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Daily Rules, Proposed Rules, and Notices of the Federal Government

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68341; File No.10-207]

In the Matter of the Application of Miami International Securities Exchange, LLC for Registration as a National Securities Exchange: Findings, Opinion, and Order of the Commission

On April 26, 2012, Miami International Securities Exchange, LLC ("MIAX Exchange" or "MIAX") submitted to the Securities and Exchange Commission ("Commission") an Application for Registration as a National Securities Exchange ("Form 1 Application") under Section 6 of the Securities Exchange Act of 1934 ("Act").1 Notice of MIAX's Form 1 Application was published for comment in theFederal Registeron August 20, 2012.2 The Commission received twocomment letters concerning MIAX's Form 1 Application.3 MIAX submitted a detailed response to comments on November 30, 2012.4 On November 30, 2012, MIAX submitted Amendment No. 1 to its Form 1 Application.5
II. Statutory Standards

Under Sections 6(b) and 19(a) of the Act,6 the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and can comply, and can 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 the exchange.

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;7 (2) prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system;8 (3) not permit unfair discrimination between customers, issuers, or dealers;9 and (4) protect investors and the public interest.10 Finally, the Commission finds that MIAX's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.11

III. DiscussionA. Governance of MIAX Exchange1. MIAX Exchange Board of Directors

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").12

Under the By-Laws of MIAX Exchange ("MIAX Exchange By-Laws"):13

* The Exchange Board will be composed of not less than ten directors;14

* One director will be the Chief Executive Officer of MIAX Exchange;15

* The number of Non-Industry Directors,16 including at least one Independent Director,17 will equal or exceed the sum of the number of Industry Directors18 and Member Representative Directors;19 and

* At least twenty percent of the directors on the Exchange Board will be Member Representative Directors.20

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.21 In addition, Miami Holdings will appoint the initial Nominating Committee22 and Member Nominating Committee,23 consistent with eachcommittee's compositional requirements,24 to nominate candidates for election to the Exchange Board. Each of the Nominating Committee and Member Nominating Committee, after completion of its respective duties for nominating directors for election to the Board for that year, shall nominate candidates to serve on the succeeding year's Nominating Committee or Member Nominating Committee, as applicable. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX Exchange members pursuant to a petition process.25

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.26 Additional candidates, however, may be nominated for the Member Representative Director positions by MIAX Exchange members pursuant to a petition process.27 If no candidates are nominated pursuant to a petition process, then the initial nominees submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to MIAX Exchange members for a run-off election to determine the final slate of candidates for the vacant Member Representative Director positions.28 In the event of a contested run-off election, the candidates who receive the most votes will be nominated as the final slate of Member Representative Director candidates by the Nominating Committee.29 Miami Holdings, as the sole LLC Member, is obligated to elect the final slate of the Member Representative Director candidates that are nominated by the Nominating Committee.30

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.31 As the Commission has previously noted, this requirement helps to ensure that members have a voice in the use of self-regulatory authority, and that an exchange is administered in a way that is equitable to all those who trade on its market or through its facilities.32

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,33 which requires in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission previously has stated that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange's ability to protect the public interest.34 Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. The Commission believes that public, non-industry directors can provide unique, unbiased perspectives, which are designed to enhance the ability of the MIAX Exchange Board to address issues in a non-discriminatory fashion and foster the integrity of MIAX Exchange.35

Interim Exchange Board.Prior to commencing operations, Miami Holdings will appoint an interim Exchange board of directors ("Interim Exchange Board"), which will include interim Member Representative Directors. With respect to the selection of the interim Member Representative Directors for the Interim Exchange Board, prior to the commencement of operations as an exchange, MIAX will submit the names of its nominees for the interim Member Representative Directors positions to persons that have begun the process of becoming members in the new MIAX Exchange.36 MIAX represents that the persons and firms that have applied to become the initial members of MIAX Exchange have already begun the process of completing the necessary applications, obtaining electronic connectivity, and testing their systems with MIAX.37 MIAX additionally represents that the initial members of MIAX will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX.38

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.39 All other interim directors, except for the interim Member Representative Directors, willbe appointed and elected by Miami Holdings, and must meet the MIAX Exchange board composition requirements as set forth in the MIAX Exchange By-Laws. Once these interim Member Representative Directors are seated on the Interim Exchange Board, then the Interim Exchange Board will meet the board composition requirements set forth in the governing documents of MIAX Exchange.

