Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Rule 103 To Reduce the Net Liquid Asset Requirements for DMM Units, 44390-44394 [2011-18686]

Download as PDF 44390 Federal Register / Vol. 76, No. 142 / Monday, July 25, 2011 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change: (i) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 9 and Rule 19b– 4(f)(6) thereunder.10 The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because the proposal is substantially similar to that of another exchange that has been approved by the Commission.11 Therefore, the Commission designates the proposed rule change to be operative upon filing with the Commission.12 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, 9 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires that a self-regulatory organization submit to the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 11 See Securities Exchange Act Release No. 63875 (February 9, 2011), 76 FR 8793 (February 15, 2011) (SR–Phlx–2010–183) (order approving expansion of Short Term Option Program). 12 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). jlentini on DSK4TPTVN1PROD with NOTICES 10 17 VerDate Mar<15>2010 16:15 Jul 22, 2011 Jkt 223001 including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BATS–2011–022 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BATS–2011–022. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BATS– 2011–022 and should be submitted on or before August 15, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–18683 Filed 7–22–11; 8:45 am] BILLING CODE 8011–01–P PO 00000 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64918; File No. SR–NYSE– 2011–35] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Rule 103 To Reduce the Net Liquid Asset Requirements for DMM Units July 19, 2011. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 14, 2011, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Rule 103 (‘‘Registration and Capital Requirements of DMMs and DMM Units’’) to reduce the net liquid asset requirements for DMM units. The text of the proposed rule change is below. Proposed new language is italicized; proposed deletions are in [brackets]. * * * * * Rule 103. Registration and Capital Requirements of DMMs and DMM Units (a)—(f) No change Supplementary Material .10–.11 No change DMM Capital Requirements .20 (a) Minimum Capital Requirements—No change (b) DMM Units—Additional Capital Requirements. (i) Each DMM unit subject to Rule 104 must maintain or have allocated to it minimum net liquid assets equal to: (A) [$250,000] $125,000 for each one tenth of one percent (.1%) of Exchange transaction dollar volume in its registered securities, exclusive of Exchange Traded Funds, plus $500,000 for each Exchange Traded Fund; and (B) A market risk add-on of [, which shall be calculated as follows: 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 13 17 CFR 200.30–3(a)(12). Frm 00092 Fmt 4703 Sfmt 4703 E:\FR\FM\25JYN1.SGM 25JYN1 44391 jlentini on DSK4TPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 142 / Monday, July 25, 2011 / Notices (1) The DMM unit may use an NYSE Regulation-approved value-at-risk (VaR) model to calculate its market risk add-on. The VaR model must have a 99%, one-tailed confidence level with price changes equivalent to a ten business day movement in rates and prices. To calculate the market risk add-on, the DMM unit multiplies the VaR of DMM and related positions by the appropriate multiplication factor, which is set at a minimum of three. The results of quarterly backtesting determine which of the multiplication factors contained in Table 1 of this rule a DMM unit must use; or (2) For those DMM units not utilizing VaR or whose models have not been approved by NYSE Regulation, three times] the average of the prior twenty business days’ securities haircuts on its DMM dealer’s positions computed pursuant to Rule 15c3–1(c)(2)(vi), exclusive of paragraph (N), under the Exchange Act. [(ii) A DMM unit may apply to NYSE Regulation for authorization to use a VaR model to calculate its market risk add-on, in lieu of calculating the average of the prior twenty business days’ capital requirement for securities haircuts under Exchange Act Rule 15c3–1(c)(2)(vi), exclusive of paragraph (N). Once a DMM unit has been granted approval by NYSE Regulation to use a VaR model, it shall continue to compute its net liquid asset market risk add-on using VaR, unless a change is approved upon application to the NYSE Regulation. To apply for authorization to use a VaR model pursuant to this rule, a DMM unit must submit in writing the following information to NYSE Regulation with its application: (A) A description of the mathematical models to be used to compute its market risk add-on; (B) A description of the requirements as set forth in paragraph .20(c) of this rule; and (C) Any other material NYSE Regulation may request.] [(iii)] (ii) Notwithstanding the requirements of Rule 98, the DMM unit’s net liquid assets needed to meet the requirements in this rule must be dedicated exclusively to DMM dealer activities, and must not be used for any other purpose without the express written consent of NYSE Regulation. [(c) Definitions and Model Approval Process.