to do so in the interest of fair and orderly markets.\222\ For purposes
of meeting the continuous quoting obligations discussed herein, a
Market Maker's quote must meet the bid/ask differential requirements of
Topaz Exchange Rule 803(b)(4).\223\
---------------------------------------------------------------------------

    \218\ See Topaz Exchange Rule 804.
    \219\ See Topaz Exchange Rule 804(e)(1); see also Topaz Exchange
Rule 804(c). A PMM shall be deemed to have provided continuous
quotes pursuant to paragraph (e)(1) of Rule 804 if it provides two-
sided quotes for 90% of the time that an options class is open for
trading on the Topaz Exchange. See Topaz Exchange Rule 804,
Supplementary Material .01; see also Amendment No. 3.
    \220\ See Topaz Exchange Rule 701(b)(1). See also Amendment No.
3.
    \221\ See Topaz Exchange Rule 804(e)(2). A CMM must maintain
continuous quotations for at least 90% of the time the options class
for which it receives Preferenced Orders is open for trading on the
Topaz Exchange. See Topaz Exchange Rule 804(e)(2)(iii); see also
Topaz Exchange Rule 713, Supplementary Material .03 regarding
Preferenced Orders.
    \222\ See Topaz Exchange Rule 804(e)(2)(iv).
    \223\ See Topaz Exchange Rule 804(e)(1)-(2). See also supra note
213.
---------------------------------------------------------------------------

    In options classes other than to which it is appointed, a Market
Maker should not engage in transactions in an account in which it has
an interest that are disproportionate in relation to, or in derogation
of, the performance of its market making obligations as specified in
the Topaz Exchange rules.\224\ Further, the total number of contracts
executed during a quarter by a CMM in options classes to which it is
not appointed may not exceed 25% of the total number of contracts
traded by such CMMs in classes to which it is appointed and with
respect to which it was quoting pursuant to Topaz Exchange Rule
804(e)(2).\225\ Similarly, the total number of contracts executed
during a quarter by a PMM in options classes to which it is not
appointed may not exceed 10% of the total number of contracts traded
per each PMM membership.\226\
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    \224\ See Topaz Exchange Rule 803(d). Among other things, a
Market Maker should not effect purchases or sales on the Topaz
Exchange except in a reasonable and orderly manner. See id.
    \225\ See Topaz Exchange Rule 805(b)(2).
    \226\ See Topaz Exchange Rule 805(b)(3).
---------------------------------------------------------------------------

    If Topaz Exchange finds any failure by a Market Maker to properly
perform as a market maker, such Market Maker may be subject to
suspension or termination.\227\ Topaz Exchange may suspend or terminate
any appointment of a Market Maker under Topaz Exchange Rule 802 and may
make additional appointments whenever, in Topaz Exchange's judgment,
the interests of a fair and orderly market are best served by such
action.\228\
---------------------------------------------------------------------------

    \227\ See Topaz Exchange Rule 800.
    \228\ See Topaz Exchange Rule 802(d).
---------------------------------------------------------------------------

    Market Makers receive certain benefits for carrying out their
responsibilities.\229\ For example, a broker-dealer or other lender may
extend ``good faith'' credit to a member of a national securities
exchange or registered broker-dealer to finance its activities as a
market maker or specialist.\230\ PMMs are also entitled to certain
participation entitlements.\231\ In addition, market makers are
excepted from the prohibition in Section 11(a) of the Act.\232\
---------------------------------------------------------------------------

    \229\ See, e.g., MIAX Order, supra note 30 (discussing the
benefits and obligations of market makers).
    \230\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR
240.15c3-1(a)(6) (capital requirements for market makers).
    \231\ See Topaz Exchange Rule 713, Supplementary Material
.01(b)-(c). See also infra notes 261-268 and accompanying text
(describing the PMM participation entitlements).
    \232\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

    The Commission believes that a market maker must be subject to
sufficient and commensurate affirmative obligations, including the
obligation to hold itself out as willing to buy and sell options for
its own account on a regular or continuous basis, to justify favorable
treatment.\233\ The Commission further believes that the rules of all
U.S. options markets need not provide the same standards for market
maker participation, so long as they impose affirmative obligations
that are consistent with the Act.\234\
---------------------------------------------------------------------------

    \233\ See MIAX Order, supra note 30, at 77 FR 73076; and BOX
Order supra note 39; see also, e.g., C2 Order, supra note 169.
    \234\ See id.
---------------------------------------------------------------------------

    The Commission believes that Topaz Exchange's Market Maker
participation requirements impose appropriate affirmative obligations
on Topaz Exchange's Market Makers that are commensurate with the
benefits afforded to such participants, as discussed above, and,
accordingly, are consistent with the Act. The Commission believes that
the specific levels of benefits conferred on the different classes of
Market Makers (PMMs and CMMs) are appropriately balanced by the
obligations imposed by Topaz Exchange's rules. The Commission further
believes that Topaz Exchange's market maker requirements,\235\ which
are identical to ISE's rules\236\ and similar to other options
exchanges' rules,\237\ impose sufficient appropriate obligations that
are consistent with the Act.
---------------------------------------------------------------------------

    \235\ See Topaz Exchange Rule 803.
    \236\ See, e.g., ISE Rule 800 Series.
    \237\ See, e.g., MIAX Order, supra note 30, and BOX Order, supra
note 39.
---------------------------------------------------------------------------

    Finally, the Commission believes that the Act does not mandate a
particular market model for exchanges, and while Market Makers may
become an important source of liquidity on Topaz Exchange, they will
likely not be the only source as Topaz Exchange is designed to match
buying and selling interest of all Topaz Exchange participants.

4. Order Display, Execution, and Priority
    Topaz Exchange proposes to operate a fully automated electronic
options trading platform to buy or sell securities with a continuous,
automated matching function.\238\ Liquidity will be derived from Topaz
Exchange members acting as principal or as agent electronically
submitting quotes as well as market and various types of limit orders
to buy or to sell.\239\ Non-members also may access Topaz Exchange
pursuant to Topaz Exchange rules governing ``sponsored access.'' \240\
All of these electronic submissions to Topaz Exchange will be from
remote locations, as there will be no trading floor.\241\ Topaz
Exchange's Optimise system generally will automatically execute
incoming orders.\242\ Non-opening trades will occur when a buy order/
quote and a sell order/quote match on the Topaz Exchange's order
book.\243\ All options will be traded in decimals on Topaz Exchange and
will be consistent with the Penny Pilot.\244\
---------------------------------------------------------------------------

    \238\ See Exhibit E to Topaz Exchange Form 1 Application.
    \239\ See id.
    \240\ See id.
    \241\ See id.
    \242\ See Topaz Exchange Rule 714.
    \243\ See Exhibit E to Topaz Exchange Form 1 Application.
    \244\ See Topaz Exchange Rule 710 and Supplementary Material
.01. The Commission has approved exchange rules on a pilot basis
that permit an exchange to quote series with premiums under $3 in
pennies and series with premiums of $3 and over in nickels in
approximately 360 options classes (``Penny Pilot''). In addition,
these rules allow all series in QQQQs, IWM, and SPY to be quoted in
pennies. See, e.g., Securities Exchange Act Release Nos. 60711
(September 23, 2009), 74 FR 49419 (September 28, 2009); 61061
(November 24, 2009), 74 FR 62857 (December 1, 2009) (File No. SR-
NYSEArca-2009-44) (approving Penny Pilot program expansions for NYSE
Arca). Proposed Supplementary Material .01 to Rule 710 would permit
Topaz Exchange to operate a pilot to permit certain options classes
to be quoted and traded in increments as low as $0.01, consistent
with these previously approved rules. Specifically, this pilot is
consistent with the penny pilot on ISE, which was last extended on
June 21, 2013 and is scheduled to expire on December 31, 2013. See
Securities Exchange Act Release No. 69828 (June 21, 2013), 78 FR
38745 (June 27, 2013) (File No. SR-ISE-2013-40). Similar to ISE,
Topaz Exchange has further agreed to submit to the Commission such
reports regarding the Penny Pilot as the Commission may request. See
Exhibit B to Topaz Exchange Form 1 Application.
---------------------------------------------------------------------------