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.40 MIAX Exchange will complete such process within 90 days after its application for registration as a national securities exchange is granted by the Commission.41

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.42 As noted above, MIAX represents that the initial members of MIAX will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX. MIAX will engage these persons and firms in the interim board election process by, prior to the commencement of operations as an exchange, providing each of them with the opportunity to participate in the selection of interim Member Representative Directors consistent with the MIAX Exchange By-Laws. Further, MIAX Exchange represents that it will complete the full nomination, petition, and voting process as set forth in the MIAX Exchange By-Laws, which will provide persons that are approved as members after the effective date of this Order with the opportunity to participate in the selection of the Member Representative Directors, within 90 days of when MIAX Exchange's application for registration as a national securities exchange is granted.43 The Commission therefore believes that MIAX Exchange's initial interim board process is consistent with the Act, including Section 6(b)(3), in that it is designed to provide representation among the persons and firms likely to become members when MIAX commences operations and is sufficient to allow MIAX to commence operations for an interim period prior to going through the process to elect a new Exchange Board pursuant to the full nomination, petition, and voting process set forth in the MIAX Exchange By-Laws.

2. Exchange Committees

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).44 The standing Committees of the Board will be the Audit, Compensation, Appeals, and Regulatory Oversight Committees.45 In addition, the MIAX Chairman, with approval of the Exchange Board, may appoint an Executive Committee and a Finance Committee, which also would be Committees of the Board.46

The Audit Committee will consist of three or more directors, a majority of which will be Non-Industry Directors.47 Each of the Compensation and Regulatory Oversight Committees will consist of three or more directors, all of which will be required to be Non-Industry Directors.48 The Appeals Committee will consist of one Independent Director, one Industry Director, and one Member Representative Director.49 If established, the Finance Committee will consist of at least three persons (who may, but are not required to, be directors) a majority of whom will be Non-Industry Directors.50 The Executive Committee, if established, will consist of at least three directors. Because the Executive Committee will have the powers and authority of the Exchange Board in the management of the business and affairs of the MIAX Exchange between meetings of the Exchange Board, its composition must reflect that of the Exchange Board. Accordingly, the number of Non-Industry Directors on the Executive Committee must equal or exceed the number of Industry Directors and the percentages of Independent Directors and Member Representative Directors must be at least as great as the corresponding percentages on the Exchange Board as a whole.51

With respect to Committees of MIAX Exchange, MIAX Exchange has proposed to establish a Nominating Committee52 and a Member Nominating Committee.53 As discussed above, these committees will have responsibility for, among other things, nominating candidates for election to the Exchange Board. On an annual basis, the members of these committees will nominate candidates for the succeeding year's respective committees to be elected by Miami Holdings, as the sole LLC Member.54 In addition, MIAX also has proposed to establish a Quality of Markets Committee,55 which will provide advice and guidance to the Exchange Board on issues related to the fairness, integrity, efficiency and competiveness of the information, order handling and execution mechanisms of the exchange from the perspective of individual and institutional investors, retail and market making firms, exchange listed companies, and other market participants. The Quality of Markets Committee will include a broad representation of participants in MIAX Exchange. Additionally, at least 20% of the members of the committee will be Member Representative members, and the number of Non-Industry members must equal or exceed the total number of Industry and Member Representative members. MIAX also has proposed to

establish a Business Conduct Committee as discussed further below.56

The Commission believes that MIAX Exchange's proposed committees, which are similar to the committees maintained by other exchanges,57 are designed to help enable MIAX Exchange to carry out its responsibilities under the Act and 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.58

B. Regulation of MIAX Exchange

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.

1. Ownership Structure; Ownership and Voting Limitations

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.59 These limitations are designed to prevent any Miami Holdings shareholder from exercising undue control over the operation of MIAX Exchange and to assure that the MIAX Exchange and the Commission are able to carry out their regulatory obligations under the Act.

