Application of Topaz Exchange, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission

I. Introduction

On July 3, 2012, Topaz Exchange, LLC (“Topaz Exchange” or “Exchange”) submitted to the Securities and Exchange Commission (“Commission”) an Application for Registration as a National Securities Exchange (“Form 1 Application”) under Section 6 of the Securities Exchange Act of 1934 (“Act”). On December 19, 2012, Topaz Exchange submitted Amendment No. 1 to its Form 1 Application. On December 31, 2012, Topaz Exchange submitted Amendment No. 2 to its Form 1 Application. Notice of the Form 1 Application, as modified by Amendment Nos. 1 and 2, was published for comment in the Federal Register on March 7, 2013. The Commission received four comment letters regarding the Form 1 Application. Topaz Exchange submitted a detailed response to comments on July 11, 2013. On July 11, 2013, Topaz Exchange submitted Amendment No. 3 to the Form 1 Application.

II. Discussion

Under Sections 6(b) and 19(a) of the Act, the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and can comply, and can enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange.

As discussed in greater detail below, the Commission finds that Topaz Exchange's application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of Topaz Exchange are consistent with Section 6 of the Act in that, among other things, they assure a fair representation of the exchange's members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer; and that they are designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, protect investors and the public interest and are not designed to permit unfair discrimination between customers, issuers, or broker-dealers. Finally, the Commission finds that Topaz Exchange's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.

A. Overview of Ownership of Topaz Exchange

Topaz Exchange is structured as a Delaware limited liability company (“LLC”), and is a wholly-owned subsidiary of International Securities Exchange Holdings, Inc. (“ISE Holdings”). In December 2007, ISE Holdings became a direct, wholly-owned subsidiary of various German companies and Swiss companies through an intermediary holding company, U.S. Exchange Holdings, Inc. (“U.S. Exchange Holdings”). U.S. Exchange Holdings is wholly-owned by a German stock corporation, Eurex Frankfurt AG (“Eurex Frankfurt”). Eurex Frankfurt is a wholly-owned subsidiary of a Swiss stock corporation, Eurex Zurich AG (“Eurex Zurich”), which, in turn, was in 2007 jointly owned by Deutsche Börse and SWX Swiss Exchange AG (“SWX”) (“Eurex Acquisition”). In 2012, SWX transferred its interest in Eurex Zurich to a Swiss subsidiary of Deutsche Börse (“Deutsche Börse Acquisition”), such that Eurex Zurich is now jointly owned by Deutsche Börse (together with Eurex Frankfurt, the “German companies”) and EGD (together with Eurex Zurich, the “Swiss companies,” and the Swiss companies and the German companies are referred to collectively as the “Non-U.S. Upstream Owners,” and collectively with U.S. Exchange Holdings, the “Upstream Owners”). As Deutsche Börse holds a 100% direct ownership interest in EGD, it therefore holds a 100% indirect ownership interest in Eurex Zurich.

B. Governance of Topaz Exchange

1. Topaz Exchange Board of Directors

The board of directors of Topaz Exchange (“Topaz Exchange Board” or “Board”) will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of Topaz Exchange as a self-regulatory organization (“SRO”). Topaz Exchange will be governed by a board of directors comprised of no fewer than 8, but no more than 16, directors. Specifically:

• At least 50% of Topaz Exchange Board must be comprised of Non-Industry Directors;

• At least one of the Non-Industry Directors must be a Public Director;

• Topaz Exchange Board will include the President/Chief Executive Officer as a director; and

• At least 30% of Topaz Exchange Board must be officers, directors or partners of Topaz Exchange members, and must be elected by a plurality of holders of Exchange Rights (“Industry Directors”), of which at least one must be elected by a plurality of holders of Primary Market Maker (“PMM”) Exchange Rights, one must be elected by a plurality of holders of Competitive Market Maker (“CMM”) Exchange Rights, and one must be elected by a plurality of holders of Electronic Access Member (“EAM”) Exchange Rights, provided that the number of each type of Industry Director shall always be equal to one another.

As part of the process to elect members of the Board, the Nominating Committee will nominate the proposed Industry Directors and the Corporate Governance Committee or ISE Holdings will nominate the proposed Non-Industry Directors. A petition process will allow Topaz Exchange members to nominate alternative candidates for consideration as Industry Directors. At the first annual meeting and at each annual meeting thereafter, ISE Holdings will elect all of the members of the Topaz Exchange Board (except the Industry Directors which are elected by Topaz Exchange members ), but it will be required to do so in compliance with the compositional requirements for the Board outlined in the Topaz Exchange Constitution.

The Commission believes that the requirement in the Topaz Exchange Constitution that at least 30% of the directors be Industry Directors and the means by which they will be chosen by Topaz Exchange members provide for the fair representation of members in the selection of directors and the administration of Topaz Exchange and therefore is consistent with Section 6(b)(3) of the Act. Section 6(b)(3) of the Act requires that “the rules of the exchange assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer.” As the Commission previously has noted, this statutory requirement helps to ensure that members have a voice in the exchange's use of self-regulatory authority, and that the exchange is administered in a way that is equitable to all those persons who trade on its market or through its facilities. In addition, with respect to the requirement that the number of Non-Industry Directors, including at least one Public Director, will at all times be at least 50% of the Board, the Commission believes that the proposed composition of the Topaz Exchange Board satisfies the requirements of Section 6(b)(3) of the Act.

Interim Board

After Topaz Exchange is granted registration by the Commission, but prior to commencing operations, ISE Holdings, as the sole shareholder of Topaz Exchange, will appoint an interim board of directors for Topaz Exchange that will serve only until the first annual meeting (“Interim Topaz Exchange Board”). The Interim Topaz Exchange Board will include the same individuals as the then-serving ISE Board and will consist of 15 directors: the President/Chief Executive Officer Director; 6 Industry Directors; and 8 Non-Industry Directors. Topaz Exchange represents that it anticipates that there will be a significant overlap between its membership and the membership of ISE. Topaz Exchange further represents that it does not expect to receive a meaningful number of applications for membership from non-ISE members during the tenure of the Interim Topaz Exchange Board. Thus, the 6 interim Industry Directors to be appointed to the Topaz Exchange Board likely will have been elected by Topaz Exchange members in their capacity as ISE members.

These interim Industry Directors will serve until the first initial Topaz Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the Topaz Exchange Constitution and described above. Topaz Exchange will complete such process as promptly as possible and within 90 days after its application for registration as a national securities exchange is granted by the Commission.

The Commission believes that the process for electing the interim Topaz Exchange Board, as proposed, is consistent with the requirements of the Act, including that the rules of the exchange assure fair representation of the exchange's members in the selection of its directors and administration of its affairs. The Interim Topaz Exchange Board will be filled by current ISE Board members (which currently include Industry Directors who were elected by current ISE members) until the first annual meeting of Topaz Exchange. As noted above, Topaz Exchange represents that it anticipates that there will be significant overlap between the initial members of Topaz Exchange and the current members of ISE. Topaz Exchange further represents that it will complete the full nomination, petition, and voting process as set forth in the Topaz Exchange Constitution, as promptly as possible and within 90 days of when Topaz Exchange's application for registration as a national securities exchange is granted. As noted above, as part of this process, members of Topaz Exchange will be able to petition for alternative candidates to be considered for Industry Director positions. This process will provide persons who are approved as members of Topaz Exchange after the effective date of this Order with the opportunity to participate in the selection of the Industry Directors within 90 days of when Topaz Exchange's application for registration as a national securities exchange is granted.

The Commission believes that the Interim Topaz Exchange Board process is designed to provide member representation sufficient to allow Topaz Exchange to commence operations for an interim period prior to going through the process to elect a new Board pursuant to the full nomination, petition, and voting process set forth in the Topaz Exchange Constitution.

2. Exchange Committees

Topaz Exchange will have a number of Board committees, including an Executive Committee (consisting of six directors, including three Non-Industry Directors), a Finance and Audit Committee (consisting of between three and five directors, all of whom must be Non-Industry Directors), a Compensation Committee (consisting of between three and five directors, all of whom must be Non-Industry Directors), and a Corporate Governance Committee (consisting of at least three directors, all of whom must be Non-Industry Directors), and such other additional committees as may be approved by the Topaz Exchange Board.

