[Federal Register Volume 80, Number 18 (Wednesday, January 28, 2015)]
[Notices]
[Pages 4611-4617]
[FR Doc No: 2015-01508]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74114; File No. SR-BOX-2015-03]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Implement an Equity Rights Program

January 22, 2015.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on January 9, 2015, BOX Options Exchange LLC (the
``Exchange'') 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
Exchange filed the proposed rule change pursuant to Section
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\
which renders the proposal effective upon filing with the Commission.
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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change
to implement an equity rights program, to be effective January 12,
2015. There are no proposed changes to any rule text.

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 implement an equity rights program (the
``Program'') in which BOX Options Participants registered with the
Exchange for purposes of participating in options trading on the BOX
market, a facility of the Exchange (``BOX''), as an order flow provider
or market maker (``Participants'') may elect to participate.\5\
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    \5\ The Program was made available to all options traders.
However, any interested party must first become a Participant (in
addition to meeting the Program's eligibility criteria and making
the initial cash payment) in order to participate in the Program.
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    The Exchange is submitting two proposed rule changes with the
Commission in connection with implementation of the Program. First, the
Exchange is submitting this proposed rule change under Section
19(b)(3)(A)(ii) of the Securities Exchange Act of 1934 (the ``Act'')
\6\ and Rule 19b-4(f)(2) thereunder,\7\ for immediate effectiveness,
inasmuch as it establishes or changes a due, fee, or other charge
imposed by the Exchange. Second, the Exchange will be submitting a
separate proposed rule change under Section 19(b)(1) of the Act \8\ and
Rule 19b-4 thereunder,\9\ subject to Commission approval, to make
changes to its company governance documents, including to accommodate
aspects of the Program that involve or affect the Subscription
Agreement and proposed Members Agreement and the Amended and Restated
Limited Liability Company Agreement (``Restated LLC Agreement'') of BOX
Holdings Group LLC (``Holdings''), an affiliate of the Exchange. As
discussed in greater detail below, the aspects of the Program that
require changes to the company governance documents, including the
acquisition of equity ownership in Holdings and any right related to
such ownership, are contingent upon Commission approval of the company
governance proposed rule change.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4(f)(2).
    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
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    Participants that elect to participate in the Program will have the
right to acquire equity in, and receive distributions from, Holdings,
an affiliate of the Exchange, in exchange for the achievement of
certain order flow volume commitment thresholds on the Exchange over a
period of five (5) years and a nominal initial cash payment. The
purpose of the Program is to promote the long-term interests of the
Exchange by providing incentives designed to encourage Participants and
Holdings owners to contribute to the growth and success of BOX by being
active liquidity providers and takers to provide enhanced levels of
trading volume to BOX, through an opportunity to increase their
proprietary interests in BOX's enterprise value.
    Upon initiation of the Program by Holdings, Participants that elect
to participate in the Program, meet the eligibility criteria and make
the initial cash payment (``Subscribers'') will be issued Volume
Performance Rights (``VPRs'') in tranches of twenty (20) VPRs (each, a
``Tranche''). There will be a minimum subscription of two Tranches. A
maximum of thirty (30) Tranches could be issued in connection with the
Program.\10\
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    \10\ A maximum of 600 VPRs may be issued in connection with the
Program (30 Tranches x 20 VPRs per Tranche). If the Program is
oversubscribed, Tranches will be allocated on a pro-rata basis,
rounded to the nearest whole Tranche, subject to the minimum of two
Tranches.
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    Each VPR will include 8.5 unvested new Class C Membership Units of
Holdings (``Class C Units'') \11\ and an average daily transaction
volume commitment (``VPR Volume Commitment'') with respect to
Qualifying Contract Equivalents equal to 0.0055% of the Industry ADV
\12\ for a total of five (5) years (twenty (20) consecutive measurement
quarters).\13\ The VPR Volume Commitment threshold will change based on
the movement of the Industry ADV.
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    \11\ 8.5 Class C Units will equal approximately 0.05% of the
fully diluted equity of Holdings, assuming all 600 VPRs are
subscribed. The total equity ownership of Holdings held by any one
Subscriber will be limited to 20%.
    \12\ The Industry ADV for a period is calculated by multiplying
(i) two (2) times (ii) the quotient of (A) the aggregate number of
cleared U.S. options transactions executed on a U.S. national
exchange or facility thereof in U.S. listed securities on trading
days during the period, as reported by the Options Clearing
Corporation (``OCC''), divided by (B) the number of trading days
during the period. A ``trading day'' is generally any day on which
the BOX market is open for business, subject to certain
qualifications to be defined in the Members Agreement. Certain
industry transactions are excluded from the calculation of Industry
ADV as described below.
    \13\ The first measurement quarter is expected to begin
measuring order flow on January 12, 2015, and end on March 31, 2015,
and thus the first measurement period will be slightly shorter than
a standard measurement quarter.