—] [(i)] (iii) For purposes of this rule, DMM units must define the term ‘‘Exchange transaction dollar volume’’ consistent with the most recent Statistical Data, calculated and provided by the NYSE on a monthly basis. [(ii) For a DMM unit’s VaR model to be approved, it must meet the following minimum qualitative and quantitative requirements: (A) Qualitative Requirements. (1) The VaR model used to calculate the market risk add-on for a position, along with a system of internal risk management controls to assist the DMM unit in managing the risks associated with its business activities, must be integrated into the daily internal risk management system of the DMM unit; (2) The VaR model must be reviewed both periodically and annually by qualified VerDate Mar<15>2010 16:15 Jul 22, 2011 Jkt 223001 independent member unit personnel or a qualified third party; and (3) For purposes of computing the market risk add-on, the DMM unit must determine the appropriate multiplication factor as follows: (I) As soon as possible, but no later than three months after the DMM unit begins using the VaR model to calculate their market risk add-on, the DMM unit must conduct backtesting of the model by comparing its actual daily net trading profit or loss with the corresponding VaR measure generated by the VaR model, using a 99 percent, one-tailed confidence level with price changes equivalent to a one business day movement in rates and prices, for each of the past 250 business days, or other period as may be appropriate for the first year of its use; (II) On the last business day of each quarter, the DMM unit must identify the number of backtesting exceptions of the VaR model, that is, the number of business days in the past 250 business days, or other period as may be appropriate for the first year of its use, for which the actual net trading loss, if any, exceeds the corresponding VaR measure; and (III) The DMM unit must use the multiplication factor indicated in Table 1 below in determining its market risk add-on until it obtains the next quarter’s backtesting results; TABLE 1—MULTIPLICATION FACTOR BASED ON THE NUMBER OF BACKTESTING EXCEPTIONS OF THE VAR MODEL Number of exceptions Multiplication factor 4 or fewer ......................... 5 ........................................ 6 ........................................ 7 ........................................ 8 ........................................ 9 ........................................ 10 or more ........................ 3.00 3.40 3.50 3.65 3.75 3.85 4.00 (4) For purposes of incorporating specific risk into a VaR model, a DMM unit must demonstrate that it has methodologies in place to capture liquidity, event, and default risk adequately for each position. Furthermore, the models used to calculate deductions for specific risk must: (I) Explain the historical price variation in the portfolio; (II) Capture concentration (magnitude and changes in composition); (III) Be robust to an adverse environment; and (IV) Be validated through backtesting. (B) Quantitative Requirements. (1) For purposes of determining market risk add-on, the VaR model must use a 99 percent, one-tailed confidence level with price changes equivalent to a ten-business day movement in rates and prices; (2) The VaR model must use an effective historical observation period of at least one year. The DMM unit must consider the effects of market stress in its construction of the model. Historical data sets must be PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 updated at least monthly and reassessed whenever market prices or volatilities change significantly; and (3) The VaR model must take into account and incorporate all significant, identifiable market risk factors applicable to positions in the accounts of the DMM unit, including: (I) Risks arising from the non-linear price characteristics of derivatives and the sensitivity of the market value of those positions to changes in the volatility of the derivatives’ underlying rates and prices; (II) Empirical correlations with and across risk factors or, alternatively, risk factors sufficient to cover all the market risk inherent in the positions in the dealer accounts of the DMM unit; and (III) Specific risk for individual positions.] [(d)] (c) Maintaining a Fair and Orderly Market. Solely for the purpose of maintaining a fair and orderly market, NYSE Regulation may, for a period not to exceed 5 business days, allow a DMM unit to continue to operate despite such DMM unit’s non-compliance with the provisions of the minimum requirements of this rule. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 103.20 to reduce the net liquid asset requirements for DMM units.4 NYSE Rule 103.20 requires each DMM unit to maintain ‘‘net liquid assets’’ (that is, assets readily convertible to cash) pursuant to a formula that results in total net liquid assets of all DMM units equal to $250 million, plus a ‘‘market risk add-on’’ equal to three times securities position haircuts (deductions from market value) calculated under the net capital rules of the SEC.5 The 4 Pursuant to NYSE Rule 2(j), a DMM unit is defined as a member organization or unit within a member organization that has been approved to act as a DMM unit under Rule 98. 5 Rule 103.20(b)(ii) allows DMM units to use an alternative market risk add-on calculation equal to E:\FR\FM\25JYN1.SGM Continued 25JYN1 44392 Federal Register / Vol. 76, No. 142 / Monday, July 25, 2011 / Notices requirements of Rule 103.20 are in addition to the net capital requirements applicable to all broker dealers as prescribed in Rule 15c3–1,6 promulgated under the Securities Exchange Act of 1934 (the ‘‘Act’’).7 The purpose of this requirement is to assure that DMM units maintain sufficient liquidity to carry out their obligations to maintain an orderly market in their assigned securities in times of market stress. The structure of the rule was established in July 2006 when the total requirement applicable to specialists was set at $1 billion. In February 2008, the amount was reduced to $250 million. In view of the significant changes since 2008 in the NYSE’s market structure, as well as market-wide regulatory and trading developments and trends, the Exchange proposes that the DMM units’ total net liquid assets requirement be further reduced to $125 million and that the market risk add-on be reduced from three times haircuts to one time haircuts. In addition, the Exchange proposes eliminating the value at risk (‘‘VaR’’) market risk add-on alternative, which is currently not being used by any DMM firms. jlentini on DSK4TPTVN1PROD with NOTICES Background On July 25, 2006, the SEC approved amendments to NYSE Rule 104 (the predecessor to the current Rule 103.20)8 to revise the capital requirement applicable to specialist member organizations.9 The amendments restructured the capital requirement for specialist organizations from an approach based on minimum dollar thresholds for each specialist stock, irrespective of position size or attendant market risk, to an approach based on specialist market share that is measured by total dollar volume traded combined with market stress and volatility risk analysis. Pursuant to the 2006 amendments, then NYSE Rule 104.21 required that three times value-at-risk (‘‘VaR’’) calculated pursuant to Exchange-approved risk models, but no DMM unit currently uses VaR to compute this requirement. 