SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-66242; File No. 10-206)
January 26, 2012
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.
BOX Options Exchange LLC 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 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.
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:
BOX Holdings Group LLC
BOX Market LLC
TMX Group, Inc.
Bourse de Montreal, Inc.
MX US 1, Inc.
MX US 2, Inc.
Indirect Foreign Affiliates
The parent ownership structure of MX US 1, Inc. is comprised entirely of foreign entities (the “Foreign Direct Affiliates”), which in turn own interests, either directly or indirectly, of 25 percent or more in a number of other foreign entities (such Foreign Direct Affiliate-owned entities, not including dormant entities, collectively the “Foreign Indirect Affiliates”).
The organizational chart of Exhibit C-7 TMX Corporate Structure is attached and includes 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:
BOX Options Exchange LLC (the "Exchange") proposes to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Additionally, BOX Market LLC (“BOX”), an affiliate of the Exchange, will operate a trading system (the “System”) as an options trading facility of the Exchange under Section 3(a)(2) of the Exchange Act. Only persons that have applied and been approved by the Exchange as BOX Options Participants will be permitted to transact business via the System. The Exchange will authorize any BOX Options Participant that meets certain enumerated qualifications to obtain access to the System. To be eligible for status as a BOX Options Participant, one must be a broker-dealer registered under Section 15(b) of the Exchange Act and meet the other standards set forth in the Rule 2000 Series of the proposed Rules of the Exchange ("Exchange Rules"). BOX Options Participants will be subject to the Exchange Rules and will have fair representation on the Exchange Board and its respective committees. BOX Options Participants who are not also shareholders of BOX Holdings will not have any ownership interest in the Exchange.
The BOX System will include a fully automated electronic order book (“Book”) for orders to buy or sell securities (“Orders”). BOX Options Participants will be entitled to enter orders into and receive executions through the Book. Liquidity will be derived from orders to buy and orders to sell submitted to the System electronically by BOX Options Participants from remote locations.
There will be three classes of BOX Options Participants: (1) Order Flow Providers ("OFPs") will be BOX Options Participants representing Customer Orders1 as agent in the System; (2) Market Makers will be Options Participants registered as Market Makers, as described below; and (3) non-market maker Options Participants conducting proprietary trading. OFPs may transact business with Public Customers2 only if the OFP is a member of another national securities exchange or association. OFPs may trade as principal, both as contra party to Customer Orders submitted by such OFP and to unrelated orders submitted by other BOX Options Participants.
Market Makers have certain rights and bear certain responsibilities beyond those of other Options Participants. Market Makers may register for appointment in any options class listed and traded on the System, and such registration is approved by the Exchange. To register as a Market Maker, a BOX Options Participant must meet certain enumerated requirements as set forth in the proposed Exchange Rule 8000 Series. All Market Makers 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 Market Makers.3 A Market Maker that engages in specified Other Business Activities,4 or that is affiliated with a broker-dealer that engages in Other Business Activities, including functioning as an OFP, must have an Information Barrier between the market making activities and the Other Business Activities pursuant to Exchange Rule 8090.
1. The means of access to the System.
BOX will provide a gateway to the System that will allow its Options Participants to send orders to the System and messages that will allow BOX Options Participants to modify or cancel orders. BOX will also provide multiple interface options that will allow its Options Participants that are already using such protocols to connect to the System with minimal effort. BOX Options Participants will be permitted to send orders to buy and sell securities listed or traded on the System by using a variety of electronic systems. BOX has designed its System to allow its Options Participants to individually determine the best method for accessing the System. Thus, BOX Options Participants 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 System. BOX Options Participants will be able to access the System remotely through a variety of methods and connections, so long as they support a minimum data exchange rate, as may be determined by BOX from time to time.
