SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-67660; File No. 10-207)
August 15, 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.
Miami International Securities Exchange, LLC (“MIAX” 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.
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:
Miami International Holdings, Inc.
Miami International Technologies, LLC
Miami International Futures Exchange, LLC
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.
Unaudited unconsolidated financial statements of Miami International Holdings, Inc. are attached. Miami International Technologies, LLC and Miami International Futures Exchange, LLC are not yet active and financial statements are not available for these companies.
Describe the manner of operation of the System. This description should include the following:
Miami International Securities Exchange, LLC (the “Exchange”) proposes to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Exchange will be owned by its parent company, Miami International Holdings, Inc. (“Miami Holdings”) which will elect all directors of the Board of Directors of the Exchange. However, Article II, Section 2.4 of the By-Laws of the Exchange provides a process by which Exchange Members may nominate representatives to the Board that complies with the requirement for fair representation of members in the selection of directors. The members of the Exchange (the “Members”) will consist of those broker-dealers admitted to transact on the Exchange. Members will be subject to the Rules of the Exchange and will have representation on the Exchange’s Board of Directors and certain committees. Members who are not also stockholders of Miami Holdings 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 Members from remote locations. There will be no physical Exchange trading floor. There will be three types of Members on the Exchange – Lead Market Makers, Registered Market Makers and all other Members, known as Electronic Exchange Members. Lead Market Makers, who meet certain additional criteria and are willing to take on additional obligations, will be appointed as the Primary Lead Market Maker in each option class. The Primary Lead Market Makers, Lead Market Makers and Registered Market Makers (together “Market Makers”) will have affirmative and negative market making obligations. Access to the Exchange will be through the use of Trading Permits issued to the Members.
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 Chapter II of the proposed Exchange Rules. 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. Trading Permits 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 Membership criteria is set forth in Chapter II of the Exchange’s proposed Rules. See Exhibit B to this Application.
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 By-Laws and Rules of the Exchange. See Exhibit A and Exhibit B to this Application.
B. Access to the Exchange (#1)
Member 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 its 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 through a front-end or service bureau 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 network. By requiring the use of a registered IP address, the Exchange assures that only authorized Members will have access. 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. Each Member will be assigned a specific port or multiple ports, each of which has a set of unique Exchange-provided login credentials assigned to that Member’s registered IP address.
Non-Member Access. Non-Members may access the Exchange pursuant to Rules governing “sponsored access” to the Exchange. The Exchange plans to permit access by entities (“Sponsored Users”) whose access is authorized in advance by entering into an arrangement with a Member (“Sponsoring Member”) in accordance with Exchange Rules. The Sponsoring Member must agree to be responsible for all trading conducted pursuant to that arrangement to the same extent as trading conducted by the Member for customers. The Sponsoring Member is responsible for implementing policies and procedures for supervising and monitoring the trading effected pursuant to the arrangement to ensure that it is in compliance with all applicable federal securities laws and rules and Exchange rules. In addition, Sponsored Users 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 on the Exchange. Orders entered on 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 best obtainable bid or offer when the order reaches the Exchange (market orders). Orders will be accepted for any security traded on the Exchange, whether submitted by a Member on a proprietary or agency basis.
Upon initiation of operations, the Exchange will advise its Members through a Regulatory Circular of the types of orders available for use on the Exchange. The Exchange will update the Members, again through a Regulatory Circular, as additional order types become available. The following are some of the order types described in MIAX Rules that will initially be or will later become available for use on the Exchange: market orders, limit orders, fill-or-kill orders, immediate-or-cancel orders, non-displayed penny orders, auction or cancel orders, WAIT orders, attributable orders, intermarket sweep orders, do not route orders, opening orders, customer cross orders, qualified contingent cross orders, day limit orders and good ‘til cancelled orders. Each of these types of orders is described in detail in proposed Exchange Rule 516. The Exchange will maintain a full audit trail of every order submitted to the Exchange’s System. 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.
In order to avoid the occurrence of potential obvious or catastrophic errors on the Exchange, the MIAX System includes the MIAX Order Monitor, as described in the Exchange’s proposed Rule 519. The MIAX Order Monitor will prevent certain orders from executing or being placed on the MIAX Book at prices outside pre-set standard limits. The Exchange has established the pre-set limits for market orders based upon market width at the time the order is received and for limit orders based upon a limit order’s price relative to the NBBO.
