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Federal Register / Vol. 86, No. 164 / Friday, August 27, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

on another. For these reasons, it is not possible for the Exchange to identify, and thus assess fees such as ORF, on order-entering participants on away markets on a given trading day. Clearing members, however, are distinguished from order-entering participants because they remain identified to the Exchange on information the Exchange receives from OCC regardless of the identity of the order-entering participant, their location, and the market center on which they execute transactions.
Therefore, the Exchange believes it is more efficient for the operation of the Exchange and for the marketplace as a whole to collect the ORF from clearing members.
ORF Revenue and Monitoring of ORF
The Exchange monitors the amount of revenue collected from the ORF to ensure that it, in combination with other regulatory fees and fines, does not exceed regulatory costs. In determining whether an expense is considered a regulatory cost, the Exchange reviews all costs and makes determinations if there is a nexus between the expense and a regulatory function. The Exchange notes that fines collected by the Exchange in connection with a disciplinary matter offset ORF.
As discussed below, the Exchange believes it is appropriate to charge the ORF only to transactions that clear as customer at the OCC. The Exchange believes that its broad regulatory responsibilities with respect to a Members activities supports applying the ORF to transactions cleared but not executed by a Member. The Exchanges regulatory responsibilities are the same regardless of whether a Member enters a transaction or clears a transaction executed on its behalf. The Exchange regularly reviews all such activities, including performing surveillance for position limit violations, manipulation, front-running, contrary exercise advice violations and insider trading. These activities span across multiple exchanges.
Revenue generated from ORF, when combined with all of the Exchanges other regulatory fees and fines, is designed to recover a material portion of the regulatory costs to the Exchange of the supervision and regulation of Members customer options business including performing routine surveillances, investigations, examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities. Regulatory costs include direct regulatory expenses and certain indirect expenses in support of the regulatory function. The direct expenses include in-house and third
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party service provider costs to support the day-to-day regulatory work such as surveillances, investigations and examinations. The indirect expenses include support from such areas as the Office of the General Counsel, technology, and internal audit. Indirect expenses are estimated to be approximately 48% of the total regulatory costs for 2021. Thus, direct expenses are estimated to be approximately 52% of total regulatory costs for 2021. The Exchange notes that its estimated direct and indirect expense percentages are in the range and similar to those at other options exchanges.7
The ORF is designed to recover a material portion of the costs to the Exchange of the supervision and regulation of its members, including performing routine surveillances, investigations, examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities.
Proposal Based on the Exchanges most recent review, the Exchange proposes to reduce the amount of ORF that will be collected by the Exchange from $0.0029
per contract side to $0.0019 per contract side. The Exchange issued an Options Regulatory Fee Announcement on July 2, 2021, indicating the proposed rate change for August 1, 2021.8
The proposed decrease is based on recent options volumes, which included an increase in retail investors. With respect to options volume, the Exchange, and the options industry as a whole, experienced a significant increase between 2020 and 2021. For example, total options contract volumes in April, May and June 2021 were 29.7%, 32.7% and 25.6% higher than the total options contract volumes in April, May and June 2020, respectively.9
There can be no assurance that the Exchanges final costs for 2021 will not differ materially from these expectations, nor can the Exchange 7 See Securities Exchange Act Release Nos. 91418
March 26, 2021, 86 FR 17254 April 1, 2021 SR
Phlx202116 reducing the Nasdaq PHLX LLC
ORF and estimating direct expenses at 58% and indirect expenses at 42%; 91420 March 26, 2021, 86 FR 17223 April 1, 2021 SRISE202104
reducing the Nasdaq ISE, LLC ORF and estimating direct expenses at 58% and indirect expenses at 42%.
8 See https www.miaxoptions.com/sites/default/
files/circular-files/MIAX_Options_RC_2021_36.pdf.
9 See data from OCC at: https
www.businesswire.com/news/home/
20210504005178/en/OCC-April-2021-TotalVolume-Up-29.7-Percent-from-a-Year-Ago, https
www.businesswire.com/news/home/
20210602005174/en/OCC-May-2021-Total-VolumeUp-32.7-Percent-from-a-Year-Ago, and https
apnews.com/press-release/business-wire/
778385e696f4407590cc6ff9cb64db03.

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predict with certainty whether options volume will remain at the current level going forward. The Exchange notes however, that when combined with regulatory fees and fines, the revenue being generated utilizing the current ORF rate may result in revenue that will run in excess of the Exchanges estimated regulatory costs for the year.10
Particularly, as noted above, the options market has seen a substantial increase in volume throughout 2020 and 2021, due in large part to the extreme volatility in the marketplace as a result of the COVID19 pandemic. This unprecedented spike in volatility resulted in significantly higher volume than was originally projected by the Exchange thereby resulting in substantially higher ORF revenue than projected. The Exchange therefore proposes to decrease the ORF in order to ensure it does not exceed its regulatory costs for the year.
Particularly, the Exchange believes that decreasing the ORF when combined with all of the Exchanges other regulatory fees and fines, would allow the Exchange to continue covering a material portion of its regulatory costs, while lessening the potential for generating excess revenue that may otherwise occur using the current rate.11
The Exchange will continue to monitor the amount of revenue collected from the ORF to ensure that it, in combination with its other regulatory fees and fines, does not exceed the Exchanges total regulatory costs. The Exchange will continue to monitor MIAX regulatory costs and revenues at a minimum on a semi-annual basis. If the Exchange determines regulatory revenues exceed or are insufficient to cover a material portion of its regulatory costs, the Exchange will adjust the ORF
by submitting a fee change filing to the Commission. The Exchange will notify Members of adjustments to the ORF via regulatory circular at least 30 days prior to the effective date of the change.
In connection with this filing, the Exchange notes that its affiliates, MIAX
Pearl and MIAX Emerald, will also be adjusting the ORF fees that each of those exchanges charge.
10 The Exchange notes that notwithstanding the potential excess ORF revenue the Exchange anticipates it would collect utilizing the current rate, it would not use such revenue for nonregulatory purposes.
11 The Exchange notes that its regulatory responsibilities with respect to Member compliance with options sales practice rules have been allocated to the Financial Industry Regulatory Authority FINRA under a 17d2 Agreement.
The ORF is not designed to cover the cost of options sales practice regulation.

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