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    There are four categories of Contract Equivalents, which are based
on the Participant account types set forth in the Exchange's Fee
Schedule:

     Public Customer: 0.71 executed orders equates to one (1)
Contract Equivalent.
     Market Maker: 1.10 executed orders equates to one (1)
Contract Equivalent.
     Broker/Dealer: 1.35 executed orders equates to one (1)
Contract Equivalent.
     Professional Customer: \14\ 1.35 executed orders equates
to one (1) Contract Equivalent.
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    \14\ A ``Professional'' Customer is defined in Exchange Rule
100(a)(50) to mean ``any person or entity that (i) is not a broker
or dealer in securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s).''
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    The escalation of the weight assigned to each category is generally
consistent with the fees charged to each account type in the Exchange's
Fee Schedule. Qualifying Contract Equivalents are Contract Equivalents,
other than Excluded Member Contracts (described below), executed by a
Class C Member (or its affiliates) on the Exchange either for its own
account or for a customer, including orders routed to the Exchange by
such Class C Member (or its affiliates).
    All holders of Holdings' outstanding equity, including Subscribers
holding Class C Units (``Class C Members''), are eligible to receive an
annual distribution, distributed on a pro-rata basis, equal to 95% of
Holdings' consolidated net income, plus depreciation and less capital
expenditures, subject to availability.\15\ Any such distribution
amounts will be calculated after taking into account all financial and
regulatory needs of the Exchange, as determined by the Exchange.\16\
Distributions are payable on Class C Units associated with both vested
and unvested VPRs. Distributions to Subscribers will be based on the
Subscriber's achievement of its Annual Volume Commitment \17\ for that
year. If a Subscriber achieves at least 100% of its Annual Volume
Commitment for all of the VPRs it holds for the distribution year, the
Subscriber will receive its full distribution on its Class C Units. If
a Subscriber achieves less than 100%, but at least 70%, of its Annual
Volume Commitment, its distribution on its Class C Units will be
prorated. If a Subscriber achieves less than 70% of its Annual Volume
Commitment, it will receive no distribution on its Class C Units. Any
unpaid distributions resulting from failure of Subscribers to achieve
their Annual Volume Commitments during the measurement year will first
be redistributed pro-rata to Subscribers that achieved volume in excess
of their Annual Volume Commitment for the measurement year, with a
maximum redistributed distribution amount equal to the Subscriber's
regular distribution multiplied by the percent by which its transaction
volume exceeded its Annual Volume Commitment for that measurement year.
Distributions available for redistribution that are not redistributed
to Subscribers will be redistributed pro-rata to holders of Holdings'
other classes of equity securities: Class A Membership Units and Class
B Membership Units (collectively with the Class C Units, ``Units'').
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    \15\ Distributions on Class C Units will not be paid until the
Commission approves the related rule change filed by the Exchange
concerning revisions to its company governance documents.
Distributions payable on Class C Units that accrue before Commission
approval of the related company governance rule filing will be held
in a segregated account until Commission approval is obtained. If
the Commission does not approve the related company governance rule
filing by July 1, 2016, a Subscriber may terminate its Subscription
Agreement with Holdings and any and all distributions with respect
to that Subscriber held in the segregated account will be released
back to Holdings and distributed to existing Members in accordance
with the terms of the Article 8 of the LLC Agreement.
    \16\ Article 8 of the LLC Agreement generally describes, and the
Restated LLC Agreement generally will describe, how the distribution
amounts will be calculated.
    \17\ ``Annual Volume Commitment'' is calculated, with respect to
any measurement year for any Class C Member, by multiplying (i) the
number of VPRs held by such Class C Member as of the first day of
the measurement year by (ii) the VPR Volume Commitment for such
measurement year. The first measurement year's Annual Volume
Commitment will be reduced as part of a phase-in period as described
below.
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    One VPR per Tranche will be eligible to vest each quarter of the
five (5) year Program period, subject to the Subscriber meeting its
Quarterly Volume Commitment \18\ for all VPRs it holds for that
quarter. In addition, Subscribers may earn additional VPRs or lose VPRs
upon exceeding or failing to meet their VPR Volume Commitments during
the Program period, as detailed below.
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    \18\ ``Quarterly Volume Commitment'' is calculated with respect
to any measurement quarter for any Class C Member, by multiplying
(i) the number of VPRs held by such Class C Member as of the first
day of the measurement quarter by (ii) the VPR Volume Commitment for
such measurement quarter.