6 17 CFR 240.15c3–1. 7 15 U.S.C. 78a et seq. 8 The capital requirement rule was kept intact but re-numbered as Rule 103 in connection with the adoption of the rules generally known as the Exchange’s New Market Model. See Securities Exchange Act Release No. 58845 (October 24, 2008), 74 FR 64379 (October 29, 2008) (SR–NYSE- 2008– 46). 9 See Securities Exchange Act Release No. 54205 (July 25, 2006); 71 FR 43260 (July 31, 2006) (SR– NYSE–2005–38) (approving amendments to NYSE Rules 104 and 123E (‘‘Specialist Combination Review Policy’’) that changed the capital requirements of specialist organizations). See also NYSE Information Memo 06–56 (August 2, 2006). VerDate Mar<15>2010 16:15 Jul 22, 2011 Jkt 223001 each specialist organization maintain minimum net liquid assets equal to $1 million for each one tenth of one percent (.1%) of the Exchange transaction dollar volume in its registered securities, exclusive of Exchange Traded Funds, plus $500,000 for each Exchange Traded Fund. Under this formula, the total base net liquid assets requirement for all specialists was fixed at $1 billion (before application of market risk add-ons). The market risk add-on under Rule 104.21 was an amount equal to three times the average of the prior twenty business days’ securities haircuts on its dealer’s positions computed pursuant to Rule 15c3–1(c)(2)(vi) under the Act, exclusive of the specialist exemption contained in the rule. The NYSE rule allowed an alternate method for computing the market risk add-on by using an Exchange-approved model for valuing the risk in its securities positions over a 20-day period. In such case, the specialist unit’s market risk add-on was equal to three times VaR. The NYSE stated in the 2006 SEC filing that, as a result of ongoing changes to the structure of the marketplace, it would be assessing specialist market risks annually to determine the continuing adequacy of the net liquid asset requirements. In connection with such assessment, in February 2008, Rule 104.21 was amended to reduce the total base net liquid assets requirement for all specialists from $1 billion to $250 million.10 The Exchange’s rationale for this reduction was based on (i) the specialist’s reduced role in the NYSE’s Hybrid Market 11 resulting in reduced participation and position levels; and (ii) specialists’ performance during recent periods of high market volatility. Based upon that analysis, the Exchange determined that the reduced base net liquid assets requirement would be adequate to support the liquidity needs of the specialist organizations. 10 See Securities Exchange Act Release No. 57272 (February 5, 2008); 73 FR 8098 (February 12, 2008) (SR–NYSE–2007–101). 11 See Securities Exchange Act Release No. 53539 (March 22, 2006); 71 FR 16353 (March 31, 2006) (SR–NYSE–2004–05) (approving the proposed rule change to establish the NYSE Hybrid Market). The rule change created a ‘‘Hybrid Market’’ by, among other things, increasing the availability of automatic executions in its existing automatic execution facility, NYSE Direct+, and providing a means for participation in the expanded automated market by its floor members. The change altered the way NYSE’s market operates by allowing more orders to be executed directly in Direct+, which in essence moved NYSE from a floor-based auction market with limited automation order interaction to a more automated market with limited floor-based auction market availability. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 Proposed Amendment to Rule 103.20 The Exchange proposes to reduce the total base net liquid assets requirement for all DMM units by 50% from $250 million to $125 million, and the market risk add-on from three times securities position haircuts to one time the haircuts. In addition, the Exchange proposes eliminating the VaR market risk add-on alternative, which is currently not being used by any DMM units. Based on an analysis of market structure changes at NYSE and across the U.S. equities markets generally, the Exchange believes that the DMM unit market risk has been sufficiently reduced and that the proposed new liquid assets requirements will be adequate to support the liquidity needs of DMM units to perform their obligations to the market during periods of market stress. In particular, the Exchange believes that the proposed changes to the DMM units’ net liquid assets requirements are appropriate given the many changes to equity trading in the U.S. since February 2008. For example, the implementation of Regulation NMS in 2007 has resulted in new exchanges such as BATS Exchange, Inc., BATS Y–Exchange, Inc., and Direct Edge’s EDGA and EDGX joining the market. These new exchanges, as well as the proliferation of off-exchange trading venues, have captured trading volume in NYSE-listed securities, which has dramatically reduced the Exchange’s market share.12 In addition, in October 2008, the Exchange adopted the New Market Model, which made significant market structure changes, including replacing the specialist category of market participant with DMMs.13 Among other changes, DMMs are not subject to the so-called ‘‘negative obligations’’ previously applicable to specialists to refrain from trading unless reasonably necessary to maintain a fair and orderly market. DMMs continue to have affirmative obligations to maintain a fair and orderly market in assigned securities. Moreover, to reflect the fact that Exchange electronic trading systems execute the vast majority of trades, the DMM is not agent for a trading ‘‘book,’’ but instead trades proprietarily subject to such obligations. DMMs were also provided new trading capabilities, including the ability to add liquidity to the market through new 12 The Commission noted the extraordinary changes in the nature of trading in NYSE-listed stocks in its 2010 Concept Release on equity market structure. See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (File No. S7–02–10). 