SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-69012; File No. 10-209)
March 1, 2013
Form 1 Application and Exhibits
* This exhibit index summarizes the exhibits required by the Form 1 Application for Registration as a National Securities Exchange.
A copy of the constitution, articles of incorporation or association with all subsequent amendments, and of existing by-laws or corresponding rules or instruments, whatever the name, of the applicant.
Topaz Exchange, LLC ("Topaz" or the "Exchange") is applying to register as a national securities exchange pursuant to Section 6(a) of the Securities Exchange Act of 1934. The following materials are submitted in response to this Exhibit A:
A copy of all written rulings, settled practices having the effect of rules, and interpretations of the Governing Board or other committee of the applicant in respect of any provisions of the constitution, by-laws, rules, or trading practices of the applicant which are not included in Exhibit A.
Notes: Items marked * above were previously executed, on the date set forth therein. Items marked ** above shall be executed following publication but prior to approval of the Topaz Form 1 application.
For each subsidiary or affiliate of the applicant, and for any entity with whom the applicant has a contractual or other agreement relating to the operation of an electronic trading system to be used to effect transactions on the exchange ("System"), provide the following information:
A. Deutsche Börse AG
B. Eurex Global Derivatives, AG
C. Eurex Zurich AG
D. Eurex Frankfurt AG
E. U.S. Exchange Holdings, Inc.
F. U.S. Exchange LLC
G. International Securities Exchange Holdings, Inc. ("ISE Holdings")
H. International Securities Exchange, LLC ("ISE LLC")
I. Longitude LLC
J. ETC Acquisition Corp.
K. Direct Edge Holdings LLC
L. Direct Edge ECN LLC (d/b/a DE Route) ("DE Route")
M. Direct Edge, Inc.
N. EDGA Exchange, Inc. ("EDGA")
O. EDGX Exchange, Inc. ("EDGX")
P. Hanweck Associates, LLC ("Hanweck")
Q. Longitude S.A.
R. Other Indirect Foreign Affiliates
An organizational chart of Affiliates owned by Deutsche Borse AG is attached, which includes an asterisk indicating which entities are Foreign Indirect Affiliates.
For each subsidiary or affiliate of the exchange, provide unconsolidated financial statements for the latest fiscal year. Such financial statements shall consist, at a minimum, of a balance sheet and an income statement with such footnotes and other disclosures as are necessary to avoid rendering the financial statements misleading. If any affiliate or subsidiary is required by another Commission rule to submit annual financial statements, a statement to that effect, with a citation to the other Commission rule, may be provided in lieu of the financial statements required here.
Describe the manner of operation of the System. This description should include the following:
Topaz Exchange ("Topaz" or "Exchange") proposes to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Exchange will be wholly-owned by its parent company, International Securities Exchange Holdings, Inc. ("ISE Holdings"), which will elect all directors of the Board of Directors of the Exchange, except for those directors elected by a plurality of the holders of Exchange Rights (as that term is defined in Article VI of the LLC Agreement) pursuant to Article III, Section 3.2 of the Constitution of the Exchange. The holders of Exchange Rights of the Exchange will consist of those broker-dealers admitted to transact on the Exchange. Holders of Exchange Rights will be subject to the rules of the Exchange, and will have representation on the Exchange's Board of Directors and committees, but will not have any ownership interest in the Exchange.
Once registered, the Exchange will operate a fully automated electronic options trading platform to buy or sell securities with a continuous, automated matching function. Liquidity will be derived from quotes as well as orders to buy and orders to sell submitted to the Exchange electronically by holders of Exchange Rights from remote locations. There will be no Exchange trading floor. There will be three types of participants on the Exchange: Primary Market Makers ("PMMs") with certain affirmative and negative market making obligations, Competitive Market Makers ("CMMs") with different affirmative and negative market making obligations, and Electronic Access Members ("EAMs") which send orders to the Exchange (PMMs, CMMs, and EAMs are collectively, "Members").
PMMs and CMMs have certain rights and bear certain responsibilities beyond those of EAMs. PMMs and CMMs may seek to become registered, or appointed, to quote in any options class listed and traded on the Exchange, and such registration / appointment shall be approved by the Exchange according to Chapter 8 of the Exchange's rules. All PMMs are designated as specialists for all purposes under the Exchange Act and the rules thereunder. The Exchange Rules place no limit on the number of qualifying entities that may become PMMs or CMMs. A PMM or CMM that engages in specified Other Business Activities, as defined in Exchange Rule 810, or that is affiliated with a broker-dealer that engages in Other Business Activities, including functioning as an EAM, must have an Information Barrier between the market making activities and the Other Business Activities, pursuant to Exchange Rule 810.
As described above, the Board or a committee designated by the Board shall appoint classes of options contracts traded on the Exchange to market makers taking into consideration: (i) the financial resources available to the market maker, (ii) the market maker's experience and expertise in market making or options trading, and (iii) the maintenance and enhancement of competition among market makers in each class of options contracts to which they are appointed. The Board or designated committee shall make appointments in the best interest of the Exchange to provide competitive markets. No appointment of a market maker shall be without the market maker's consent to such appointment, provided that refusal to accept an appointment may be deemed sufficient cause for termination or suspension of a market maker's registration. A PMM shall be appointed to each options class traded on the Exchange. This allocation process shall be identical to the allocation process that is presently in place on ISE. As well, in accordance with Exchange Rule 302, the Exchange shall provide non-ISE Members with at least sixty (60) days advance written notice of the date upon which the Exchange shall allocate options classes and appoint market makers pursuant to Exchange Rule 802 in order to ensure non-ISE Members have a reasonable opportunity to participate in those processes. A market participant must have completed a membership application to be eligible to participate in the processes set forth in Rule 802.