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    If a Subscriber fails to meet its Tranche Volume Commitment
(calculated as VPR Volume Commitment x 20 for a full Tranche) for a
measurement quarter, a VPR eligible to vest for that Tranche in that
quarter will not vest.\19\ However, for any measurement quarter in
which a Subscriber achieves less than 100%, but at least 70%, of its
Tranche Volume Commitment, the Subscriber may ``make up'' the shortfall
for vesting purposes by achieving order flow during the next two
consecutive measurement quarters at least equal to its requisite
Quarterly Volume Commitment for each quarter plus the shortfall amount
for that Tranche.\20\ If the shortfall is so ``made up,'' one VPR per
Tranche will vest at the end of the measurement quarter in which the
shortfall is made up, in addition to any other VPRs that would
otherwise vest. If a Subscriber fails to ``make up'' the shortfall
within the two immediately subsequent measurement quarters, or if a
Subscriber fails to meet at least 70% of its Tranche Volume Commitment,
the VPR eligible to vest for that Tranche will fail to vest and become
available to be reallocated to interested Subscribers to the extent
such interested Subscribers achieved order flow volume above their
Quarterly Volume Commitment for that measurement quarter. If a
Subscriber exceeds 100% of its Quarterly Volume Commitment in any
measurement quarter, the Subscriber will be eligible to earn
reallocated VPRs from the pool of VPRs available for reallocation. The
number of VPRs received in such reallocation will depend upon the
Subscriber's achieved volume in excess of its Quarterly Volume
Commitment and the extent to which other Subscribers miss or exceed
their own Quarterly Volume Commitments.
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    \19\ Notwithstanding, the Program is currently designed to allow
for an initial phase-in period during the first two measurement
quarters of the Program, during which each Subscriber's Quarterly
Volume Commitment will be reduced to 40% for the first measurement
quarter and 70% for the second measurement quarter. All subsequent
measurement quarters will require a 100% Quarterly Volume
Commitment. As such, for the first measurement year, each
Subscriber's Annual Volume Commitment will be 77.5% of the Annual
Volume Commitment calculation.
    \20\ For the sake of clarity, a portion of the shortfall can be
made up in either or both measurement quarters in the ``make-up''
period.
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    In addition to the reallocation of individual VPRs described above,
if a Subscriber fails to meet its Tranche Volume Commitment for one or
more Tranches in at least two (which need not be consecutive)
measurement quarters, including after any applicable ``make up'' period
as described above, all of the Subscriber's VPRs in such Tranche(s),
whether vested or unvested, will become available to be reallocated to
interested Subscribers to the extent such interested Subscribers
achieved, on average from the beginning of the Program through the most
recent measurement quarter, order flow volume above their applicable
Quarterly Volume Commitment. If a Subscriber, on average from the
beginning of the Program through the most recent

measurement quarter, exceeds 100% of its Quarterly Volume Commitment,
the Subscriber will be eligible to earn reallocated VPRs from the pool
of such Tranches available for reallocation. The number of VPRs
received in such reallocation will depend upon the Subscriber's
achieved volume, on average from the beginning of the Program through
the most recent measurement quarter, in excess of its applicable
Quarterly Volume Commitment and the extent to which other Subscribers
miss or exceed their own Quarterly Volume Commitments.
    Notwithstanding the foregoing, once a Subscriber has achieved forty
(40) vested VPRs, and subsequently when each additional level of twenty
(20) VPRs vest, those VPRs will become protected from reallocation.
    Any reallocated VPR will come with the same Class C Units ownership
rights and VPR Volume Commitment obligations. If the number of VPRs
available for reallocation is insufficient to reallocate fully to all
eligible Subscribers, the available VPRs will be relocated on a pro-
rata basis based on each eligible Subscriber's percentage of the
aggregate excess volume achieved by all eligible Subscribers. If the
number of VPRs available for reallocation exceeds the interest or
availability of eligible Subscribers, Holdings may cancel any such
excess VPRs not reallocated.
    As noted above, only Qualifying Contract Equivalents will be
included in the calculation of a Subscriber's VPR Volume Commitment.
The following Excluded Member Contracts are not Qualifying Contract
Equivalents, and thus will not count towards a Subscriber's VPR Volume
Commitment: (1) Excluded Industry Transactions, i.e., executed and
cleared transactions (i) in a proprietary product traded on a U.S.
equity options exchange other than the Exchange (and not traded on the
Exchange), (ii) that are Strategic Transactions,\21\ or (iii) that are
otherwise agreed to be Excluded Industry Transactions by Holdings and
holders of at least a majority of the outstanding Class C Units
(including both vested and unvested Class C Units) in writing; (2)
transactions that the Class C Member has notified Holdings shall not be
credited to such Member for purposes of calculating the Member's actual
order volume; (3) transactions determined to have been in violation of
any applicable law, statute, regulation, rule, official directive or
guideline (whether or not having the force of law) of any governmental
authority with legal jurisdiction or of any self-regulatory
organization with supervisory authority; and (4) transactions with
respect to which it is unlawful for the Class C Member to receive
compensation.