To accommodate independent software vendors and approved BOX Options Participants who want to connect their own front-end trading applications to the System, BOX will offer an open platform. BOX offers its Options Participants the ability to use the BOX order management application or to use an Industry Standard Protocol, such as the Financial Information Exchange ("FIX") protocol or the CMS protocol, for connection for OFPs. BOX would provide a an interface which will allow its Options Participants who are already using either of these protocols for order routing and management to other options markets to connect to the System with a minimum of effort.
Direct access to the System will be available to BOX Options Participants at an Internet Protocol address by either of the following: (1) electronic access at the System's IP network address by the BOX Options Participant's own software, via communications that are compliant with FIX protocol application programmer interface ("API") provided by BOX; or (2) other means of access provided from time to time by BOX.
BOX Options Participants provide a unique IP address to BOX for each requested connection, and BOX then configures its routers to only allow access from the BOX Options Participant's IP address to a dedicated IP address on the System network. In this way, only authorized BOX Options Participants can gain access to the System via registered physical IP addresses. BOX Options Participants will be responsible for having procedures reasonably designed for safeguarding access to the System and for notifying the Exchange upon learning that such safeguards have been compromised. Connectivity to the System will occur through secure telecommunications "pops" or points of presence. Specifically, each BOX Options Participant will be assigned a specific port, or multiple ports, each of which has a unique session identification code provided only to such BOX Options Participant.
Non-BOX Options Participant Access. The Exchange plans to become a participant in the Options Order Protection and Locked/Crossed Market Plan. If admitted as a participant to the Plan, other plan participants would be able to send orders to the System in accordance with the terms of the plan as applied to the Exchange.
In addition, the Exchange intends to join the Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (known as the Options Price Reporting Authority ("OPRA")), the Options Listing Procedures Plan ("OLPP"), and the Options Clearing Corporation.
2. Procedures governing entry and display of quotations and orders in the System.
The System will accept orders for options contracts from BOX Options Participants in securities listed for trading on the System. Orders entered into the System 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 ("NBBO") when the order reaches the System ("Market Orders"). Orders will be accepted for any such security, whether submitted by a BOX Options Participant on a proprietary or agency basis, in any quantity up to 99,999,999 contracts.
a. Order Entry
Order Types. BOX Options Participants may submit the following types of orders: Limit; BOX-Top; Market-on-Opening; Market; and Intermarket Sweep Order. Limit Orders entered into the Book are executed at the stated limit price or better. Any residual volume left after part of a Limit Order has traded is retained in the Book until it is withdrawn or traded (unless a specific designation is added which prevents the untraded part of a Limit Order from being retained). The System will automatically withdraw all Limit Orders, except for those with a Good `Til Cancelled ("GTC") designation, at market close.5 BOX-Top orders are executed at the best price available for the total quantity available from any contra bid (offer). Any residual volume is converted by the System to a limit order at the price at which the initial BOX-Top order was executed.6
Order Designations. Options Participants can add the designation of 'Good 'Til Cancelled' ("GTC"), 'Fill and Kill' ("FAK"), or ‘Session Order’ to each of the above mentioned order types. GTC orders remain in the Book until the order (A) trades; (B) is withdrawn by the relevant responsible trader or BOX at the BOX Options Participant's request; (C) is automatically withdrawn by the System at market close on the date specified at the time of order entry; or (D) is automatically cancelled by the System on expiration of the contract month to which the order related. FAK orders are immediately executed against any existing orders at the specified price or better, up to the volume of the FAK order. Any residual volume left after part of the FAK order has traded will be automatically cancelled.
A Session Order will remain active in the System until one of certain specified Triggering Events occur that affect an Options Participant’s connection to the System or the System’s order processing.7 When a Triggering Event does occur, a Session Order may be cancelled.8 All Session Orders will be cancelled at the end of the trading day, unless the order is within certain specified System processes when a Triggering Event occurs.9
Order Information. The Exchange will maintain a full audit trail of every order submitted to the System. BOX Options Participants may receive status reports regarding submitted orders and orders can be changed or canceled after they are submitted to the Book. The System will trade all securities in decimals. The minimum price increment for securities orders trading on the System will be consistent with any Exchange Rules, Commission rules or regulations adopted in this regard.