    All orders submitted to Topaz Exchange's trading platform must have
a designated price and size (limit orders) \245\ or must be orders to
buy or sell a stated amount of a security at the national best bid or
offer when the order reaches Topaz Exchange (market orders).\246\
Members may submit the following orders to Topaz Exchange: Market
Orders; Limit Orders (including Marketable Limit, Fill-or-Kill,
Immediate or Cancel, Non-Displayed Penny Order, Intermarket Sweep, and
Stopped Orders); \247\ or Contingency Orders (including All-Or-None,
Stop, Stop Limit, Customer Participation, Reserve, Attributable,
Customer Cross, Qualified Contingent Cross, Minimum Quantity,\248\ Do-
Not-Route, Add Liquidity, Opening Only, and Good-Till-Date
Orders).\249\ Like ISE, Topaz Exchange also will permit flash
mechanisms, which thereby permit certain orders to first be exposed at
the NBBO to all Topaz Exchange members for execution at the National
Best Bid or Offer (``NBBO'') before an unaffiliated broker will, under
contract with Topaz Exchange, route the order to another market for
execution.\250\
---------------------------------------------------------------------------

    \245\ A limit order is an order to buy or sell a stated number
of options contracts at a specified price or better. Topaz Exchange
Rule 715(b).
    \246\ A market order is an order to buy or sell a stated number
of options contracts that is to be executed at the best price
obtainable when the order reaches Topaz Exchange. Topaz Exchange
Rule 715(a).
    \247\ See Topaz Exchange Rule 715. A Marketable Limit Order is a
limit order to buy (sell) at or above (below) the best offer (bid)
on the Topaz Exchange. A Fill-or-Kill Order is a limit order that is
to be executed in its entirety as soon as it is received and, if not
so executed, treated as cancelled. An Immediate-or-Cancel Order is a
limit order that is to be executed in whole or in part upon receipt
and any portion not so executed is to be treated as cancelled. A
Non-Displayed Penny Order is a limit order that specifies a one-cent
price increment in a security that has a minimum trading increment
pursuant to Topaz Exchange Rule 710 that is larger than one-cent. An
Intermarket Sweep Order is a limit order that meets the requirements
of Topaz Exchange Rule 1900(h), which incorporates by reference ISE
Rule 1900(h). A Stopped Order is a limit order that meets the
requirements of Topaz Exchange Rule 1901(b)(8), which incorporates
by reference ISE Rule 1901(b)(8). To execute Stopped Orders, members
must enter them into the Facilitation Mechanism or Solicited Order
Mechanism pursuant to Topaz Exchange Rule 716.
    \248\ The NASDAQ Letter noted that both Topaz Exchange Rules
715(l) and 715(q) appear to describe Minimum Quantity Orders and
urged that Topaz Exchange clarify the difference between these two
types of Minimum Quantity Orders. See NASDAQ Letter, supra note 6.
Topaz Exchange stated that it will correct the duplicative
definition. See Topaz Exchange Response Letter, supra note 7, and
Amendment No. 3. The Commission believes that Topaz Exchange's
revision to Topaz Exchange Rule 715(l) appropriately addresses the
commenter's concern.
    \249\ See Topaz Exchange Rule 715. An All-or-None Order is a
limit or market order that is to be executed in its entirety or not
at all. A Stop Order is an order that becomes a market order when
the stop price is elected. A Stop Limit Order is an order that
becomes a limit order when the stop price is elected. A Customer
Participation Order is a limit order on behalf of a Public Customer
(as defined in Topaz Exchange Rule 100(a)(38)) that, in addition to
the limit order price in standard increments according to Topaz
Exchange Rule 710, includes a price stated in one-cent increments at
which the Public Customer wishes to participate in trades executed
in the same options series in penny increments through the Price
Improvement Mechanism pursuant to Topaz Exchange Rule 723. A Reserve
Order is a limit order that contains both a displayed portion and a
non-displayed portion. An Attributable Order is a market or limit
order which displays the user firm ID for purposes of electronic
trading on Topaz Exchange. A Customer Cross Order is comprised of a
Priority Customer Order (as defined in Topaz Exchange Rule
100(a)(37B) to buy and a Priority Customer Order to sell at the same
price and for the same quantity. A Qualified Contingent Cross order
is comprised of an order to buy or sell at least 1000 contracts that
is identified as being part of a qualified contingent trade (as
defined in Topaz Exchange Rule 715, Supplementary Material .02)
coupled with a contra-side order to buy or sell an equal number of
contracts. A Minimum Quantity Order is an order that is initially
available for partial execution only for a specified number of
contracts or greater. A Do-Not-Route Order is a market or limit
order that is to be executed in whole or in part on Topaz Exchange
only. An Add Liquidity Order is a limit order that is to be executed
in whole or in part on Topaz Exchange (i) only after being displayed
on Topaz Exchange's limit order book; and (ii) without routing any
portion of the order to another market center. An Opening Only Order
is a limit order that can be entered for the opening rotation only.
A Good-Till-Date Order is a limit order to buy or sell which, if not
executed, will be cancelled at the sooner of the end of the
expiration date assigned to the order, or the expiration of the
series. These order types are the same order types that are
available on ISE, except that ISE also includes several complex
order types that are not proposed for Topaz Exchange. See Topaz
Exchange Rule 715; ISE Rules 715 and 722; see also Exhibit B to
Topaz Exchange Form 1 Application.
    \250\ See Topaz Exchange Rule 1901, Supplementary Material .02
(which incorporates by reference ISE Rule 1901, Supplementary
Material .02). See also Amendment No. 3 (removing exposure and
routing obligation from PMMs under Topaz Exchange Rule 800 Series).
---------------------------------------------------------------------------

    Quotes entered by PMMs and CMMs must, like Limit Orders, be priced
and have a designated size.\251\ Orders will be accepted for any
security traded on Topaz Exchange, whether submitted by a member on a
proprietary or agency basis in any size,\252\ whereas quotes for any
security traded on Topaz Exchange may only be submitted by PMMs and
CMMs and only in the options classes to which the market makers are
appointed.\253\ Topaz Exchange will be required to maintain a full
audit trail of every incoming and outgoing message (including all
orders and quotes) submitted to the Topaz Exchange's system.\254\
Members may receive status reports regarding orders submitted to Topaz
Exchange or change or cancel an

order at any time before that order is executed on Topaz Exchange,
except as otherwise specified in Topaz Exchange Rule 723 (Price
Improvement Mechanism for Crossing Transactions).\255\
---------------------------------------------------------------------------