In particular, for so long as Miami Holdings (directly or indirectly) controls MIAX Exchange, no person, either alone or together with its related persons,60 may beneficially own more than 40% of any class of capital stock of Miami Holdings.61 MIAX proposed a more conservative restriction for MIAX Exchange members, wherein MIAX Exchangemembers,either alone or together with their related persons, are prohibited from beneficially owning more than 20% of shares of any class of capital stock of Miami Holdings.62 If any stockholder violates these ownership limits, Miami Holdings would redeem the shares in excess of the applicable ownership limit at their par value.63 In addition, no person, alone or together with its related persons, may vote or cause the voting of more than 20% of the voting power of the then issued and outstanding capital stock of Miami Holdings.64 If any stockholder purports to vote, or cause the voting of, shares that would violate this voting limit, Miami Holdings would not honor such vote in excess of the voting limit.65

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.66 The notice must be delivered to the Board not less than 45 days before the proposed ownership of such shares or proposed exercise of such voting rights or the granting of such proxies or consents.67 The Miami Holdings board may waive the 40% ownership limitation and the 20% voting limitation, pursuant to a resolution duly adopted by the Board of Directors, if it makes certain findings,68 except that the Miami Holdings board cannot waive the voting and ownership limits above 20% for MIAX Exchange members and their related persons.69 Any such waiver would not be effective unless and until approved by the Commission pursuant to Section 19 of the Act.70

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.71 Thereafter, such persons will be required to update Miami Holdings of any increase or decrease of 1% or more in their previously reported ownership percentage.72

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.73 Thus, if Miami Holdings ever proposes to no longer be the sole LLC Member of MIAX Exchange (and therefore no longer its sole owner), MIAX Exchange would be required to amend the MIAX Exchange LLC Agreement. Any changes to the MIAX Exchange LLC Agreement (which includes the MIAX Exchange By-Laws), including any change in the provisions that identify Miami Holdings as the sole owner of MIAX Exchange, must be filed with, or filed with and approved by, the Commission pursuant to Section 19 of the Act, as the case may be.74 Further, pursuant to the MIAX Exchange By-Laws, Miami Holdings may not transfer or assign, in whole or in part, its ownership interest in MIAX Exchange, unless such transfer is filed with and approved by the Commission pursuant to Section 19 of the Act.75

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.76 A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, the Commission believes that these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of MIAX Exchange to effectively carry out its regulatory oversight responsibilities under the Act.

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.77 In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or MIAX Exchange to effectively carry out their regulatory oversight responsibilities under the Act.

2. Regulatory Independence and Oversight

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.78 Specifically:

* 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.79

* 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.80

* 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 rulesand regulations thereunder, arising out of, or relating to, MIAX Exchange activities.81

* 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.82

* The books and records of MIAX Exchange and Miami Holdings must be maintained in the United States83 and, to the extent they are related to the operation or administration of MIAX Exchange, Miami Holdings books and records will be subject at all times to inspection and copying by the Commission.84

* 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.85

* 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.86

* 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.87

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.88 Whether MIAX Exchange operates in compliance with the Act, however, depends on how it and Miami Holdings in practice implement the governance and other provisions that are the subject of this Order.89

Further, Section 19(h)(1) of the Act90 provides the Commission with the authority "to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance" with any such provision by its members (including associated persons thereof).91 If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under 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.92 In addition, Section 20(e) of the Act creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder.93 Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been "a cause of" a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation.94 These provisions are applicable to all entities' dealings with MIAX Exchange, including Miami Holdings.

3. Regulation of MIAX

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.95 Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the federal securities laws and the rules of the exchange.96 The discussion below summarizes how MIAX Exchange proposes to conduct and structure its regulatory operations.

a. Regulatory Oversight Committee

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.97

Further, a Chief Regulatory Officer ("CRO") of MIAX Exchange will have general day-to-day supervision over MIAX Exchange's regulatory operations.98 The Regulatory Oversight Committee also will be responsible for recommending compensation and personnel actions involving the CRO and senior regulatory personnel to the Compensation Committee of the MIAX Exchange for action.99 The CRO will report to the Regulatory Oversight Committee.100

b. Regulatory Funding

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.101 Specifically, MIAX Exchange represents that prior to launching operations, Miami Holdings will allocate sufficient operational assets and make a capital contribution of not less than $2,000,000 into MIAX Exchange's capital account, in addition to either directly making payments of, or contributing adequate funds from Miami Holdings to MIAX Exchange for payments by MIAX Exchange of: (i) Personnel costs (including regulatory department personnel), (ii) technology support for regulatory oversight, (iii) infrastructure costs, and (iv) industry and regulatory memberships.102

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.103

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.104 Any excess funds, as determined by MIAX Exchange, may be remitted to Miami Holdings, however "Regulatory Funds" will not be remitted to Miami Holdings.105

c. Rule 17d-2 Agreements; Regulatory Contract With CBOE

Section 19(g)(1) of the Act,106 among other things, requires every SRO registered as either a national securities exchange or national securities association to examine for, and enforce compliance by, its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO's own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act.107 Rule 17d-2 of the Act108 permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members.109 These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO. Such regulatory duplication would add unnecessary expenses for common members and their SROs.