Order Display. The Book is the electronic book of all BOX Options Participants' orders maintained by the System. BOX Options Participants' Limit Orders submitted to the System will be ranked and maintained in the Book according to price/time priority, such that within each price level, all orders would be organized by the time of entry.10 No distinction is made to this priority with regard to account designation (Public Customer, Broker-Dealer or Market Maker). The number of orders and the total quantity at each of the five best price levels in the Book will be displayed to all BOX Options Participants on an anonymous basis.11
Order Dissemination. The Exchange intends to become a participant in the OPRA Plan and will collect and submit to the relevant plan processor the best-ranked price level to buy and to sell in the Book and the aggregate size of orders associated with such prices. This information will be submitted for dissemination pursuant to the requirements under Rule 602 of Regulation NMS under the Exchange Act.
b. Filtering of In-Bound Orders to Prevent Trade-Throughs
With the exception of certain orders submitted during a PIP and Directed Orders, all orders submitted to the System (whether on behalf of Customers, non-BOX Options Participant broker-dealer proprietary accounts or market makers at other exchanges) will be filtered by the System, to ensure that such orders will not execute at a price outside of the current NBBO, prior to their being placed on the Book. The filter operates according to Rule 7130.12
c. Directed Orders Process
A "Directed Order" means a Customer Order that an OFP directs to a particular BOX Market Maker. Unlike all other orders submitted to the System, Directed Orders are not anonymous. A Market Maker who wishes to accept Directed Orders must systemically indicate that it wishes to receive Directed Orders, must be willing to accept Directed Orders from all OFPs, may receive Directed Orders only through the System, and may not reject Directed Orders.13 The Directed Order process is described in further detail in Exchange Rule 8040.
3. Procedures governing the execution, reporting, clearance and settlement of transactions in connection with the System.
Trades will execute when orders or quotations on the Book match one another. The priority of orders at the same price will be determined by time of order entry. Limit Orders would trade immediately with any orders already in the Book at the limit price or better, up to the available quantity. Before being placed on the Book, any remaining Limit Order quantity will be filtered to ensure that it does not trade at a price outside the NBBO.
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.14 Proposed Exchange Rule 7170 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 7170(g), an Options Participant that believes an executed order was the result of an Obvious Error must notify the BOX Market Operations Center (“MOC”). 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.
Similarly, under the Catastrophic Error Procedure in proposed Rule 7170(h), if a Participant believes it has participated in a transaction that qualifies as a Catastrophic Error as defined in proposed Rule 7170(d), the Participant must notify MOC. The Exchange will review the transaction to determine whether, in fact, the transaction qualifies as a Catastrophic Error. If so, the Chief Regulatory Officer (“CRO”) or an Exchange Official, who is not a Participant, will instruct the MOC to adjust the execution price of the transaction within the parameters set forth in Rule 7170.
Under both the Obvious Error and Catastrophic Error Procedure, a Participant may appeal the initial decision by the Exchange to the CRO, and all determinations by the CRO shall constitute final Exchange action on the transaction at issue.
The Exchange Rules provide for the PIP process which can be used by BOX Options Participants seeking to execute their agency orders as principal. With certain exceptions, a BOX Options Participant is not otherwise permitted to trade with its agency orders.15 In addition, prior to submitting an order to the PIP, a BOX Options Participant cannot inform another BOX Options Participant 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 Customer Orders to be eligible for the PIP Process.16
The Exchange Rules also provide for a Facilitation Auction and Solicitation Auction for BOX Options Participants to execute two-sided, block-size orders.17 It will be a violation of an Option Participant’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 BOX.18 Additionally, Options Participants may not use the Solicitation Auction to circumvent the limitations in Rule 7140 regarding Participants trading as principal with their customer orders.19
Transaction Reporting. The Exchange intends to become a participant of the Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (known as the Options Price Reporting Authority plan ("OPRA Plan")) and will report trades in Eligible Securities (as defined in the OPRA Plan) pursuant to the terms of the OPRA Plan.