Topaz Exchange also will have a Nominating Committee, which will be a committee of Topaz Exchange and not a committee of the Board. The Nominating Committee will be composed of three industry representatives, and will be responsible for nominating candidates for Industry Director positions. As noted above, there will be a petition process by which members of Topaz Exchange can nominate their own nominees for the Industry Director positions. These nomination processes are consistent with processes that the Commission has approved for other exchanges.

The Commission believes that Topaz Exchange's proposed committees, which are similar to committees maintained by other exchanges, are designed to help enable Topaz Exchange to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

C. Regulation of Topaz Exchange

When Topaz Exchange commences operations as a national securities exchange, Topaz Exchange will have all the attendant regulatory obligations under the Act. In particular, Topaz Exchange will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the Topaz Exchange and ISE Holdings governance documents are designed to facilitate the ability of Topaz Exchange and the Commission to fulfill their regulatory and oversight obligations under the Act. The discussion below summarizes some of these key provisions.

1. Ownership Structure: Ownership and Voting Limitations

As noted above in Section II.A, Topaz Exchange will be structured as a Delaware LLC and will be a wholly-owned subsidiary of ISE Holdings following any Commission grant of registration to Topaz Exchange as a national securities exchange. ISE Holdings is owned by German companies and Swiss companies through an intermediary holding company, U.S. Exchange Holdings. ISE Holdings' governing documents impose limits on any direct or indirect change in control of ISE Holdings, which are to be enforced through the creation of a statutory trust.

First, ISE Holdings' governing documents prohibit any Topaz Exchange member (alone or together with its Related Persons ) from owning more than 20% of any class of Voting Shares of ISE Holdings. A second limit prohibits any other person (alone or together with its related persons) from owning more than 40% of any class of Voting Shares of ISE Holdings. A third limit prohibits any person (alone or together with its Related Persons) from voting or causing the voting of shares representing more than 20% of the voting power of the then outstanding Voting Shares of ISE Holdings. As described more fully below, if a person exceeds an ISE Holdings' ownership or voting limit, a majority of the capital stock of ISE Holdings that has the right by its terms to vote in the election of the ISE Holdings board of directors (“ISE Holdings Board”) or on other matters (other than matters affecting the rights, preferences or privileges of the capital stock) automatically will be transferred to a Delaware statutory trust (“Trust”).

Consistent with the governance structure of other exchanges, ISE Holdings' Board may waive the 40% ownership limitation and the 20% voting restriction for persons other than Topaz Exchange members, subject to certain specified conditions, but such waiver will not be effective unless approved by the Commission.

The Topaz Exchange LLC Agreement and Topaz Exchange Constitution do not include change of control provisions that are similar to those in the ISE Holdings Certificate and ISE Holdings Bylaws. However, the Topaz Exchange LLC Agreement and the Topaz Exchange Constitution explicitly provide that ISE Holdings is the Sole LLC Member of Topaz Exchange. ISE Holdings is permitted under the Topaz Exchange LLC Agreement to assign all but not less than all of its interest in Topaz Exchange (and therefore no longer would be its sole owner), but the assignment of all of ISE Holdings' interest in Topaz Exchange will be subject to the rule filing procedures under Section 19 of the Act.

As detailed above, ISE Holdings is owned by various Upstream Owners, none of which have similar ownership and voting limits in their governing documents. To facilitate compliance with the ISE Holdings ownership and voting limits, the Upstream Owners have committed to take reasonable steps necessary to cause ISE Holdings to be in compliance with the ISE Holdings ownership and voting limits. These commitments are contained in the governing documents for U.S. Exchange Holdings and in corporate resolutions for the non-U.S. Upstream Owners.

Further, in connection with the Eurex Acquisition, ISE implemented the Trust pursuant to a Trust Agreement (“2007 Trust Agreement”) among ISE Holdings, U.S. Exchange Holdings, trustees (“Trustees”), and a Delaware trustee, which agreement has been subsequently amended to take into account subsequent acquisitions, including the current transaction.

The current agreement (“2012 Trust Agreement”) serves, in part, to effectuate the ownership and voting limits for ISE Holdings in the event that a person obtains an ownership or voting interest in excess of the limits established in the ISE Holdings Certificate without prior Commission approval. To accomplish that purpose, for as long as ISE Holdings controls, directly or indirectly, a national securities exchange, including Topaz Exchange, the Trust would accept, hold and dispose of Trust Shares on the terms and subject to the conditions set forth therein. Specifically, if any person's ownership percentage exceeds the ownership limits or any person's voting control percentage exceeds the voting limits without Commission approval, the Excess Shares will be transferred automatically to the Trust pursuant to the terms prescribed in the ISE Holdings Certificate. The Trust then would accept the Excess Shares and hold them for the benefit of the trust beneficiary, U.S. Exchange Holdings, who has the right to reacquire the Excess Shares either when a person no longer exceeds the ownership or voting limits or when such excess ownership percentage or voting control percentage is approved by the Commission in accordance with ISE Holdings Certificate.

Although ISE Holdings is not independently responsible for regulation of Topaz Exchange, its activities with respect to the operation of Topaz Exchange must be consistent with, and must not interfere with, the self-regulatory obligations of Topaz Exchange. As described above, the provisions applicable to direct and indirect changes in control of ISE Holdings and Topaz Exchange, as well as the voting limitation, are designed to help prevent any owner of ISE Holdings from exercising undue influence or control over the operation of Topaz Exchange and to help assure that Topaz Exchange is able to effectively carry out its regulatory obligations under the Act. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. As the Commission has noted in the past, however, a member's interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member. A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of Topaz Exchange to effectively carry out its regulatory oversight responsibilities under the Act.

The Commission believes that Topaz Exchange's and ISE Holdings' proposed ownership and voting limitation provisions, coupled with the provisions in U.S. Exchange Holdings' governing documents, the Topaz Exchange Resolutions and the 2012 Trust Agreement described above, are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act. In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or Topaz Exchange to effectively carry out their regulatory oversight responsibilities under the Act.

2. Regulatory Independence and Oversight

a. ISE Holdings

Although ISE Holdings itself will not itself carry out regulatory functions, its activities with respect to the operation of Topaz Exchange must be consistent with, and not interfere with, the self-regulatory obligations of Topaz Exchange. In this regard, Topaz Exchange and ISE Holdings' respective corporate documents include certain provisions that are designed to maintain the independence of the Topaz Exchange's self-regulatory function. These provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration. Specifically:

• The directors, officers, and employees of ISE Holdings must give due regard to the preservation of the independence of the self-regulatory function of Topaz Exchange and must not take actions that would interfere with the effectuation of decisions by the Topaz Exchange Board relating to its regulatory functions (including disciplinary matters) or that would adversely affect the ability of Topaz Exchange to carry out its responsibilities under the Act.

• ISE Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and must cooperate with Topaz Exchange and the Commission pursuant to, and to the extent of, their respective regulatory authority. In addition, ISE Holdings' officers, directors, and employees must comply with federal securities laws and the rules and regulations thereunder and agree to cooperate with Topaz Exchange and the Commission pursuant to their respective regulatory authority.

• ISE Holdings, and its officers, directors, employees, and agents are deemed to irrevocably submit to the jurisdiction of the U.S. federal courts, the Commission, and Topaz Exchange, for purposes of any suit, action, or proceeding pursuant to U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, Topaz Exchange's activities.

• All books and records of Topaz Exchange containing confidential information pertaining to the self-regulatory function of Topaz Exchange (including but not limited to confidential information regarding disciplinary matters, trading data, trading practices and audit information) shall be retained in confidence by Topaz Exchange and its officers, directors, employees and agents and will not be used by Topaz Exchange for any commercial purpose and shall not be made available to persons other than those officers, directors, employees and agents that have a reasonable need to know the contents thereof.