    \251\ See Topaz Exchange Rule 804(b). The NASDAQ Letter noted
that proposed Topaz Exchange Rule 804(g) and Supplementary Material
.01 appear to be identical and urged that Topaz Exchange clarify
this provision. See NASDAQ Letter, supra note 6. Topaz Exchange
stated that it will correct the duplicative provision. See Topaz
Exchange Response Letter, supra note 7, and Amendment No. 3. The
Commission believes that Topaz Exchange's revision to Topaz Exchange
Rule 804, Supplementary Material .01 appropriately addresses the
commenter's concern.
    \252\ See Topaz Exchange Rule 713(a).
    \253\ See Topaz Exchange Rule 804(a).
    \254\ See 17 CFR 240.17a-5. See also Exhibit E to Topaz Exchange
Form 1 Application, Section C.
    \255\ See Exhibit E to Topaz Exchange Form 1 Application,
Section C.
---------------------------------------------------------------------------

    All orders and quotes submitted to Topaz Exchange will be displayed
unless designated otherwise by the member submitting the order.\256\
Displayed orders and quotes will be displayed on an anonymous basis
(except for Attributable Orders,\257\ which will allow voluntary
disclosure of firm identification information) at a member's specified
price. Non-Displayed Orders (the non-displayed portion of a Reserve
Order or a Non-Displayed Penny Order) will not be displayed to anyone
and will not have time priority over displayed orders at the same
price.\258\
---------------------------------------------------------------------------

    \256\ See Topaz Exchange Rule 704.
    \257\ An Attributable Order is a market or limit order which
displays the user firm's ID for purposes of trading on the Topaz
Exchange. Use of Attributable Orders would be voluntary. This order
type is consistent with similar order types on other exchanges. See,
e.g., CBOE Rule 6.53(o) (attributable order type).
    \258\ See Topaz Exchange Rules 715(b)(4) and 715(g).
---------------------------------------------------------------------------

    Topaz Exchange will utilize a pro-rata priority scheme with a
Priority Customer preference.\259\ This scheme is the same as what the
Commission has approved for ISE.\260\
---------------------------------------------------------------------------

    \259\ See Topaz Exchange Rule 713, Supplementary Material 01.
Under this priority methodology, the highest bid and lowest offer
will have priority except that Priority Customer Orders will have
priority over professional interest and all market maker interest at
the same price. Subject to certain limits, Professional Orders and
market maker quotes at the best price receive allocations based upon
the percentage of the total number of contracts available at the
best price that is represented by the size of the Professional Order
or quote. If there were two or more Priority Customer Orders for the
same options series at the same price, priority will be afforded
based on the sequence in which such orders were received. Topaz
Exchange rules will define ``Priority Customer'' as a person or
entity that is not a broker or dealer in securities, and does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial accounts.
``Professional Orders,'' i.e., orders for the account of a person or
entity that is not a Priority Customer, will be subordinate to
Priority Customer Orders for priority and fee purposes. Professional
Orders will include orders of broker-dealers and orders of those
Public Customers that are not Priority Customers. See Topaz Exchange
Rules 100(a)(37A)-(37C) for definitions of Priority Customer,
Priority Customer Order and Professional Order, respectively.
    \260\ See, e.g., ISE Rule 713, Priority of Quotes and Orders.
---------------------------------------------------------------------------

    In addition, under Topaz Exchange rules, PMMs are granted certain
participation entitlements. For example, PMMs will be entitled to a
participation entitlement with respect to each incoming order if they
have a quote at the NBBO.\261\ The PMM participation entitlement will
apply only to any remaining balance after any Priority Customer \262\
orders have first been satisfied.\263\ The PMM will not be allocated a
total quantity greater than the quantity it is quoting at the execution
price, and it will not receive any further allocation of an order if it
receives a participation entitlement.\264\ Another such entitlement
provides that small size orders (i.e., five or fewer contracts) will be
allocated in full to the PMM if it has a quote at the NBBO.\265\
---------------------------------------------------------------------------

    \261\ See Topaz Exchange Rule 713, Supplementary Material .01.
Specifically, the PMM's participation entitlement will be equal to
the greater of: (i) The proportion of the total size at the best
price represented by the size of its quote, or (ii) 60% of the
contracts to be allocated if there is only one other Market Maker
quotation at the NBBO or 40% if there are two or more other Market
Maker quotes at the NBBO. See Topaz Exchange Rule 713, Supplementary
Material .01(b).
    \262\ See supra note 259 for the definition of Priority
Customer.
    \263\ See Topaz Exchange Rule 713, Supplementary Material .01.
    \264\ See id.
    \265\ See Topaz Exchange Rule 713, Supplementary Material
.01(c). The rule provides that Topaz Exchange will review the
functioning of this provision quarterly to make sure that small size
orders do not account for more than 40% of the volume executed on
Topaz Exchange. Id.
---------------------------------------------------------------------------

    These participation entitlements for PMMs are consistent with
provisions that the Commission has approved for other exchanges.\266\
The Commission believes that these entitlements are appropriately
balanced by the obligations imposed on these classes of market makers,
as discussed in detail above.\267\ In particular, PMMs are subject to
higher quoting obligations than other Market Makers who are not
eligible to receive the aforementioned participation entitlements.\268\
Therefore, the Commission believes that the proposed rules regarding
participation entitlements are consistent with the Act.
---------------------------------------------------------------------------

    \266\ See, e.g., ISE Rule 713, Supplementary Materials .01 and
.03; see also MIAX Order, supra note 30.
    \267\ See supra Section II.D.3.b (discussing market maker
obligations).
    \268\ For example, as discussed above, supra Section II.D.3.b.,
PMMs must provide continuous two-sided quotes in each appointed
option class.
---------------------------------------------------------------------------

    Topaz Exchange proposes to make available certain additional order
processing and matching features, largely based on features available
on ISE.\269\ Mechanisms that will be utilized by Topaz Exchange
include: A Price Improvement Mechanism (which affords the opportunity
for price improvement after an auction for eligible orders above the
NBBO); \270\ a Facilitation Mechanism (which affords members an
opportunity to cross orders after an auction and provides the
facilitating member the opportunity to receive 40% of the agency
order); \271\ and a Solicited Order Mechanism (which allows members
representing agency orders the opportunity to cross large size
solicited orders after an auction).\272\ These mechanisms are
consistent with substantially similar mechanisms currently existing on
other options exchanges, including identical mechanisms on ISE with
respect to non-complex orders.\273\
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    \269\ The primary difference between Topaz Exchange's order
processing and matching features and those of ISE previously
approved by the Commission will be that Topaz Exchange will not
accept complex orders.
    \270\ See Topaz Exchange Rule 723. Topaz Exchange will operate a
pilot program whereby there will be no minimum size requirements for
orders to be eligible for the PIM. See Exhibit B to Topaz Exchange
Form 1 Application; see also Topaz Exchange Rule 723, Supplementary
Material .03.
    \271\ See Topaz Exchange Rule 716(d). The NASDAQ Letter stated
that it appears that the rule concerning the Facilitation Mechanism
was internally inconsistent in part. Specifically, the NASDAQ Letter
noted that proposed Topaz Exchange Rule 716(d)(3)(i) stated that
Priority Customer bids (offers) that are priced higher (lower) than
the facilitation price will be executed at the facilitation price,
and further noted that the same section of the rule also stated that
a facilitation order would be cancelled at the end of the exposure
period if an execution would take place a price that is inferior to
the best bid (offer) on Topaz. See NASDAQ Letter, supra note 6. The
NASDAQ Letter suggested that this means that a Priority Customer
bidding higher than the facilitation price would cause the
facilitation order to be cancelled. See id. Topaz Exchange clarified
this point by explaining that, because Topaz Exchange is a price
priority exchange, Topaz Exchange will not execute a facilitation
order at a price that is inferior to the Topaz Exchange best bid or
offer (``Topaz BBO'') at the time of execution. Topaz Exchange noted
that, since interest on the opposite side of a facilitation order
participates in the execution of the facilitation order, the only
instance where a better priced Priority Customer Order might be
outside of the Topaz BBO is when the order is on the same side of
the market as the facilitation order. In other words, the text of
Rule 716(d) means that better-priced Priority Customer Orders on the
opposite side of the market from the order being facilitated will be
given the benefit of executing at the facilitation price, whereas
better-priced Priority Customer Orders on the same side of the
market as the order being facilitated will cause the facilitation
order to be cancelled. See Topaz Exchange Response Letter, supra
note 7.
    \272\ See Topaz Exchange Rule 716(e). With respect to the Block
Order, Facilitation and Solicited Order Mechanisms described in
Topaz Exchange Rule 716(b), (d) and (e), the NYSE Euronext Letter II
recommended clarifying language to describe what terms, if any,
should be contained within a ``broadcast message.'' See NYSE
Euronext Letter II, supra note 6. Topaz Exchange stated that it
would amend the various sections of the rule to clarify the terms of
the broadcast message. See Topaz Exchange Response Letter, supra
note 7, and Amendment No. 3. The Commission believes that Topaz
Exchange's revisions to Topaz Exchange Rule 716(b), (d), and (e)
appropriately address the commenter's concerns.
    \273\ See ISE Rules 716 and 723.
---------------------------------------------------------------------------