Clearance and Settlement of Transactions. The Exchange intends to become a participant in the Options Clearing Corporation.
4. Proposed fees.
BOX Options Exchange LLC (the “Exchange”) has been formed but has not commenced operations and, therefore, it does not have a current fee schedule. The Exchange will file with the Commission any proposed changes in fees in accordance with the process set forth in Section 19(b) of the Exchange Act, as amended. The Exchange currently does not propose to charge a fee for broker-dealers to obtain BOX Options Participant status. The Exchange may, however, prescribe such reasonable dues, fees, and assessments or other charges for BOX Options Participants as it may deem appropriate in the future. BOX Options Participants will be subject to fees for orders executed on the System as set forth in the Exchange Rules or as may otherwise be determined by the Exchange Board from time to time. The Exchange does not intend to charge a fee for modifications or cancellations of orders.
BOX Options Participants will be solely responsible for all telecommunications costs and all other expenses incurred in linking to, and maintaining links to the System and the Exchange. The Exchange will assess a variable Point of Presence Connection fee based on the number of connections for each BOX Options Participant to maintain network communications with the System, and the bandwidth associated with such connections.
5. Procedures for ensuring compliance with System usage guidelines.
The System contains embedded BOX Options Participant order entry and trade guidelines. All data representing a BOX Options Participant's order must comply with these guidelines and BOX Options Participants cannot override these embedded guidelines. With respect to technical standards, prior to allowing a new BOX Options Participant to begin trading, BOX and the BOX Options Participant will thoroughly test the BOX Options Participant's connectivity. In addition, the BOX Options Participant may enter orders in test securities to ensure compatibility with System protocols. A BOX Options Participant may begin trading only after the Exchange is satisfied that both the BOX Options Participant's hardware and software meet the Exchange's standards. BOX Options Participants also must agree to maintain an adequate connection to the System, including a connection of sufficient speed and equipment of a certain minimum quality, as defined from time-to-time by the Exchange.
BOX Options Participants with a proprietary order management system must successfully complete all mandatory test cases associated with their business profile for each of the applications that they intend to use on the System. BOX will work with BOX Options Participants to determine the technology hardware and software certification requirements of each application a BOX Options Participant intends to use.
6. The hours of operation of the System, and the date on which applicant intends to commence operation of the System.
The Exchange proposes that BOX trading be continuous after the opening of the underlying equity security or exchange traded fund ("ETF") in its primary market at 9:30 a.m. EST until the close of the equity markets at 4:00 p.m. EST. Transactions in certain ETF option classes and options on certain indexes may be effected on the System until 4:15 p.m. EST each business day or during any other day or time approved by the Exchange Board.20
The Exchange proposes that the BOX System commence trading operations upon the Commission's approval of the Exchange Application for Registration as a national securities exchange, upon approval of all necessary regulatory and National Market System plans, and upon the Exchange joining the Options Clearing Corporation. The Exchange also intends to join the following: (1) 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 (OLPP)); (2) Intermarket Symbols Reservation Authority (ISRA); (3) Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information (i.e., the Options Price Reporting Authority (OPRA)); (4) Options Sales Practice Pursuant to Rule 17d-2 and the Options Self-Regulatory Council (OSRC); (5) Program for Allocation of Regulatory responsibilities Pursuant to Rule 17d-2 (Designated Options Surveillance Regulator (DPSR) for Common Surveillance Reviews); (6) Options Regulatory Surveillance Authority (ORSA) Insider Trading 17d-2; (7) Options Order Protection and Locked/Cross Markets Plan; and (8) the Intermarket Surveillance Group (ISG) Agreement.
7. Attach a copy of the users' manual.
Attached is a draft Users' Manual that will be provided to all BOX Options Participants and prospective BOX Options Participants and will describe the
System's technical specifications. It will provide BOX Options Participants and prospective BOX Options Participants with additional information that the Exchange believes will be useful to such persons for trading on the System. (See Exhibit E-1).