13 See supra note 8. E:\FR\FM\25JYN1.SGM 25JYN1 Federal Register / Vol. 76, No. 142 / Monday, July 25, 2011 / Notices order and quotation types, and parity to execute against incoming orders. In addition, NYSE amended Rule 98 to, among other things, expand DMM units’ ability to hedge intra-day and overnight market risk. Market-wide changes have also served to dampen volatility and thus reduce DMM unit risk. These include the implementation of single-stock volatility circuit breakers and short sale price restrictions. The single-stock volatility circuit breakers seek to prevent extreme price movement by pausing trading in a covered security (currently all S&P 500 Index and Russell 1000 Index securities) for five minutes if it moves more than 10% within a five-minute window.14 In addition, Regulation SHO short sale price restrictions were implemented on February 28, 2010, which help to reduce downside risk in securities falling more than 10% from the previous day’s close.15 The Exchange also recently filed with the SEC, together with other markets, a plan pursuant to Rule 608 of Regulation NMS under the Act to address extraordinary market volatility by adopting market-wide limit up-limit down requirements that would prevent trades in individual NMS stocks from occurring outside of specified price bands.16 If implemented, the limit uplimit down plan would help reduce error trades and further mitigate risk. A comparison of recent data against the 2007 data that was used to support the reduction in the net liquid assets test in February 2008, illustrates the degree to which the developments noted above have reduced overall DMM risk. 1. Market fragmentation has reduced the amount of trading on the NYSE from 48% market share in 2007 to 24% market share in 2010, and the amount of NYSE dollar value traded declined by half over the same period. There are 13 competing exchanges trading NYSE-listed securities and one third of NYSE consolidated volume is traded off-exchange on over 30 dark pools and over 200 upstairs trading desks. The net liquid asset requirement should be correlated to the amount of trading that DMM units transact within the NYSE’s market share and dollar value traded. As NYSE share and dollar volume has declined, the amount of net liquid assets required to meet the DMM unit’s obligations should similarly decline. jlentini on DSK4TPTVN1PROD with NOTICES 14 See NYSE Rule 80C. The Exchange and other markets recently filed to extend the single-stock circuit breakers to all other NMS stocks, See Securities Exchange Act Release No. 64420 (May 6, 2011), 76 FR 27675 (May 12, 2011) (SR–NYSE– 2011–21). 15 See Securities Exchange Act Release No. 61595 (February 26, 2010), 75 FR 11232 (March 10, 2010) (File No. S7–08–09; Amendments to Regulation SHO) and NYSE Rule 440B. 16 See Securities Exchange Act Release No. 64547 (May 25, 2011), 76 FR 31647 (June 1, 2011) (File No. 4–631). VerDate Mar<15>2010 16:15 Jul 22, 2011 Jkt 223001 2. End-of-day DMM/specialist inventory positions on average have declined 80% from 2007 to present, reducing overnight risk exposure. DMM unit inventory positions fell from an average of $280 million during the week of September 10–14, 2007 (the time period used in the 2008 filing to support the previous reduction) to $57 million based on the 6-month average in the second half of 2010. Looking at May 2010, a volatile period, the DMM’s average daily inventory was $78 million, 72% lower than the week of September 10–14, 2007. 3. DMM units are putting fewer dollars at risk on a given trade, and less capital is needed to support the resultant positions. The average dollar value per trade for DMMs declined 70% from $15,000 in 2007 to $4,600 in 2010. This trend partly reflects the decline in the average NYSE stock price (down 35% from 2007 to 2010), but is largely the result of the DMM units’ increased use of algorithms to trade in smaller order sizes to reduce risk exposure. Algorithms are increasingly used by many market participants to trade in retail-sized increments and, as a result, the average NYSE trade size was only 357 shares ($9,924) in 2010. 4. The DMM units increasing use of trading technology and faster NYSE execution speeds enable DMMs to reduce order exposure time and better manage the risks of positions held. Faster NYSE executions speeds and DMM units’ use of algorithms allow them to adjust positions quickly in response to changing market dynamics. NYSE has also reduced the time needed to incorporate market information into quotes, thereby allowing for better risk controls mechanisms by DMMs. Based on the foregoing, the Exchange believes that it is appropriate to require DMM units to maintain base net liquid assets of $125 million, plus market risk add-ons. As proposed, the individual DMM unit percentage of this requirement will be fixed monthly based on a fraction for which the denominator is the total dollar value of all Exchange traded securities for the 20 trading days preceding the first day of a calendar month and the numerator is the DMM unit’s total dollar value of securities traded for such period. In addition, the market risk add-on under Rule 103.20(b)(i)(B)(2), currently amounting to three times the average of the prior twenty business days securities haircut on its DMM unit positions computed pursuant to SEA Rule 15c3–1(2)(v)(1), exclusive of paragraph (N), as proposed would be set at one-times these haircuts and renumbered 103.20(b)(i)(B). Finally, because no DMM unit uses the VaR methodology to determine the market risk add-on, the Exchange proposes to remove this alternative. The Exchange notes that FINRA will continue to assess DMM capital requirements in relationship to the New Market Model and monitor their capital positions on a daily basis. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 44393 The Exchange will notify DMM units of the implementation date of this rule change via a Member Education Bulletin. 2. Statutory Basis The statutory basis for the proposed rule change is Section 6(b)(5) of the Exchange Act 17 which requires, among other things, that the rules of the Exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to perfect the mechanism of a free and open market and national market system, and in general to protect investors and the public interest. The Exchange believes that the proposed rule change will reduce the burden on DMM units to maintain net liquidity while still ensuring adequate protection of DMM units during periods of market stress. Each of the DMM units have sources of funding that will provide necessary liquidity during a period of market stress and thus, it is no longer necessary for this liquidity to be maintained as capital, as DMM unit positions and the likelihood of losses have been reduced dramatically due to changes in the structure of the market. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 18 and Rule 19b–4(f)(6) thereunder.19 Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on 17 15 U.S.C. 78f(b)(5). U.S.C. 78s(b)(3)(A)(iii). 19 17 CFR 240.19b–4(f)(6). 18 15 E:\FR\FM\25JYN1.SGM 25JYN1 44394 Federal Register / Vol. 76, No. 142 / Monday, July 25, 2011 / Notices competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder. A proposed rule change filed under Rule 19b–4(f)(6)20 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b4(f)(6)(iii),21 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: jlentini on DSK4TPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2011–35 on the subject line. Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Section, 100 F Street, NE., Washington, DC 20549–1090. Copies of the filing will also be available for inspection and copying at the NYSE’s principal office and on its Internet Web site at http://www.nyse.com. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2011–35 and should be submitted on or before August 15, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–18686 Filed 7–22–11; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice: 7532] Culturally Significant Objects Imported for Exhibition Determinations: ‘‘Pacific Standard Time: Crosscurrents in L.A. Painting and Sculpture 1950–1970’’ SUMMARY: Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of Paper Comments October 19, 1965 (79 Stat. 985; 22 U.S.C. • Send paper comments in triplicate 2459), Executive Order 12047 of March to Elizabeth M. Murphy, Secretary, 27, 1978, the Foreign Affairs Reform and Securities and Exchange Commission, Restructuring Act of 1998 (112 Stat. 100 F Street, NE., Washington, DC 2681, et seq.; 22 U.S.C. 6501 note, et 20549–1090. seq.), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority All submissions should refer to File No. 236–3 of August 28, 2000 (and, as Number SR–NYSE–2011–35. This file appropriate, Delegation of Authority No. number should be included on the subject line if e-mail is used. To help the 257 of April 15, 2003), I hereby determine that the objects to be Commission process and review your included in the exhibition ‘‘Pacific comments more efficiently, please use only one method. The Commission will Standard Time: Crosscurrents in L.A. post all comments on the Commission’s Painting and Sculpture 1950–1970,’’ imported from abroad for temporary Internet Web site (http://www.sec.gov/ exhibition within the United States, are rules/sro.shtml). Copies of the of cultural significance. The objects are submission, all subsequent imported pursuant to loan agreements amendments, all written statements with the foreign owners or custodians. with respect to the proposed rule I also determine that the exhibition or change that are filed with the display of the exhibit objects at The J. 20 17 21 17 CFR 240.19b–4(f)(6). CFR 240.19b–4(f)(6)(iii). VerDate Mar<15>2010 16:15 Jul 22, 2011 22 17 Jkt 223001 PO 00000 CFR 200.30–3(a)(12). Frm 00096 Fmt 4703 Sfmt 4703 Paul Getty Museum, Los Angeles, CA, from on or about October 1, 2011, until on or about February 5, 2012, and at possible additional exhibitions or venues yet to be determined, is in the national interest. I have ordered that Public Notice of these Determinations be published in the Federal Register. FOR FURTHER INFORMATION CONTACT: For further information, including a list of the exhibit objects, contact Julie Simpson, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202–632–6467). The mailing address is U.S. Department of State, SA–5, L/PD, Fifth Floor (Suite 5H03), Washington, DC 20522–0505. Dated: July 19, 2011. J. Adam Ereli, Principal Deputy Assistant Secretary, Bureau of Educational and Cultural Affairs, Department of State. [FR Doc. 2011–18717 Filed 7–22–11; 8:45 am] BILLING CODE 4710–05–P DEPARTMENT OF TRANSPORTATION Federal Transit Administration Public Transportation on Indian Reservations Program; Tribal Transit Program AGENCY: Federal Transit Administration (FTA), DOT. ACTION: Notice of Funding Availability: Solicitation of Grant Proposals for FY 2011 Tribal Transit Program Funds. SUMMARY: This notice announces the availability of $15,075,000 in funding provided by the Public Transportation on Indian Reservations Program (Tribal Transit Program (TTP)), a program authorized by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA–LU), Section 3013(c). This notice is a national solicitation for grant proposals and it includes the selection criteria and program eligibility information for FY 2011 projects. This announcement is available on the FTA Web site at: http://www.fta.dot.gov. FTA will announce final selections on the Web site and in the Federal Register. Additionally, a synopsis of the funding opportunity will be posted in the FIND module of the government-wide electronic grants Web site at http:// www.grants.gov. DATES: Complete proposals for the Tribal Transit program announced in this Notice must be submitted by September 26, 2011. All proposals must be submitted electronically through the grants.gov apply function. Any Tribe E:\FR\FM\25JYN1.SGM 25JYN1