    Members will be able to access Topaz Exchange through a variety of
electronic

systems, and non-members will be able to access Topaz Exchange pursuant
to sponsored access arrangements with Topaz Exchange members, pursuant
to Topaz Exchange rules.\274\ As noted above, Topaz Exchange also
intends to become a participant in the Linkage Plan.\275\ The manner in
which Topaz Exchange proposes to comply with the Linkage Plan is
identical to the manner in which ISE complies with the Linkage
Plan.\276\ To comply with the Linkage Plan, Topaz Exchange, among other
things, will prohibit its members from effecting a transaction at a
price that is inferior to the NBBO, unless an exception applies.\277\
Topaz Exchange will provide a centralized process for sending
intermarket sweep orders to other exchanges on behalf of Public
Customer Orders.\278\ Topaz Exchange will contract with one or more
unaffiliated brokers to route orders to other exchanges when necessary
to comply with the Linkage Plan. In circumstances where marketable
Public Customer Orders are received when Topaz Exchange is not at the
NBBO or orders are received that would lock or cross another market,
they will be exposed to Topaz Exchange members for up to one
second.\279\ If, after a Public Customer Order is exposed, such order
cannot be executed in full on Topaz Exchange at the then-current NBBO
or better and is marketable, the lesser of the full displayed size of
the protected bid(s) or protected offer(s) that are priced better than
the Topaz Exchange's quote or the balance of the order will be sent to
a contracted unaffiliated broker, and any additional balance of the
order that is not marketable against the then-current NBBO will be
placed on the Topaz Exchange book.\280\
---------------------------------------------------------------------------

    \274\ See, e.g., Topaz Exchange Rule 706, Supplementary Material
.01.
    \275\ See Topaz Exchange Rule 1900 Series, which incorporates by
reference ISE Rule 1900 Series.
    \276\ The Commission recently approved a change in the way in
which ISE complies with the Linkage Plan by now contracting with one
or more unaffiliated brokers to route intermarket sweep orders of
Public Customers to other exchanges when necessary. See Securities
Exchange Act Release No. 69396 (April 18, 2013), 78 FR 24273 (April
24, 2013) (File No. SR-ISE-2013-18). PMMs no longer have the
responsibility of either executing the Public Customer Order at a
price that at least matches the NBBO or obtaining better prices from
the away market(s) by sending one or more intermarket sweep orders
on the Public Customer's behalf. See also Amendment No. 3 (removing
exposure and routing obligation from PMMs under Topaz Exchange's
Rule 800 Series).
    \277\ See Topaz Exchange Rule 714; see also ISE Rule 714.
    \278\ See Topaz Exchange Rule 1901, which incorporates by
reference ISE Rule 1901.
    \279\ See Topaz Exchange Rule 1901, Supplementary Material .02,
which incorporates by reference ISE Rule 1901, Supplementary
Material .02.
    \280\ See id. Any additional balance of the order will be
executed on Topaz Exchange if it is marketable.
---------------------------------------------------------------------------

    The Commission believes that Topaz Exchange's proposed display,
execution, and priority rules are consistent with the Act. In
particular, the Commission finds that the proposed rules are consistent
with Section 6(b)(5) of the Act,\281\ which, among other things,
requires that the rules of a national securities exchange be designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest, and to not
permit unfair discrimination between customers, issuers, or dealers.
The Commission also finds that the proposed rules are consistent with
Section 6(b)(8) of the Act,\282\ which requires that the rules of an
exchange not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The trading
rules of Topaz Exchange are substantially similar to the current ISE
trading rules, which were approved at the time ISE's registration as a
national securities exchange was granted \283\ or filed with and
approved by the Commission (or otherwise became effective) pursuant to
Section 19(b) of the Act.\284\ The Commission believes that Topaz
Exchange's trading rules, in general, do not raise any novel or
controversial issues.\285\
---------------------------------------------------------------------------

    \281\ 15 U.S.C. 78f(b)(5).
    \282\ 15 U.S.C. 78f(b)(8).
    \283\ See ISE Order, supra note 167.
    \284\ The Commission notes, however, that some of Topaz
Exchange's rules differ in some respects from the rules of ISE. For
example, Topaz Exchange is not proposing to incorporate ISE's rules
relating to the trading of equity securities or to incorporate any
rules concerning the trading of complex or multi-legged orders at
this time.
    \285\ With respect to clearing rules, the three commenters
recommended clarifying language with respect to Topaz Exchange Rule
712(b), specifically ``. . . or other guarantee given by such
Clearing Member to such Member . . . .'' The commenters noted that
this language lacks clarity whether Topaz Exchange Rule 712(b)
requires some form of written authorization between a clearing
member and a member in order for the member to give up the name of a
particular clearing member. See CBOE Letter, NASDAQ Letter and NYSE
Euronext Letter I, supra note 6. The NASDAQ Letter noted that a
written, transparent and auditable authorization is needed to
provide proper safeguards and protections for clearing members and
to ensure clearing members are in compliance with aspects of the
Commission Rule 15c3-3 in general. See NASDAQ Letter, supra note 6.
The NYSE Euronext Letter I noted that the requirements for a letter
of authorization were also not clearly defined and that Topaz
Exchange should have rule text that governs the terms and revocation
of letters of authorization. Topaz Exchange clarified this point by
noting that ISE has interpreted and applied its identical rule to
require the submission of written authorization in order for an ISE
member to give up a particular clearing member's name. Topaz
Exchange further noted that it would amend the rule to make clear
that written authorization is required. See Topaz Exchange Response
Letter, supra note 7, and Amendment No 3. The Commission believes
that Topaz Exchange's revision to Topaz Exchange Rule 712(b)
appropriately addresses the commenters' concerns.
---------------------------------------------------------------------------