• The books and records of Topaz Exchange and ISE Holdings must be maintained in the United States and, to the extent they are related to the operation or administration of Topaz Exchange, ISE Holdings books and records will be subject at all times to inspection and copying by the Commission.

• Furthermore, to the extent that they are related to the activities of Topaz Exchange, the books, records, premises, officers, directors, and employees of ISE Holdings will be deemed to be the books, records, premises, officers, directors, and employees of Topaz Exchange, for purposes of, and subject to oversight pursuant to, the Act.

• ISE Holdings will take necessary steps to cause its officers, directors, and employees, prior to accepting a position as an officer, director, or employee (as applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to Topaz Exchange.

• ISE Holdings Certificate and ISE Holdings Bylaws require that, so long as ISE Holdings controls Topaz Exchange, any changes to those documents be submitted to the Topaz Exchange Board, and, if such change is required to be filed with, or filed with and approved by, the Commission before it may be effective pursuant to Section 19 of the Act and the rules thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.

b. Upstream Owners

Although the Upstream Owners will not carry out any regulatory functions, the activities of each of the Upstream Owners with respect to the operation of Topaz Exchange must be consistent with, and not interfere with, the self-regulatory obligations of Topaz Exchange. The 2007 Resolutions, as supplemented by the supplemental Resolutions for Topaz Exchange, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws include certain provisions that are designed to maintain the independence of the self-regulatory function of Topaz Exchange, enable Topaz Exchange to operate in a manner that complies with the U.S. federal securities laws, including the objectives and requirements of Sections 6(b) and 19(g) of the Act, and facilitate the ability of Topaz Exchange, and the Commission to fulfill their regulatory and oversight obligations under the Act. Specifically:

• Each such Non-U.S. Upstream Owner and U.S. Exchange Holdings will comply with the U.S. federal securities laws and the rules and regulations thereunder and cooperate with the Commission and Topaz Exchange. Also, each board member, officer, and employee of the Non-U.S. Upstream Owners, and of U.S. Exchange Holdings, in discharging his or her responsibilities, must comply with the U.S. federal securities laws and the rules and regulations thereunder, and must cooperate with the Commission and Topaz Exchange.

• In discharging his or her responsibilities as a board member of a Non-U.S. Upstream Owner, or of U.S. Exchange Holdings, each such member must, to the fullest extent permitted by applicable law, take into consideration the effect that the actions of the Upstream Owner or U.S. Exchange Holdings, as applicable, will have on the ability of Topaz Exchange to carry out its responsibilities under the Act. In addition, each of the Non-U.S. Upstream Owners and U.S. Exchange Holdings, and their board members, officers, and employees, must give due regard to the preservation of the independence of the self-regulatory function of Topaz Exchange (or in the case of the Non-U.S. Upstream Owners, that they will take reasonable steps necessary to cause their officers and employees involved in the activities of Topaz Exchange to give due regard to preserving the independence of the self-regulatory functions of Topaz Exchange).

• The Non-U.S. Upstream Owners (along with their respective board members, officers, and employees), and U.S. Exchange Holdings agree to keep confidential, to the fullest extent permitted by applicable law, all confidential information pertaining to the self-regulatory function of Topaz Exchange, including, but not limited to, confidential information regarding disciplinary matters, trading data, trading practices and audit information, contained in the books and records of Topaz Exchange and not use such information for any commercial purposes.

• The books and records of the Non-U.S. Upstream Owners related to the activities of Topaz Exchange must at all times be made available for, and the books and records of U.S. Exchange Holdings must be subject at all times to, inspection and copying by the Commission and Topaz Exchange.

• Books and records of U.S. Exchange Holdings related to the activities of Topaz Exchange will be maintained within the United States.

• For so long as each of the Non-U.S. Upstream Owners or U.S. Exchange Holdings directly or indirectly controls Topaz Exchange, the books, records, officers, directors (or equivalent), and employees of each of the Non-U.S. Upstream Owners or of U.S. Exchange Holdings will be deemed to be the books, records, officers, directors, and employees of Topaz Exchange, as applicable. And, for so long as U.S. Exchange Holdings directly or indirectly controls Topaz Exchange, the premises of U.S. Exchange Holdings will be deemed to be the premises of Topaz Exchange.

• To the extent involved in the activities of Topaz Exchange, each of the Non-U.S. Upstream Owners, its board members, officers, and employees, irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission for purposes of any suit, action or proceeding arising out of, or relating to, the activities of Topaz Exchange to the extent such board member, officer or employee are involved in the activities of Topaz Exchange. Likewise, U.S. Exchange Holdings, its officers, directors, and employees whose principal place of business and residence is outside of the United States, to the extent such director, officer, or employee is involved in the activities of Topaz Exchange, irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission for purposes of any suit, action or proceeding pursuant to the U.S. federal securities laws, and the rules or regulations thereunder, commended or initiated by the Commission arising out of, or relating to, the activities of Topaz Exchange.

• The 2007 Resolutions, as supplemented by the Topaz Exchange Resolutions, and the U.S. Exchange Holdings Certificate and the U.S. Exchange Holdings Bylaws each require that any change to the applicable document (including any action by the Non-U.S. Upstream Owners that would have the effect of amending or repealing the Topaz Exchange Resolutions or the 2007 Resolutions) must be submitted to the Topaz Exchange Board. If such change must be filed with, or filed with and approved by, the Commission under Section 19 of the Act, and the rules thereunder, then such change shall not be effective until filed with, or filed with and approved by, the Commission.

The 2012 Trust Agreement, in addition to enforcing the ownership and voting limits, also serves to effectuate compliance with the other commitments made under the Topaz Exchange Resolutions, which incorporate the 2007 Resolutions. To accomplish that purpose, the Trust would determine whether a Material Compliance Event has occurred or is continuing. The Trust would determine whether the occurrence and continuation of a Material Compliance Event requires the exercise of the Call Option. The Trust holds a Call Option over the capital stock of ISE Holdings that may be exercised if a Material Compliance Event has occurred and continues to be in effect, and upon such exercise, the Trust Beneficiary and ISE Holdings, as applicable, will take such actions as are necessary to transfer, or cause the transfer to the Trust of a majority of the Voting Shares then outstanding. The Trust will transfer Deposited Shares from the Trust back to the Trust Beneficiary, as provided in Section 4.2(h) therein, only if no Material Compliance Event is continuing or, notwithstanding its continuation, the Trustees determine that the retention of the Deposited Shares could not reasonably be expected to address the continuing Material Compliance Event, provided that the determination is filed with, or filed with and approved by, the Commission.

The Commission believes that the provisions discussed above in Sections II.C.2.a. and b., which are designed to help maintain the independence of Topaz Exchange's regulatory function and help facilitate the ability of Topaz Exchange to carry out its regulatory responsibilities and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act. Whether Topaz Exchange operates in compliance with the Act, however, depends on how it and ISE Holdings in practice implement the governance and other provisions that are the subject of this Order.

Further, Section 19(h)(1) of the Act provides the Commission with the authority “to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of [the Act], the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance” with any such provision by its members (including associated persons thereof). If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act.

Even in the absence of the provisions described above, under Section 20(a) of the Act, any person with a controlling interest in Topaz Exchange would be jointly and severally liable with and to the same extent that Topaz Exchange is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. In addition, Section 20(e) of the Act) creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been “a cause of” a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation. These provisions are applicable to all entities controlling Topaz Exchange, including the Trust, ISE Holdings, U.S. Exchange Holdings, and the Non-U.S. Upstream Owners.

c. Swiss Resolutions and Procedure With FINMA

As discussed more fully in the Eurex Acquisition Order, Swiss law is designed to protect Swiss sovereignty concerns and prohibits the direct delivery of information from the Swiss owners of Topaz Exchange to the Commission or Topaz Exchange with respect to the activities of Topaz Exchange. In light of the Swiss penal code, the Swiss companies agreed to make their books and records relating to the activities of ISE, EDGA and EDGX available for inspection and copying by the Commission through FINMA. The Swiss companies made the same agreement in connection with the Eurex Acquisition, and agreed to do so again with respect to the Topaz Exchange prior to the grant of registration to Topaz Exchange as a national securities exchange. In November 2009, the Commission and FINMA both approved and signed the Undertaking Relating to the Oversight of Affiliated Markets (“2009 Undertaking”) pursuant to which FINMA undertook to serve as a conduit for the delivery of information between the Commission and the Swiss owners of ISE Holdings (“Procedure”) for any national securities exchange registered under Section 6 of the Act that ISE Holdings controls or would, in the future, control, directly or indirectly.