All options will be traded in decimals on the Exchange and consistent with the Penny Pilot Program.
Entry of Quotations on the Exchange. Quotes and eQuotes may only be entered by Market Makers, must be priced and must have a designated size. Similar to order types, eQuotes provide time in force and other contingencies to quotes and will allow Market Makers to use their quoting systems for submission of such eQuote types to MIAX. All of the bids and offers in the quote and eQuote types described below shall be firm in accordance with the Market Maker’s obligations under proposed Exchange Rules and Rule 602 of Regulation NMS. However, bids and offers in certain of the eQuote types, will not be disseminated by the Exchange to quotation vendors in accordance with Rule 602 of Regulation NMS given their limited time in force or other contingencies (i.e., Auction or Cancel eQuotes, Opening Only eQuotes, Immediate or Cancel eQuotes, Fill or Kill eQuotes and immediate or cancel Intermarket Sweep eQuotes). Upon initiation of operations, the Exchange will advise its Members through a Regulatory Circular of the types of quotes and eQuotes available for use on the Exchange. The Exchange will update the Members, again through a Regulatory Circular, as additional quote and eQuote types become available. Market Makers may submit standard quotes and multiple types of eQuotes. Market Makers may have multiple types of eQuotes active in a single series at any time. Market Makers may submit any of the following quote types: standard quote, day eQuote, immediate or cancel eQuote, fill or kill eQuote, Intermarket Sweep eQuote, auction or cancel eQuote and opening only eQuote. With respect to Day eQuotes, although it is not anticipated that Day eQuotes will be available for use on the Exchange upon initiation of its operations, when Day eQuotes do become available, the Exchange may limit the number of Day eQuotes that a single Market Maker may place on the same side of an individual option. If the Exchange determines to establish a limit, it will be no more than ten Day eQuotes on the same side of an individual option. The same limit will apply to all types of Market Makers. Exchange Rules also provide for the categorization of certain Market Maker quotes as priority quotes and non-priority quotes. Use of priority quotes, which need to meet certain bid/ask differential requirements, will entitle Market Makers to precedence over all professional interest (i.e., non-Priority Customer orders and Market Maker orders and non-priority quotes) on the Exchange.
Display of Orders and Quotations . All orders and quotes submitted to the Exchange will be displayed unless (i) the order is a contingent order (such as immediate or cancel orders or auction or cancel orders); (ii) the quote is a certain type of eQuote (such as an auction or cancel eQuote or an immediate or cancel eQuote); (iii) the order is a non-displayed penny order (the closest Minimum Price Variation that does not violate the limit price will be displayed); or (iv) quotes entered for options designated by the Exchange as available for non-displayed penny options (quotes entered in one-cent increments will be displayed at the Minimum Price Variation for the option). Based on Exchange System functionality, a locked or crossed market will not be displayed by the Exchange with respect to orders or quotes to buy and orders or quotes to sell submitted to the Exchange unless allowed pursuant to Exchange Rules or a national market system plan governing locked and crossed markets. Orders and quotes submitted to the Exchange shall be displayed on an anonymous basis (except for attributable orders which allow voluntary disclosure of firm identification information) at the price specified by the submitting Member. Non-displayed orders will not be displayed to any Members. In addition, the Exchange intends to become a member 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.
The Exchange will engage an Aggregate Risk Manager, which will automatically remove a Market Maker’s quotations from the Exchange’s disseminated quote in all series of a particular option class when it has been determined that the Market Maker has traded, during a specified time period (established by the Market Maker), a number of contracts equal to or greater than an allowable percentage (which percentage will be determined in accordance with Rule 612). Once the Market Maker has submitted a revised quotation, the Exchange will add the Market Makers quotes back into the Exchange’s disseminated quote.
