applies to customer-range
transactions executed during Global Trading Hours.
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    Revenue generated from ORF, when combined with all of the
Exchange's other regulatory fees and fines, is designed to recover a
material portion of the regulatory costs to the Exchange of the
supervision and regulation of TPH customer options business including
performing routine surveillances, investigations, examinations,
financial monitoring, and policy, rulemaking, interpretive, and
enforcement activities.

Regulatory costs include direct regulatory expenses and certain
indirect expenses for work allocated in support of the regulatory
function. The direct expenses include in-house and third-party service
provider costs to support the day to day regulatory work such as
surveillances, investigations and examinations. The indirect expenses
include support from such areas as human resources, legal, information
technology, facilities and accounting. These indirect expenses are
estimated to be approximately 1% of C2 Options' total regulatory costs
for 2020. Thus, direct expenses are estimated to be approximately 99%
of total regulatory costs for 2020. In addition, it is C2 Options'
practice that revenue generated from ORF not exceed more than 75% of
total annual regulatory costs.
    The Exchange monitors its regulatory costs and revenues at a
minimum on a semi-annual basis. If the Exchange determines regulatory
revenues exceed or are insufficient to cover a material portion of its
regulatory costs in a given year, the Exchange will adjust the ORF by
submitting a fee change filing to the Commission. The Exchange also
notifies TPHs of adjustments to the ORF via regulatory circular and/or
Exchange Notice.\4\ Based on the Exchange's most recent semi-annual
review, the Exchange is proposing to reduce the amount of ORF that will
be collected by the Exchange from $0.0012 per contract side to $0.0004
per contract side. The proposed decrease is based on the Exchange's
estimated projections for its regulatory costs, which have decreased,
balanced with recent options volumes, which has significantly
increased. For example, total options contract volume in June 2020 was
82.2% higher than the total options contract volume in June 2019.\5\ In
fact, June 2020 was the highest options volume month in the history of
U.S. equity options industry.\6\ In particular, customer options volume
across the industry has also significantly increased year to date. For
example, total customer options contract volume in April 2020 was
50.27% higher than total customer volume in April 2019 and total
customer options contract volume in May 2020, was 29.10% higher than
total customer volume in May 2019. These expectations are estimated,
preliminary and may change. There can be no assurance that the
Exchange's final costs for 2020 will not differ materially from these
expectations and prior practice, nor can the Exchange predict with
certainty whether options volume will remain at the current level going
forward. The Exchange notes however, that when combined with the
Exchange's other non-ORF regulatory fees and fines, the revenue being
generated by ORF using the current rate results in revenue that is
running in excess of the Exchange's estimated regulatory costs for the
year.\7\ Particularly, as noted above, the options market has seen a
substantial increase in volume over the first half of the year, due in
large part to the extreme volatility in the marketplace as a result of
the COVID-19 pandemic. This unprecedented spike in volatility resulted
in significantly higher volume than was originally projected by the
Exchange (thereby resulting in substantially higher ORF revenue than
projected). Moreover, in addition to projected reductions in regulatory
expenses, the Exchange experienced further unanticipated reductions in
costs, in connection with COVID-19 (e.g., reduction in travel
expenses).\8\ The Exchange therefore proposes to decrease the ORF in
order to ensure it does not exceed its regulatory costs for the year.
Particularly, the Exchange believes that by decreasing the ORF, as
amended, when combined with all of the Exchange's other regulatory fees
and fines, would allow the Exchange to continue covering a material
portion of its regulatory costs, while lessening the potential for
generating excess revenue that may otherwise occur using the current
rate. \9\
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    \4\ The Exchange endeavors to provide TPHs with such notice at
least 30 calendar days prior to the effective date of the change.
The Exchange notified TPHs of the proposed rate change for August 3,
2020 on July 1, 2020. See C2 Options Regulatory Circular RG20-042
``Options Regulatory Fee Decrease and Discontinuation of Regulatory
Circular'' and Exchange Notice, C2020070100 ``Cboe Options Exchanges
Regulatory Fee Update Effective August 3, 2020.''
    \5\ See https://www.theocc.com/Newsroom/Press-Releases/2020/07-01-OCC-June-2020-Total-Volume-Up-Nearly-81-Perc.
    \6\ Id. The previous record for highest U.S. equity options
volume was March 2020. For further context, the Exchange notes that
The Options Clearing Corporation total volume for March 2020 was up
62.8% as compared to March 2019.
    \7\ Consistent with Rule 2.3 (Regulatory Revenue), the Exchange
notes that notwithstanding the excess ORF revenue collected to date,
it has not used such revenue for nonregulatory purposes.
    \8\ The Exchange notes that in connection with proposed ORF rate
changes, it provides the Commission confidential details regarding
the Exchange's projected regulatory revenue, including projected
revenue from ORF, along with a breakout of its projected regulatory
expenses, including both direct and indirect allocations.