Access to the Exchange will be open to broker-dealers registered under Section 15(b) of the Exchange Act that meet the standards for membership set forth in proposed Exchange Chapter 3. Further, all International Securities Exchange ("ISE") members in good standing will be eligible for an Exchange Right in the same membership category to trade on Topaz. For example, a CMM in good standing on ISE will be eligible to become a CMM on the Exchange, through the submission and approval of an Exchange Waive-In Membership Application. Members will be subject to fees for executions on the Exchange as set forth in the Rules of the Exchange or as may otherwise be determined by the Exchange from time-to-time pursuant to a fee schedule. Exchange Rights will not be transferable except in the event of a change in control of a Member subject to meeting certain criteria. A more detailed description of the Member criteria is set forth in Chapter 3 of the Exchange's proposed rules. See Exhibit B, supra.
This exhibit describes, in summary form, the proposed operation of the Exchange. A more detailed description of the proposed Exchange is set forth in the proposed Constitution, LLC Agreement and Rules of the Exchange. See Exhibits A and B to this Application.
B. Access to the Exchange (#1)
Access. Members will access the Exchange electronically through the use of a variety of systems. The Exchange will not accept telephone orders.
The Exchange has designed its systems to allow Members to individually determine the best method for accessing the Exchange. Thus, Members may develop their own customized front-end software using protocols determined by the Exchange, or may use third-party vendors to route orders to the Exchange via a front end configuration. Members will be able to access the Exchange remotely through a variety of methods and connections that support a minimum data exchange rate, as may be determined by the Exchange from time-to-time.
Direct access to the Exchange is available to Members at an Internet Protocol ("IP") address by one or more of the following methods: (i) electronic access at the Exchange's IP network address by the Member's own software, via communications that are compliant with the Financial Information Exchange ("FIX") protocol application programmer interface ("API") provided by the Exchange; (ii) electronic access at the IP network address maintained by the Exchange by the Member's own software that is compliant with the API provided by the Exchange; or (iii) other means of access provided from time to time by the Exchange.
Members provide a unique IP address to the Exchange for each requested connection, and the Exchange then configures its routers to only allow access from the Member's IP address to a dedicated IP address on the Exchange's order handling network. In this way, only authorized Members can gain access to the Exchange via registered physical IP addresses.
Members will be responsible for having procedures reasonably designed for safeguarding access to the Exchange and for notifying the Exchange upon learning that such safeguards have been compromised. Connectivity to the Exchange will occur through secure telecommunications "ports" or points of entry. Specifically, each Member will be assigned a specific port, or multiple ports, each of which has a unique session identification code provided only to such Member.
Non-Member Access. The Exchange plans to become a participant in the Decentralized Linkage Plan or any successor plan ("Linkage Plan"). If admitted as a participant to the Linkage Plan, other plan participants would be able to send orders to the Exchange in accordance with the terms of the Linkage Plan.
Non-Members also may access the Exchange pursuant to Exchange rules governing "sponsored access" to the Exchange. The Exchange plans to permit access to the Exchange to entities ("Sponsored Customers") whose access is authorized in advance by one or more Members ("Sponsoring Members") in accordance with Exchange Rules. The Sponsoring Member must agree to be responsible for all orders entered into on the Exchange by the Sponsored Customer. In addition, Sponsored Customers must agree to comply with all applicable Rules of the Exchange governing the entry, execution, reporting, clearing and settling of orders in securities eligible for trading on the Exchange.
C. Entry and Display of Quotations and Orders in the System (#2)
Entry of Orders/Quotes on the Exchange. Orders entered into the Exchange must be priced and must have a designated size (limit orders) or must be orders to buy or sell a stated amount of a security at the national best bid or offer when the order reaches the Exchange (market orders). Some orders, both limit and market, can include an instruction to ignore prices on other markets. Like limit orders, quotes entered by PMMs and CMMs must be priced and must have a designated size. Orders will be accepted for any security traded on the Exchange, whether submitted by a Member on a proprietary or agency basis, in any size. Quotes for any security traded on the Exchange may only be submitted by Exchange PMMs and CMMs.
Members may submit the following orders to the Exchange: Market and Contingency (including All-Or-None, Immediate Or Cancel, Fill Or Kill, Stop, and Reserve). Each of these types of orders is described in detail in proposed Exchange Rules 715 and 722. The Exchange will maintain a full audit trail of every incoming and outgoing message (including all quotes and orders) submitted to the Exchange. Members may receive status reports regarding orders submitted to the Exchange or change or cancel an order at any time before that order is executed on the Exchange, except as otherwise specified in Exchange Rule 723 (Price Improvement Mechanisms for Crossing Transactions).
All options will be traded in decimals on the Exchange and consistent with the Penny Pilot.
Display of Orders/Quotes. All orders/quotes submitted to the Exchange will be displayed unless designated otherwise by the Member submitting the order (e.g. the non-displayed portion of a Reserve Order). Orders/Quotes submitted to the Exchange shall be displayed on an anonymous basis (except for attributable orders which allow voluntary disclosure of ID information) at the price specified by the submitting Member. Non-displayed orders will not be displayed to any Members and will not have time priority over displayed orders. In addition, the Exchange intends to become a participant in the Options Price Reporting Authority Plan ("OPRA Plan") and will collect and submit to OPRA the best buy and sell interest displayed on the Exchange in accordance with the terms of the OPRA Plan.