8. If applicant proposes to hold funds or securities on a regular basis, describe the controls that will be implemented to ensure safety of those funds or securities.
Neither BOX nor the Exchange will hold funds or securities of BOX Options Participants.
A complete set of all forms pertaining to:
Attached please find the following documents:
Other required materials sent directly from the applicant to the BOX Options Exchange LLC (the “Exchange”):
A complete set of all forms of financial statements, reports or questionnaires required of members, participants, subscribers, or any other users relating to financial responsibility or minimum capital requirements for such members, participants, or any other users. Provide a table of contents listing the forms included in this Exhibit G.
As broker-dealers, BOX Options Participants will be required to comply with the Commission’s net capital and customer protection rule set forth in Rules 15c3-1 and 15c3-3 of the Securities Exchange Act of 1934, as amended. (See proposed Exchange Rule 10200). In addition, pursuant to Commission Rule 17a-5, BOX Options Participants will file Commission Form X-17A-5. Further, a BOX Options Participant that fails or is unable to perform any of its contracts or is insolvent is required to immediately notify the Exchange in writing. (See proposed Exchange Rule 10210). Moreover, whenever it appears that a BOX Options Participant has failed to perform its contracts, is insolvent or in such other financial and operating condition or is conducting its business in a manner that is not safe to customers, creditors or other BOX Options Participants, the Chief Regulatory Officer of the Exchange may force the BOX Options Participant to take corrective action that he deems necessary for the protection of investors, other BOX Options Participants, or the Exchange. (See proposed Exchange Rule 10220).
Other than those forms and financial statements required to be submitted with an application to become a BOX Options Participant (See Exhibit F), the Exchange will not require BOX Options Participants to submit specific forms of financial statements, reports, or questionnaires relating to financial responsibility or minimum capital requirements. The Exchange will, however, be able to obtain such financial information from a BOX Options Participant’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.
BOX Options 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 proposed Exchange Rules 5020 - 5030, 6020, and 6090. (See Exhibit B-1). These criteria for the underlying securities and indices of the options to be traded on the Exchange are substantially similar to the criteria used by the International Securities Exchange.
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.
BOX Options Exchange LLC (the “Exchange”) has been formed but has not commenced operations and does not yet have audited financial statements for the latest fiscal year. Prior to the launch of the Exchange, the Exchange represents that BOX Options Exchange LLC will allocate sufficient assets to operate the Exchange. Boston Options Exchange Group, LLC has made a loan of one million ($1,000,000) dollars to the Exchange in addition to previously provided infrastructure and existing industry and regulatory memberships. The Exchange represents that such funding 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 BOX Market LLC (the “Market”) that requires the Market 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 Participants, as well as any funds received from any applicable market data fees and OPRA tape revenue. The agreement will further provide that the Market (and BOX Holdings Group LLC, to the extent it holds Market funds) will reimburse the Exchange for its costs and expenses to the extent the Exchange’s assets are insufficient. Excess funds, as determined by the Exchange, will be remitted to the Market.
The Exchange will file pro forma financial statements when it is closer to commencing operations as a national securities exchange. The 2010 Audited Financial Statements of the Boston Options Exchange Group, LLC are submitted to represent financials of the Market as the current Boston Options Exchange Group, LLC will merge into the BOX Market LLC (See Exhibit I-1).
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.)
BOX Options Exchange LLC
BOX Options Exchange LLC (the “Exchange”) has been formed but has not commenced operations and has not yet named its Directors and Committee Members.
1. Officers of the Exchange:
Prior to commencing operations as a National Securities Exchange, directors will be elected in accordance with the Limited Liability Company Agreement and Bylaws of the Exchange. Directors of the Exchange will serve terms of one year each. The composition of the Board of Directors as of the commencement of operations as a National Securities Exchange will likely be the persons listed below.