    \9\ The Exchange notes that its regulatory responsibilities with
respect to TPH compliance with options sales practice rules have
largely been allocated to FINRA under a 17d-2 agreement. The ORF is
not designed to cover the cost of that options sales practice
regulation.
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    The Exchange will continue to monitor the amount of revenue
collected from the ORF to ensure that it, in combination with its other
regulatory fees and fines, does not exceed the Exchange's total
regulatory costs.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\10\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4) of the Act,\11\ which provides that Exchange rules may provide
for the equitable allocation of reasonable dues, fees, and other
charges among its TPHs and other persons using its facilities.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \12\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed fee change is reasonable because
customer transactions will be subject to a lower ORF fee than the
current rate. Moreover, the proposed reduction is necessary in order
for the Exchange to not collect revenue in excess of its anticipated
regulatory costs, in combination with other regulatory fees and fines,
which is consistent with the Exchange's practices. The Exchange had
designed the ORF to generate revenues that would be less than or equal
to 75% of the Exchange's regulatory costs, which is consistent with the
view of the Commission that regulatory fees be used for regulatory
purposes and not to support the Exchange's business operations. As
discussed above, however, after its semi-annual review of its
regulatory costs and regulatory revenues, which includes revenues from
ORF and other regulatory fees and fines, the Exchange determined that
absent a reduction in ORF, it would be collecting revenue in excess of
75% of its regulatory costs. Indeed, the Exchange notes that when
taking into account the recent options volume, coupled with the
projected reduction in regulatory costs, it estimates the ORF will
generate revenues that would cover more than the approximated 75% of
the Exchange's projected regulatory costs. Moreover, when coupled with
the Exchange's other regulatory fees and revenues, the Exchange
estimates ORF to generate over 100% of the Exchange's projected
regulatory costs. As such, the Exchange believes it's reasonable and

appropriate to decrease the ORF amount from $0.0012 to $0.0004 per
contract side.
    The Exchange also believes the proposed fee change is equitable and
not unfairly discriminatory in that it is charged to all TPHs on all
their transactions that clear in the customer range at the OCC. The
Exchange believes the ORF ensures fairness by assessing higher fees to
those TPHs that require more Exchange regulatory services based on the
amount of customer options business they conduct. Regulating customer
trading activity is much more labor intensive and requires greater
expenditure of human and technical resources than regulating non-
customer trading activity, which tends to be more automated and less
labor-intensive. For example, there are costs associated with main
office and branch office examinations (e.g., staff and travel
expenses), as well as investigations into customer complaints and the
terminations of Registered persons. As a result, the costs associated
with administering the customer component of the Exchange's overall
regulatory program are materially higher than the costs associated with
administering the non-customer component (e.g., TPH proprietary
transactions) of its regulatory program.\13\ Moreover, the Exchange
notes that it has broad regulatory responsibilities with respect to its
TPHs' activities, irrespective of where their transactions take place.
Many of the Exchange's surveillance programs for customer trading
activity may require the Exchange to look at activity across all
markets, such as reviews related to position limit violations and
manipulation. Indeed, the Exchange cannot effectively review for such
conduct without looking at and evaluating activity irregardless of
where it transpires. In addition to its own surveillance programs, the
Exchange also works with other SROs and exchanges on intermarket
surveillance related issues. Through its participation in the
Intermarket Surveillance Group (``ISG'') \14\ the Exchange shares
information and coordinates inquiries and investigations with other
exchanges designed to address potential intermarket manipulation and
trading abuses. Accordingly, there is a strong nexus between the ORF
and the Exchange's regulatory activities with respect to its TPH's
customer trading activity.
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    \13\ If the Exchange changes its method of funding regulation or
if circumstances otherwise change in the future, the Exchange may
decide to modify the ORF or assess a separate regulatory fee on TPH
proprietary transactions if the Exchange deems it advisable.
    \14\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. This proposal does not create
an unnecessary or inappropriate intra-market burden on competition
because the ORF applies to all customer activity, thereby raising
regulatory revenue to offset regulatory expenses. It also supplements
the regulatory revenue derived from non-customer activity. The Exchange
notes, however, the proposed change is not designed to address any
competitive issues. Indeed, this proposal does not create an
unnecessary or inappropriate inter-market burden on competition because
it is a regulatory fee that supports regulation in furtherance of the
purposes of the Act. The Exchange is obligated to ensure that the
amount of regulatory revenue collected from the ORF, in combination
with its other regulatory fees and fines, does not exceed regulatory
costs.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File No. SR-C2-2020-008 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-C2-2020-008. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-C2-2020-008, and should be submitted on or
before August 31, 2020.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17351 Filed 8-7-20; 8:45 am]
BILLING CODE 8011-01-P