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.110 Many SROs have entered into Rule 17d-2 agreements.111 MIAX Exchange has represented to the Commission that it intends to become a party to the existing multiparty options Rule 17d-2 plans concerning sales practice regulation and market surveillance.112 Under these agreements, the examining SROs will examine firms that are commonmembers of MIAX Exchange and the particular examining SRO for compliance with certain provisions of the Act, certain rules and regulations adopted thereunder, and certain MIAX Exchange Rules.

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.113 Pursuant to the RSA, CBOE, in its capacity as service provider to MIAX Exchange, will perform various services on MIAX's behalf, including conducting certain market surveillances; assisting MIAX Exchange in conducting investigations of potential violations of MIAX Exchange rules and/or federal securities laws related to activity on the Exchange; conducting examinations related to Exchange members' conduct on MIAX Exchange; assisting MIAX Exchange with disciplinary proceedings pursuant to MIAX Exchange rules, including issuing charges and conducting hearings; and providing dispute resolution services to Exchange members on behalf of MIAX Exchange, including operation of the MIAX Exchange's arbitration program.114 Notwithstanding the RSA, MIAX Exchange will retain ultimate legal responsibility for the regulation of its members and its market.

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.115 These functions are fundamental elements of a regulatory program, and constitute core self-regulatory functions. The Commission believes that CBOE, as an SRO that operates two options exchanges, should have the capacity to perform these functions for MIAX Exchange.116 However, MIAX Exchange, unless relieved by the Commission of its responsibility,117 bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on MIAX Exchange's behalf. In performing these regulatory functions, however, the SRO retained to perform regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of MIAX Exchange to perform its regulatory functions.118 Accordingly, although CBOE will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for MIAX Exchange, as the SRO retained to perform regulatory functions, CBOE may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by MIAX Exchange.

C. Trading System1. Access to MIAX

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.119 Trading Permits will not convey upon members any ownership interest in MIAX Exchange, and they will not be transferable except in cases where a member experiences a change in control or corporate reorganization.120 Membership will be open to any broker-dealer that: (1) Is registered under Section 15 of the Act;121 and (2) has and maintains membership in another registered options exchange or the Financial Industry Regulatory Authority ("FINRA").122 There will be no limit to the number of Trading Permits that MIAX Exchange can issue, although MIAX could determine in the future that a limit on or decrease to the number of Trading Permits issued is necessary.123 Members of MIAX may be one of three classes of market maker,124 or they may be non-market makers.

Those seeking to become members of MIAX will need to submit an application in accordance with procedures that MIAX will announce by Regulatory Circular.125 Entities that become members, and their associated persons, will be required to meet and maintain certain qualification and registration criteria similar to what is required by other options exchanges.126 In addition, MIAX proposes further requirements on members that seek to do business with the public.127 Applicants who are denied membership may appeal MIAX Exchange's decision pursuant to MIAX's rules governing Hearings, Review, and Arbitration.128 Every member will be subject to MIAX's regulatory jurisdiction, including MIAX's disciplinary jurisdiction.129

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.130 In response, MIAX explains that MIAX Rule 209 already requires a letter of guarantee for all MIAX members.131

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.132 NASDAQ argues this approach is potentially burdensome for MIAX members since some MIAX members might not maintain contact information for all other MIAX members.133 NASDAQ believes that a better approach, given that the Options Clearing Corporation serves as the central clearing party for listed options trades, would be for the member to notify MIAX.134 In response, MIAX revised Rule 507 to accommodate this suggestion, which MIAX believes should be less burdensome for members.135

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.136 MIAX's proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges.

The Commission notes that pursuant to Section 6(c) of the Act,137 an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, MIAX must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.138

In addition, members may enter into arrangements with other parties, including non-members and other members, to provide "Sponsored Access" to trading on MIAX.139 Members who provide such Sponsored Access will be responsible for all trading conducted pursuant to the access agreement, and to the same extent as if the member were trading directly.140 Accordingly, members that provide Sponsored Access must maintain and implement policies and procedures to supervise and monitor sponsored trading activity.141 Additionally, non-members who seek to trade on MIAX through Sponsored Access agreements will need to agree to comply with all applicable federal securities laws and rules and MIAX Exchange rules.142 MIAX's rules governing Sponsored Access arrangements are similar to the rules of other exchanges143 and are consistent with Rule 15c3-5 under the Act.144

2. Linkage

MIAX intends to become a participant in the Plan Relating to Options Order Protection and Locked/Crossed Markets or any successor plan ("Linkage Plan").145 If admitted as a participant to the Plan, other plan participants would be able to send orders to MIAX in accordance with the terms of the plan as applied to MIAX Exchange.