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    \21\ ``Strategic Transactions'' will be defined in the Members
Agreement and will include any transaction in a product that, with
respect to any day on which BOX is open for business, is one of the
top twenty (20) highest equity or ETF volume products reported by
the OCC for such trading day and for which a majority of the volume
of cleared transactions in such product reported by OCC consists of
executed and cleared transactions involving: (i) Reveals and
conversions; (ii) dividend spreads; (iii) deep-in-the-money call and
put spreads; (iv) short stock interest spreads; (v) merger spreads;
(vi) box spreads; or (vii) jelly rolls. This definition will be
subject to change by subsequent amendment of the Members Agreement.
Strategic Transactions will be excluded from the VPR Volume
Commitment calculation to the extent it is possible to identify such
transactions.
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    Any disputes with respect to Quarterly Volume Commitment
calculations may be appealed to the Holdings board of directors. If
such dispute is not resolved within sixty (60) calendar days following
the end of any applicable measurement quarter, Subscribers may request
the dispute be resolved by an independent accounting firm appointed by
a majority of the Subscribers requesting the audit and reasonably
acceptable to Holdings.
    As noted above, the Exchange will be submitting a separate proposed
rule change, subject to Commission approval, to make changes to its
company governance documents to accommodate certain aspects of the
Program that involve or affect the rights and limitations associated
with Class C Unit ownership. For example, the total equity ownership of
all classes of Units held by any one Subscriber will be limited to
20%.\22\ Also, the Restated LLC Agreement will provide that Subscribers
will have the right to vote the Class C Units associated with vested
VPRs on matters submitted for a vote of all holders of Units, and the
Class C Units will vote with all other classes of Units as a single
class. Subscribers will also have the right to designate one individual
to a new Advisory Committee organized by Holdings, whose purpose will
be to advise and make recommendations to Holdings with respect to the
Exchange's competitiveness in the marketplace.\23\ In addition,
Subscribers with Class C Units associated with vested VPRs that
represent greater than 4% of all outstanding Units will have the right
to appoint one (1) director to the Holdings board of directors.\24\ As
noted, these and other rights associated with Class C Unit ownership
are contingent upon Commission approval of the company governance rule
filing.
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    \22\ Any purported transfer of Class C Units or ownership of
Class C Units in violation of this 20% ownership limit by a
Subscriber will be subject to limitations set forth in the Restated
LLC Agreement, including the non-recognition of voting rights of
Class C Units in excess of the 20% ownership limit.
    \23\ The Members Agreement will provide that only Class C
Members will be able to designate members to the Advisory Committee.
    \24\ The Restated LLC Agreement will provide that existing
Holdings Members will continue to have the right to designate a
director to the Holdings board of directors. Each Class A or Class B
Member will have the right to appoint one (1) director to the
Holdings board of directors if it owns in excess of 2.5% of all
outstanding Units. In addition, any Member that owns greater than
14% and 28% of all outstanding Units will have the right to appoint
two (2) and three (3) directors, respectively. No Member will be
allowed to designate more than three (3) directors to the Holdings
board of directors.
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    The Program will also foster key changes to the governance of
Holdings, assuming Commission approval of the separate company
governance proposed rule change. The Program will foster the removal of
MX US 2, Inc.\25\ from being a direct majority owner of Holdings.
Assuming full participation in the Program, the ownership of Holdings
by current Unitholders, including MX US 2, Inc., will be diluted such
that no single Unitholder will have a majority ownership of Holdings.
Also, upon vesting of VPRs associated with Class C Units equal to at
least 10% of the total outstanding Units, the non-compete obligations
applicable to MX US 2, Inc. in the Restated LLC Agreement will expire
and be of no further effect, automatically and without further
action.\26\ In addition, upon vesting of VPRs associated with Class C
Units equal to at least 25% of the total outstanding Units, the Major
Action veto for the benefit of MX US 2, Inc. and IB Exchange Corp. in
the Restated LLC Agreement will expire and be of no further effect,
automatically and without further action.\27\ Finally, the Restated LLC
Agreement will include a requirement that, subject to the other
provisions of the Restated LLC

Agreement, including the Major Action veto discussed above, holders of
at least 67% of all outstanding Units must vote to approve certain
major company actions by Holdings.\28\ As noted, these and other
governance changes are contingent upon Commission approval of the
company governance rule filing.
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    \25\ MX US 2, Inc., which is indirectly owned by TMX Group,
Inc., a Canadian entity, currently owns approximately 54% of
Holdings.
    \26\ Article 16, Section 16.1 of the LLC Agreement generally
provides, and the Restated LLC Agreement generally will provide,
that, so long as MX US 2, Inc. and its affiliates own 4% or more of
Holdings, it shall not invest in more than 5% or participate in the
creation and/or operation of a competing business.
    \27\ Section 4.4 of the LLC Agreement generally provides, and
the Restated LLC Agreement generally will provide, that certain
Major Actions (as defined therein) shall not be effective unless
approved by the Holdings board of directors, including all of the
directors designated by each of MX US 2, Inc. and IB Exchange Corp.