D. Price Protection on the Exchange–Routing to Other Market Centers
MIAX intends to become a participant in the Options Order Protection and Locked/Crossed Market Plan (“Plan”). In accordance with the Plan, MIAX will provide price protection in options by routing intermarket sweep orders to other options exchanges. Intermarket sweep orders may be routed to another options exchange when trading interest is not available on MIAX or is of insufficient size, or when MIAX is not at the National Best Bid or Offer (“NBBO”) consistent with the Plan. Orders with certain contingencies and orders designated as Do Not Route or “DNR” can only be executed on MIAX. Orders that are routable may either be eligible for immediate routing, provided the criteria for immediate routing are met, or be subject to a route timer. Immediate routing is available for Priority Customer orders that meet certain criteria relating to the order’s limit price (cannot cross the NBBO), the displayed market (displayed NBBO cannot be crossed) and the size of the order and the size of displayed market. The route timer allows Market Makers and other market participants an opportunity to interact with an order before it is routed to another options exchange. At the start of the route timer, the System will broadcast a Route Notification message to subscribers of it market data feeds providing details about the order to be routed and the NBBO price on the opposite side of the market. During the timer, which will not exceed one second (the duration of the timer will be announced to Members through a Regulatory Circular), Market Makers and other market participants may submit certain order and quote types at any price level. If, during the Route Timer, the Exchange receives a new order or quote on the opposite side of the market from the initiating order that can be executed, the System will immediately execute the remaining contracts. If at any point during the Route Timer the initiating order and all interest on the same side of the market is either traded in full or cancelled in full, or a change in the Away Best Bid or Offer (“ABBO”) would allow the initiating order to trade on the Exchange at the revised NBBO, the Route Timer will be terminated and normal trading will resume. At the end of the route timer any contracts that could not be executed and are marketable at the NBBO on another exchange will be marked an intermarket sweep order and routed to the appropriate away market. The Exchange will route intermarket sweep orders to the other options exchanges through unaffiliated broker-dealers. The Exchange will determine the logic that provides when, how and where intermarket sweep orders are routed away to other options exchanges. The routing broker-dealers will receive instructions from MIAX to route intermarket sweep orders to the other options exchanges and report the executions back to MIAX.
E. Execution, Reporting, Clearance and Settlement Procedures (#3)
The Exchange will employ an opening process structured to match and execute the greatest number of pending buy and sell orders. Pre-opening orders and quotes will be accepted. Once the opening process begins, if there are no quotes or orders that lock or cross each other, the System will open by disseminating the Exchange’s best bid and offer among quotes and orders that exist in the System at that time. If there are quotes or orders that lock or cross each other, the System will calculate an opening price taking into consideration all valid Exchange quotes and all valid orders, together with other exchanges’ markets for the series and identify the price at which the maximum number of contracts can trade. If that price is within the highest valid width quote bid and lowest valid width quote offer and leaves no imbalance, the Exchange will open at that price, executing marketable trading interest, as long as the opening price includes only Exchange interest. If the opening price includes other interest, the System will broadcast a System Imbalance Message and initiate a Route Timer (not to exceed one second) to allow additional orders or quotes to be submitted. If no new interest is received during the Route Timer, the System will route to other markets disseminating prices better than the Exchange’s opening price, execute marketable interest at the opening price on the Exchange, and route to other markets disseminating prices equal to the Exchange opening price if necessary. If interest is received during the Route Timer, the System will recalculate the opening price taking such new interest into account. Then, if there is no imbalance, the System will execute marketable interest at the opening price on the Exchange and route the remainder to other markets.
If the opening process results in an imbalance, the System will begin an imbalance process by establishing an Expanded Quote Range, which will represent the limits of the range in which transactions may occur during the opening process. If there is sufficient size on the Exchange and on away markets on the opposite side of the market from the imbalance to execute all opening marketable interest at a price that is within the established EQR without leaving an imbalance, the System will open the affected series for trading at that price by executing opening marketable interest on the System, as long as the System does not trade through the ABBO. If all opening marketable size cannot be completely executed at or within the EQR without trading through the ABBO, the System will initiate an imbalance process. The System will broadcast a System Imbalance Message and initiate an Imbalance Timer (not to exceed three seconds) to allow additional orders or quotes to be submitted. At the end of the Imbalance Timer, if quotes and orders submitted during the Imbalance Timer, or other changes to the ABBO, would not allow the entire imbalance amount to trade at the Exchange at or within the EQR without trading through the ABBO, the System will send a new System Imbalance Message and initiate a Route Timer (not to exceed one second). If during the Route Timer, interest is received by the System which would allow all interest to trade on the System (i.e., there is no longer an imbalance) at the opening price without trading through other markets, the System will trade and the Route Timer will end. At the end of the Route Timer, the System will execute as many of the marketable contracts as possible by: (i) routing the number of contracts that will satisfy interest at other markets at prices better than the Exchange opening price; (ii) trading available contracts on the Exchange at the Exchange opening price; and/or (iii) routing a number of contracts that will satisfy interest at other markets at prices equal to the Exchange opening price. If not all of the marketable contracts on the Exchange can be executed, the System may repeat the imbalance process up to three times.