Subject to the terms and conditions relating to the Procedure, coupled with the fact that under the Topaz Exchange LLC Agreement, all trading records of Topaz Exchange must be maintained in the United States, the Commission believes that the Procedure should not result in a level of access materially different from that agreed to by other entities that control U.S. national securities exchanges.

3. Regulation of Topaz Exchange

As a prerequisite to the Commission's granting of an exchange's application for registration, an exchange must be so organized and have the capacity to carry out the purposes of the Act. Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the Act and the rules and regulations thereunder and the rules of the exchange. The discussion below summarizes how Topaz Exchange proposes to structure and conduct its regulatory operations.

a. Corporate Governance Committee and Finance and Audit Committee

Topaz Exchange will have a Chief Regulatory Officer (“CRO”) with general responsibility for supervision of the regulatory operations of Topaz Exchange. The CRO will report to the Corporate Governance Committee and to the President/Chief Executive Officer, although the Topaz Exchange Board would retain the power to call the CRO to report directly to the Board as needed, and the CRO may call special meetings of the Board, as necessary. The Corporate Governance Committee will meet regularly with the CRO to review regulatory matters.

The Corporate Governance Committee will monitor the regulatory program for sufficiency, effectiveness and independence, and will oversee trade practices and market surveillance, audits, examinations and other regulatory responsibilities with respect to members and the conduct of investigations. The Corporate Governance Committee also will supervise the CRO; will receive an annual report from the CRO assessing Topaz Exchange's self-regulatory program for the Board; will recommend changes that would ensure fair and effective regulation; and will review regulatory proposals and advise the Board as to whether and how such changes may impact regulation. The Corporate Governance Committee will review annually the regulatory budget and specifically inquire into the adequacy of the resources available in the budget for regulatory activities. The Corporate Governance Committee will authorize unbudgeted expenditures for necessary regulatory expenses. In addition, the Finance and Audit Committee will provide oversight over the systems of internal controls established by management and the Board and the Exchange's regulatory and compliance process.

The Compensation Committee will set compensation for the CRO. The Corporate Governance Committee, in its sole discretion, will make hiring and termination decisions with respect to the CRO, in each case taking into consideration any recommendations made by the President/Chief Executive Officer. The Corporate Governance Committee will be informed about the compensation of the CRO, including factors affecting changes thereto.

b. Regulatory Funding

To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, Topaz Exchange represented that, prior to commencing operations as a national securities exchange, ISE Holdings will provide sufficient funding to Topaz Exchange for the exchange to carry out its responsibilities under the Act. Specifically, Topaz Exchange represented that ISE Holdings will make a cash contribution to Topaz Exchange of $5 million, in addition to previously provided “in-kind” contributions of legal, regulatory and infrastructure-related services to Topaz Exchange Topaz Exchange represented in its Form 1 Application that the cash and in-kind contributions to Topaz Exchange will be adequate to operate Topaz Exchange, including its regulatory program. Further, Topaz Exchange, with ISE Holdings as its parent, will be affiliated with an existing exchange, ISE. Individuals currently employed by ISE have been providing, and will continue to provide, services to Topaz Exchange.

Topaz Exchange represented in its Form 1 Application that there will be a written agreement between Topaz Exchange and ISE Holdings that requires ISE Holdings to provide adequate funding for Topaz Exchange's operation, including the regulation of Topaz Exchange. This agreement further provides that ISE Holdings will reimburse Topaz Exchange for its costs and expenses to the extent Topaz Exchange's assets are insufficient to meet its costs and expenses. Excess funds, as solely determined by Topaz Exchange, will be remitted to ISE Holdings. Further, Topaz Exchange will receive all fees, including regulatory fees and trading fees, payable by Topaz Exchange's members, as well as any funds received from any applicable market data fees and OPRA tape revenue. Regulatory funds, meaning the fees, fines or penalties derived from the regulatory operations of Topaz Exchange, will be used to fund the legal, regulatory and surveillance operations of Topaz Exchange.

c. Rule 17d-2 Agreements; Regulatory Contracts with FINRA and ISE

Section 19(g)(1) of the Act, among other things, requires every SRO registered as either a national securities exchange or national securities association to examine for, and enforce compliance by, its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO's own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act. Rule 17d-2 of the Act permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members. These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO. Such regulatory duplication would add unnecessary expenses for common members and their SROs.

A 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO. Many SROs have entered into Rule 17d-2 agreements.

Topaz Exchange has represented to the Commission that it will enter into the following allocation of regulatory responsibilities pursuant to Rule 17d-2 of the Act (“17d-2 Plans”), including the two existing multiparty plans applicable to options trading:

• Multiparty 17d-2 Plan for the Allocation of Regulatory Responsibility for Options Sales Practice Matters;

• Multiparty 17d-2 Plan for the Allocation of Regulatory Responsibility for Options Related Market Surveillance Matters; and

• Bilateral 17d-2 Plan with FINRA that would cover, among other things, general inspection, examination, and enforcement activity.

If the Commission declares effective the amendments to the multilateral 17d-2 Plans and the new bilateral 17d-2 Plan, another SRO (often FINRA) would assume certain regulatory responsibility for members of Topaz Exchange that are also members of the SRO that assumes the regulatory responsibilities. This regulatory structure would be consistent with that of other exchanges, including ISE.

In addition, Topaz Exchange has entered into a third-party Regulatory Service Agreement (“RSA”) with FINRA. Under the RSA, FINRA will carry out certain specified regulatory activities on behalf of Topaz Exchange. For example, FINRA, in its capacity as service provider to Topaz Exchange, will provide member operation services, including membership application review, conducting market surveillance investigation services, conducting routine and cause examination services, assisting Topaz Exchange with disciplinary proceedings pursuant to Topaz Exchange's rules including conducting hearings, and providing dispute resolution services to Topaz Exchange members on behalf of Topaz Exchange. Topaz Exchange, however, will retain ultimate legal responsibility for the regulation of its members and market. This regulatory structure would be consistent with that of other exchanges.

Topaz Exchange has also entered into a facilities management agreement (“FMA”) with ISE. Pursuant to the proposed FMA, ISE intends to provide to Topaz Exchange certain services, including, for example, business management services, facilities management services, IT services, fiscal services, as well as Commission and other regulatory compliance services and other legal services, such as surveillance programs, legal programs, systems and other operational services. Topaz Exchange, however, will retain ultimate legal responsibility for the regulation of its members and market.

The Commission believes that it is consistent with the Act for Topaz Exchange to contract with other SROs to perform certain examination, enforcement, and disciplinary functions. These functions are fundamental elements of a regulatory program, and constitute core self-regulatory functions. The Commission believes that both FINRA, as a SRO that provides contractual services to other SROs, and ISE, as an SRO that currently operates an options exchange, should have the capacity to perform these functions for Topaz Exchange. However, Topaz Exchange, unless relieved by the Commission of its responsibility, bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on Topaz Exchange's behalf. In performing these regulatory functions, however, the SRO retained to perform specified regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of Topaz Exchange to perform its regulatory functions. Accordingly, although FINRA and ISE will not act on their own behalves under their respective SRO responsibilities in carrying out these regulatory services for Topaz Exchange, as the SROs retained to perform regulatory functions, FINRA and ISE may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by Topaz Exchange.

As part of its FMA with ISE, Topaz Exchange proposes to use dual employees to staff its regulatory services program. In other words, current ISE employees will also serve in a similar capacity for Topaz Exchange under the FMA. Topaz Exchange represents that the FMA will contain an obligation on the part of Topaz Exchange and ISE to preserve the other party's information and materials which are confidential, proprietary and/or trade secrets and prevent unauthorized use or disclosure to third parties.