D. Execution, Reporting, Clearance and Settlement Procedures (#3)
The Exchange will employ an opening process structured to match the greatest number of pending buy and sell orders. Pre-opening orders will be accepted. Prior to opening a series, the expected opening price and size is provided to Members so that imbalances may be offset. After the start of trading in the underlying security, the Exchange will open each series at a price that executes the greatest amount of pre-opening interest and that does not trade-through the NBBO (if one exists).
Non-opening trades on the Exchange will occur when a buy order/quote and a sell order/quote match on the Exchange's order book. Pursuant to proposed Rule 713, all orders are matched according to a pro rata allocation method after any and all orders for Priority Customers (as defined in Exchange Rule 100(a)(37A)) at that price level are executed. In the event that less than the full size of a resting order is executed, whether displayed or non-displayed, the unexecuted size of the order will continue to reside on the Exchange's order book, and if displayed, will be redisplayed at such price, except if the relevant order specifies otherwise.
When the displayed portion of a Reserve Order (as defined in Exchange Rule 715(g)) is decremented, either in full or in part, it shall be refreshed from the non-displayed portion of the resting Reserve Order. If the displayed portion is refreshed in part, the new displayed portion shall include the previously displayed portion. Upon any refresh, the entire displayed portion shall be ranked at the specified limit price and obtain a new time stamp, i.e., the time that the new displayed portion of the order was refreshed. The initial non-displayed portion of a Reserve Order rests on the order book and is ranked based on the specified limit price and time of order entry. Thereafter, non-displayed portions, if any, always obtain the same time stamp as that of the new displayed portion as described above. The non-displayed portion of any Reserve Order is available for execution only after all displayed interest has been executed.
As previously discussed, orders for Priority Customers have priority on the Exchange. When all orders for Priority Customers have been executed and there are two or more Professional Orders (as defined in Rule 100(a)(37C)) or market maker quotes at the best price, the general allocation procedure is as follows:
All Exchange Members will submit orders to the Exchange from remote locations and have equal access to orders residing on the Exchange. Similarly, because orders on the Exchange will be executed automatically, no Member of the Exchange will have the ability to control the execution (other than to change or cancel an order/quote prior to execution).
The Price Improvement Mechanism, or PIM, is a process set forth in Rule 723 whereby an EAM can provide price improvement opportunities for a transaction wherein the EAM seeks to facilitate an order it represents as agent, and/or a transaction wherein the EAM solicited interest to execute against an order it represents as agent (a "Crossing Transaction"). A Crossing Transaction is comprised of the order the EAM represents as agent (the "Agency Order") and a counter-side order for the full size of the Agency Order (the "Counter-Side Order"). The Counter-Side Order may represent interest for the Member's own account, or interest the Member has solicited from one or more other parties, or a combination of both.
With certain exceptions, an EAM is not otherwise permitted to trade with its agency orders. In addition, prior to submitting an order to the PIM, an EAM cannot inform another Member or any other third party of any of the terms of the order, except as provided for in the Rules regarding directed orders. During a pilot period to be established, there will be no minimum size requirement for orders to be eligible for the PIM.
Upon entry of a Crossing Transaction into the PIM, a broadcast message that includes the series, price and size of the Agency Order, and whether it is to buy or sell, will be sent to all Members. This broadcast message will not be included in the Exchange's disseminated best bid or offer and will not be disseminated through OPRA. At the end of the exposure period the Agency Order will be executed in full at the best prices available, taking into consideration orders and quotes in the Exchange market, improvement orders, customer participation orders and the Counter-Side Order, all as set forth in Rule 723. The Agency Order will receive executions at multiple price levels if there is insufficient size to execute the entire order at the best price.
The Exchange Rules also provide for a Facilitation Mechanism, Solicited Order Mechanism, and Block Order Mechanism that allows EAMs to execute certain orders. The Block Mechanism allows members to obtain liquidity for the execution of an order of 50 contracts or more. The Facilitation and Solicited Order Mechanisms allow for Members to designate certain customer orders for price improvement and submit such orders into one of the mechanisms with a matching contra order. It will be a violation of an EAM's duty of best execution to its customer if it were to cancel a facilitation order to avoid execution of the customer order at a better price that may be available on ISE. Additionally, EAMs may not use the Solicited Order Mechanism to circumvent the limitations in Exchange Rules regarding EAMs trading as principal with their customer orders.
The Facilitation Mechanism requires a minimum size of 50 contracts. Upon the entry of an order into the Facilitation Mechanism, a broadcast message will be sent and Members will be given an opportunity to enter responses with the prices and sizes at which they want to participate in the facilitation of the order. Responses may be priced at the price of the order to be facilitated or at a better price and must not exceed the size of the order to be facilitated. At the end of the period given for the entry of responses, the facilitation order will be automatically executed.
The receipt of an unrelated, incoming order, on either side of the market, prior to the end of the period given for the entry of responses does not cause the early termination of such period. Unrelated orders continue to be executable during the exposure period, and orders on the limit order book that are on the opposite side of the order being exposed are eligible to participate in the execution of the order at the end of the exposure period. An order being exposed through the Facilitation Mechanism will be cancelled at the end of the exposure period if execution of the order would be inferior to the best price on the Exchange's limit order book on the same side of the market.
