Daily Rules, Proposed Rules, and Notices of the Federal Government
Under Sections 6(b) and 19(a) of the Act,
As discussed in greater detail below, the Commission finds that MIAX's application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of MIAX are consistent with Section 6 of the Act in that, among other things, they are designed to: (1) Assure fair representation of the exchange's members in the selection of its directors and administration of its affairs and provide that, among other things, one or more directors shall be representative of investors and not be associated with the exchange, or with a broker or dealer;
The board of directors of MIAX Exchange ("Exchange Board") will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of MIAX Exchange as a self-regulatory organization ("SRO").
Under the By-Laws of MIAX Exchange ("MIAX Exchange By-Laws"):
* The Exchange Board will be composed of not less than ten directors;
* One director will be the Chief Executive Officer of MIAX Exchange;
* The number of Non-Industry Directors,
* At least twenty percent of the directors on the Exchange Board will be Member Representative Directors.
For the interim board (discussed below), and subsequently at the first annual meeting and each annual meeting thereafter, Miami Holdings, as the sole LLC Member of MIAX Exchange, will elect the MIAX Exchange Board pursuant to the MIAX By-Laws.
The Nominating Committee will nominate candidates for each director position, and Miami Holdings, as the sole LLC Member, will elect those directors. For Member Representative Director positions, the Nominating Committee will nominate those candidates submitted to it, and approved, by the Member Nominating Committee.
The Commission believes that the requirement in the MIAX Exchange By-Laws that 20% of the directors be Member Representative Directors and the means by which they will be chosen by MIAX Exchange members provide for the fair representation of members in the selection of directors and the administration of MIAX Exchange and therefore is consistent with Section 6(b)(3) of the Act.
In addition, with respect to the requirement that the number of Non-Industry Directors, including at least one Independent Director, will equal or exceed the sum of the number of Industry Directors and Member Representative Directors, the Commission believes that the proposed composition of the MIAX Exchange Board satisfies the requirements in Section 6(b)(3) of the Act,
Such persons will be allowed 14 days to submit the name of an alternative candidate and 5 days to vote for the final slate of candidates.
The Interim Exchange Board will serve until the first initial Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the MIAX By-Laws.
The Commission believes that the process for electing the Interim Exchange Board, as proposed, is consistent with the requirements of the Act, including that the rules of the exchange assure fair representation of the exchange's members in the selection of its directors and administration of its affairs.
In the MIAX Exchange By-Laws, MIAX Exchange has proposed to establish several standing committees, which will be divided into two categories: Committees of the Board (composed of MIAX Exchange directors) and Committees of the MIAX Exchange (composed of a mixture of MIAX Exchange directors and persons that are not MIAX Exchange directors).
The Audit Committee will consist of three or more directors, a majority of which will be Non-Industry Directors.
With respect to Committees of MIAX Exchange, MIAX Exchange has proposed to establish a Nominating Committee
The Commission believes that MIAX Exchange's proposed committees, which are similar to the committees maintained by other exchanges,
When MIAX Exchange commences operations as a national securities exchange, MIAX Exchange will have all the attendant regulatory obligations under the Act. In particular, MIAX Exchange will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the MIAX Exchange and Miami Holdings governance documents are designed to facilitate the ability of MIAX Exchange and the Commission to fulfill their regulatory obligations. The discussion below summarizes some of these key provisions.
MIAX Exchange will be structured as a Delaware limited liability company ("LLC"), which will be wholly-owned by the sole member of the LLC, Miami International Holdings, Inc. ("Miami Holdings"). The Miami Holdings' proposed Amended and Restated Certificate of Incorporation ("Miami Holdings Certificate") includes restrictions on the ability to own and vote shares of capital stock of Miami Holdings.
In particular, for so long as Miami Holdings (directly or indirectly) controls MIAX Exchange, no person, either alone or together with its related persons,
Any person that proposes to own shares of capital stock in excess of the 40% ownership limitation, or vote or grant proxies or consents with respect to shares of capital stock in excess of the 20% voting limitation, must deliver written notice to the Miami Holdings board to notify the Board of its intention.
The Miami Holdings Certificate also contains provisions that are designed to further safeguard the ownership and voting limitation described above, or are otherwise related to direct and indirect changes in control. Specifically, any person that, either alone or together with its related persons owns, directly or indirectly, of record or beneficially, 5% or more of the capital stock of Miami Holdings will be required to immediately notify Miami Holdings in writing upon acquiring knowledge of such ownership.
The MIAX LLC Agreement does not include change of control provisions that are similar to those in the Miami Holdings Certificate; however the MIAX Exchange LLC Agreement explicitly provides that Miami Holdings is the sole LLC Member of MIAX Exchange.
Although Miami Holdings is not independently responsible for regulation, its activities with respect to the operation of MIAX Exchange must be consistent with, and must not interfere with, the self-regulatory obligations of MIAX Exchange. As described above, the provisions applicable to direct and indirect changes in control of Miami Holdings and MIAX Exchange, as well as the voting limitation imposed on owners of Miami Holdings who also are MIAX Exchange members, are designed to help prevent any owner of Miami Holdings from exercising undue influence or control over the operation of MIAX Exchange and to help assure that MIAX Exchange retains a sufficient degree of independence to effectively carry out its regulatory obligations under the Act. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. Members that trade on an exchange traditionally have had ownership interests in such exchange. As the Commission has noted in the past, however, a member's interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.