Further, the Restated LLC Agreement will provide that Sections 4.4
and 14.12 of the BOX Market LLC Agreement will also be amended, at
the same time as the Holdings Major Actions provision expires, to
provide that the corresponding provisions in the BOX Market LLC
Agreement relating to Major Actions (as defined therein) will have
no further effect.
    \28\ The Restated LLC Agreement will set forth the terms and
conditions of this ``supermajority'' provision.
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    Any Participant may elect to subscribe to the Program subject to
its satisfaction of eligibility requirements and making the initial
cash payment. All applicant Participants will be subject to the same
eligibility and designation criteria and all Subscribers will
participate in the Program on the same terms, conditions and
restrictions. To be designated as a Subscriber, an applicant must: (i)
Represent and warrant that no grounds exist for the suspension or
termination of the Subscriber's voting privileges or membership under
the Limited Liability Company Agreement of Holdings, as may be amended
from time to time (``LLC Agreement''), or the Restated LLC Agreement;
(ii) qualify as an ``accredited investor'' as such term is defined in
Rule 501(a) of Regulation D promulgated under the Securities Act of
1933 (the ``Securities Act''); and (iii) have executed all required
documentation for Program participation. In addition, the applicant
must make a nominal cash payment of $10 per Class C Unit (which equates
to $85 per VPR) by January 12, 2015, and subscribe to a minimum of two
Tranches of 20 VPRs, for a total minimum initial cash payment of
$3,400.\29\ Once a Participant becomes a Subscriber, Holdings may
cancel any VPR held by the Subscriber if the Subscriber's membership in
Holdings is terminated as provided in the LLC Agreement or Restated LLC
Agreement.
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    \29\ Because, as noted above, the acquisition of equity
ownership in Holdings, and any right related to such ownership, in
connection with a Subscriber's participation in the Program is
contingent upon Commission approval of the related company
governance rule change, the initial cash payment will be held in
escrow until the Commission approves the related company governance
rule change. As disclosed to the Subscribers and provided in the
Subscription Agreement, if the Commission does not approve the
related company governance rule change by July 1, 2016, any
Subscriber will be authorized to terminate its Subscription
Agreement with the Holdings, upon which Holdings will promptly
refund the terminating Subscriber's initial cash payment.
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    Neither VPRs nor Class C Units are expected to be registered for
resale by Holdings and may not be transferred without complying with,
or qualifying for an exemption from, the registration requirements of
the Securities Act. Any transfer of Class C Units by an existing Class
C Member will be subject to a primary right of first refusal for the
benefit of Holdings and a secondary right of first refusal for the
benefit of other Class C Members. Notwithstanding the foregoing, a
Class C Member may transfer all of its rights and obligations related
to the VPRs and Class C Units it holds to any affiliate without the
consent of Holdings so long as, among other things, the affiliate is
admitted as a member of Holdings as provided in the Restated LLC
Agreement and becomes a party to, and bound by the terms and conditions
of, the Members Agreement. Upon completion of all 20 measurement
quarters (plus any applicable ``make up'' period), assuming Commission
approval of the related company governance rule filing discussed above,
all outstanding Class C Units associated with vested VPRs will be
automatically converted into Class A Membership Units, and all
outstanding Class C Units associated with unvested VPRs will be
automatically cancelled.
    As discussed above, the purpose of the Program is to encourage
Participants to direct greater trade volume to the Exchange to enhance
trading volume in BOX. Toward that end, the Exchange has reached out to
known options traders--both Participants and non-Participants--to gauge
interest in the Program, including whether the Program would induce
non-Participants to become Participants and, once Participants, direct
trading volume to BOX. Increased volume will provide for greater
liquidity and enhanced price discovery, which benefits all market
participants. Other exchanges currently engage in the practice of
incentivizing increased order flow in order to attract liquidity
providers through equity sharing arrangements.\30\ The Program
similarly intends to attract order flow, which will increase liquidity,
thereby providing greater trading opportunities and tighter spreads for
other market participants and causing a corresponding increase in order
flow from these other market participants. The Program will similarly
reward the liquidity providers that provide this additional volume with
a potential proprietary interest in BOX.
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    \30\ See, e.g., Securities Exchange Act Release No. 62358 (June
22, 2010), 75 FR 37861 (June 30, 2010) (SR-NSX-2010-006) (Notice of
Filing and Immediate Effectiveness of National Stock Exchange, Inc.
equity rights program); Securities Exchange Act Release No. 64742
(June 24, 2011), 76 FR 38436 (June 30, 2011) (SR-NYSEAmex-2011-018)
(Order Approving NYSE Amex LLC (now NYSE MKT LLC) options facility,
including a volume-based equity plan); Securities Exchange Act
Release No. 69200 (March 21, 2013), 78 FR 18657 (March 27, 2013)
(SR-CBOE-2013-031) (Notice of Filing and Immediate Effectiveness of
CBOE Stock Exchange, LLC equity rights program); and Securities
Exchange Act Release No. 70498 (September 25, 2013), 78 FR 60348
(October 1, 2013) (SR-MIAX-2013-043) (Notice of Filing and Immediate
Effectiveness of Miami International Securities Exchange, LLC equity
rights program).