The Solicited Order Mechanism is a process by which an EAM can attempt to execute orders of 500 or more contracts it represents as agent (the "Agency Order") against contra orders that it solicited. Each order entered into the Solicited Order Mechanism shall be designated as all-or-none. Upon entry of both orders into the Solicited Order Mechanism at a proposed execution price, a broadcast message will be sent and Members will be given an opportunity to enter responses with the prices and sizes at which they would be willing to participate in the execution of the Agency Order. At the end of the period given Members to enter responses, the Agency Order will be automatically executed in full or cancelled. The receipt of an unrelated, incoming order, on either side of the market, prior to the end of the period given for the entry of responses does not cause the early termination of such period, however such unrelated, incoming order may participate in or cause the cancellation of the execution, depending on the attributes of such unrelated, incoming order, all as set forth in Exchange Rule 716.
The Block Order Mechanism is a process by which a Member can obtain liquidity for the execution of block-size orders. Upon the entry of an order into the Block Order Mechanism, a broadcast message will be sent and Members will be given an opportunity to enter responses with the prices and sizes at which they would be willing to trade with a block-size order. At the conclusion of the time given Members to enter responses, either an execution will occur automatically, or the order will be cancelled. See Exchange Rule 716 for more detailed information.
The Exchange is not proposing to adopt rules to allow for the trading of complex or multi-legged orders at this time. Accordingly, the Exchange will not accept any complex or multi-legged orders until such time as it has received Commission approval pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder for the trading of complex and multi-legged orders following approval of this Form 1 Application. A Qualified Contingent Cross Order (QCC Order") is comprised of an order to buy or sell at least 1000 contracts that is identified as being part of a "qualified contingent trade" coupled with a contra-side order to buy or sell an equal number of contracts. A "qualified contingent trade" is a transaction consisting of two or more component orders, executed as agent or principal, where at least one component is an NMS Stock, as defined in Rule 600 of Regulation NMS under the Exchange Act; all components are effected with a product or price contingency that either has been agreed to by all the respective counterparties or arranged for by a broker-dealer as principal or agent; the execution of one component is contingent upon the execution of all other components at or near the same time; the specific relationship between the component orders (e.g., the spread between the prices of the component orders) is determined by the time the contingent order is placed; the component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or cancelled; and the transaction is fully hedged (without regard to any prior existing position) as a result of other components of the contingent trade.
QCC Orders are automatically executed upon entry provided that the execution is not at the same price as a Priority Customer Order on the Exchange's limit order book and is at or between the NBBO. QCC Orders will be automatically canceled if they cannot be executed and may only be entered in the regular trading increments applicable to the options class as provided in Rule 710.
The Exchange will have a policy that will permit it to address those instances in which transactions occurring on the Exchange involve obvious or catastrophic errors. Proposed Exchange Rule 720 describes this error policy. The Exchange proposes to permit the Exchange to either bust a transaction or adjust the execution price of a transaction that results from an obvious error. Under the Obvious Error Procedure in proposed Rule 720(b), if a Member believes an executed order was the result of an Obvious Error it must notify the Exchange's Market Control. The Exchange will review the transaction to determine whether, in fact, the transaction was the result of an Obvious Error, and work with the parties to the transaction to determine if the appropriate action is to bust the trade or adjust the price of the trade to achieve an equitable rectification of the error, as set forth in Rule 720.
Similarly, under the Catastrophic Error Procedure in proposed Rule 720(d), if a Member believes it has participated in a transaction that qualifies as a Catastrophic Error as defined in proposed Rule 720(a)(2), the Member must notify Market Control. The Exchange will review the transaction to determine whether, in fact, the transaction qualifies as a Catastrophic Error. If so, the tribunal will instruct Market Control to adjust the execution price of the transaction(s) according to the procedure contained in Rule 720.
Trade Reporting. The Exchange intends to become an OPRA participant and will report trades pursuant to the terms of the OPRA Plan.
Clearance and Settlement of Exchange Trades. The Exchange will report matched trades to the Options Clearing Corporation and will require Members to give up the name of a Clearing Participant through whom the transaction will be cleared.
E. Exchange Fees (#4)
Fees Generally. In accordance with proposed Rule 205, the Exchange may prescribe such reasonable fees, and assessments or other charges as it may deem appropriate and as consistent with the Exchange Act. The Exchange intends to establish a Fee Schedule setting forth all applicable transaction and other fees. Actual fee amounts will not be determined until close to launch because they will need to reflect the competitive landscape at that time. The Exchange will file with the Commission any proposed fees as well as any changes thereto in accordance with the process set forth in Section 19(b) of the Exchange Act, as amended.
Exchange Members will be subject to fees for orders executed on the Exchange as set forth in the Exchange Rules or as may otherwise be determined by the Exchange Board from time to time. The Exchange may charge permit application fees, connectivity fees, and bandwidth fees. Exchange Members will be solely responsible for all telecommunications costs and all other expenses incurred in linking to, and maintaining links to, the Exchange. The Exchange may determine to revise or impose different fees upon its Members and Sponsoring Participants from time-to-time.
F. Procedures for Ensuring Compliance with Exchange Usage Guidelines (#5)
The Exchange System contains embedded order/quote entry and trade guidelines. All data representing an order/quote must comply with these guidelines. Members cannot override these embedded guidelines. With respect to technical standards, prior to allowing a new Member to begin trading, the Exchange and the Member will thoroughly test the Member's connectivity. In addition, the Member may enter orders/quotes in test securities to ensure compatibility with the Exchange's system protocol. A Member may begin trading only after the Member and the Exchange are satisfied that both the Member's hardware and software meet the Exchange's standards.