The committees of the Board will include an Audit Committee, a Compensation Committee and a Regulatory Oversight Committee and may include other committees as determined by the Board. Upon the approval of BOX Options Exchange’s Form 1 Application for Registration as a National Securities Exchange by the Commission, and after the election of the Board, the Board shall appoint persons to sit on the committees of the Board, consistent with the Exchange’s Limited Liability Company Agreement and Bylaws.
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:
MX US 2, Inc.
IB Exchange Corporation
CSFB Next Fund Inc.
Citigroup Financial Products Inc.
UBS Americas Inc.
Strategic Investments II, Inc.
Citadel Securities LLC
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.
Describe the exchange’s criteria for membership in the exchange.
Participation on the Exchange will be open to any registered broker or dealer or any corporation, partnership, limited liability company or sole proprietorship organized under the laws of a jurisdiction of the United States, or such other jurisdictions as the Exchange may approve. To become or continue as a BOX Options Participant of the Exchange, a firm must (1) have as the principal purpose of being a Participant the conduct of a securities business; (2) be a Clearing Participant or establish a clearing arrangement with a Clearing Participant; (3) meet the capital requirements of the Exchange or Rule 15c3-1 of the Exchange Act, whichever is greater; (4) demonstrate an ability to adhere to all applicable Exchange, Commission, Options Clearing Corporation and Federal Reserve Board policies, rules and regulations, including those concerning record-keeping, reporting, finance and trading procedures and be able to satisfactorily demonstrate reasonably adequate systems capability and capacity. (See proposed Exchange Rules 2000, 2010, 2020 and Rule 10000 Series).
A prospective BOX Options Participant must complete an application and provide such information as required by the Exchange and satisfy the qualification requirements for BOX Options Participant status as specified by the Exchange. In addition, each prospective BOX Options Participant shall enter into a Participant Agreement, whereby they shall, among other things, agree to abide by the Agreement, the Exchange Rules, and by all circulars, notices, directives or decisions adopted pursuant to or made in accordance with the Rules. Existing BOX Options Participants of BOX trading facility will be permitted to submit a short-form waive-in membership application form. (See Exhibit F-3).
Within 30 days after the Exchange has completed its consideration of an application, it shall provide written notice of the action of the Exchange, specifying in the case of disapproval of an application the grounds therefore. The Exchange may deny or condition BOX Options Participation for any valid reason under the Exchange Rules, for the same reasons that the Commission may deny or revoke a broker-dealer registration, for those reasons required or allowed under the Exchange Act or Rules thereunder, or whenever it has reason to believe that a prospective BOX Options Participant fails to meet the qualification requirements of the Exchange. (See proposed Exchange Rule 2020).
Describe conditions under which members may be subject to suspension or termination with regard to access to the exchange.
The Exchange may discipline BOX Options Participants by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction if a BOX Options Participant fails to: (1) satisfy on a continuing basis the qualification requirements specified by the proposed Exchange Rule 2020; (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 BOX Options Participant from continuing to do business with investors, creditors, other BOX Options Participants, or the Exchange. (See proposed Exchange Rules 11000 Series and 12000 Series).
Describe any procedures that will be involved in the suspension or termination of a member.
Any BOX Options Participant is subject to suspension or termination with regard to access to the Exchange will be afforded an opportunity to be heard under the proposed Exchange Rule 12000 Series governing Discipline. The Exchange’s regulatory staff will investigate possible violations for potential disciplinary action. A Hearing Panel will be appointed from among the members of the Exchange Board Hearing Committee and issue a written decision of its findings. The BOX Options Participant, regulatory staff or the Exchange Board itself may petition the Exchange 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 12000 Series.
Description of the Exchange’s Regulatory Program
The Exchange will employ a regulatory model that includes self-regulation and partnerships with other self-regulatory oversight groups through regulatory service agreements. The Exchange will become the Self-Regulatory Organization (SRO) overseeing the BOX Market. There will be a regulatory service agreement between the Exchange and the BOX Market. Certain surveillance oversight and disciplinary and enforcement will be performed under a regulatory services agreement with the Financial Industry Regulatory Authority (FINRA). As the Exchange will not be a Designated Examining Authority (DEA) 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 (ORSA) 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 (CBOE).