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    As discussed above, the acquisition of Class C Units, and any right
related to such ownership, in connection with the Program is contingent
upon Commission approval of the company governance proposed rule change
by July 1, 2016, after which a Subscriber may terminate its
participation in the Program. This contingency will be a known risk to
Subscribers: The Subscription Agreement, which all Subscribers must
sign by January 12, 2015, will disclose that the purchase of Class C
Units is contingent upon, among other things, Commission approval of
the Program. In addition, the Membership Agreement, which all
Subscribers must sign by January 12, 2015, will disclose that BOX will
begin measuring order flow volume for the Program on January 12, 2015.
Accordingly, Subscribers will be aware that they may send order flow to
BOX in connection with the Program in advance of Commission approval,
and that there is a risk that the Program is not approved by the
Commission and that they never receive the Class C Units or the rights
associated therewith.
    In addition, the Exchange has taken steps to minimize the risk that
the Program does not become fully operational and the related costs
imposed on Subscribers if such risk is realized. For example, all
internal approvals and consents required to operate the Program,
including approval by the Holdings board of directors of the
Subscription Agreement, Membership Agreement and amendments to the
Restated LLC Agreement, will be obtained in advance of commencement of
the Program. Besides Commission approval, there will be no other
governmental or regulatory approval required to operate the Program.
Also, regardless of if and when Commission approval is obtained,
Subscribers will continue to be required to pay fees in accordance with
the same published Exchange Fee Schedule to which all Participants are
subject. In addition, Subscribers are not guaranteed distributions; any
distribution to holders of Holdings equity (including Class C Members)
is contingent upon, among other things, the profitability of Holdings,
and nothing in the Subscription Agreement or Members Agreement
guarantees the payment of any distributions to Subscribers.

Finally, the Subscription Agreement will set forth the right of each
Subscriber to terminate the Subscription Agreement if the Commission
does not approve the proposed company governance rule change by July 1,
2016 or if the Subscriber's participation in the Program is legally
prohibited before issuance of the Class C Units.\31\ Accordingly, the
only potential ``cost'' to Subscribers if Commission approval is not
obtained by July 1, 2016, would be that they would have sent order flow
to BOX with the hope of receiving an equity interest and related
rights, which they knew were not guaranteed.
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    \31\ In addition, as noted above, the Subscription Agreement
will provide that, upon such termination, Holdings will promptly
return the terminating Subscriber's initial cash payment.
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    The VPR Volume Commitment threshold was set based upon business
determinations, including increasing diversity of Holdings' ownership
and an analysis of current volume levels. The specific Contract
Equivalent categories were defined and weighted in accordance with the
Exchange's Fee Schedule, such that those categories that earn higher
fees are weighted more heavily. The VPR Volume Commitment threshold and
Contract Equivalent categories are intended to incentivize firms to
increase the number of orders that are sent to BOX. Increasing the
number of orders that are sent to BOX will in turn provide tighter and
more liquid markets, and therefore attract more business as well.
    BOX intends to begin measuring order flow volume for the Program on
January 12, 2015. The Exchange notified Participants of the Program by
Regulatory Circular published on October 1, 2014. The Exchange will
also post a copy of this rule filing on its Web site. Any Participant
that is interested in participating in the Program may contact BOX for
more information and legal documentation and will be required to enter
into a nondisclosure agreement regarding this additional Program
information.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\32\ Specifically, the Exchange believes that its proposed rule
change is consistent with Section 6(b)(5) of the Act \33\ in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the requirement in
Section 6(b)(5) of the Act \34\ that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Exchange also believes the proposed rule
change is consistent with Section 6(b)(4) of the Act,\35\ which
requires that exchange rules provide for the equitable allocation of
reasonable dues, fees, and other charges among its members and other
persons using its facilities.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ Id.
    \35\ 15 U.S.C. 78f(b)(4).
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    In particular, the proposed rule change is equitable and not
unfairly discriminatory because all Participants may elect to
participate (or elect to not participate) in the Program and earn
vested VPRs on the same terms and conditions, assuming they satisfy the
same eligibility criteria as described above. The eligibility criteria
are objective; thus, all Participants have the same opportunity to
satisfy them. Also, Holdings is offering VPRs, including Class C Units,
to any Participant that requests designation to participate in the
Program and otherwise satisfies the eligibility criteria to ensure that
all Participants will have the opportunity to subscribe for VPRs and
the associated Class C Units and thus participate in the Program if
they so choose. In addition, VPRs will vest based on achievement of a
predetermined VPR Volume Commitment threshold during each measurement
period that will apply evenly to all Subscribers. Further, each
Subscriber will have the right to terminate its Subscription Agreement
if the Commission does not approve the proposed company governance rule
change by July 1, 2016 or if the Subscriber's participation in the
Program is legally prohibited before issuance of the Class C Units.\36\
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    \36\ In addition, as noted above, the Subscription Agreement
will provide that, upon such termination, Holdings will promptly
return the terminating Subscriber's initial cash payment.