Agencies

[Federal Register Volume 76, Number 142 (Monday, July 25, 2011)]
[Notices]
[Pages 44390-44394]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18686]



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SECURITIES AND EXCHANGE COMMISSION



[Release No. 34-64918; File No. SR-NYSE-2011-35]




Self-Regulatory Organizations; New York Stock Exchange LLC; 

Notice of Filing and Immediate Effectiveness of Proposed Rule Change 

Amending NYSE Rule 103 To Reduce the Net Liquid Asset Requirements for 

DMM Units



 July 19, 2011.

    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 

1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 

given that, on July 14, 2011, New York Stock Exchange LLC (``NYSE'' or 

the ``Exchange'') filed with the Securities and Exchange Commission 

(the ``Commission'') the proposed rule change as described in Items I 

and II below, which Items have been prepared by the self-regulatory 

organization. The Commission is publishing this notice to solicit 

comments on the proposed rule change from interested persons.

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    \1\ 15 U.S.C. 78s(b)(1).

    \2\ 15 U.S.C. 78a.

    \3\ 17 CFR 240.19b-4.

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I. Self-Regulatory Organization's Statement of the Terms of Substance 

of the Proposed Rule Change



    The Exchange proposes to amend NYSE Rule 103 (``Registration and 

Capital Requirements of DMMs and DMM Units'') to reduce the net liquid 

asset requirements for DMM units. The text of the proposed rule change 

is below. Proposed new language is italicized; proposed deletions are 

in [brackets].

* * * * *



Rule 103. Registration and Capital Requirements of DMMs and DMM Units



    (a)--(f) No change



Supplementary Material



    .10-.11 No change



 DMM Capital Requirements



    .20

    (a) Minimum Capital Requirements--No change

    (b) DMM Units--Additional Capital Requirements.

    (i) Each DMM unit subject to Rule 104 must maintain or have 

allocated to it minimum net liquid assets equal to:

    (A) [$250,000] $125,000 for each one tenth of one percent (.1%) 

of Exchange transaction dollar volume in its registered securities, 

exclusive of Exchange Traded Funds, plus $500,000 for each Exchange 

Traded Fund; and

    (B) A market risk add-on of [, which shall be calculated as 

follows:



[[Page 44391]]



    (1) The DMM unit may use an NYSE Regulation-approved value-at-

risk (VaR) model to calculate its market risk add-on. The VaR model 

must have a 99%, one-tailed confidence level with price changes 

equivalent to a ten business day movement in rates and prices. To 

calculate the market risk add-on, the DMM unit multiplies the VaR of 

DMM and related positions by the appropriate multiplication factor, 

which is set at a minimum of three. The results of quarterly 

backtesting determine which of the multiplication factors contained 

in Table 1 of this rule a DMM unit must use; or

    (2) For those DMM units not utilizing VaR or whose models have 

not been approved by NYSE Regulation, three times] the average of 

the prior twenty business days' securities haircuts on its DMM 

dealer's positions computed pursuant to Rule 15c3-1(c)(2)(vi), 

exclusive of paragraph (N), under the Exchange Act.

    [(ii) A DMM unit may apply to NYSE Regulation for authorization 

to use a VaR model to calculate its market risk add-on, in lieu of 

calculating the average of the prior twenty business days' capital 

requirement for securities haircuts under Exchange Act Rule 15c3-

1(c)(2)(vi), exclusive of paragraph (N). Once a DMM unit has been 

granted approval by NYSE Regulation to use a VaR model, it shall 

continue to compute its net liquid asset market risk add-on using 

VaR, unless a change is approved upon application to the NYSE 

Regulation. To apply for authorization to use a VaR model pursuant 

to this rule, a DMM unit must submit in writing the following 

information to NYSE Regulation with its application:

    (A) A description of the mathematical models to be used to 

compute its market risk add-on;

    (B) A description of the requirements as set forth in paragraph 

.20(c) of this rule; and

    (C) Any other material NYSE Regulation may request.]

    [(iii)] (ii) Notwithstanding the requirements of Rule 98, the 

DMM unit's net liquid assets needed to meet the requirements in this 

rule must be dedicated exclusively to DMM dealer activities, and 

must not be used for any other purpose without the express written 

consent of NYSE Regulation.

    [(c) Definitions and Model Approval Process.--]

    [(i)] (iii) For purposes of this rule, DMM units must define the 

term ``Exchange transaction dollar volume'' consistent with the most 

recent Statistical Data, calculated and provided by the NYSE on a 

monthly basis.