The Exchange intends to also join the Options Clearing Corporation (OCC), 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 (OLPP), the Intermarket Symbols Reservation Authority (ISRA), the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information (OPRA), the Options Sales Practice Pursuant to 17d-2 and the Options Self-Regulatory Council (OSRC), the Program for Allocation of Regulatory Responsibilities Pursuant to Rule 17d-2 (Designated Options Surveillance Regulator (DPSR) for Common Surveillance Reviews, the Options Order Protection and Locked/Crossed Market Plan and the Intermarket Surveillance Group (ISG).
Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:
BOX Options Exchange has not commenced operations and currently has no BOX Options Participants.
Exhibit Request: Provide a schedule for each of the following:
Provide a schedule for each of the following:
BOX Options Exchange LLC (the “Exchange”) has been formed but has not commenced operations and, therefore, it has no securities that are listed or traded pursuant to unlisted trading privileges.
Upon the effectiveness of its Form 1 Application for Registration as a national securities exchange, the Exchange 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 proposed Exchange Rules 5020 - 5030, 6020, and 6090. (See Exhibit B). These criteria for the underlying securities and indices of the options to be traded on the Exchange are substantially similar to the criteria used by the International Securities Exchange.
1 See Exchange Rule 100(a)(18) which defines Customer Order to mean "an agency order for the account of either a Public Customer (defined at footnote 2) . . . or a broker-dealer."
2 See Exchange Rule 100(a)(50) which defines Public Customer as "a person that is not a broker or dealer in securities."
3 See Exchange Rule 8000(e). However, the Exchange may limit access to the System based on System constraints, capacity restrictions, or other factors relevant to protecting the integrity of the System, pending action required to address the issue of concern. To the extent that the Exchange places limitations on any Participant's access to the System, such limits shall be objectively determined and submitted to the Commission for approval pursuant to a rule change filed under Section 19(b) of the Exchange Act.
4 See Exchange Rule 8090(b) which defines Other Business Activities to mean: (1) conducting an investment or banking or public securities business; (2) making markets in the stocks underlying the options in which it makes markets; or (3) functioning as an Order Flow Provider, except where such Market Maker, or broker-dealer with which such Market Maker is affiliated engages solely in proprietary trading and does not, under any circumstance, maintain customer accounts or solicit or accept orders or funds from or on behalf of public customers, including broker-dealers and other securities firms, and does not place or accept directed orders or utilize any other order types which call for the participation of, or interaction with, public customers, including broker-dealers and other securities firms.
5 Rule 7110(c)(1).
6 Rule 7110(c)(2).
7 Rule 7110(e)(iii)(A).
8 Rule 7110(e)(iii)(B).
9 Rule 7110(e)(iii)(C).
10 Rule 7130(a).
11 Rule 7130(a)(2).
12 Rule 7130(b).
13 Rule 8040(d).
14 Rule 7170.
17 Rule 7270 (Block Trades). The Facilitation Auction (Rule 7270(a)) permits orders of 50 contracts or more, while the Solicitation Auction (Rule 7270(b)) permits all or none orders of 500 contracts or more.
19 IM-7270-5. This may include, but is not limited to, Options Participants entering Solicitation Orders that are solicited from 1) affiliated broker-dealers, or 2) broker-dealers with which the Options Participant has an arrangement that allows the Options Participant to realize similar economic benefits from the solicited transaction as it would achieve by executing the customer order in whole or in part as principal. Further, any Solicited Orders entered by Options Participants to trade against Agency Orders may not be for the account of a BOX market maker that is assigned to the options class.
20 Rule 7020.
21 FINRA typically does not issue letters of Good Standing. The Exchange will need permission to use Broker Check to confirm whether or not an applicant is in good standing prior to becoming a national securities exchange.