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    The Exchange believes that the methodology used to calculate the
VPR Volume Commitment threshold is fair, reasonable and not unfairly
discriminatory because it is based on objective criteria that are
designed to omit from the calculation functionality that is not
available on the Exchange and types of transactions that are subject to
little or no transaction fees. Specifically, as noted above, the VPR
Volume Commitment calculation only includes Qualifying Contract
Equivalents, which excludes the following Excluded Member Contracts:
     Excluded Industry Transactions, i.e., executed and cleared
transactions:
    [cir] In a proprietary product traded on a U.S. equity options
exchange other than the Exchange (and not traded on the Exchange);
    [cir] that are Strategic Transactions; \37\ or
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    \37\ See supra note 21 for a description of the types of
``Strategic Transactions.''
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    [cir] that are otherwise agreed to be Excluded Industry
Transactions by Holdings and holders of at least a majority of the
outstanding Class C Units (including both vested and unvested Class C
Units) in writing;
     Transactions that the Class C Member has notified Holdings
shall not be credited to such Member for purposes of calculating the
Member's actual order volume.
     Transactions determined to have been in violation of any
applicable law, statute, regulation, rule, official directive or
guideline (whether or not having the force of law) of any governmental
authority with legal jurisdiction or of any self-regulatory
organization with supervisory authority.
     Transactions with respect to which it is unlawful for the
Class C Member to receive compensation.
    The Exchange believes excluding Strategic Transactions and
transactions in proprietary products traded on a U.S. options exchange
other than the Exchange is reasonable and not unfairly discriminatory
because, at this time, these transactions generally are not executed on
the Exchange, and thus do not contribute to the purpose behind the
Program of incentivizing Participants to send order flow to BOX. The
Exchange further believes it is reasonable and not unfairly
discriminatory to exclude transactions determined to have been executed
in violation of applicable law \38\ and transactions for which it is
unlawful for the Subscriber to receive compensation, because the
Exchange does not want to incent or reward the execution of unlawful
transactions. The Program is designed to reward Subscribers for
bringing orders to be executed on the Exchange; the distribution reward
is primarily based on the profitability of Holdings, which is directly
related to the fees earned by the Exchange. The foregoing

transactions, in which no transaction fees are earned by the Exchange,
do not contribute to the profitability of Holdings. Finally, the
Exchange believes it is reasonable and not unfairly discriminatory to
exclude transactions that the Subscriber has notified Holdings should
not be credited to such Subscriber for purposes of calculating such
Subscriber's actual order volume, and transactions otherwise agreed to
be excluded by Holdings and holders of at least a majority of the
outstanding Class C Units, because these exclusions permit flexibility
in the Program to allow Subscribers to account for business
arrangements with affiliates and third parties, including execution
arrangements through other Subscribers in the Program, allow
Subscribers to voice possible concerns and opinions, and allow
Subscribers to modify the order types that can contribute to meeting
the VPR Volume Commitment, either individually by and for the
Subscriber itself, or by majority vote \39\ for all Subscribers.
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    \38\ The Exchange believes that including transactions executed
in violation of applicable law, particularly, would not be
consistent with the purposes of the Act.
    \39\ Because Class C Unit ownership will be subject to a 20%
cap, no one Subscriber will be able to, by vote, require a
transaction to be excluded for all Subscribers.
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    Further, the Exchange believes the definition of, and weight
assigned to, each Contract Equivalent category is fair, reasonable and
not unfairly discriminatory because each category is defined and
weighted in accordance with the Exchange's Fee Schedule, so that those
categories that earn higher fees are weighted more heavily.\40\
Although the different Contract Equivalent categories are weighted
differently, the weighting is equitable, and strikes an appropriate
balance based on the quantity of orders executed and the type of
account. The Public Customer category is assigned the lowest weight
(0.71) because these orders are charged the lowest fees by the
Exchange, and the Exchange believes low customer transaction fees are
reasonable, appropriate and consistent with the Act because it promotes
the best interests of investors to have lower transaction costs for
Public Customers and attract Public Customer order flow to BOX. The
Market Maker category is assigned more weight (1.10) because these
orders generate higher fees designed to be comparable to the fees that
such accounts would be charged at competing venues. The Professional
Customer and Broker/Dealer Firm categories are assigned the most weight
(1.35) because these orders generate the highest fees for the Exchange
and, again, are designed to be comparable to fees charged by competing
options exchanges. By definition, a Professional Customer places more
than 390 orders in listed options per day on average during a calendar
month for its own beneficial account(s),\41\ and such level of trading
activity generates higher operational costs for the Exchange. Broker/
Dealer Firms are engaged in the business of executing orders, and thus
similarly generate high operational costs for the Exchange. Broker/
Dealer Firms are charged higher fees than Market Makers because Broker/
Dealer Firms do not have the obligations (such as maintaining active
two-sided markets) that Market Makers have. Professional Customer and
Broker/Dealer Firm orders are given equal weight, consistent with the
Exchange's Fee Schedule, which charges these two account types equal
fees. The Exchange believes it is equitable to assign different weights
to each account type based on the fee generated by that account type,
given that the Program distributions are based on revenues earned by
the Exchange.