The Commission believes that the use of ISE employees by Topaz Exchange is appropriate, as the operations, rules, and management of ISE and Topaz Exchange will overlap to a considerable degree such that Topaz Exchange should benefit by leveraging the experience of current ISE staff. The Commission has approved such arrangements in a similar context. However, the Commission expects both ISE and Topaz Exchange to monitor the workload of their dual employees and supplement their staffs, if necessary, so that Topaz Exchange maintains sufficient personnel to allow it to carry out the purposes of the Act and enforce compliance with the rules of Topaz Exchange and the federal securities laws.

D. Trading System

1. Access to Topaz Exchange

Access to Topaz Exchange will be through the use of Exchange Rights. Through an application process, organizations will be approved to become members of Topaz Exchange and to exercise trading rights. Exchange Rights will not convey any ownership rights, but will provide for voting rights for representation on the Topaz Exchange Board and will confer the ability to transact on Topaz Exchange. Exchange Rights may not be leased and are not transferable except in the event of a change in control of a member or corporate reorganization involving a member. There is no limit on the number of Exchange Rights issued by Topaz Exchange.

Membership in Topaz Exchange will be open to any broker-dealer registered under Section 15(b) of the Act that meets the standards for membership set forth in the rules of Topaz Exchange. The Exchange's denials from, and impositions of conditions upon, becoming or continuing to be a member may be appealed pursuant to rules governing hearing and review, described in Section II.E below. In addition to its regular membership application process, Topaz Exchange also will provide a process whereby a current member of ISE in good standing that is a registered broker-dealer can submit an abbreviated “waive-in” application to Topaz Exchange. This waive-in process is similar to arrangements in place at other exchanges.

Topaz Exchange will have three classes of membership: (1) PMMs; (2) CMMs; and (3) EAMs. PMM and CMMs may seek appointment to become market makers in one or more options classes traded on the exchange. Topaz Exchange proposes to allow firms that register as market makers to receive special privileges or rights over non-market maker members, such as participation entitlements for PMMs, if they satisfy certain affirmative and negative market making obligations on the exchange. This is similar to arrangements in place at other exchanges, such as ISE.

The Commission finds that Topaz Exchange's proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof. Topaz Exchange's proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges.

The Commission notes that pursuant to Section 6(c) of the Act, an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, Topaz Exchange must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.

In addition, Topaz Exchange also will allow non-members to access Topaz Exchange as “sponsored customers” of a Topaz Exchange member, subject to certain rules. The sponsoring member will be responsible for implementing policies and procedures to supervise and monitor the trading of its sponsored users to ensure compliance with all applicable federal securities laws and rules and Topaz Exchange rules. Topaz Exchange's proposed sponsored access rules are similar to the rules of other exchanges that provide for sponsored access and are consistent with Rule 15c3-5 under the Act.

2. Linkage

Topaz Exchange intends to become a participant in the Plan Relating to Options Order Protection and Locked/Crossed Markets or any successor plan (“Linkage Plan”). If admitted as a participant to the Linkage Plan, other plan participants will be able to send orders to Topaz Exchange in accordance with the terms of the plan as applied to Topaz Exchange.

Topaz Exchange rules include relevant definitions; establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan; impose obligations on Topaz Exchange regarding how it must process incoming orders; establish a general standard that members and Topaz Exchange should avoid trade-throughs; establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges; and establish obligations with respect to locked and crossed markets.

The Commission believes that Topaz Exchange has proposed rules that are designed to comply with the requirements of the Linkage Plan. Further, as provided below, before Topaz Exchange can commence operations as an exchange, it must become a participant in the Linkage Plan.

3. Market Makers

a. Registration of Market Makers

Members of Topaz Exchange may apply to become one of two types of market maker: PMMs or CMMs (collectively, “Market Makers”). Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations. Each class of Market Maker will receive a specific level of benefits and privileges in exchange for a specific level of obligation that such Market Maker assumes to the Topaz Exchange market.

To begin the process of registering as a PMM or CMM, a member will be required to file a written application with Topaz Exchange. In reviewing a member's application for membership, Topaz Exchange will consider, among other things, the applicant's market making ability. To qualify for registration as a Market Maker, a member of Topaz Exchange must meet the requirements established in Rule 15c3-1 under the Act and the general requirements set forth in Topaz Exchange Rule 800 series, including the minimum financial requirements of Topaz Exchange Rule 809. All members who are approved to become Market Makers will be designated as specialists on Topaz Exchange for all purposes under the Act and rules thereunder. Topaz Exchange will not limit the number of qualifying entities that may become Market Makers.

In addition, all ISE market makers in good standing will be eligible for an Exchange Right in the same membership category in which they operate on ISE to trade on Topaz Exchange. For example, a CMM in good standing on ISE will be eligible to become a CMM on Topaz Exchange, through the submission and approval of a Topaz Exchange Waive-In Membership Application.

Once approved, a Market Maker may seek appointment to make markets in one or more options classes traded on the Topaz Exchange. Topaz Exchange will provide non-ISE Members with at least sixty days advance written notice of the date upon which the Exchange will allocate options classes and appoint market makers in order to ensure that non-ISE Members have a reasonable opportunity to participate in those processes. A market participant must have completed a membership application to be eligible to participate in the appointment and allocation processes.

Either the Topaz Exchange Board or a committee thereof will appoint classes of options contracts traded on Topaz Exchange to Market Makers taking into consideration: (1) The financial resources available to the Market Maker; (2) the Market Maker's experience and expertise in market making or options trading; and (3) the maintenance and enhancement of competition among Market Makers in each option class to which they are appointed. No appointment of a Market Maker will be without the Market Maker's consent to such appointment, provided that refusal to accept an appointment may be deemed sufficient cause for termination or suspension of a market maker's registration. Topaz Exchange will appoint a PMM to each options class traded on Topaz Exchange. Once appointed, Topaz Exchange will surveil a Market Maker's activity for continued compliance with all applicable rules and requirements, which are discussed in more detail below.

The Commission finds that Topaz Exchange's proposed rules for the registration and appointment of Market Makers are consistent with the Act. In particular, Topaz Exchange's rules provide an objective process by which a member could become a Market Maker on Topaz Exchange and provide for oversight by Topaz Exchange to monitor for continued compliance by Market Makers with the terms of their application for such status. The Commission notes that Topaz Exchange's proposed Market Maker registration and appointment requirements are similar to those of other options exchanges.

b. Market Maker Obligations

Pursuant to Topaz Exchange rules, Market Makers will be subject to a number of general obligations. In particular, the transactions of a Market Maker should constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market and a Marker Maker should not make bids or offers or enter into transactions that are inconsistent with such a course of dealings. A Market Maker has a continuous obligation to engage, to a reasonable degree under the existing circumstances, in dealings for his own account when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of and demand for a particular options contract, or a temporary distortion of the price relationships between options contracts of the same class. For all series of option classes which the Market Maker is appointed, the Market Maker is expected to: (1) Compete with other Market Makers to improve the market; (2) make markets that, absent changed market conditions, will be honored for the number of contracts entered into the Topaz Exchange's system; (3) update market quotations in response to changed market conditions; (4) price options contracts fairly by, among other things, bidding and offering so as to create the prescribed bid/ask differentials. These provisions are similar to arrangements in place at other options exchanges.

Further, Market Makers must maintain minimum net capital in accordance with Topaz Exchange rules, including the minimum financial requirement of Topaz Exchange Rule 809, in addition to the Act and rules and regulations thereunder. Market Makers also must maintain information barriers between their market making activity and Other Business Activities that are reasonably designed to prevent the misuse of material, non-public corporate or market information in the possession of persons on one side of the barrier from influencing the conduct of persons on the other side of the barrier.