5. Section 11(a) of the Act
    Section 11(a)(1) of the Act \286\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts''), unless an exception applies. The
Exchange has represented that it has analyzed its rules proposed
hereunder, and believes that they are consistent with Section 11(a) of
the Act and rules thereunder. For the reasons set forth below, based on
Topaz Exchange's representations, the Commission believes that Topaz
Exchange's order execution algorithm, including the Facilitation,
Solicitation and Customer Cross processes (but excluding the Price
Improvement Mechanism), will allow members to meet the requirements of
Rule 11a2-2(T) for executions on Topaz Exchange. Additionally, the
Commission believes that Topaz Exchange members' executions that occur
through the Price Improvement Mechanism will be consistent with the
requirements in Section 11(a)(1)(G) of the Act and rule 11a1-1(T)
thereunder.
---------------------------------------------------------------------------

    \286\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

a. Rule 11a2-2(T)
    Rule 11a2-2(T) under the Act,\287\ known as the ``effect versus
execute'' rule, provides exchange members with an exemption from the
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange
member, subject to certain conditions, to effect transactions for
covered accounts by arranging for an unaffiliated member to execute the
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) May not be affiliated with the executing
member; (ii) must transmit the order from off the exchange floor; (iii)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution; \288\ and (iv)

with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule.
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    \287\ 17 CFR 240.11a2-2(T).
    \288\ The member may, however, participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the
NYSE's Designated Order Turnaround System) (``1978 Release'').
---------------------------------------------------------------------------

    In a letter to the Commission,\289\ Topaz Exchange requested that
the Commission concur with its conclusion that Topaz Exchange members
that enter orders through the Topaz Exchange system, including the
Facilitation, Solicitation and Customer Cross processes, (but excluding
those transactions effected through the PIM process), satisfy the
requirements of Rule 11a2-2(T). For the reasons set forth below, the
Commission believes that Topaz Exchange members that enter orders
through the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes, but excluding those
transactions effected through the PIM process, will satisfy the
conditions of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \289\ See Letter from Michael Simon, General Counsel, Secretary
and Chief Regulatory Officer, Topaz Exchange, to Elizabeth Murphy,
Secretary, Commission, dated December 14, 2012 (``Exchange 11(a)
Request Letter'').
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s first condition is that the order be executed by
an exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as the Topaz Exchange system,
including the Facilitation, Solicitation and Customer Cross processes,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages over non-
members in handling their orders after transmitting them to the
Exchange.\290\ Topaz Exchange has represented that the design of the
trading platform ensures that no member has any special or unique
trading advantage in the handling of its orders after transmitting its
orders to Topaz Exchange.\291\ Based on the Exchange's representation,
the Commission believes that the Topaz Exchange trading system,
including the Facilitation, Solicitation and Customer Cross processes,
will satisfy this requirement.
---------------------------------------------------------------------------

    \290\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that while
there is no independent executing exchange member, the execution of
an order is automatic once it has been transmitted into each system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084, 6086
n.25 (January 31, 1979) (File No. S7-613) (regarding the American
Stock Exchange (``Amex'') Post Execution Reporting System, the Amex
Switching System, the Intermarket Trading System, the Multiple
Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX
Communications and Execution System, and the Philadelphia Stock
Exchange Automated Communications and Execution System (``1979
Release'')).
    \291\ See Exchange 11(a) Request Letter, supra note 289.
---------------------------------------------------------------------------

    Second, Rule 11a2-2(T) requires orders for covered accounts to be
transmitted from off the exchange floor. Topaz Exchange will not have a
physical trading floor, and like other automated systems, will receive
orders electronically through remote terminals or computer-to-computer
interfaces. In the context of other automated trading systems, the
Commission has found that the off-floor transmission requirement is met
if a covered account order is transmitted from a remote location
directly to an exchange's floor by electronic means.\292\ Orders sent
to Topaz Exchange, regardless of where it executes within the Topaz
Exchange system, including as a Facilitation, a Solicitation or a
Customer Cross process, will be transmitted from remote terminals
directly to Topaz Exchange by electronic means. Since the Topaz
Exchange trading system receives all orders electronically through
remote terminals or computer-to-computer interfaces, the Commission
believes that the trading system, including the Facilitation,
Solicitation and Customer Cross processes, will satisfy the off-floor
transmission requirement.
---------------------------------------------------------------------------

    \292\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48)
(order approving proposed rules of BX); 49068, (January 13, 2004),
69 FR 2775 (January 20, 2004) (SR-BSE-2002-15) (establishing, among
other things, BOX as an options trading facility of BSE); 44983,
(October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25)
(approving the PCX's use of the Archipelago Exchange as its equity
trading facility); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991)
(SR-NYSE-90-52 and SR-NYSE-90-53) (regarding NYSE's Off-Hours
Trading Facility). See 1978 Release, supra note 288. See also 1979
Release, supra note 290.
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the member not participate in
the execution of its order once it has been transmitted to the member
performing the execution.\293\ Topaz Exchange represented that at no
time following the submission of an order is a member able to acquire
control or influence over the result or timing of an order's execution.
According to Topaz Exchange, orders submitted through the Topaz
Exchange system, including the Facilitation, Solicitation and Customer
Cross processes, also meet the non-participation requirement. The
execution of a member's order depends not on the member entering the
order, but rather on what orders, bids, or offers are present in the
system at the time the member submits the order and on the priority of
those orders, bids or offers.\294\ Topaz Exchange represents that
orders sent to Topaz Exchange and through the Facilitation,
Solicitation and Customer Cross processes will be centrally processed
and executed automatically by Topaz Exchange.\295\ Topaz Exchange
further represents that orders sent to Topaz Exchange will be
transmitted from remote terminals directly to the system by electronic
means.\296\ Once an order is submitted to Topaz Exchange, the order is
executed against another order based on the established matching
algorithms for the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes.\297\ Trades will execute
when orders or quotations on Topaz Exchange match one another based on
their priority.\298\ As Topaz Exchange stated in its Exchange 11(a)
Request Letter, the execution does not depend on the participant but
rather upon what other orders are entered into the Topaz Exchange
system, including the Facilitation, Solicitation and Customer Cross
processes, at or around the same time as the subject order; what orders
are on Topaz Exchange; or submitted as Responses; and where the order
is ranked based on the priority ranking algorithm.\299\ Therefore, at
no time following the submission of an order to the Topaz Exchange
system, including through the Facilitation, Solicitation or Customer
Cross processes, is a participant able to acquire control or influence
the result or timing of orders

submitted to the Topaz Exchange system, including through the
Facilitation, Solicitation or Customer Cross processes.\300\
Accordingly, the Commission believes that the non-participation
requirement will be met when orders are executed automatically through
use of the Topaz Exchange system, including the Facilitation,
Solicitation and Customer Cross processes.
---------------------------------------------------------------------------

    \293\ The member may cancel or modify the order, or modify the
instructions for executing the order, but only from off the Exchange
floor. See 1978 Release, supra note 288, at 43 FR 11547. The
Commission has stated that the non-participation requirement is
satisfied under such circumstances so long as such modifications or
cancellations are also transmitted from off the floor. See id.
(stating that the ``non-participation requirement does not prevent
initiating members from canceling or modifying orders (or the
instructions pursuant to which the initiating member wishes orders
to be executed) after the orders have been transmitted to the
executing member, provided that any such instructions are also
transmitted from off the floor'').
    \294\ See Exchange 11(a) Request Letter, supra note 289.
    \295\ See id.
    \296\ See id.
    \297\ See id.
    \298\ See id.
    \299\ See id.
    \300\ See id.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\301\ Topaz Exchange members trading for covered accounts over
which they exercise investment discretion must comply with this
condition in order to rely on the rule's exemption.\302\
---------------------------------------------------------------------------