Members also must agree to maintain an adequate connection to the Exchange as defined from time-to-time by the Exchange that includes a connection of sufficient speed and equipment of minimum quality.
G. Hours of Operation and Proposed Commencement of the Exchange (#6)
The Exchange proposes to operate Monday to Friday from 9:30 a.m. Eastern Time to 4:15 p.m. Eastern Time, or during any other day or time approved by the Board of Directors of the Exchange.
The Exchange proposes to commence operations during the fourth quarter of 2012 subject to the Commission's approval of its Form 1 Application for Registration as a National Securities Exchange and subject to approval of all necessary regulatory and National Market System plans, including the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information (i.e., the Options Price Reporting Authority (OPRA)), and subject to the Exchange joining The Options Clearing Corporation, or OCC.
H. Exchange Users Manual (#7)
As discussed above, Members will be provided with the Exchange's technical specifications, which will enable them to develop or purchase their own, customized front-end software for interfacing with the Exchange. Members also may use third-party vendors to route orders to the Exchange via a front end configuration. The Exchange makes available to prospective Members all necessary API connectivity documentation and technical specifications on the Exchange's internal, intranet website. The Exchange considers the technical user manual to be confidential information, and thus has provided a copy of such user manual to the Commission under separate cover that seeks confidential treatment under the Freedom of Information Act, 5 U.S.C. 552(b)(4).
I. Possession of Funds or Securities (#8)
The Exchange will not hold funds or securities of its Members.
A complete set of all forms pertaining to:
Attached please find the following documents:
The Exchange intends to use Form U-4, the Uniform Application for Securities Industry Registration or Transfer, for persons applying to be associated persons of a Member.
A complete set of all forms of financial statements, reports, or questionnaires required of members, subscribers, or any other users relating to financial responsibility or minimum capital requirements for such members, or any other users. Provide a table of contents listing the forms included in this Exhibit G.
As broker-dealers, Members of the Exchange will be required to comply with the Commission's net capital and customer protection rules set forth in Rules 15c3-1 and 15c3-3 of the Securities Exchange Act of 1934, as amended. In addition, pursuant to Commission Rule 17a-5, Topaz Members will file Commission Form X-17A-5. See also, proposed Chapter 13 of Topaz Rules, which such Rules are Chapter 13 of ISE Rules incorporated by reference. Under such Exchange Rule 1301, every Member subject to the reporting or notification requirements of Rule 17a-11 under the Exchange Act or the "early warning" reporting, business restriction or business reduction requirements of another national securities exchange, registered securities association or registered securities clearing organization shall promptly notify the Exchange in writing and shall thereafter file with the Exchange such reports and financial statements as may be required by the Exchange. Under Exchange Rule 1302, whenever it shall appear to the President of the Exchange that a Member obligated to give notice to the Exchange under Exchange Rule 1301 is unable within a reasonable period to reduce the ratio of its aggregate indebtedness to net capital, or to increase its net capital, to a point where it is no longer subject to such notification obligations, or that such Member is engaging in any activity which casts doubt upon its continued compliance with the net capital requirements, the President may impose such conditions and restrictions upon the operations, business and expansion of such Member and may require the submission of, and adherence to, such plan or program for the correction of such situation as he determines to be necessary or appropriate for the protection of investors, other Members and the Exchange.
Other than those forms and financial statements required to be submitted with an application for Exchange membership (see Exhibit F), the Exchange will not have specific forms of financial statements, reports or questionnaires required of its Members with respect to financial responsibility or minimum capital requirements. The Exchange will, however, be able to obtain such financial information from a Member's Designated Examining Authority, if necessary.
A complete set of documents comprising the applicant’s listing applications, including any agreements required to be executed in connection with listing and a schedule of listing fees. If the applicant does not list securities, provide a brief description of the criteria used to determine what securities may be traded on the exchange. Provide a table of contents listing the forms included in this Exhibit H.
Topaz Exchange does not intend to offer original listings on the Exchange, but rather, intends to trade only equity and index options which are listed on other exchanges and cleared by The Options Clearing Corporation ("OCC"). For a description of the criteria used to determine what securities may be traded on the Exchange, please refer to Chapter 5 of the Topaz Rules, which such Rules are Chapter 5 of ISE Rules incorporated by reference.
For the latest fiscal year of the applicant, audited financial statements which are prepared in accordance with, or in the case of a foreign applicant, reconciled with, United States generally accepted accounting principles, and are covered by a report prepared by an independent public accountant. If an applicant has no consolidated subsidiaries, it shall file audited financial statements under Exhibit I alone and need not file a separate unaudited financial statement for the applicant under Exhibit D.
Topaz Exchange, LLC (the "Exchange") has been formed but has not commenced operations and does not yet have audited financial statements for any fiscal year. Prior to the approval of the Exchange's Form 1 Application for Registration as a National Securities Exchange by the Commission, International Securities Exchange Holdings, Inc., as the sole owner of the membership interests in the Exchange, shall allocate sufficient assets to the Exchange to enable its operation. In particular, International Securities Exchange Holdings, Inc. shall make a cash contribution to the Exchange of $5 million, in addition to any previously-provided in-kind contributions, such as legal, regulatory, and infrastructure-related services. The Exchange represents that such cash and in-kind contributions from will be adequate to operate the Exchange, including the regulation of the Exchange.