After the 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 514(c), all orders are matched according to either price-time priority, or pro-rata priority (as determined by the Exchange on a class-by-class basis). In addition, priority customer, market turner, Primary Lead Market Maker and/or Directed Lead Market Maker priority overlays are also available at the Exchange’s discretion on a class-by-class basis pursuant to proposed Rule 514(d). For example, (i) the priority customer overlay provides priority customers with priority over all professional and Market Maker interest at the same price; (ii) the Primary Lead Market Maker overlay (which may only be in effect if the priority customer overlay is also in effect) provides Primary Lead Market Makers with priority over other Market Makers for a certain percentage of contracts allocated at the same price (60% or 40% depending upon the number of other Market Makers at the NBBO) and for small size orders; and (iii) the Directed Lead Market Maker overlay (which may only be in effect if the priority customer overlay is also in effect) provides the Directed Lead Market Maker with priority over other Market Makers for a certain percentage of contracts allocated at the same price (60% or 40% depending upon the number of other Market Makers at the NBBO).
The Exchange’s System will, when appropriate, immediately execute incoming orders or quotes against orders and quotes in the System, provided such incoming orders and quotes will not be executed at prices inferior to the NBBO. When an incoming order cannot be fully executed, the System will handle the order by either (i) posting the order or quote at its limit price; (ii) routing it to an away market; (iii) managing it at the disseminated MBBO; or (iv) executing it in accordance with the price protection processes. The System provides price protection for non-Market Maker market orders and limit orders, which cross the NBBO upon receipt, and could not be fully executed. Such orders will only receive additional executions one minimum price variation worse than the NBBO, provided the execution does not trade through the current NBBO. The Exchange will also provide a liquidity refresh pause as part of its price protection processes, which will include the broadcasting of a liquidity refresh message. The liquidity refresh pause will be implemented when a Market Maker’s best bid or offer was at the NBBO, MIAX was the only market at the NBBO, an execution has occurred that exhausted the Exchange’s bid or offer, and there are contracts remaining to be executed at one MPV through the original MBBO. The purpose of the liquidity refresh pause, which will not exceed one second, is to give Market Makers the ability to refresh and potentially improve their quotations by allowing them to submit quotes or orders and other market participants the ability to submit orders at any price level. If, during the liquidity refresh pause, the Exchange receives a new order or quote on the opposite of the market from the incoming order’s remaining contracts, which locks or crosses the original NBBO price, the System will immediately execute the remaining contracts at the original NBBO price provided it does not trade through the current NBBO. Once the liquidity refresh pause has ended the Exchange will execute any remaining contracts as appropriate.
In executing orders submitted to the Exchange’s Book, the Exchange will not distinguish between orders submitted by Members for their own accounts and orders submitted by Members for their customers (unless the priority customer overlay is activated for a class). 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 timing of execution (other than to change or cancel an order/quote prior to execution).
The Exchange will adopt an obvious error rule that will permit it to address those instances in which transactions occurring on the Exchange involve obvious or catastrophic errors. Under the proposed rule, Members receiving an execution based on the entry of a buy or sell order or quote that clearly was in error in terms of price, will be permitted to request that the Exchange have the trade nullified or its price adjusted, in the absence of the mutual agreement of the parties to the trade. MIAX Regulatory Control (“MRC”) will review the transaction to determine whether, in fact, the transaction was the result of an obvious or catastrophic error. Upon final Exchange official action, the MRC, in conjunction with the MIAX Operations Center (“MOC”), where appropriate, shall promptly notify both parties to the trade and will either nullify or adjust the execution price of the transaction if it qualifies as an obvious or catastrophic error. A Member may appeal the decision by Exchange officials to the CRO.