    [(ii) For a DMM unit's VaR model to be approved, it must meet 

the following minimum qualitative and quantitative requirements:

    (A) Qualitative Requirements.

    (1) The VaR model used to calculate the market risk add-on for a 

position, along with a system of internal risk management controls 

to assist the DMM unit in managing the risks associated with its 

business activities, must be integrated into the daily internal risk 

management system of the DMM unit;

    (2) The VaR model must be reviewed both periodically and 

annually by qualified independent member unit personnel or a 

qualified third party; and

    (3) For purposes of computing the market risk add-on, the DMM 

unit must determine the appropriate multiplication factor as 

follows:

    (I) As soon as possible, but no later than three months after 

the DMM unit begins using the VaR model to calculate their market 

risk add-on, the DMM unit must conduct backtesting of the model by 

comparing its actual daily net trading profit or loss with the 

corresponding VaR measure generated by the VaR model, using a 99 

percent, one-tailed confidence level with price changes equivalent 

to a one business day movement in rates and prices, for each of the 

past 250 business days, or other period as may be appropriate for 

the first year of its use;

    (II) On the last business day of each quarter, the DMM unit must 

identify the number of backtesting exceptions of the VaR model, that 

is, the number of business days in the past 250 business days, or 

other period as may be appropriate for the first year of its use, 

for which the actual net trading loss, if any, exceeds the 

corresponding VaR measure; and

    (III) The DMM unit must use the multiplication factor indicated 

in Table 1 below in determining its market risk add-on until it 

obtains the next quarter's backtesting results;



    Table 1--Multiplication Factor Based on the Number of Backtesting

                       Exceptions of the VaR Model

------------------------------------------------------------------------

                                                         Multiplication

                 Number of exceptions                        factor

------------------------------------------------------------------------

4 or fewer............................................              3.00

5.....................................................              3.40

6.....................................................              3.50

7.....................................................              3.65

8.....................................................              3.75

9.....................................................              3.85

10 or more............................................              4.00

------------------------------------------------------------------------



    (4) For purposes of incorporating specific risk into a VaR 

model, a DMM unit must demonstrate that it has methodologies in 

place to capture liquidity, event, and default risk adequately for 

each position. Furthermore, the models used to calculate deductions 

for specific risk must:

    (I) Explain the historical price variation in the portfolio;

    (II) Capture concentration (magnitude and changes in 

composition);

    (III) Be robust to an adverse environment; and

    (IV) Be validated through backtesting.

    (B) Quantitative Requirements.

    (1) For purposes of determining market risk add-on, the VaR 

model must use a 99 percent, one-tailed confidence level with price 

changes equivalent to a ten-business day movement in rates and 

prices;

    (2) The VaR model must use an effective historical observation 

period of at least one year. The DMM unit must consider the effects 

of market stress in its construction of the model. Historical data 

sets must be updated at least monthly and reassessed whenever market 

prices or volatilities change significantly; and

    (3) The VaR model must take into account and incorporate all 

significant, identifiable market risk factors applicable to 

positions in the accounts of the DMM unit, including:

    (I) Risks arising from the non-linear price characteristics of 

derivatives and the sensitivity of the market value of those 

positions to changes in the volatility of the derivatives' 

underlying rates and prices;

    (II) Empirical correlations with and across risk factors or, 

alternatively, risk factors sufficient to cover all the market risk 

inherent in the positions in the dealer accounts of the DMM unit; 

and

    (III) Specific risk for individual positions.]

    [(d)] (c) Maintaining a Fair and Orderly Market.

    Solely for the purpose of maintaining a fair and orderly market, 

NYSE Regulation may, for a period not to exceed 5 business days, 

allow a DMM unit to continue to operate despite such DMM unit's non-

compliance with the provisions of the minimum requirements of this 

rule.

* * * * *



II. Self-Regulatory Organization's Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule Change



    In its filing with the Commission, the self-regulatory organization 

included statements concerning the purpose of, and basis for, the 

proposed rule change and discussed any comments it received on the 

proposed rule change. The text of those statements may be examined at 

the places specified in Item IV below. The Exchange has prepared 

summaries, set forth in sections A, B, and C below, of the most 

significant parts of such statements.



A. Self-Regulatory Organization's Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule Change



1. Purpose

    The Exchange proposes to amend Rule 103.20 to reduce the net liquid 

asset requirements for DMM units.\4\ NYSE Rule 103.20 requires each DMM 

unit to maintain ``net liquid assets'' (that is, assets readily 

convertible to cash) pursuant to a formula that results in total net 

liquid assets of all DMM units equal to $250 million, plus a ``market 

risk add-on'' equal to three times securities position haircuts 

(deductions from market value) calculated under the net capital rules 

of the SEC.\5\ The



[[Page 44392]]



requirements of Rule 103.20 are in addition to the net capital 

requirements applicable to all broker dealers as prescribed in Rule 

15c3-1,\6\ promulgated under the Securities Exchange Act of 1934 (the 

``Act'').\7\ The purpose of this requirement is to assure that DMM 

units maintain sufficient liquidity to carry out their obligations to 

maintain an orderly market in their assigned securities in times of 

market stress.