Topaz Exchange's rules governing Market Maker quoting obligations are tailored to the specific class of Market Maker (that is, PMM or CMM). Specifically, a PMM will be subject to the highest standard applicable on Topaz Exchange, as a PMM must enter continuous two-sided quotations and enter into any resulting transactions in all of the series listed on the Topaz Exchange of the options classes to which it is appointed on a daily basis. PMMs are also required to participate in the opening rotation. Although a CMM is not required to enter quotations in the options classes to which it is appointed, whenever a CMM does enter a quote in an options class to which it is appointed, the CMM must then provide continuous quotations in that class for 60% of the time the options class is open for trading on the Topaz Exchange. Further, CMMs may be called upon by a Topaz Exchange official to submit a single quote or maintain continuous quotes in one or more series of options class to which the CMM is appointed whenever, in the judgment of such official, it is necessary to do so in the interest of fair and orderly markets. For purposes of meeting the continuous quoting obligations discussed herein, a Market Maker's quote must meet the bid/ask differential requirements of Topaz Exchange Rule 803(b)(4).

In options classes other than to which it is appointed, a Market Maker should not engage in transactions in an account in which it has an interest that are disproportionate in relation to, or in derogation of, the performance of its market making obligations as specified in the Topaz Exchange rules. Further, the total number of contracts executed during a quarter by a CMM in options classes to which it is not appointed may not exceed 25% of the total number of contracts traded by such CMMs in classes to which it is appointed and with respect to which it was quoting pursuant to Topaz Exchange Rule 804(e)(2). Similarly, the total number of contracts executed during a quarter by a PMM in options classes to which it is not appointed may not exceed 10% of the total number of contracts traded per each PMM membership.

If Topaz Exchange finds any failure by a Market Maker to properly perform as a market maker, such Market Maker may be subject to suspension or termination. Topaz Exchange may suspend or terminate any appointment of a Market Maker under Topaz Exchange Rule 802 and may make additional appointments whenever, in Topaz Exchange's judgment, the interests of a fair and orderly market are best served by such action.

Market Makers receive certain benefits for carrying out their responsibilities. For example, a broker-dealer or other lender may extend “good faith” credit to a member of a national securities exchange or registered broker-dealer to finance its activities as a market maker or specialist. PMMs are also entitled to certain participation entitlements. In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.

The Commission believes that a market maker must be subject to sufficient and commensurate affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify favorable treatment. The Commission further believes that the rules of all U.S. options markets need not provide the same standards for market maker participation, so long as they impose affirmative obligations that are consistent with the Act.

The Commission believes that Topaz Exchange's Market Maker participation requirements impose appropriate affirmative obligations on Topaz Exchange's Market Makers that are commensurate with the benefits afforded to such participants, as discussed above, and, accordingly, are consistent with the Act. The Commission believes that the specific levels of benefits conferred on the different classes of Market Makers (PMMs and CMMs) are appropriately balanced by the obligations imposed by Topaz Exchange's rules. The Commission further believes that Topaz Exchange's market maker requirements, which are identical to ISE's rules and similar to other options exchanges' rules, impose sufficient appropriate obligations that are consistent with the Act.

Finally, the Commission believes that the Act does not mandate a particular market model for exchanges, and while Market Makers may become an important source of liquidity on Topaz Exchange, they will likely not be the only source as Topaz Exchange is designed to match buying and selling interest of all Topaz Exchange participants.

4. Order Display, Execution, and Priority

Topaz Exchange proposes to operate a fully automated electronic options trading platform to buy or sell securities with a continuous, automated matching function. Liquidity will be derived from Topaz Exchange members acting as principal or as agent electronically submitting quotes as well as market and various types of limit orders to buy or to sell. Non-members also may access Topaz Exchange pursuant to Topaz Exchange rules governing “sponsored access.” All of these electronic submissions to Topaz Exchange will be from remote locations, as there will be no trading floor. Topaz Exchange's Optimise system generally will automatically execute incoming orders. Non-opening trades will occur when a buy order/quote and a sell order/quote match on the Topaz Exchange's order book. All options will be traded in decimals on Topaz Exchange and will be consistent with the Penny Pilot.

All orders submitted to Topaz Exchange's trading platform must have a designated price and size (limit orders) or must be orders to buy or sell a stated amount of a security at the national best bid or offer when the order reaches Topaz Exchange (market orders). Members may submit the following orders to Topaz Exchange: Market Orders; Limit Orders (including Marketable Limit, Fill-or-Kill, Immediate or Cancel, Non-Displayed Penny Order, Intermarket Sweep, and Stopped Orders); or Contingency Orders (including All-Or-None, Stop, Stop Limit, Customer Participation, Reserve, Attributable, Customer Cross, Qualified Contingent Cross, Minimum Quantity, Do-Not-Route, Add Liquidity, Opening Only, and Good-Till-Date Orders). Like ISE, Topaz Exchange also will permit flash mechanisms, which thereby permit certain orders to first be exposed at the NBBO to all Topaz Exchange members for execution at the National Best Bid or Offer (“NBBO”) before an unaffiliated broker will, under contract with Topaz Exchange, route the order to another market for execution.

Quotes entered by PMMs and CMMs must, like Limit Orders, be priced and have a designated size. Orders will be accepted for any security traded on Topaz Exchange, whether submitted by a member on a proprietary or agency basis in any size, whereas quotes for any security traded on Topaz Exchange may only be submitted by PMMs and CMMs and only in the options classes to which the market makers are appointed. Topaz Exchange will be required to maintain a full audit trail of every incoming and outgoing message (including all orders and quotes) submitted to the Topaz Exchange's system. Members may receive status reports regarding orders submitted to Topaz Exchange or change or cancel an order at any time before that order is executed on Topaz Exchange, except as otherwise specified in Topaz Exchange Rule 723 (Price Improvement Mechanism for Crossing Transactions).

All orders and quotes submitted to Topaz Exchange will be displayed unless designated otherwise by the member submitting the order. Displayed orders and quotes will be displayed on an anonymous basis (except for Attributable Orders, which will allow voluntary disclosure of firm identification information) at a member's specified price. Non-Displayed Orders (the non-displayed portion of a Reserve Order or a Non-Displayed Penny Order) will not be displayed to anyone and will not have time priority over displayed orders at the same price.

Topaz Exchange will utilize a pro-rata priority scheme with a Priority Customer preference. This scheme is the same as what the Commission has approved for ISE.

In addition, under Topaz Exchange rules, PMMs are granted certain participation entitlements. For example, PMMs will be entitled to a participation entitlement with respect to each incoming order if they have a quote at the NBBO. The PMM participation entitlement will apply only to any remaining balance after any Priority Customer orders have first been satisfied. The PMM will not be allocated a total quantity greater than the quantity it is quoting at the execution price, and it will not receive any further allocation of an order if it receives a participation entitlement. Another such entitlement provides that small size orders (i.e., five or fewer contracts) will be allocated in full to the PMM if it has a quote at the NBBO.

These participation entitlements for PMMs are consistent with provisions that the Commission has approved for other exchanges. The Commission believes that these entitlements are appropriately balanced by the obligations imposed on these classes of market makers, as discussed in detail above. In particular, PMMs are subject to higher quoting obligations than other Market Makers who are not eligible to receive the aforementioned participation entitlements. Therefore, the Commission believes that the proposed rules regarding participation entitlements are consistent with the Act.

Topaz Exchange proposes to make available certain additional order processing and matching features, largely based on features available on ISE. Mechanisms that will be utilized by Topaz Exchange include: A Price Improvement Mechanism (which affords the opportunity for price improvement after an auction for eligible orders above the NBBO); a Facilitation Mechanism (which affords members an opportunity to cross orders after an auction and provides the facilitating member the opportunity to receive 40% of the agency order); and a Solicited Order Mechanism (which allows members representing agency orders the opportunity to cross large size solicited orders after an auction). These mechanisms are consistent with substantially similar mechanisms currently existing on other options exchanges, including identical mechanisms on ISE with respect to non-complex orders.