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    \40\ It is not uncommon for exchanges to treat certain market
participants in a disparate manner, particularly in the Fee
Schedule. For example, the Fee Schedules of the Chicago Board
Options Exchange, Incorporated (``CBOE'') and the International
Securities Exchange (``ISE''), among other exchanges, charge
different fees based on the customer type, including Customer,
Market Maker, Broker/Dealer and Professional. See CBOE Fees Schedule
(Sept. 2, 2014), available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf and ISE Schedule of Fees (last
updated Aug. 1, 2014), available at http://www.ise.com/fees.
    \41\ See Exchange Rule 100(a)(50), which defines the term
``Professional.''
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    The Exchange believes the Program is equitable and reasonable
because an increase in volume and liquidity will benefit all market
participants by providing more trading opportunities and tighter
spreads, even to those market participants that do not participate in
the Program. Additionally, the Exchange believes the proposed rule
change is consistent with the Act because, as described above, the
Program is designed to bring greater volume and liquidity to the
Exchange, which will benefit all market participants by providing
tighter quoting and better prices, all of which perfects the mechanism
for a free and open market and national market system.

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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change will improve competition by providing market
participants with an incentive to consider and utilize another market,
BOX, when determining where to execute options contracts and post
liquidity.
    The Exchange believes that the proposed change will increase both
intermarket and intramarket competition by incenting Subscribers to
direct their orders to the Exchange, which will enhance the quality of
quoting and increase the volume of contracts traded there.
Notwithstanding, Subscribers will be free to send orders to other
markets, even if they have not met their VPR Volume Commitment for that
measurement period; thus the proposed change should not impose a burden
on competition among exchanges. To the extent that there is an
additional competitive burden on non-Subscribers, the Exchange believes
that this is appropriate because the Program should incent Participants
to direct additional order flow to the Exchange and thus provide
additional liquidity, which enhances the quality of BOX and increases
the volume of options traded on BOX. To the extent that this purpose is
achieved, all of the Exchange's Participants, even non-Subscribers,
should benefit from the improved market liquidity. Enhanced market
quality and increased transaction volume that results from the
anticipated increase in order flow directed to the Exchange will
benefit all market participants and improve competition on the
Exchange.
    Given the robust competition for volume among options markets, many
of which offer the same products, implementing a program to attract
order flow like the one being proposed in this filing is consistent
with the above-mentioned goals of the Act. This is especially true for
the smaller options markets, such as BOX, which is competing for volume
with much larger exchanges that dominate the options trading industry.
BOX has a modest percentage of the average daily trading volume in
options, so it is unlikely that the Program could cause any competitive
harm to the options market or to market participants. Rather, the
Program is an attempt by a small options market to attract order volume
away from larger competitors by adopting an innovative pricing
strategy, as evidenced by the VPR Volume Commitment threshold of the
Program representing a fraction of 1% of the total national average
daily volume of options contracts reported to OCC. The Exchange notes
that, if the Program resulted in the expected increase in the average
daily trading volume in options

executing on BOX, such increase will represent a large percentage
increase for BOX but it will represent a minimal reduction in volume of
its larger competitors in the industry. The Exchange believes that the
Program will help further competition, because market participants will
have yet another additional option in determining where to execute
orders and post liquidity if they factor the benefits of the Program
and BOX equity participation into the determination.
    Finally, the Program will increase the diversity of ownership of
Holdings such that no one entity will have a majority ownership of
Holdings. Upon the issuance of Class C Units to Subscribers, the
ownership of Holdings will be distributed among more holders. If there
is full participation in the Program, then the ownership of Holdings by
current Unitholders will be diluted and no single Unitholder will have
a majority ownership of Holdings.

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

    No written comments were either solicited or received.

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

    Pursuant to Section 19(b)(3)(A)(ii) of the Act and Rule 19b-4(f)(2)
thereunder the proposed rule change is filed for immediate
effectiveness inasmuch as it establishes or changes a due, fee, or
other charge imposed by the Exchange.
    At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily 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 shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

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 Number SR-BOX-2015-03 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 Number SR-BOX-2015-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BOX-2015-03 and should be
submitted on or before February 18, 2015.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01508 Filed 1-27-15; 8:45 am]
BILLING CODE 8011-01-P