The Commission believes that MIAX's and Miami Holding's proposed governance provisions are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.
Although Miami Holdings will not itself carry out regulatory functions, its activities with respect to the operation of MIAX Exchange must be consistent with, and must not interfere with, MIAX Exchange's self-regulatory obligations. In this regard, MIAX Exchange and Miami Holdings propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of MIAX Exchange. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration.
* The directors, officers, employees, and agents of Miami Holdings must give due regard to the preservation of the independence of the self-regulatory function of MIAX Exchange and must not take actions that would interfere with the effectuation of decisions by the MIAX Exchange Board relating to its regulatory functions or that would interfere with MIAX Exchange's ability to carry out its responsibilities under the Act.
* Miami Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and agrees to cooperate with the Commission and MIAX Exchange pursuant to, and to the extent of, their respective regulatory authority. In addition, Miami Holdings' officers, directors, employees, and agents must comply with federal securities laws and the rules and regulations promulgated thereunder and agree to cooperate with the Commission and MIAX Exchange in respect of the Commission's oversight responsibilities regarding MIAX Exchange and the self-regulatory functions and responsibilities of MIAX Exchange.
* Miami Holdings, and its officers, directors, employees, and agents submit to the jurisdiction of the U.S. federal courts, the Commission, and MIAX Exchange, for purposes of any action, suit, or proceeding pursuant to U.S. federal securities laws, and the rules
* All books and records of MIAX Exchange reflecting confidential information pertaining to the self-regulatory function of MIAX Exchange (including but not limited to disciplinary matters, trading data, trading practices, and audit information) shall be retained in confidence by MIAX Exchange and its personnel and will not be used by MIAX Exchange for any non-regulatory purpose and shall not be made available to persons (including, without limitation, any MIAX Exchange member) other than to personnel of the Commission, and those personnel of MIAX Exchange, members of committees of MIAX Exchange, members of the MIAX Exchange Board, or hearing officers and other agents of MIAX, to the extent necessary or appropriate to properly discharge the self-regulatory function of MIAX Exchange.
* The books and records of MIAX Exchange and Miami Holdings must be maintained in the United States
* Furthermore, to the extent they relate to the activities of MIAX Exchange, the books, records, premises, officers, directors, employees, and agents of Miami Holdings will be deemed to be the books, records, premises, officers, directors, employees, and agents of MIAX Exchange, for purposes of, and subject to oversight pursuant to, the Act.
* Miami Holdings will take necessary steps to cause its officers, directors, employees, and agents, prior to accepting a position as an officer, director, employee or agent (as applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to MIAX Exchange.
* Miami Holdings Certificate and By-Laws require that, so long as Miami Holdings controls MIAX Exchange, any changes to those documents be submitted to the MIAX Exchange Board, and, if such change is required to be filed with the Commission pursuant to Section 19(b) of the Act and the rules and regulations thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.
The Commission believes that the provisions discussed in this section, which are designed to help maintain the independence of MIAX Exchange's regulatory function and help facilitate the ability of MIAX Exchange to carry out its responsibility and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.
Further, Section 19(h)(1) of the Act
The Commission also notes that, even in the absence of the governance provisions described above, under Section 20(a) of the Act any person with a controlling interest in MIAX Exchange would be jointly and severally liable with and to the same extent that MIAX Exchange is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
As a prerequisite for the Commission's granting of an exchange's application for registration, an exchange must be organized and have the capacity to carry out the purposes of the Act.
The regulatory operations of MIAX Exchange will be monitored by the Regulatory Oversight Committee of the MIAX Exchange Board. The Regulatory Oversight Committee will consist of at least three directors, all of whom will be Non-Industry Directors. The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of MIAX Exchange's regulatory and SRO responsibilities, assessing MIAX Exchange's regulatory performance, and assisting the MIAX Exchange Board (and committees of the MIAX Exchange Board) in reviewing MIAX Exchange's regulatory plan and the overall effectiveness of MIAX Exchange's regulatory functions.
Further, a Chief Regulatory Officer ("CRO") of MIAX Exchange will have general day-to-day supervision over MIAX Exchange's regulatory operations.
To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, MIAX Exchange represented that, prior to commencing operations as a national securities exchange, Miami Holdings will provide sufficient funding to MIAX Exchange for the exchange to carry out its responsibilities under the Act.
MIAX Exchange also represents that such direct funding by Miami Holdings, as well as allocations and contributions by Miami Holdings to MIAX Exchange, will be adequate to operate MIAX Exchange, including the ongoing regulation of the exchange, and that Miami Holdings and MIAX Exchange have entered into a funding agreement that requires Miami Holdings to provide adequate funding for the exchange's initial and ongoing operations, including the regulation of MIAX Exchange.
Further, any revenues received by MIAX Exchange from fees derived from its regulatory function or regulatory penalties will not be used for non-regulatory purposes.