Members will be able to access Topaz Exchange through a variety of electronic systems, and non-members will be able to access Topaz Exchange pursuant to sponsored access arrangements with Topaz Exchange members, pursuant to Topaz Exchange rules. As noted above, Topaz Exchange also intends to become a participant in the Linkage Plan. The manner in which Topaz Exchange proposes to comply with the Linkage Plan is identical to the manner in which ISE complies with the Linkage Plan. To comply with the Linkage Plan, Topaz Exchange, among other things, will prohibit its members from effecting a transaction at a price that is inferior to the NBBO, unless an exception applies. Topaz Exchange will provide a centralized process for sending intermarket sweep orders to other exchanges on behalf of Public Customer Orders. Topaz Exchange will contract with one or more unaffiliated brokers to route orders to other exchanges when necessary to comply with the Linkage Plan. In circumstances where marketable Public Customer Orders are received when Topaz Exchange is not at the NBBO or orders are received that would lock or cross another market, they will be exposed to Topaz Exchange members for up to one second. If, after a Public Customer Order is exposed, such order cannot be executed in full on Topaz Exchange at the then-current NBBO or better and is marketable, the lesser of the full displayed size of the protected bid(s) or protected offer(s) that are priced better than the Topaz Exchange's quote or the balance of the order will be sent to a contracted unaffiliated broker, and any additional balance of the order that is not marketable against the then-current NBBO will be placed on the Topaz Exchange book.

The Commission believes that Topaz Exchange's proposed display, execution, and priority rules are consistent with the Act. In particular, the Commission finds that the proposed rules are consistent with Section 6(b)(5) of the Act, which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and to not permit unfair discrimination between customers, issuers, or dealers. The Commission also finds that the proposed rules are consistent with Section 6(b)(8) of the Act, which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The trading rules of Topaz Exchange are substantially similar to the current ISE trading rules, which were approved at the time ISE's registration as a national securities exchange was granted or filed with and approved by the Commission (or otherwise became effective) pursuant to Section 19(b) of the Act. The Commission believes that Topaz Exchange's trading rules, in general, do not raise any novel or controversial issues.

5. Section 11(a) of the Act

Section 11(a)(1) of the Act prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises discretion (collectively, “covered accounts”), unless an exception applies. The Exchange has represented that it has analyzed its rules proposed hereunder, and believes that they are consistent with Section 11(a) of the Act and rules thereunder. For the reasons set forth below, based on Topaz Exchange's representations, the Commission believes that Topaz Exchange's order execution algorithm, including the Facilitation, Solicitation and Customer Cross processes (but excluding the Price Improvement Mechanism), will allow members to meet the requirements of Rule 11a2-2(T) for executions on Topaz Exchange. Additionally, the Commission believes that Topaz Exchange members' executions that occur through the Price Improvement Mechanism will be consistent with the requirements in Section 11(a)(1)(G) of the Act and rule 11a1-1(T) thereunder.

a. Rule 11a2-2(T)

Rule 11a2-2(T) under the Act, known as the “effect versus execute” rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) May not be affiliated with the executing member; (ii) must transmit the order from off the exchange floor; (iii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; and (iv) with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule.

In a letter to the Commission, Topaz Exchange requested that the Commission concur with its conclusion that Topaz Exchange members that enter orders through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, (but excluding those transactions effected through the PIM process), satisfy the requirements of Rule 11a2-2(T). For the reasons set forth below, the Commission believes that Topaz Exchange members that enter orders through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, but excluding those transactions effected through the PIM process, will satisfy the conditions of Rule 11a2-2(T).

Rule 11a2-2(T)'s first condition is that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages over non-members in handling their orders after transmitting them to the Exchange. Topaz Exchange has represented that the design of the trading platform ensures that no member has any special or unique trading advantage in the handling of its orders after transmitting its orders to Topaz Exchange. Based on the Exchange's representation, the Commission believes that the Topaz Exchange trading system, including the Facilitation, Solicitation and Customer Cross processes, will satisfy this requirement.

Second, Rule 11a2-2(T) requires orders for covered accounts to be transmitted from off the exchange floor. Topaz Exchange will not have a physical trading floor, and like other automated systems, will receive orders electronically through remote terminals or computer-to-computer interfaces. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange's floor by electronic means. Orders sent to Topaz Exchange, regardless of where it executes within the Topaz Exchange system, including as a Facilitation, a Solicitation or a Customer Cross process, will be transmitted from remote terminals directly to Topaz Exchange by electronic means. Since the Topaz Exchange trading system receives all orders electronically through remote terminals or computer-to-computer interfaces, the Commission believes that the trading system, including the Facilitation, Solicitation and Customer Cross processes, will satisfy the off-floor transmission requirement.

Third, Rule 11a2-2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. Topaz Exchange represented that at no time following the submission of an order is a member able to acquire control or influence over the result or timing of an order's execution. According to Topaz Exchange, orders submitted through the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, also meet the non-participation requirement. The execution of a member's order depends not on the member entering the order, but rather on what orders, bids, or offers are present in the system at the time the member submits the order and on the priority of those orders, bids or offers. Topaz Exchange represents that orders sent to Topaz Exchange and through the Facilitation, Solicitation and Customer Cross processes will be centrally processed and executed automatically by Topaz Exchange. Topaz Exchange further represents that orders sent to Topaz Exchange will be transmitted from remote terminals directly to the system by electronic means. Once an order is submitted to Topaz Exchange, the order is executed against another order based on the established matching algorithms for the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes. Trades will execute when orders or quotations on Topaz Exchange match one another based on their priority. As Topaz Exchange stated in its Exchange 11(a) Request Letter, the execution does not depend on the participant but rather upon what other orders are entered into the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes, at or around the same time as the subject order; what orders are on Topaz Exchange; or submitted as Responses; and where the order is ranked based on the priority ranking algorithm. Therefore, at no time following the submission of an order to the Topaz Exchange system, including through the Facilitation, Solicitation or Customer Cross processes, is a participant able to acquire control or influence the result or timing of orders submitted to the Topaz Exchange system, including through the Facilitation, Solicitation or Customer Cross processes. Accordingly, the Commission believes that the non-participation requirement will be met when orders are executed automatically through use of the Topaz Exchange system, including the Facilitation, Solicitation and Customer Cross processes.

Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2-2(T). Topaz Exchange members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule's exemption.

b. Section 11(a)(1)(G) and Rule 11a1-1(T)

Section 11(a)(1)(G) of the Act provides an additional exemption from the general prohibition set forth in Section 11(a)(1) for any transaction for a member's own account, provided that: (i) Such member is primarily engaged in certain underwriting, distribution, and other activities generally associated with broker-dealers and whose gross income is derived principally from such business and related activities; and (ii) the transaction is effected in compliance with the rules of the Commission, which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the exchange. In addition, Rule 11a1-1(T) under the Act specifies that a transaction effected on a national securities exchange for the account of a member which meets the requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in accordance with the requirements of Section 11(a)(1)(G)(ii), to be not inconsistent with the maintenance of fair and orderly markets and to yield priority, parity, and precedence in execution to orders for the account of non-members or persons associated with non-members of the exchange, if such transaction is effected in compliance with certain requirements.

Topaz Exchange represented that its Price Improvement Mechanism, or PIM, is a process set forth in Topaz Exchange Rule 723 whereby an EAM can provide price improvement opportunities for a transaction. As Topaz Exchange stated in its Exchange 11(a) Request Letter, Topaz Exchange's proposed PIM rules will require that Priority Customer interest, at any given price, be executed in full before Professional Orders and market maker quotes. Additionally, Topaz Exchange's proposed PIM rules will require non-member Professional Orders to be executed in full before any proprietary interest of members (i.e., proprietary interest from EAMs and market makers). Because Topaz Exchange Rule 723(d) will require Topaz Exchange members to yield priority to Priority Customers and non-member Professional Orders in the PIM process, the Commission believes that the proposal with respect to transactions effected through the PIM process will be consistent with Section 11(a)(1)(G) and Rule 11a1-1(T) thereunder. The Commission also reminds exchanges and their members, however, that, in addition to yielding priority to non-member orders at the same price, members must also meet the other requirements under Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) thereunder (or satisfy the requirements of another exception) to effect transactions for their own accounts.

