Susquehanna Int'l Grp., LLP v. Sec. & Exch. Comm'n

• Citation: 866 F.3d 442
• Decision Date: 08 August 2017
• Docket Number: No. 16-1061,16-1061
• Parties: SUSQUEHANNA INTERNATIONAL GROUP, LLP, et al., Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent Options Clearing Corporation, Intervenor
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

866 F.3d 442

SUSQUEHANNA INTERNATIONAL GROUP, LLP, et al., Petitioners

v. SECURITIES AND EXCHANGE COMMISSION, RespondentOptions Clearing Corporation, Intervenor

No. 16-1061

United States Court of Appeals, District of Columbia Circuit.

Argued March 20, 2017

Decided August 8, 2017

David H. Thompson, Washington, DC, argued the cause for petitioners. With him on the briefs were Howard C. Nielson Jr., Washington, DC, Peter A. Patterson, Ada, MI, and Harold S. Reeves, Washington, DC.

Robert Battalio and Robert Jennings, pro se, were on the brief for amicus curiae Robert Battalio and Robert Jennings in support of petitioners.

Tracey A. Hardin, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. With her on the brief were Anne K. Small, General Counsel, Sanket J. Bulsara, Deputy General Counsel, Michael A. Conley, Solicitor, and Emily T.P. Rosen, Senior Counsel.

William J. Nissen, argued the cause for intervenor. With him on the brief were Steven E. Sexton and Kristen E. Rau, Chicago, IL.

Before: Garland, Chief Judge, Griffith, Circuit Judge, and Sentelle, Senior Circuit Judge.

Garland, Chief Judge

Seeking to increase its capital reserves, the Options Clearing Corporation proposed a change in its rules. That change was subject to approval by the Securities and Exchange Commission, which granted approval without itself making the findings and determinations prescribed by the Securities Exchange Act of 1934. Instead, it effectively abdicated that responsibility to the Corporation. Because this does not represent the kind of reasoned decisionmaking required by either the Exchange Act or the Administrative Procedure Act, we remand the case to the Commission for further proceedings.

I

The Options Clearing Corporation (OCC), a Delaware corporation, is a clearing agency that facilitates trades in options and other financial instruments. It is the only clearing agency for standardized U.S. options listed on U.S. national securities exchanges. Given its significant role, OCC has been designated a systemically important financial market utility and is closely regulated by the Securities and Exchange Commission (SEC). See Order Approving Proposed Rule Change Concerning the Options Clearing Corporation's Capital Plan, 81 Fed. Reg. 8294, 8294 (Feb. 18, 2016) ("Order").

At the time of the events in this case, there were twelve national securities exchanges on which listed options were traded. Five were equal shareholders in OCC; seven were nonshareholders, lacking any ownership interest. All of the exchanges clear their trades in listed options through OCC. In addition to the exchanges, OCC has "clearing members" that clear and settle options trades for their customers through the exchanges. See Order, 81 Fed. Reg. at 8294 ; OCC, Bylaws Art. V (amended 2009).

OCC charges clearing members fees for the transactions they make. For each upcoming year, OCC sets the fees to cover the year's projected expenses, plus a buffer. If, at the end of the year, OCC has taken in more fees than needed to cover its expenses and maintain its reserves, it refunds the excess fees to the clearing members, allocated in proportion to what they had paid. Until the developments at issue here, OCC refunded all such excess fees. See Notice of Filing of a Proposed Rule Change Concerning a Proposed Capital Plan, 80 Fed. Reg. 5171, 5175 (Jan. 30, 2015) ("Notice of Proposed Rule Change").

This case concerns OCC's attempt to boost its capital reserves and, in order to do so, to alter how fees and refunds are calculated. In 2014, OCC began evaluating its capital level and eventually determined that it did not have enough to cover "business, operational, and pension risks." Order, 81 Fed. Reg. at 8296. While these capital needs exclude counterparty and on-balance-sheet risks, which are covered by billions of dollars in other funds, they are still significant. OCC determined that on top of its existing capital reserves of $25 million, it needed an additional $222 million of capital immediately on hand, plus another $117 million in backup "Replenishment Capital" that it could call upon if necessary. See Notice of Proposed Rule Change, 80 Fed. Reg. at 5172 ; Order, 81 Fed. Reg. at 8295-96.