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. The Exchange will require each Member to be a Member of a registered clearing agency or clear its transactions through a Member that is a member of a registered clearing agency. The Exchange will also require each Member, for every transaction in which it participates, to immediately give up the name of the Clearing Member through whom the transaction will be cleared. If there is a subsequent change in identity of the Clearing Member, the Member must, as promptly as possible, report such change to the Clearing Member on the other side of the transaction.
F. Participation in Industry Programs
The Penny Pilot Program. As indicated above, the Exchange plans to participate in the Penny Pilot Program (“Penny Pilot”). The Penny Pilot, which provides for the quoting and trading of certain option classes in penny increments was initiated at all option exchanges on January 24, 2007. The Penny Pilot is currently set to expire on June 30, 2012, unless extended. As part of the Penny Pilot, the Exchange agrees to submit semi-annual reports to the SEC for each year the Penny Pilot continues after the Exchange becomes operational. The reports will include sample data and analysis of information collected from April 1 through September 30 and October 1 through March 31 each year for the ten most active and twenty least active option classes added to the Penny Pilot. In addition, for comparison purposes, the reports include data from a control group consisting of the ten least active option classes from the initial group of 63 option classes in the program. The reports include the following: (1) data and analysis on the number of quotations generated for the options included in the report; (2) an assessment of the quotation spreads for the options included in the report; (3) an assessment of the impact of the Penny Pilot Program on the capacity of the exchange’s automated systems; (4) data reflecting the size and depth of markets, and (5) any capacity problems or other problems that arose related to the operation of the Penny Pilot Program and how the exchange addressed them.
Short Term Option Series Program. The Exchange plans to participate in the Short-Term Series Program. Pursuant to proposed Rule 404, Interpretations and Policies .02, MIAX intends to open for trading on any Thursday or Friday that is a business day, series of options on select option classes that expire on Friday of the following week. The Exchange may select up to twenty-five option classes in which Short Term Option Series may be traded. In addition to those twenty five option classes the Exchange may also list Short Term Option Series on any option classes that are selected by other securities exchanges that employ a similar program. In conjunction with this program, MIAX will submit to the SEC a report providing an analysis of the Short Term Option Series Program (the “Report”). The Report will cover a period of nine months beginning with the date of the effectiveness of the program on MIAX. The Report will be submitted no later than a month after the end of the nine month period. The Report will include the following: (1) data and written analysis on the open interest and trading volume in the classes for which Short Term Option Series were opened; (2) an assessment of the appropriateness of the option classes selected for the Program; (3) an assessment of the impact of the Program on the capacity of the Exchange, OPRA, and market data vendors (to the extent data from market data vendors is available); (4) any capacity problems or other problems that arose during the operation of the Program and how the Exchange addressed such problems; (5) any complaints that the Exchange received during the operation of the Program and how the Exchange addressed them; and (6) any additional information that would assist in assessing the operation of the Program.
G. Exchange Fees (#4)
Fees Generally . The Exchange may prescribe such reasonable fees, and assessments or other charges as it may deem appropriate and as consistent with Section 6(b) of the Exchange Act. The Exchange intends to establish a Fee Schedule, which will be filed by the Exchange pursuant to Section 19 of the Exchange Act and Rule 19b-4 thereunder setting forth all applicable transaction and other fees. It is anticipated that the Fee Schedule will have the flexibility to include (1) conventional transaction fees in which a Member is charged a fee for executions that occur on the Exchange, the amount of which will generally vary depending on different factors including whether the execution is for a Market Maker account, a firm proprietary account or a customer account; and (2) maker-taker fees in which a Member is charged a fee for transactions that access liquidity and given a rebate for certain transactions in orders that provide liquidity. The Exchange will determine on a class by class basis which type of fee will apply. Actual fee amounts and types will not be determined until close to launch of Exchange operations because the fees and how they are applied will need to reflect the competitive landscape at that time.
The Exchange may also charge membership fees, application fees, market data 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 Members from time-to-time.
H. 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.
I. 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 4:00 p.m. Eastern Time, except the Exchange may remain open for trading option contracts on Exchange Traded Fund Shares and Index-Linked Securities beyond 4:00 p.m. but in no case later than 4:15 p.m. Eastern Time. In addition, the Exchange may operate during any other day or time approved by the Board of Directors of the Exchange. The Exchange proposes to commence operations upon the approval of its Form 1 Application for Registration as a National Securities Exchange by the Securities and Exchange Commission (the “Commission”).