E. Discipline and Oversight of Members

As noted above, one prerequisite for the Commission's grant of an exchange's application for registration is that a proposed exchange must be so organized and have the capacity to be able to carry out the purposes of the Act. Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with the Act and the rules and regulations thereunder and the rules of the exchange.

Topaz Exchange rules codify Topaz Exchange's disciplinary jurisdiction over its members, thereby facilitating its ability to enforce its members' compliance with its rules and the federal securities laws. Topaz Exchange's rules permit it to sanction members for violations of the Act and the rules and regulation thereunder and Topaz Exchange's rules by, among other things, expelling or suspending members; limiting members' activities, functions, or operations; fining or censuring members; suspending or barring a person from being associated with a member; or any other fitting sanction in accordance with Topaz Exchange rules.

Topaz Exchange's disciplinary and oversight functions will be administered in accordance with Chapter 16 of the Topaz Exchange rules, which incorporates by reference Chapter 16 of ISE rules, governing disciplinary jurisdiction. Unless delegated to another SRO pursuant to the terms of an effective 17d-2 Plan, Topaz Exchange regulatory staff (including regulatory staff of another SRO that may be acting on Topaz Exchange's behalf pursuant to a regulatory services agreement) will, among other things, investigate potential securities laws violations and initiate charges pursuant to Topaz Exchange rules.

Upon a finding of probable cause of a violation within the disciplinary jurisdiction of Topaz Exchange and where further proceedings are warranted, Topaz Exchange will conduct a hearing on disciplinary matters before a professional hearing officer and two members of the Business Conduct Committee (“Panel”). The Topaz Exchange member (or its associated person) or the Topaz Exchange regulatory staff may petition for review of the Panel's decision by the Topaz Exchange Board. Any review will be conducted by the Topaz Exchange Board or a committee thereof composed of at least three of its directors, at least one of which shall be an Industry Director (whose decision must be ratified by the Topaz Exchange Board). In addition, the Topaz Exchange Board on its own motion may order review of a disciplinary decision. The Topaz Exchange Board may affirm, reverse, or modify, in whole or in part, the Panel's decision. The decision of the Topaz Exchange Board will be in writing and will be final.

Appeals from any determination that impacts access to Topaz Exchange, such as termination or suspension of membership, will be instituted under, and governed by, the provisions in the Chapter 17 of the Topaz Exchange rules, which incorporates by reference the provisions in Chapter 17 of ISE rules. Topaz Exchange's Chapter 17 applies to persons economically aggrieved by any of the following actions of Topaz Exchange including, but not limited to: (a) Denial of an application to become a Member; (b) barring a person from becoming associated with a Member; and (c) limiting or prohibiting services provided by the Topaz Exchange or services of any exchange member.

Any person aggrieved by an action of Topaz Exchange within the scope of the Chapter 17 may file a written application to be heard within thirty days after such action has been taken. Applications for hearing and review will be referred to the Business Conduct Committee, which will appoint a hearing panel of no less than three members of such Committee. The decision of the hearing panel made pursuant to Chapter 17 of the Topaz Exchange rules is subject to review by the Topaz Exchange Board, either on its own motion, or upon written request submitted by the applicant or the President of Topaz Exchange. The review will be conducted by the Topaz Exchange Board or a committee of the Topaz Exchange Board composed of at least three directors.

The Commission finds that Topaz Exchange's proposed disciplinary and oversight rules and structure, as well as its proposed process for persons economically aggrieved by certain Topaz Exchange actions, are consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act in that they provide fair procedures for the disciplining of members and persons associated with members. The Commission further finds that the proposed Topaz Exchange rules, which incorporate by reference ISE rules, are designed to provide Topaz Exchange with the ability to comply, and with the authority to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of Topaz Exchange. The Commission notes that Topaz Exchange's proposed disciplinary and oversight rules and structures are similar to the rules of other exchanges.

F. Listing Requirements

Topaz Exchange does not intend to offer original listings when it commences operations. Instead, Topaz Exchange will list and trade only standardized option contracts that are listed on other national securities exchanges and cleared by the Options Clearing Corporation. Topaz Exchange's listing rules, including the criteria for the underlying securities of the options to be traded, incorporate by reference all of the listing rules of ISE. The Commission finds that Topaz Exchange's proposed initial and continued listing rules are consistent with the Act, including Section 6(b)(5), in that they are designed to protect investors and the public interest and to promote just and equitable principles of trade. Before beginning operation, Topaz Exchange will need to become a participant in the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Act (“OLPP”). In addition, before beginning operation, Topaz Exchange will need to become a participant in the Options Clearing Corporation.

III. Exemption From Section 19(b) of the Act With Regard to ISE, CBOE, NYSE, and FINRA Rules Incorporated by Reference

Topaz Exchange proposes to incorporate by reference certain ISE, CBOE, NYSE and FINRA rules. Thus, for certain Topaz Exchange rules, Topaz Exchange members will comply with a Topaz Exchange rule by complying with the referenced ISE, CBOE, NYSE or FINRA rule.

In connection with the proposal to incorporate the ISE, CBOE, NYSE and FINRA rules by reference, Topaz Exchange requested, pursuant to Rule 240.0-12 under the Act, an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to the Topaz Exchange rules that are effected solely by virtue of a change to a cross-referenced ISE, CBOE, NYSE or FINRA rule. Topaz Exchange proposes to incorporate by reference categories of rules, rather than individual rules within a category, that are not trading rules. In addition, Topaz Exchange agrees to provide written notice to its members whenever FINRA, ISE, CBOE or NYSE proposes a change to a cross-referenced rule and whenever any such proposed changes are approved by the Commission or otherwise become effective.

Using the authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act. The Commission is hereby granting Topaz Exchange's request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that Topaz Exchange proposes to incorporate by reference. The exemption is conditioned upon Topaz Exchange providing written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or NYSE proposes to change an incorporated by reference rule and when the Commission approves any such changes. The Commission believes that the exemption is appropriate in the public interest and consistent, with the protection of investors because it will promote more efficient use of Commission's and SROs' resources by avoiding duplicative rule filings based on simultaneous changes to identical rule text sought to be implemented by more than one SRO.

IV. Conclusion

It is ordered that the application of Topaz Exchange for registration as a national securities exchange be, and it hereby is, granted.

It is furthered ordered that operation of Topaz Exchange is conditioned on the satisfaction of the requirements below:

A. Participation in National Market System Plans Relating to Options Trading. Topaz Exchange must join: (1) The Plan for the Reporting of Consolidated Options Last Sale Reports and Quotation Information (Options Price Reporting Authority); (2) the OLPP; (3) the Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance Authority.

B. Participation in Multiparty Rule 17d-2 Plans. Topaz Exchange must become a party to the multiparty Rule 17d-2 agreements concerning options sales practice regulation and market surveillance.

C. Participation in the Options Clearing Corporation. Topaz Exchange must become an Options Clearing Corporation participant exchange.

D. Participation in the Intermarket Surveillance Group. Topaz Exchange must join the Intermarket Surveillance Group.

E. Effective Regulation. Topaz Exchange must have, and represent in a letter to the staff in the Commission's Office of Compliance Inspections and Examinations that it has, adequate procedures and programs in place to effectively regulate Topaz Exchange.

F. Trade Processing and Exchange Systems. Topaz Exchange must have, and represent in a letter to the staff in the Commission's Division of Trading and Markets that it has, adequate procedures and programs in place, as detailed in Commission Automation Policy Review guidelines, to effectively process trades and maintain the confidentiality, integrity, and availability of Topaz Exchange's systems.

It is further ordered, pursuant to Section 36 of the Act, that Topaz Exchange shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the FINRA, ISE, CBOE and NYSE rules that Topaz Exchange proposes to incorporate by reference, subject to the conditions specified in this Order that Topaz Exchange provide written notice to Topaz Exchange members whenever FINRA, ISE, CBOE or NYSE propose to change an incorporated by reference rule and when the Commission approves any such changes.