    \301\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 288, at 43 FR 11548 (stating ``[t]he contractual and disclosure
requirements are designed to assure that accounts electing to permit
transaction-related compensation do so only after deciding that such
arrangements are suitable to their interests'').
    \302\ See Exchange 11(a) Request Letter, supra note 289.
---------------------------------------------------------------------------

b. Section 11(a)(1)(G) and Rule 11a1-1(T)
    Section 11(a)(1)(G) of the Act provides an additional exemption
from the general prohibition set forth in Section 11(a)(1) for any
transaction for a member's own account, provided that: (i) Such member
is primarily engaged in certain underwriting, distribution, and other
activities generally associated with broker-dealers and whose gross
income is derived principally from such business and related
activities; and (ii) the transaction is effected in compliance with the
rules of the Commission, which, as a minimum, assure that the
transaction is not inconsistent with the maintenance of fair and
orderly markets and yields priority, parity, and precedence in
execution to orders for the account of persons who are not members or
associated with members of the exchange.\303\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national
securities exchange for the account of a member which meets the
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not
inconsistent with the maintenance of fair and orderly markets and to
yield priority, parity, and precedence in execution to orders for the
account of non-members or persons associated with non-members of the
exchange, if such transaction is effected in compliance with certain
requirements.\304\
---------------------------------------------------------------------------

    \303\ See 15 U.S.C. 78k(a)(1)(G).
    \304\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the
following requirements must be met: (1) A member must disclose that
a bid or offer for its account is for its account to any member with
whom such bid or offer is placed or to whom it is communicated, and
any member through whom that bid or offer is communicated must
disclose to others participating in effecting the order that it is
for the account of a member; (2) immediately before executing the
order, a member (other than the specialist in such security)
presenting any order for the account of a member on the exchange
must clearly announce or otherwise indicate to the specialist and to
other members then present for the trading in such security on the
exchange that he is presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member must
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
---------------------------------------------------------------------------

    Topaz Exchange represented that its Price Improvement Mechanism, or
PIM, is a process set forth in Topaz Exchange Rule 723 whereby an EAM
can provide price improvement opportunities for a transaction.\305\ As
Topaz Exchange stated in its Exchange 11(a) Request Letter, Topaz
Exchange's proposed PIM rules will require that Priority Customer
interest, at any given price, be executed in full before Professional
Orders and market maker quotes.\306\ Additionally, Topaz Exchange's
proposed PIM rules will require non-member Professional Orders to be
executed in full before any proprietary interest of members (i.e.,
proprietary interest from EAMs and market makers).\307\ Because Topaz
Exchange Rule 723(d) will require Topaz Exchange members to yield
priority to Priority Customers and non-member Professional Orders in
the PIM process, the Commission believes that the proposal with respect
to transactions effected through the PIM process will be consistent
with Section 11(a)(1)(G) and Rule 11a1-1(T) thereunder.\308\ The
Commission also reminds exchanges and their members, however, that, in
addition to yielding priority to non-member orders at the same price,
members must also meet the other requirements under Section 11(a)(1)(G)
of the Act and Rule 11a1-1(T) thereunder (or satisfy the requirements
of another exception) to effect transactions for their own accounts.
---------------------------------------------------------------------------

    \305\ The PIM is a process wherein an EAM may seek to facilitate
an order it represents as agent, and/or a transaction wherein the
EAM solicited interest to execute against an order it represents as
agent (a ``Crossing Transaction''). A Crossing Transaction is
comprised of the order the EAM represents as agent (the ``Agency
Order'') and a counter-side order for the full size of the Agency
Order (the ``Counter-Side Order''). The Counter-Side Order may
represent interest for the Member's own account, or interest the
Member has solicited from one or more other parties, or a
combination of both. See Exchange 11(a) Request Letter, supra note
289. See also Topaz Exchange Rule 723.
    \306\ See Exchange 11(a) Request Letter, supra note 289. See
also Topaz Exchange Rule 723(d)(1).
    \307\ See Exchange 11(a) Request Letter, supra note 289. See
also Topaz Exchange Rule 723(d)(3).
    \308\ See Securities Exchange Act Release No. 50819 (December 8,
2004), 69 FR 75093 (December 15, 2004) (File No. SR-ISE-2003-06).
---------------------------------------------------------------------------

E. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an
exchange's application for registration is that a proposed exchange
must be so organized and have the capacity to be able to carry out the
purposes of the Act.\309\ Specifically, an exchange must be able to
enforce compliance by its members and persons associated with its
members with the Act and the rules and regulations thereunder and the
rules of the exchange.\310\
---------------------------------------------------------------------------

    \309\ See 15 U.S.C. 78f(b)(1).
    \310\ See id.
---------------------------------------------------------------------------

    Topaz Exchange rules codify Topaz Exchange's disciplinary
jurisdiction over its members, thereby facilitating its ability to
enforce its members' compliance with its rules and the federal
securities laws.\311\ Topaz Exchange's rules permit it to sanction
members for violations of the Act and the rules and regulation
thereunder and Topaz Exchange's rules by, among other things, expelling
or suspending members; limiting members' activities, functions, or
operations; fining or censuring members; suspending or barring a person
from being associated with a member; or any other fitting sanction in
accordance with Topaz Exchange rules.\312\
---------------------------------------------------------------------------

    \311\ See Topaz Exchange Rule 1600(a) (which incorporates by
reference ISE Rule 1600(a)).
    \312\ See id. See also MIAX Rule 1000 and BOX Exchange Rule
12000 Series (containing identical provisions).
---------------------------------------------------------------------------

    Topaz Exchange's disciplinary and oversight functions will be
administered in accordance with Chapter 16 of the Topaz Exchange rules,
which

incorporates by reference Chapter 16 of ISE rules, governing
disciplinary jurisdiction. Unless delegated to another SRO pursuant to
the terms of an effective 17d-2 Plan,\313\ Topaz Exchange regulatory
staff (including regulatory staff of another SRO that may be acting on
Topaz Exchange's behalf pursuant to a regulatory services agreement)
will, among other things, investigate potential securities laws
violations and initiate charges pursuant to Topaz Exchange rules.\314\
---------------------------------------------------------------------------

    \313\ See supra notes 154-156 and accompanying text (concerning
the multiparty 17d-2 Plans to which Topaz Exchange has committed to
join).
    \314\ See Topaz Exchange Rule 1602 (which incorporates by
reference ISE Rule 1602). As noted above, Topaz Exchange has entered
into an RSA with FINRA and a FMA with ISE under which FINRA and ISE,
respectively, will perform certain regulatory functions on behalf of
Topaz Exchange. Topaz Exchange may perform some or all of the
functions specified in Chapter 16 of the Topaz Exchange Rules. See
Topaz Exchange Rule 1615 (which incorporates by reference ISE Rule
1615).
---------------------------------------------------------------------------

    Upon a finding of probable cause of a violation within the
disciplinary jurisdiction of Topaz Exchange and where further
proceedings are warranted,\315\ Topaz Exchange will conduct a hearing
on disciplinary matters before a professional hearing officer \316\ and
two members of the Business Conduct Committee \317\ (``Panel'').\318\
The Topaz Exchange member (or its associated person) or the Topaz
Exchange regulatory staff may petition for review of the Panel's
decision by the Topaz Exchange Board.\319\ Any review will be conducted
by the Topaz Exchange Board or a committee thereof composed of at least
three of its directors, at least one of which shall be an Industry
Director \320\ (whose decision must be ratified by the Topaz Exchange
Board).\321\ In addition, the Topaz Exchange Board on its own motion
may order review of a disciplinary decision.\322\ The Topaz Exchange
Board may affirm, reverse, or modify, in whole or in part, the Panel's
decision.\323\ The decision of the Topaz Exchange Board will be in
writing and will be final.\324\
---------------------------------------------------------------------------