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.146 Further, as provided below, before MIAX can commence operations as an exchange, it must become a participant in the Linkage Plan.

3. Market Makersa. Registration and Appointment

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.147 Each class of Market Maker will receive a specific level of benefits and privileges in exchange for a specific level of obligation that such Market Maker assumes to the MIAX market.

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.148 In reviewing a member's application for membership, MIAX will consider, among other things, the applicant's market making ability.149 Only approved Lead Market Makersmay apply to be considered for appointment as a Primary Lead Market Maker in one or more option classes traded on MIAX.150 All members who are approved to become Market Makers will be designated as specialists on MIAX for all purposes under the Act and rules thereunder.151

Once approved, a Market Maker would seek appointment to make markets in options classes.152 Either the Exchange Board or a committee thereof153 would evaluate an application for Market Maker status based on: (1) The financial resources available to the Market Maker; (2) the Market Maker's experience and expertise in market making or options trading; (3) the preferences of the Market Maker to receive appointment(s) in specific option class(es); and (4) the maintenance and enhancement of competition among Market Makers in each option class.154 MIAX will allow one Primary Lead Market Maker appointment per class, and will have a maximum class quoting limit of fifty Market Makers per class.155 Once appointed, MIAX will surveil a Market Maker's activity for continued compliance with all applicable rules and requirements, which are discussed in more detail below.

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.156

b. Market Maker Obligations

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.157 Among other things, a Market Maker must: (1) Engage in dealings for its own account when there is a lack of price continuity, a temporary disparity between the supply of and demand for a particular option contract, or a temporary distortion of the price relationships between options contracts of the same class; (2) compete with other market makers; (3) make markets that will be honored for the number of contracts entered; (4) update quotations in response to changed market conditions; and (5) price option contracts fairly by, among other things, meeting the bid/ask differential requirements prescribed.158 In addition, Market Makers must maintain minimum net capital in accordance with MIAX rules and the federal securities laws.159 Market Makers also must maintain information barriers between market making activities and any other business activities that are reasonably designed to prevent the misuse of material, non-public information.160

MIAX's rules governing Market Maker quoting obligations are tailored to the specific class of Market Maker.161 Specifically, a Primary Lead Market Maker will be subject to the highest standard applicable on MIAX, as they will be required to provide continuous two-sided Standard quotes and/or Day eQuotes162 throughout the trading day 99% of the time in the lesser of 99% of the series, or 100% of the series minus one put-call pair, in each appointed class.163 Primary Lead Market Makers also are required to participate in the opening rotation.164 Lead Market Makers must provide continuous two-sided quotes (consisting of Standard quotes and/or Day eQuotes) throughout the trading day 90% of the time in 90% of the series in each of their appointed classes.165 Lead Market Makers also must participate in the opening rotation.166 Lastly, Registered Market Makers must provide continuous two-sided quotes (consisting of Standard quotes and/or Day eQuotes) 90% of the time in 60% of the series in each of its appointed classes.167 Further, Registered Market Makers may be called upon by a MIAX Exchange official to submit a single quote or maintain continuous quotes in one or more series of its appointed classes whenever, in the judgment of such official, it is necessary to do so in the interest of fair and orderly markets.168 For purposes of meeting the continuous quoting obligations discussed herein, a Market Maker's quote must meet the bid/ask differential requirements of MIAX Rule 603(b)(4).169

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.170 Further, the total number of contracts executed during a quarter by a Registered Market Maker in options classes to which it is not appointed may not exceed 25% of the total number of contracts traded by such Registered Market Maker in classes to which it is appointed.171 Similarly, the total number of contracts executed during a quarter by a Lead Market Maker (including a Primary Lead Market Maker) in options classes to which it is not appointed may not exceed 10% ofthe total number of contracts traded by such Lead Market Maker in classes to which it is appointed.172 Executions resulting from orders in a Registered Market Maker's and Lead Market Maker's appointed classes are included in these 25% and 10% limitations, respectively.173

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.174

Market Makers will receive certain benefits in return for satisfying their responsibilities.175 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.176 In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.177 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.178 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.179

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.180 The Commission believes that this treatment is appropriate under the Act and consistent with a Market Maker's obligation to contribute to the maintenance of a fair and orderly market. Further, the Commission believes that the specific levels of benefits conferred on the different classes of Market Makers are appropriately balanced by the obligations imposed by MIAX's rules. For example, as discussed below, Primary Lead Market Makers and Lead Market Makers are entitled to certain participation entitlements,181 and at the same time, are subject to heightened continuous quoting obligations to justify these special benefits.182

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.