J. 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 or service bureau configuration. The Exchange will make available on the internet to prospective Members all necessary API connectivity documentation. A draft Users’ Manual that will be provided to all Members and prospective Members of the Exchange is included with this Exhibit E. The draft Users’ Manual describes the Exchange’s technical specifications and provides Members, prospective Members and other users of the Exchange with additional information that the Exchange believes will be useful to such persons for trading on the Exchange.
K. 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 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. See also, Chapter XVI of the proposed Rules. In addition, a Member that fails or is unable to perform any of its contracts or is insolvent is required to immediately notify the Exchange in writing. Moreover, whenever it appears that a Member 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 and other Members, the President of the Exchange may impose restrictions on such Member. See proposed Exchange Rule 305.
Other than those forms and financial statements required to be submitted with an application for 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.
The Exchange does not intend to initially list or trade common stock or non-option securities of operating companies but rather intends to initially only trade option contracts that meet the options listing standards of the Exchange. Trading of option contracts will be pursuant to applicable options listing standard requirements for option contracts in Chapter IV of the proposed Rules.
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.
Audited unconsolidated financial statements for Miami International Securities Exchange, LLC are attached. The Miami International Securities Exchange, LLC has no consolidated subsidiaries.
The Exchange represents that prior to the launch of the Exchange, Miami Holdings will provide sufficient funding to the Exchange in order for the Exchange to carry out its responsibilities under the Securities Exchange Act of 1934, as amended. The Exchange represents that prior to the launch of the Exchange (1) Miami Holdings will allocate sufficient operational assets and make a capital contribution of not less than $2,000,000 in to the Exchange’s capital account prior to the launch of the Exchange, in addition to either directly making payments of, or contributing adequate funds from Miami Holdings to the Exchange for payments by the Exchange of, the following: (i) personnel costs (including regulatory department personnel), (ii) technology support for regulatory oversight, (iii) infrastructure costs, and (iv) industry and regulatory memberships, (2) such direct funding by Miami Holdings as well as allocations and contributions by Miami Holdings to the Exchange will be adequate to operate the Exchange, including the regulation of the Exchange, and (3) there will be an explicit agreement between the Exchange and Miami Holdings that requires Miami Holdings to provide adequate funding for the Exchange’s operations, including the regulation of the Exchange, either directly by Miami Holdings or through a contribution to the Exchange. This agreement will further provide that Regulatory Funds (as defined in the By-Laws of the Exchange) will not be distributed by the Exchange to Miami Holdings. The agreement will further provide that excess funds (other than from Regulatory Funds), as determined by the Exchange, may be remitted by the Exchange to Miami Holdings.
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.)
Officers of Miami International Securities Exchange, LLC
The following are currently the officers of the Exchange entity:
1. Officers of the Exchange:
Prior to commencement of operations of the Exchange, a President and Chief Executive Officer of the Exchange may be appointed. The officers of the Exchange will serve until their successors are appointed in accordance with the By-Laws of the Exchange. Officers of the Exchange will serve at the direction of the Board of Directors.
2. Directors of Miami International Securities Exchange, LLC
The following persons are currently the directors of the Exchange entity.
Prior to the commencement of the operations of the Exchange, Miami International Holdings, Inc., as the sole owner of the securities of the Exchange, will elect directors in accordance with the By-Laws of the Exchange and the By-Laws of Miami International Holdings, Inc. Directors of the Exchange, other than the Chief Executive Officer, will serve staggered three-year terms.
3. Committees of Miami International Securities Exchange, LLC
The committees of the Board will consist of a Compensation Committee, an Audit Committee, a Regulatory Oversight Committee, an Appeals Committee, a Nominating Committee, a Member Nomination Committee and may consist of a Finance Committee and Executive Committee or such other committees as may be approved by the Board of the Exchange. After the election of the Board, the Chairman, with approval of the Board, shall appoint persons to sit on the standing committees of the Board, consistent with the Exchange’s 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:
Miami International Holdings, Inc. owns 100% of Miami International Securities Exchange, LLC. Miami International Holdings, Inc. exercises “control” over the Exchange, as that term is defined in the Form 1 instructions. Miami International Securities Exchange, LLC became a wholly owned subsidiary of Miami International Holdings, Inc. on February 1, 008.