    \315\ See Topaz Exchange Rule 1604 (which incorporates by
reference ISE Rule 1604). If there is probable cause for finding a
violation, Topaz Exchange's regulatory staff will prepare a
statement of charges including the allegations and specifying the
provisions of the Act and the rules and regulations promulgated
thereunder, provisions of the Topaz Exchange Constitution or rules,
or interpretations or resolutions of which such acts are in
violation. The CRO must approve the statement of charges.
    \316\ See Topaz Exchange Rule 1606 (which incorporates by
reference ISE Rule 1606); see also Topaz Exchange Rule 1615,
Supplemental Material .01 (which incorporates by reference ISE Rule
1615, Supplemental Material .01).
    \317\ Pursuant to a Resolution of the Topaz Exchange Board, the
President and CEO shall establish Topaz Exchange's Business Conduct
Committee, pursuant to a charter. The Committee shall consist of no
more than 21 persons, all of whom are employees of members of Topaz
Exchange, representing members as follows: at least three persons
shall represent PMMs; at least three persons shall represent CMMs
that are not also PMMs; and at least four persons shall represent
EAMs that neither are, nor are affiliated with, a PMM or CMM. See
Amendment No. 3.
    \318\ See Topaz Exchange Rule 1606 (which incorporates by
reference ISE Rule 1606). A Panel may make a determination without a
hearing and may impose a penalty as to violations that the member or
associated person has admitted or has failed to answer or that
otherwise do not appear to be in dispute. See Topaz Exchange Rule
1608 (which incorporates by reference ISE Rule 1608). A member or
associated person alleged to have committed a disciplinary violation
may submit a written offer of settlement to the Panel, or CRO if a
Panel is not yet been appointed, which the Panel or CRO may accept
or reject. See Topaz Exchange Rule 1609 (which incorporates by
reference ISE Rule 1609). If the second offer of settlement is
rejected (such decision is not subject to review), a hearing will
proceed in accordance with Topaz Exchange Rule 1606 (which
incorporates by reference ISE Rule 1606). See also Topaz Exchange
Rule 1609 (which incorporates by reference ISE Rule 1609).
    \319\ See Topaz Exchange Rule 1610 (which incorporates by
reference ISE Rule 1610).
    \320\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704) (detailing the composition of the Appeals
Committee); see also Amendment No. 3. Any director who participated
in a matter before it was appealed to the Topaz Exchange Board shall
not participate in any review of the action by the Board concerning
the matter. See Topaz Exchange Rule 1704.
    \321\ See Topaz Exchange Rule 1610 (which incorporates by
reference ISE Rule 1610).
    \322\ See id.
    \323\ See id.
    \324\ See id.
---------------------------------------------------------------------------

    Appeals from any determination that impacts access to Topaz
Exchange, such as termination or suspension of membership, will be
instituted under, and governed by, the provisions in the Chapter 17 of
the Topaz Exchange rules, which incorporates by reference the
provisions in Chapter 17 of ISE rules. Topaz Exchange's Chapter 17
applies to persons economically aggrieved by any of the following
actions of Topaz Exchange including, but not limited to: (a) Denial of
an application to become a Member; (b) barring a person from becoming
associated with a Member; and (c) limiting or prohibiting services
provided by the Topaz Exchange or services of any exchange member.\325\
---------------------------------------------------------------------------

    \325\ See Topaz Exchange Rule 1700 (which incorporates by
reference ISE Rule 1700). As noted above, Topaz Exchange has entered
into an RSA with FINRA and a FMA with ISE under which FINRA and ISE,
respectively, will perform certain regulatory functions on behalf of
Topaz Exchange. For example, FINRA may perform some or all of the
functions specified in Chapter 17 of Topaz Exchange rules. See supra
notes 158-160 and accompanying text. See also Topaz Exchange Rule
1706 (which incorporates by reference ISE Rule 1706).
---------------------------------------------------------------------------

    Any person aggrieved by an action of Topaz Exchange within the
scope of the Chapter 17 may file a written application to be heard
within thirty days \326\ after such action has been taken.\327\
Applications for hearing and review will be referred to the Business
Conduct Committee, which will appoint a hearing panel of no less than
three members of such Committee.\328\ The decision of the hearing panel
made pursuant to Chapter 17 of the Topaz Exchange rules is subject to
review by the Topaz Exchange Board, either on its own motion, or upon
written request submitted by the applicant or the President of Topaz
Exchange.\329\ The review will be conducted by the Topaz Exchange Board
or a committee of the Topaz Exchange Board composed of at least three
directors.\330\
---------------------------------------------------------------------------

    \326\ An applicant may file for an extension of time within
thirty days of Topaz Exchange's action. An application for such an
extension will be ruled upon by the Chairman of the Business Conduct
Committee and is not subject to appeal. See Topaz Exchange Rule 1701
(which incorporates by reference ISE Rule 1701).
    \327\ See Topaz Exchange Rule 1701 (which incorporates by
reference ISE Rule 1701).
    \328\ See Topaz Exchange Rule 1702 (which incorporates by
reference ISE Rule 1702).
    \329\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704). The Topaz Exchange Board, or a committee
of the Topaz Exchange Board, will have sole discretion to grant or
deny either request. See id.
    \330\ See Topaz Exchange Rule 1704 (which incorporates by
reference ISE Rule 1704). The Topaz Exchange Board or its designated
committee may affirm, reverse, or modify in whole or in part, the
decision of the hearing panel. The decision of the Topaz Exchange
Board or its designated committee will be in writing and will be
final. See Topaz Exchange Rule 1704 (which incorporates by reference
ISE Rule 1704).
---------------------------------------------------------------------------

    The Commission finds that Topaz Exchange's proposed disciplinary
and oversight rules and structure, as well as its proposed process for
persons economically aggrieved by certain Topaz Exchange actions, are
consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the
Act \331\ in that they provide fair procedures for the disciplining of
members and persons associated with members. The Commission further
finds that the proposed Topaz Exchange rules, which incorporate by
reference ISE rules, are designed to provide Topaz Exchange with the
ability to comply, and with the authority to enforce compliance by its
members and persons associated with its members, with the provisions of
the Act, the rules and regulations thereunder, and the rules of Topaz
Exchange.\332\ The Commission notes that Topaz Exchange's proposed
disciplinary and oversight rules and

structures are similar to the rules of other exchanges.\333\
---------------------------------------------------------------------------

    \331\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \332\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \333\ See, e.g., MIAX Order, supra note 30, and BOX Order, supra
note 39.
---------------------------------------------------------------------------

F. Listing Requirements

    Topaz Exchange does not intend to offer original listings when it
commences operations. Instead, Topaz Exchange will list and trade only
standardized option contracts that are listed on other national
securities exchanges and cleared by the Options Clearing
Corporation.\334\ Topaz Exchange's listing rules, including the
criteria for the underlying securities of the options to be traded,
incorporate by reference all of the listing rules of ISE.\335\ The
Commission finds that Topaz Exchange's proposed initial and continued
listing rules are consistent with the Act, including Section
6(b)(5),\336\ in that they are designed to protect investors and the
public interest and to promote just and equitable principles of trade.
Before beginning operation, Topaz Exchange will need to become a
participant in the Plan for the Purpose of Developing and Implementing
Procedures Designed to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the
Act (``OLPP'').\337\ In addition, before beginning operation, Topaz
Exchange will need to become a participant in the Options Clearing
Corporation.
---------------------------------------------------------------------------

