Overview
Title
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Increase the Options Regulatory Fee Until December 31, 2025
Agencies
ELI5 AI
Cboe Exchange, Inc. wants to make a rule that slightly raises the fee they charge for checking on trading activities to make sure they're fair, and this new rule will last until the end of 2025. This little fee increase helps cover the cost of keeping trading safe and honest, but it won't cover more than 75% of their total costs for doing this job.
Summary AI
Cboe Exchange, Inc. proposed a temporary increase in its Options Regulatory Fee (ORF) from $0.0017 to $0.0023 per contract side, effective April 1, 2025, to cover more of its regulatory costs. The revenue from ORF helps pay for the regulation of customer trading activities, like monitoring and investigations. This increase will still keep ORF revenue below 75% of Cboe's total regulatory costs. The new rate is set to end on December 31, 2025, and the Exchange plans to explore a revised ORF model and possibly seek further adjustments in the future.
Keywords AI
Sources
AnalysisAI
Cboe Exchange, Inc. has announced a proposal to temporarily increase its Options Regulatory Fee (ORF) from $0.0017 to $0.0023 per contract side, effective April 1, 2025. This adjustment is intended to meet a larger portion of the Exchange's regulatory costs associated with supervising and regulating customer trading activities. The ORF helps cover costs related to routine regulatory activities, including surveillances, investigations, and policy enforcement.
Summary of the Document
The proposal sets a new rate for the ORF, which will be in effect until December 31, 2025. The purpose of the ORF increase is to generate revenue that covers, but doesn't exceed, 75% of the Exchange's regulatory costs. The remaining costs will be met through other regulatory fees and fines. Cboe plans to explore a revised ORF model in the future, which might result in further adjustments to how fees are imposed.
Significant Issues and Concerns
The document contains technical language and industry-specific terms that might be challenging for the average reader. Terms like "Trading Permit Holder," "Clearing Trading Permit Holder," and "Consolidated Audit Trail" are specific to financial markets and may not be readily understandable without background knowledge.
The temporary nature of the rate increase, ending December 31, 2025, adds a layer of uncertainty. Businesses may find it challenging to plan financially with this transient adjustment, especially without clear insight into the future ORF model changes. Furthermore, the current proposal lacks specific details about the upcoming model changes, leaving Trading Permit Holders (TPHs) uncertain about long-term impacts.
The reasoning behind the 75% revenue threshold is not explicitly clear, presenting potential challenges for readers in understanding its significance. Without industry background, it may seem that existing practices are favored, without exploring new methodologies.
Broad Impact on the Public
The fee increase impacts the broader public by potentially increasing the cost of engaging in options trading. This could hit smaller traders or new entrants to the market harder, as they have tighter margins and fewer resources. Because the ORF is applied to transactions cleared in the customer range, individual investors transacting through TPHs might see indirect cost increases.
Specific Stakeholder Impacts
Specific stakeholders, such as TPHs, will be directly impacted by the ORF increase. The fee structure aims to ensure that entities responsible for more regulatory activity bear higher costs. However, this could disadvantage smaller TPHs that can less easily absorb increased fees compared to larger firms.
Furthermore, while existing market participants might comprehend previous rate changes, new entrants or smaller entities could find it difficult to navigate the rationale behind these adjustments, potentially causing hesitation to enter the market.
Positive Impacts could include a better-funded regulatory framework, which in theory, should ensure more robust market surveillance and integrity. This aspect benefits the overall market by deterring manipulative practices and ensuring a level playing field.
In conclusion, while the proposed ORF rate increase addresses regulatory funding needs, it poses challenges due to its temporary nature and complex terminology. These facets could affect the decision-making of public investors and financial professionals. The Exchange should aim to clarify the necessity and impacts of these changes to aid understanding and facilitate smoother transitions for all stakeholders involved.
Financial Assessment
The Federal Register document discusses a proposal by the Cboe Exchange, Inc. to modify the Options Regulatory Fee (ORF), which is a charge levied on transactions in the options market. The Exchange proposes to increase the ORF from $0.0017 per contract side to $0.0023 per contract side, effective April 1, 2025. This increase is intended to better align the revenue generated from the ORF with the regulatory costs incurred by the Exchange. This change is an effort to address the gap between the revenue collected and the regulatory costs, which currently fall short of covering even 75% of these costs.
The increased fee is set against the backdrop of a broader regulatory financial structure. The ORF, in conjunction with other regulatory fees and fines, is designed not to exceed 75% of the Exchange's total annual regulatory costs. This threshold is set to ensure that fees are used primarily for regulatory purposes and not for other business functions of the Exchange. In recent years, the revenue from the ORF and other regulatory sources has been significantly lower than this threshold, prompting this proposed increase. Even with the proposed adjustment, the revenue is expected to cover only 54% of the total regulatory costs, well within the industry's typical practice.
A notable aspect of the proposal is the temporary nature of this fee adjustment. The increased fee of $0.0023 per contract side has a proposed sunset date of December 31, 2025, after which it would revert to the current rate of $0.0017. This reflects an ongoing evaluation of the ORF structure and hints at future changes that could streamline the model.
The proposal highlights potential issues with long-term planning for Trading Permit Holders (TPHs) due to this temporary increase. The document indicates that the Exchange is contemplating a broader revamp of the ORF model to assess fees only on transactions occurring on the Exchange itself, yet details on this future model remain unspecified. This lack of specificity may cause uncertainty for stakeholders attempting to plan strategically. Additionally, there is no detailed discussion on the financial impact of this increase on smaller trading entities or individual investors, which could be perceived as a disadvantage to these groups compared to larger organizations that might better absorb increased costs.
The document references comparisons to other exchanges, noting that the proposed ORF rate is still lower than that of competitors such as NYSE Arca and Nasdaq PHLX, which charge $0.0038 and $0.0034 per contract side, respectively. This comparison underscores the competitive market environment and the Exchange's attempts to remain within industry norms while addressing internal regulatory funding shortfalls.
In summary, the proposed fee increase is a calculated move to ensure the financial sustainability of the Cboe Exchange's regulatory activities, albeit temporarily, while potentially reevaluating the ORF model in the future. However, the effects on various market participants and the strategic implications due to the temporary nature of the change present challenges that merit close attention from stakeholders.
Issues
• The document uses technical jargon and industry-specific terminology that may be difficult for general readers to understand, such as 'Options Regulatory Fee', 'Trading Permit Holder', 'Clearing Trading Permit Holder', 'linkage transactions', 'Routing Services', 'semi-annual review', and 'Consolidated Audit Trail'.
• The document is lengthy and detailed, which might overwhelm readers who are not familiar with financial regulatory practices.
• The proposal mentions a sunset date of December 31, 2025, for the current proposed rate, which suggests uncertainty and may not provide long-term clarity or stability for TPHs (Trading Permit Holders).
• There is potential complexity in understanding the rationale behind setting the revenue threshold at 75% of regulatory costs and how it compares to other exchanges.
• The discussion on future proposals to revamp the ORF model lacks specific details on how the new framework will be different and how it will affect TPHs.
• There is no discussion on the impact of the fee increase on smaller trading entities or individual investors, which might be seen as favoring larger entities that can absorb higher costs.
• The explanation for why the ORF revenue is capped at 75% is not immediately clear without industry background knowledge, which might appear to favor existing market practices over potential new approaches.
• The document assumes that readers are familiar with past fee levels and changes, which might make it difficult for new readers to fully understand the context of the proposed changes.