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.
A Member must be a broker-dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Every Applicant must have and maintain membership in another options exchange registered under the Act and that is not registered solely under Section 6(g) of the Exchange Act. If such other registered options exchange has not been designated by the Commission, pursuant to Rule 17d-1 under the Exchange Act, to examine Members for compliance with financial responsibility rules (known as the Designated Examining Authority of “DEA”), then such Applicant must have and maintain a membership in FINRA.
The Exchange shall deny Membership where an Applicant has failed a required Membership test. The Exchange may deny (or may condition) an Applicant from becoming a Member or may prevent a person from becoming associated (or may 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 an Applicant from becoming a Member or may prevent a person from becoming associated (or may condition an association) with a Member when the Applicant:
(1) is a broker-dealer and (A) has a net worth (excluding personal assets) below $25,000 if the applicant is an individual, (B) has a net worth (excluding personal assets) below $50,000 if the applicant is an organization, (C) has financial difficulties involving an amount that is more than 5% of the applicant's net worth, or (D) has a pattern of failure to pay just debts;
(2) is unable satisfactorily to demonstrate a capacity to adhere to all applicable Exchange, Commission, Clearing Corporation, and Federal Reserve Board policies, rules, and regulations, including those concerning record-keeping, reporting, finance, and trading procedures; or
(3) for such other cause as the Exchange reasonably may decide.
The Exchange may determine not to permit a Member or person associated with a Member to continue in Membership or association with a Member if the Member:
(1) fails to meet any of the qualification requirements for becoming a Member or becoming associated with a Member after approval thereof;
(2) fails to meet any condition placed by the Exchange on such Membership or association; or
(3) violates any agreement with the Exchange.
The Exchange’s denials from, and imposition of conditions upon, becoming or continuing to be a Member may be appealed under Chapter XI (Hearings, Review and Arbitration) of the Exchange’s Rules.
The Exchange may also determine in accordance with the provisions of the Exchange Rules not to allow a Member or associated person of a Member to continue being a Member or associated with a Member, or to condition such continuance as a Member or associated person, if the Member or associated person is or becomes subject to a “statutory disqualification” under the Exchange Act.
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 30 days of becoming subject to a statutory disqualification, submit an application to the Exchange, in a form and manner prescribed by the Exchange, seeking to continue as a Member or in association with a Member notwithstanding the statutory disqualification.
Following the receipt of such an application, or in the event the Exchange becomes aware that a Member or associated person of a Member is subject to a statutory disqualification and has failed to submit such an application within the required time period, the Exchange shall appoint a panel composed of not less than 3 members of the Business Conduct Committee to conduct a hearing concerning the matter.
The hearing panel shall hold a hearing to determine whether to permit the Member or associated person of a Member to continue being a Member or associated with a Member, and if so, whether to condition such continuance as a Member or associated person.
Following the hearing, the hearing panel shall prepare a written decision. The decision of the hearing panel shall be subject to review by the Board, either on its own motion within 30 days after issuance, upon written request submitted by the Member or associated person of a Member or by the President of the Exchange within 15 days after issuance of the decision. If the Board does not order review of the hearing panel’s decision, the hearing panel’s decision shall become the final decision of the Exchange.
A review of the hearing panel’s decision shall be conducted by the Board or a Committee of the Board composed of at least 3 members of the Board. The decision of the Board or its described Committee shall be in writing, shall be promptly provided to the subject of the proceeding, and shall be the final decision of the Exchange.
The Exchange has entered into a regulatory services agreement with the Chicago Board
Options Exchange (“CBOE”), and may enter into a regulatory services agreement with another self-regulatory organization, FINRA, to conduct various regulatory services on behalf of the Exchange. In addition, it is the Exchange's intention to file with the Commission a plan setting forth the allocation of certain regulatory responsibilities between itself and one or more other self-regulatory organizations pursuant to Rule 17d-2 of the Exchange Act.
Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:
The Exchange 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:
The Exchange has not commenced operations and, therefore, it has no securities that are listed or traded on the Exchange. Upon the effectiveness of its Form 1 Application for Registration as a National Securities Exchange, the Exchange intends to trade listed option contracts.