In addition, the Exchange represents that there will be an explicit agreement between the Exchange and International Securities Exchange Holdings, Inc. that requires International Securities Exchange Holdings, Inc. to provide adequate funding for the Exchange's operations, including the regulation of the Exchange. This agreement will provide that the Exchange receive all fees, including regulatory fees and trading fees, payable by the Exchange's members, as well as any funds received from any applicable market data fees and OPRA tape revenue. The agreement will further provide that International Securities Exchange Holdings, Inc. will reimburse the Exchange for its costs and expenses to the extent the Exchange's assets are insufficient to meet its costs and expenses. Excess funds, as solely determined by the Exchange, will be remitted to International Securities Exchange Holdings, Inc.
The Exchange will file pro forma financial statements with the Commission prior to the approval of the Exchange's Form 1 Application for Registration as a National Securities Exchange by the Commission. The 2011 Financial Statements of International Securities Exchange Holdings, Inc. include the funds that will be used to provide the cash contribution to the Exchange
A list of the officers, governors, Members of all standing committees, or persons performing similar functions, who presently hold or have held their offices or positions during the previous year, indicating the following for each:
Dates of commencement and termination of term of office or position.
Type of business in which each is primarily engaged (e.g., floor broker, specialist, odd lot dealer, etc.)
The Exchange anticipates that its management will initially be the same as that of the International Securities Exchange, LLC ("ISE"), as shown below. Officers shall serve until their successors are appointed by the Board in accordance with the Constitution and LLC Agreement. Officers of the Exchange will serve at the direction of the Board of Directors.
Pursuant to Article III, Section 3.2 of the Exchange's Constitution, the number of directors of the Exchange shall be no less than eight (8) and no more than sixteen (16) and in no event shall the number of Industry Directors constitute less than 30% of the members of the Board and in no event shall the number of Non-Industry Directors constitute less than the number of Industry Directors.
The Board shall be composed as follows:
Upon approval of the Exchange's Form 1 Application by the Securities and Exchange Commission (the "Approval Date"), the Sole LLC Member will appoint the interim Directors ("Interim Directors") of the Board (the "Interim Board"), which will include interim Industry Directors. The Sole LLC Member will appoint the then-current directors serving on the ISE Board to the Interim Board. As it relates to the interim Industry Directors, the Exchange represents that all ISE members in good standing will be eligible for an Exchange Right in the same membership category to trade on the Exchange through the submission and approval of an Exchange Waive-In Membership Application. Based on discussions with ISE members, the Exchange represents that it currently expects that the Exchange's membership will consist substantially of the current group of ISE members, including, but not limited to, those ISE members that have representatives serving as industry directors on the ISE Board. Moreover, the Exchange does not expect to receive a meaningful number of applications for Exchange membership from non-ISE members during the tenure of the Interim Board. As such, the Exchange believes that the Interim Board will be a fair representation of the Exchange's membership. Upon the appointment of the Interim Directors by the Sole LLC Member, the Interim Board will meet the board composition requirements set forth in the Exchange's Constitution.
The Interim Directors shall serve only until the first annual meeting of the holders of Exchange Rights and the Sole LLC Member following such appointment pursuant to the full nomination, petition, and voting process set forth in the Exchange's Constitution. The Exchange represents that it will complete the full nomination, petition, and voting process set forth in the Exchange's Constitution, which will provide persons that are approved as members of the Exchange after the Approval Date with the opportunity to participate in the selection of the Industry Directors as promptly as possible after the effective date of the LLC Agreement and within ninety (90) days after the Approval Date. It is the intention of the Exchange that its future annual meetings of the holders of Exchange Rights and the Sole LLC Member shall occur on the same dates as the future annual meetings of ISE. As a result, depending on the timing of the Approval Date, Directors elected at the Exchange's first annual meeting of the holders of Exchange Rights and the Sole LLC Member may serve for a period that is slightly longer or shorter than one year, in order to align the next annual meeting dates of the Exchange and ISE.
Nominees for election of the Non-Industry Directors shall be selected by the Corporate Governance Committee. In addition, persons may be nominated by for election to the Board as Non-Industry Directors by a petition, signed by the Sole LLC Member. At each annual meeting of the holders of Exchange Rights and the Sole LLC Member, the Sole LLC Member shall elect the successors to such Non-Industry Directors whose terms are expiring. The Non-Industry Directors shall hold office for a term expiring at each succeeding annual meeting of the holders of Exchange Rights and Sole LLC Member held in the first year following the year of their election, and until their successors are elected and qualified.
Nominees for election of the Industry Directors shall be selected by the Nominating Committee, which does not act as a committee of the Board, but rather, a committee of the Exchange and is composed of three (3) industry representatives appointed by the Board. In addition to the nominees for Industry Directors selected by the Nominating Committee, persons eligible to serve as such may be nominated for election to the Board of Directors pursuant to a petition process. If no Industry Director candidates are nominated pursuant to a petition process, then the initial candidates submitted by the Nominating Committee will be nominated for election. If a petition process produces additional Industry Director candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Nominating Committee, will be presented to the Exchange membership for election in accordance with the Exchange's Constitution. At each annual meeting of the holders of Exchange Rights and the Sole LLC Member, the holders of Exchange Rights shall elect the successors to such Industry Directors whose terms are expiring. In the event there is more than one (1) PMM Director, one (1) CMM Director, and one (1) EAM Director elected at any annual meeting, the Industry Directors shall be divided into two classes, and designated as Class I or Class II directors. Each of Class I and Class II shall be comprised of half of the Industry Directors. At the first annual meeting of the holders of Exchange Rights and the Sole LLC Member, the Class I directors shall be elected for a term expiring at the [20XX] annual meeting of the holders of Exchange Rights and the Sole LLC Member and the Class II directors shall be elected for a term expiring at the [20XX] annual meeting of the holders of Exchange Rights and the Sole LLC Member. Thereafter, the Industry Directors shall hold office for a term expiring at each succeeding annual meeting of holders of Exchange Rights and the Sole LLC Member held in the second year following the year of their election, and until their successors are elected and qualified.