    \334\ See Exhibit H to Topaz Exchange Form 1 Application.
    \335\ See Topaz Exchange Rule 500 Series (which incorporates by
reference ISE Rule 500 Series) (Securities Traded on the Exchange).
See also MIAX Rule 400 Series and BOX Rule 5000 Series.
    \336\ 15 U.S.C. 78f(b)(5).
    \337\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------

III. Exemption From Section 19(b) of the Act With Regard to ISE, CBOE,
NYSE, and FINRA Rules Incorporated by Reference

    Topaz Exchange proposes to incorporate by reference certain ISE,
CBOE, NYSE and FINRA rules.\338\ Thus, for certain Topaz Exchange
rules, Topaz Exchange members will comply with a Topaz Exchange rule by
complying with the referenced ISE, CBOE, NYSE or FINRA rule.
---------------------------------------------------------------------------

    \338\ Specifically, Topaz Exchange proposes to incorporate by
reference the following ISE Rules: Chapter 4 (Business Conduct),
Chapter 5 (Securities Traded on the Exchange), Chapter 6 (Doing
Business with the Public), Chapter 10 (Closing Transactions),
Chapter 11 (Exercises and Deliveries), Chapter 12 (Margins), Chapter
13 (Net Capital Requirements), Chapter 14 (Records, Reports and
Audits), Chapter 15 (Summary Suspension), Chapter 16 (Discipline),
Chapter 17 (Hearings and Review), Chapter 18 (Arbitration), Chapter
19 (Order Protection; Locked and Crossed Market), Chapter 20 (Index
Rules), Chapter 22 (Rate-Modified Foreign Currency Options Rules).
The following rules are cross-referenced in the ISE rules: ISE Rule
1202 (Margin Requirements) cross-references the same CBOE and NYSE
rules that may be in effect from time to time; ISE Rule 1615
(Disciplinary Functions) cross-references the FINRA Code of
Procedure and ISE Rule 1800 cross-references the 12000 and 13000
Series of the FINRA Manual and FINRA Rule 2268.
---------------------------------------------------------------------------

    In connection with the proposal to incorporate the ISE, CBOE, NYSE
and FINRA rules by reference, Topaz Exchange requested, pursuant to
Rule 240.0-12 under the Act,\339\ an exemption under Section 36 of the
Act from the rule filing requirements of Section 19(b) of the Act for
changes to the Topaz Exchange rules that are effected solely by virtue
of a change to a cross-referenced ISE, CBOE, NYSE or FINRA rule.\340\
Topaz Exchange proposes to incorporate by reference categories of
rules, rather than individual rules within a category, that are not
trading rules. In addition, Topaz Exchange agrees to provide written
notice to its members whenever FINRA, ISE, CBOE or NYSE proposes a
change to a cross-referenced rule \341\ and whenever any such proposed
changes are approved by the Commission or otherwise become
effective.\342\
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    \339\ 17 CFR 240.0-12.
    \340\ See Letter from Michael Simon, General Counsel, Secretary
and Chief Regulatory Officer, Topaz Exchange, to Elizabeth M.
Murphy, Secretary, Commission, dated December 14, 2012 (``Section
19(b) Exemption Request'').
    \341\ See id.
    \342\ Topaz Exchange will provide such notice through a posting
on the same Web site location where Topaz Exchange posts its own
rule filings pursuant to Rule 19b-4 under the Act, within the
required time frame. The Web site posting will include a link to the
location on the FINRA, ISE, CBOE or NYSE Web site where FINRA's,
ISE's, CBOE's or NYSE's proposed rule change is posted. See id.
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    Using the authority under Section 36 of the Act, the Commission
previously exempted certain SROs from the requirement to file proposed
rule changes under Section 19(b) of the Act.\343\ The Commission is
hereby granting Topaz Exchange's request for exemption, pursuant to
Section 36 of the Act, from the rule filing requirements of Section
19(b) of the Act with respect to the rules that Topaz Exchange proposes
to incorporate by reference. The exemption is conditioned upon Topaz
Exchange providing written notice to Topaz Exchange members whenever
FINRA, ISE, CBOE or NYSE proposes to change an incorporated by
reference rule and when the Commission approves any such changes. The
Commission believes that the exemption is appropriate in the public
interest and consistent, with the protection of investors because it
will promote more efficient use of Commission's and SROs' resources by
avoiding duplicative rule filings based on simultaneous changes to
identical rule text sought to be implemented by more than one SRO.
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    \343\ See, e.g., DirectEdge Exchanges Order, supra note 70, BATS
Order, supra note 29, C2 Order, supra note 169, Nasdaq Order, supra
note 29 and NOM Approval Order, supra note 164.
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IV. Conclusion

    It is ordered that the application of Topaz Exchange for
registration as a national securities exchange be, and it hereby is,
granted.
    It is furthered ordered that operation of Topaz Exchange is
conditioned on the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to
Options Trading. Topaz Exchange must join: (1) The Plan for the
Reporting of Consolidated Options Last Sale Reports and Quotation
Information (Options Price Reporting Authority); (2) the OLPP; (3) the
Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance
Authority.
    B. Participation in Multiparty Rule 17d-2 Plans. Topaz Exchange
must become a party to the multiparty Rule 17d-2 agreements concerning
options sales practice regulation and market surveillance.
    C. Participation in the Options Clearing Corporation. Topaz
Exchange must become an Options Clearing Corporation participant
exchange.
    D. Participation in the Intermarket Surveillance Group. Topaz
Exchange must join the Intermarket Surveillance Group.
    E. Effective Regulation. Topaz Exchange must have, and represent in
a letter to the staff in the Commission's Office of Compliance
Inspections and Examinations that it has, adequate procedures and
programs in place to effectively regulate Topaz Exchange.
    F. Trade Processing and Exchange Systems. Topaz Exchange must have,
and represent in a letter to the staff in the Commission's Division of
Trading and Markets that it has, adequate procedures and programs in
place, as detailed in Commission Automation Policy Review guidelines,
to effectively process trades and maintain the confidentiality,
integrity, and availability of Topaz Exchange's systems.\344\
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    \344\ On November 16, 1989, the Commission published its first
Automation Review Policy (``ARP I''), in which the Commission
created a voluntary framework for SROs to establish comprehensive
planning and assessment programs to determine systems capacity and
vulnerability. On May 9, 1991, the Commission published its second
Automation Review Policy (``ARP II'') to clarify the types of review
and reports expected from SROs. See Securities Exchange Act Release
Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989) and
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991). The Commission has
proposed Regulation Systems Compliance and Integrity, which, if
adopted, would replace this policy. See Securities Exchange Act
Release No. 69077 (March 8, 2013), 78 FR 18084 (March 25, 2013)
(File No. S7-01-13).

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    It is further ordered, pursuant to Section 36 of the Act,\345\ that
Topaz Exchange shall be exempted from the rule filing requirements of
Section 19(b) of the Act with respect to the FINRA, ISE, CBOE and NYSE
rules that Topaz Exchange proposes to incorporate by reference, subject
to the conditions specified in this Order that Topaz Exchange provide
written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or
NYSE propose to change an incorporated by reference rule and when the
Commission approves any such changes.
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    \345\ 15 U.S.C. 78mm.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18474 Filed 7-31-13; 8:45 am]
BILLING CODE 8011-01-P