4. Order Display, Execution, and Priority

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.183 In addition, MIAX will participate in the penny pilot program pursuant to which it will permit certain options with premiums under $3 (as well as heavily traded options on certain indices) to be quoted and traded in increments as low as $.01.184

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 eQuote185 (such as an Auction or Cancel eQuote). Displayed orders and quotes will be displayed on an anonymous basis (except for attributable orders,186 which will allow voluntary disclosure of firm identification information) at a specified price. Non-displayed orders will not be displayed to any participant.

In certain cases, orders and quotes may be displayed at a price different from the price specified by the submitting member.187 One such case isnon-displayed penny orders. Specifically, MIAX proposes to allow a member to enter an order or quote (as applicable) priced in a penny increment for series that are subject to a minimum price variation other than a penny (e.g.,5 cents or 10 cents). The order would be displayed at the applicable minimum increment (rounded as appropriate), not the narrower penny price, but would be available for execution at the non-displayed penny price (i.e.,a "non-displayed penny order").188 With respect to MIAX's proposed use of non-displayed penny orders, the ISE Letter appears to assert that MIAX has proposed to permit non-displayed prices to be entered in regular trading increments in all classes, which (if true) ISE would oppose to the extent it could decrease transparency and further internalization of order flow.189 ISE believes that MIAX's proposal on this point could be much broader than what has been previously approved by the Commission.190 In response, MIAX notes that, pursuant to MIAX Rule 516(b)(3), non-displayed penny orders will only be accepted in designated classes, which must have a minimum price variation larger than one penny.191 MIAX notes that such orders, which are limit orders priced in a one-cent increment, are executable at their stated penny limit price, but are displayed at the closest minimum price variation that does not violate the limit price.192 MIAX reiterated that it does not propose to handle orders and quotes in a manner that will permit non-displayed prices in the regular trading increments in all options classes, and that its proposed rule is not intended to be broader than what has previously been approved by the Commission.193 To clarify this point, MIAX revised Rule 516(b)(3) to state that non-displayed penny orders would only be accepted in designated classes and must have a minimum pricing variation larger than one penny.194

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.195 In response, MIAX amended proposed MIAX Rule 516(b)(3) to state that such order would be rejected.196

Members may submit the following types of orders: Market; Limit (including Marketable Limit, Fill-or-Kill, Immediate-or-Cancel, Non-Displayed Penny,197 and Auction or Cancel ("AOC")); WAIT;198 Attributable; Intermarket Sweep ("ISO"); Do Not Route;199 Opening; Customer Cross; Qualified Contingent Cross; Day Limit; and Good `Til Cancelled.200 With the exception of the AOC Order, which is unique to MIAX, all of these order types are based on similar order types available on other options exchanges.201 MIAX's AOC Order is a limit order which is used to provide liquidity during a specific MIAX Exchange mechanism (e.g.,the opening imbalance mechanism in MIAX Rule 503) with a time in force that corresponds to the duration of that event.202 In other words, such an order would automatically expire at the end of the auction or event. AOC Orders are not displayed to any market participant, are not included in the MIAX best bid or offer, are not eligible for trading outside of the event, and may not be routed. The Commission believes that this order type, while not specifically based on an order type on another exchange, is substantially similar to order types approved by the Commission on other exchanges for use in various auction mechanisms, which are similarly not displayed to any participant and have a limited time in force related to the auction, and thus raises no new regulatory issues.203

Trades will execute on MIAX when orders or quotes on the MIAX order book match one another.204 The MIAX system will continuously and automatically match orders pursuant toeither price/time priority or pro-rata priority, as determined by MIAX on a class-by-class basis.205

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.206 Under the "Priority Customer" overlay, the highest bid and lowest offer will have priority except that Priority Customer orders207 will have priority over "professional interest"208 and all Market Maker interest at the same price.209 By the Commission.

Kevin M. O'Neill, Deputy Secretary.
ACTION: 40415 U.S.C. 78mm.