In addition, the President and Chief Executive Officer shall hold office for a term of one (1) year, or until such earlier time as such person no longer serves as President and Chief Executive Officer of the Exchange. If a Former Employee Director is elected by the Sole LLC Member pursuant to Section 3.2(b)(iv) of the Constitution, such director shall hold office for a term expiring at the annual meeting of holders of Exchange Rights and the Sole LLC Member held in the first year following the year of his or her election. In the event that such Former Employee Director position becomes available, whether through vacancy resulting from death, resignation, retirement, disqualification, removal from office or other cause, the Sole LLC Member may, in its sole and absolute discretion, elect a person satisfying the requirements of a "Former Employee Director," and such director so chosen shall hold office for a term expiring at the annual meeting of holders of Exchange Rights and the Sole LLC Member at which the term of office of the prior Former Employee Director expires.
The Interim Directors of the Exchange will likely be the persons listed below:
The committees of the Board shall consist of an Executive Committee, a Finance & Audit Committee, a Compensation Committee, a Corporate Governance Committee and such other standing and special committees as may be approved by the Board. Upon the approval of Topaz's Form 1 Application for Registration as a National Securities Exchange by the Commission, and after the appointment of the Board, the Board shall appoint, persons to sit on the standing committees of the Board, consistent with Article V of the Exchange's Constitution.
This Exhibit is applicable only to exchanges that have one or more owners, shareholders, or partners that are not also members of the exchange. If the exchange is a corporation, please provide a list of each shareholder that directly owns 5% or more of a class of a voting security of the applicant. If the exchange is a partnership, please provide a list of all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more of the partnership’s capital. For each of the persons listed in the Exhibit K, please provide the following:
Topaz will be wholly-owned by International Securities Exchange Holdings, Inc. International Securities Exchange Holdings, Inc. will exercise "control" over the Exchange, as that term is defined in the Form 1 instructions.
Describe the exchange’s criteria for membership in the exchange. Describe conditions under which members may be subject to suspension or termination with regard to access to the exchange. Describe any procedures that will be involved in the suspension or termination of a member.
Applicants for membership on the Exchange will be required to complete a membership application agreeing, among other things, to comply with the Constitution (also known as the By-laws), Rules and interpretations of the Exchange. An ISE member in good standing is eligible to be approved as a Topaz Member of the same category, as set forth in Rule 302, by submitting a short-form waive-in membership application form. For example, an ISE PMM in good standing is eligible to be approved as a Topaz PMM by submitting a short form waive-in membership application form. The Exchange anticipates that there will be a significant overlap between its Members and the members of the International Securities Exchange, LLC. Membership applications will be reviewed by the Exchange staff, which may include FINRA staff pursuant to a Regulatory Services Agreement. The Exchange's denials from, and imposition of conditions upon, becoming or continuing to be a Member may be appealed under Chapter 17 of the Exchange's Rules, which such Rules are Chapter 17 of ISE Rules incorporated by reference.
In accordance with Exchange Rule 301, a Member must be registered as a broker-dealer pursuant to Section 15 of the Securities Exchange Act of 1934 and must meet the qualifications for a Member in accordance with Exchange Rules applicable thereto. Pursuant to Exchange Rule 600, which such Rule is ISE Rule 600 incorporated by reference, an EAM may be approved by the Exchange to transact business with the public only if such Member is also a member of another registered national securities exchange or association with which the Exchange has entered into an agreement under Rule 17d-2 under the Exchange Act pursuant to which such other exchange or association shall be the designated examining authority for the Member.
As provided in Exchange Rule 303, the Exchange may deny (or condition) approval of a Member, or may prevent a person from becoming associated (or condition an association) with a Member, for the same reasons that the Commission may deny or revoke a broker-dealer registration and for those reasons required or allowed under the Exchange Act. The Exchange also may deny (or condition) approval of a Member, or may prevent a person from becoming associated with (or condition an association) with a Member, when the applicant, directly or indirectly:
The Exchange may determine not to permit a Member or person associated with a Member to continue as a Member or associated therewith, if the member or associated person:
If a Member or person associated with a Member that becomes subject to a statutory disqualification under the Exchange Act wants to continue as a Member of the Exchange or in association with a Member, the Member or associated person must, within thirty (30) days of becoming subject to a statutory disqualification, submit an application to the Exchange seeking to continue as a Member or in association with a Member notwithstanding the statutory disqualification. Failure to timely file such an application is a factor that may be taken into consideration by the Exchange in making determinations pursuant to Rule 303.
Subject to Chapter 15 (Summary Suspension) of the Topaz Rules, which such Rules are Chapter 15 of ISE Rules incorporated by reference, any applicant whose application to become a Member is denied Membership or conditioned, or any person whose association with a Member is denied or conditioned pursuant to Exchange Rule 302, and any Member or person associated with a Member who is not permitted pursuant to Exchange Rule 302 to continue as a Member or to be associated with a Member or which continuance as a Member or association is conditioned, may appeal the Exchange's decision under Chapter 17 (Hearings and Review) of the Topaz Rules, which such Rules are Chapter 17 of ISE Rules incorporated by reference.