To amass those reserves, OCC developed a Capital Plan. Under the Plan, OCC's five shareholder exchanges would make immediate capital contributions to reach OCC's current capital target and also pledge to provide Replenishment Capital upon request. The Plan compensates those contributions with dividends paid out of OCC's fees. In particular, after fees are applied to OCC's operating expenses, and then used to restore capital reserves if they have dipped, the remaining unused fees are split between dividends and refunds. Approximately half of the unused fees go to shareholders as dividends; approximately half are refunded to clearing members. In other words, whereas clearing members previously received all of the excess fees as refunds, the Plan diverts roughly half of those refunds to dividends. See Notice of Proposed Rule Change, 80 Fed. Reg. at 5173-75.

The Plan makes other changes to OCC's fee practices as well. The buffer used to calculate each year's fees—that is, the amount by which that year's projected expenses are inflated to arrive at the amount to be charged as upfront fees—decreases under the Plan from 31% to 25%. And the Plan provides for a permanent end to refunds (but not dividends) if Replenishment Capital becomes necessary and is not repaid in 24 months or if the target capital requirement is not restored within that period. See id.

OCC's Plan cannot go into effect unless approved by the SEC because OCC is a "self-regulatory organization" under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq . ("Exchange Act"). In early 2015, OCC brought its Plan to the SEC, which published a Notice of Filing of a Proposed Rule Change and solicited public comments. The SEC issued a final Order approving the Plan in early 2016. See Order, 81 Fed. Reg. at 8294-95.

Petitioners—two nonshareholder exchanges (Miami International Securities Exchange, LLC and BOX Options Exchange LLC), a clearing member (KCG Americas LLC, a subsidiary of Petitioner KCG Holdings), and a market participant (Susquehanna International Group, LLP)—sought judicial review. They also moved to stay the SEC's Order to prevent the OCC's Plan from going into effect, but a panel of this court denied the stay.

Susquehanna Int'l Grp., LLP v. SEC , No. 16-1061 (D.C. Cir. Feb. 23, 2016) (order denying motion for stay). As a consequence, OCC currently operates according to the Plan.

II

We have jurisdiction to review the SEC's Order pursuant to 15 U.S.C. § 78y(a)(3). We review the Order under the Administrative Procedure Act (APA), which requires us to hold unlawful agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or that is "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E) ; see 15 U.S.C. § 78y(a)(4) ; NetCoalition v. SEC , 615 F.3d 525, 532 (D.C. Cir. 2010). To satisfy the "arbitrary and capricious" standard, "the agency must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’ " Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co. , 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines, Inc. v. United States , 371 U.S. 156, 168, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962) ).

OCC is registered as a clearing agency with the SEC, and is therefore classified as a "self-regulatory organization." See 15 U.S.C. §§ 78c(a)(26), 78q-1(b). The SEC "shall approve" a self-regulatory organization's proposed rule change only "if it finds that such proposed rule change is consistent with" provisions of the Exchange Act. Id. § 78s(b)(2)(C)(i); see id. § 78s(b)(2)(C)(ii). In turn, a clearing agency's rules are consistent with the Act only if "the Commission determines that" they meet certain specified requirements. Id. § 78q-1(b)(3). Petitioners argue that the SEC erred in approving OCC's Plan because it does not meet several of those requirements.

First, the Exchange Act requires that a clearing agency's rules "not impose any burden on competition not necessary or appropriate in furtherance of the purposes of" the Act. Id. § 78q-1(b)(3)(I). Petitioners object that the Plan overcompensates shareholder exchanges, which unjustifiably burdens competition by nonshareholders. See Pet'rs' Br. 24.¹

Second, the Act requires that a clearing agency's rules be "designed ..., in general, to protect investors and the public interest." Id. § 78q-1(b)(3)(F). Petitioners contend that the Plan harms investors and the public by transforming OCC from a public utility to a profit-seeking monopoly and by increasing the fees charged to OCC's customers. See Pet'rs' Br. 33-40.

Third, the same subsection requires that rules not be "designed to permit unfair discrimination ... among participants in the use of the clearing agency." 15 U.S.C. § 78q-1(b)(3)(F). Petitioners maintain that the Plan unfairly discriminates between shareholder exchanges and nonshareholder exchanges by denying nonshareholders the opportunity to contribute capital in exchange for dividends. Petitioners argue further that the Plan discriminates between shareholder exchanges and clearing members by denying clearing members compensation for the capital they contribute as fees. See Pet'rs' Br. 41-43.²

Fourth, the Act requires that a self-regulatory organization "comply with ... its own rules." 15 U.S.C. § 78s(g)(1).

OCC's bylaws provide that nonshareholder exchanges "will be promptly provided with information that [OCC's] Executive Chairman considers to be of competitive significance" and that a "requesting [nonshareholder exchange] shall be afforded the opportunity to make presentations" to OCC's Board or to a committee of the Board. OCC, Bylaws...