Section 19(g)(1) of the Act,
A 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.
In addition, MIAX Exchange has entered into a Regulatory Services Agreement ("RSA") with the Chicago Board Options Exchange, Incorporated ("CBOE"), under which CBOE will perform certain regulatory functions on behalf of MIAX Exchange.
The Commission believes that it is consistent with the Act for MIAX Exchange to contract with another SRO to perform certain examination, enforcement, and disciplinary functions.
Access to MIAX will be granted to individuals or organizations who are approved to become members. Approved members will be issued Trading Permits that grant the member the ability to transact on MIAX Exchange through the exchange's electronic systems.
Those seeking to become members of MIAX will need to submit an application in accordance with procedures that MIAX will announce by Regulatory Circular.
Further, MIAX Rule 608 requires market makers to have a letter of guarantee. In its comment letter, NASDAQ argues that MIAX should broaden this rule to require all members to provide a letter of guarantee, not just market makers.
In addition, in its comment letter, NASDAQ notes that MIAX Rule 507 requires a member who changes clearing information to contact the clearing member on the other side of a trade.
The Commission finds that MIAX's proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof.
The Commission notes that pursuant to Section 6(c) of the Act,
In addition, members may enter into arrangements with other parties, including non-members and other members, to provide "Sponsored Access" to trading on MIAX.
MIAX intends to become a participant in the Plan Relating to Options Order Protection and Locked/Crossed Markets or any successor plan ("Linkage Plan").
MIAX Exchange rules include relevant definitions, establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan, impose obligations on MIAX Exchange regarding how it must process incoming orders, establish a general standard that members and MIAX Exchange should avoid trade-throughs, establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges, and establish obligations with respect to locked and crossed markets.
The Commission believes that MIAX has proposed rules that are designed to comply with the requirements of the Linkage Plan.
Members of MIAX may apply to become one of three types of market maker: Primary Lead Market Maker, Lead Market Maker, or Registered Market Maker (collectively, "Market Makers"). Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations.
To begin the process of registering as a Registered Market Maker or Lead Market Maker, a member will be required to file a written application with MIAX.
Once approved, a Market Maker would seek appointment to make markets in options classes.
The Commission finds that MIAX's rules for the registration and appointment of Market Makers are consistent with the Act. In particular, MIAX's rules provide an objective process by which a member could become a Market Maker on MIAX and provide for oversight by MIAX Exchange to monitor for continued compliance by Market Makers with the terms of their application for such status. The Commission notes that MIAX's proposed Market Maker registration and appointment requirements are similar to those of other options exchanges.
Pursuant to MIAX rules, all Market Makers will be subject to a number of general obligations. In particular, the transactions of a Market Maker must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market.
MIAX's rules governing Market Maker quoting obligations are tailored to the specific class of Market Maker.
In options classes other than to which they are appointed, a Market Maker is prohibited from engaging in transactions in an account in which it has an interest that are disproportionate to, or in derogation of, the performance of its market making obligations as set forth in the MIAX rules.
If MIAX finds any failure by a Market Maker to meet minimum performance standards or properly perform as a Market Maker, such Market Maker may be subject to suspension, termination, or restriction of registration in one or more of the securities in which the Market Maker is registered.
Market Makers will receive certain benefits in return for satisfying their responsibilities.
The Commission believes that MIAX's Market Maker participation requirements impose appropriate affirmative obligations on MIAX Exchange's Market Makers that are commensurate with the benefits afforded to such participants and, accordingly, are consistent with the Act.
Specifically, with regard to MIAX's proposed continuous quoting obligations, only those quotes that are liquidity providing--Standard quotes and Day eQuotes--will be counted towards a Market Maker's quoting obligations, rather than all types of eQuotes that a Market Maker will be permitted to utilize.
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 MIAX, they will likely not be the only source as MIAX is designed to match buying and selling interest of all MIAX participants.
MIAX will operate a fully automated electronic options marketplace. Liquidity will be derived from orders to buy and orders to sell, as well as market maker quotations, submitted to MIAX electronically by its members from remote locations. There will be no physical trading floor. Options traded on the Exchange will be subject to Minimum Price Variations that will begin at $0.05 for option contracts trading at less than $3.00 per option, and $.10 for option contracts trading at $3.00 per option or higher.
All orders and quotes submitted to MIAX will be displayed unless: (i) The order is a contingent order (such as immediate or cancel orders); or (ii) the quote is a certain type of eQuote
In certain cases, orders and quotes may be displayed at a price different from the price specified by the submitting member.
In its comment letter, NASDAQ notes that proposed MIAX Rule 516(b)(4) is silent on what would happen if a member attempted to submit a non-displayed penny order in an option that is not eligible for such orders.
Members may submit the following types of orders: Market; Limit (including Marketable Limit, Fill-or-Kill, Immediate-or-Cancel, Non-Displayed Penny,
Trades will execute on MIAX when orders or quotes on the MIAX order book match one another.
MIAX also will offer additional priority overlays at its discretion on a class-by-class basis, which include "Priority Customer" and "Market Turner" overlays. Priority overlays would only be applicable for pro rata priority.