In general, the Exchange may discipline Members by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction if a Member fails to: (1) satisfy on a continuing basis the qualification requirements specified by the proposed Exchange Rule 303 as described above; (2) comply with any of the Rules of the Exchange; (3) pay on a timely basis such participation, transaction and other fees as the Exchange shall prescribe; (4) comply with all its agreements with the Exchange; (5) correct a financial or operating difficulty that the Exchange determines should otherwise prevent the Member from continuing to do business with investors, creditors, other Exchange Members, or the Exchange.
As well, any Member that is subject to suspension or termination with regard to access to the Exchange will be afforded an opportunity to be heard under Chapters 16 (Discipline) and 17 (Hearings and Review) of the Topaz Rules, which such Rules are Chapters 16 and 17 of ISE Rules incorporated by reference. The Exchange's regulatory staff (which may include the regulatory staff of FINRA pursuant to a Regulatory Services Agreement) will investigate possible violations for potential disciplinary action. A hearing panel will be appointed from among three members of the Exchange's Business Conduct Committee. The hearing panel will conduct a hearing, and will issue a written decision of its findings in accordance with Rule 1607. The respondent or regulatory staff may petition may petition the Board for a review of the hearing panel's decision. The Board may affirm, reverse or modify, in whole or in part, the decision of the hearing panel. A more detailed description of the Exchange's Discipline process is set forth in the proposed Exchange Rule Chapters 16 (Discipline) and 17 (Hearings and Review) of the Topaz Rules, which such Rules are Chapters 16 and 17 of ISE Rules incorporated by reference.
Description of the Exchange's Regulatory Program
The Exchange will employ a regulatory model that includes services agreements with the International Securities Exchange, LLC ("ISE") and the Financial Industry Regulatory Authority ("FINRA") to conduct various regulatory services on behalf of the Exchange. The services provided under the regulatory program with respect to the Exchange shall be substantially similar to the services provided under the regulatory program of ISE. As the Exchange will not be a Designated Examining Authority under Section 17d-1 of the Exchange Act, financial responsibility examinations will not be performed by the Exchange. The Exchange will be a participant in the Options Sales Practices Agreement and the Options Surveillance Regulatory Authority both under separate 17d-2 agreements; the former coordinates and allocates options sales practice examinations among the various U.S. options exchanges and the latter delegates consolidated insider trading investigations that are performed by the Chicago Board Options Exchange.
The Exchange proposes to enter into a Facilities Management Agreement with ISE pursuant to which, among other things, ISE shall provide certain legal and regulatory services to the Exchange. These legal and regulatory services generally include the provision of ISE's regulatory infrastructure, including surveillance programs, legal programs, systems and other operational services required to execute the regulatory program of the Exchange.
The Exchange intends to also join the Options Clearing Corporation, the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options (i.e., Options Listing Procedures Plan), the Intermarket Symbols Reservation Authority, the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information, the Options Sales Practice Pursuant to 17d-2 and the Options Self-Regulatory Council, the Program for Allocation of Regulatory Responsibilities Pursuant to Rule 17d-2 (Designated Options Surveillance Regulator for Common Surveillance Reviews), the Options Order Protection and Locked/Crossed Market Plan and the Intermarket Surveillance Group.
The Exchange will have a Chief Regulatory Officer ("CRO") with general day-to-day supervision over the Exchange's regulatory operations. The CRO will report to the Exchange's Corporate Governance Committee (the "CGC") and to the President. The CGC will meet regularly with the CRO to review regulatory matters. In addition to these direct reporting lines, the Exchange Board will retain full power to call the CRO to report directly to the Board as needed and the CRO may call special meetings of the Exchange Board, as necessary. The CGC will monitor the Exchange's regulatory program for sufficiency, effectiveness, and independence; monitor the Exchange to ensure it operates in accordance with Exchange and SEC rules; oversee all facets of the regulatory program, including trade practice and market surveillance; audits, examinations, and other regulatory responsibilities with respect to Members (insuring compliance with Exchange rules) and the conduct of investigations; provide oversight over the systems of internal controls established by management and the Board and the Exchange's legal and compliance process; review the regulatory budget and resources and authorize unbudgeted expenditures for necessary regulatory expenses; supervise the CRO; prepare an annual report assessing the Exchange's self-regulatory program for the Board; recommend changes that would ensure fair and effective regulation; and review regulatory proposals and advise the Board as to whether and how such changes may impact regulation. The Compensation Committee will set compensation for the CRO and the CGC, in its sole discretion, will make hiring and termination decisions with respect to the CRO, in each case taking into consideration any recommendations made by the President. The CGC will be informed about the compensation of the CRO, including factors affecting changes thereto. The CGC will annually review the regulatory budget and specifically inquire into the adequacy of the resources available in the budget for regulatory activities. The CGC will authorize unbudgeted expenditures for necessary regulatory expenses.
Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:
Topaz has not commenced operations and currently has no Members.
Exhibit Request: Provide a schedule for each of the following:
Provide a schedule for each of the following:
Topaz has not commenced operations and, therefore, it has no securities that are listed or traded on the Exchange. The Exchange will not list or trade non-option securities. Upon the effectiveness of its Form 1 Application for Registration as a National Securities Exchange, the Exchange intends to trade listed option contracts.