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    \4\ Pursuant to NYSE Rule 2(j), a DMM unit is defined as a 

member organization or unit within a member organization that has 

been approved to act as a DMM unit under Rule 98.

    \5\ Rule 103.20(b)(ii) allows DMM units to use an alternative 

market risk add-on calculation equal to three times value-at-risk 

(``VaR'') calculated pursuant to Exchange-approved risk models, but 

no DMM unit currently uses VaR to compute this requirement.

    \6\ 17 CFR 240.15c3-1.

    \7\ 15 U.S.C. 78a et seq.

---------------------------------------------------------------------------



    The structure of the rule was established in July 2006 when the 

total requirement applicable to specialists was set at $1 billion. In 

February 2008, the amount was reduced to $250 million. In view of the 

significant changes since 2008 in the NYSE's market structure, as well 

as market-wide regulatory and trading developments and trends, the 

Exchange proposes that the DMM units' total net liquid assets 

requirement be further reduced to $125 million and that the market risk 

add-on be reduced from three times haircuts to one time haircuts. In 

addition, the Exchange proposes eliminating the value at risk (``VaR'') 

market risk add-on alternative, which is currently not being used by 

any DMM firms.

Background

    On July 25, 2006, the SEC approved amendments to NYSE Rule 104 (the 

predecessor to the current Rule 103.20)\8\ to revise the capital 

requirement applicable to specialist member organizations.\9\ The 

amendments restructured the capital requirement for specialist 

organizations from an approach based on minimum dollar thresholds for 

each specialist stock, irrespective of position size or attendant 

market risk, to an approach based on specialist market share that is 

measured by total dollar volume traded combined with market stress and 

volatility risk analysis.

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    \8\ The capital requirement rule was kept intact but re-numbered 

as Rule 103 in connection with the adoption of the rules generally 

known as the Exchange's New Market Model. See Securities Exchange 

Act Release No. 58845 (October 24, 2008), 74 FR 64379 (October 29, 

2008) (SR-NYSE- 2008-46).

    \9\ See Securities Exchange Act Release No. 54205 (July 25, 

2006); 71 FR 43260 (July 31, 2006) (SR-NYSE-2005-38) (approving 

amendments to NYSE Rules 104 and 123E (``Specialist Combination 

Review Policy'') that changed the capital requirements of specialist 

organizations). See also NYSE Information Memo 06-56 (August 2, 

2006).

---------------------------------------------------------------------------



    Pursuant to the 2006 amendments, then NYSE Rule 104.21 required 

that each specialist organization maintain minimum net liquid assets 

equal to $1 million for each one tenth of one percent (.1%) of the 

Exchange transaction dollar volume in its registered securities, 

exclusive of Exchange Traded Funds, plus $500,000 for each Exchange 

Traded Fund. Under this formula, the total base net liquid assets 

requirement for all specialists was fixed at $1 billion (before 

application of market risk add-ons). The market risk add-on under Rule 

104.21 was an amount equal to three times the average of the prior 

twenty business days' securities haircuts on its dealer's positions 

computed pursuant to Rule 15c3-1(c)(2)(vi) under the Act, exclusive of 

the specialist exemption contained in the rule. The NYSE rule allowed 

an alternate method for computing the market risk add-on by using an 

Exchange-approved model for valuing the risk in its securities 

positions over a 20-day period. In such case, the specialist unit's 

market risk add-on was equal to three times VaR.

    The NYSE stated in the 2006 SEC filing that, as a result of ongoing 

changes to the structure of the marketplace, it would be assessing 

specialist market risks annually to determine the continuing adequacy 

of the net liquid asset requirements. In connection with such 

assessment, in February 2008, Rule 104.21 was amended to reduce the 

total base net liquid assets requirement for all specialists from $1 

billion to $250 million.\10\ The Exchange's rationale for this 

reduction was based on (i) the specialist's reduced role in the NYSE's 

Hybrid Market \11\ resulting in reduced participation and position 

levels; and (ii) specialists' performance during recent periods of high 

market volatility. Based upon that analysis, the Exchange determined 

that the reduced base net liquid assets requirement would be adequate 

to support the liquidity needs of the specialist organizations.

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    \10\ See Securities Exchange Act Release No. 57272 (February 5, 

2008); 73 FR 8098 (February 12, 2008) (SR-NYSE-2007-101).

    \11\ See Securities Exchange Act Release No. 53539 (March 22, 

2006); 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05) (approving the 

proposed rule change to establish the NYSE Hybrid Market). The rule 

change created a ``Hybrid Market'' by, among other things, 

increasing the availability of automatic executions in its existing 

automatic execution facility, NYSE Direct+, and providing a means 

for participation in the expanded automated market by its floor 

members. The change altered the way NYSE's market operates by 

allowing more orders to be executed directly in Direct+, which in 

essence moved NYSE from a floor-based auction market with limited 

automation order interaction to a more automated market with limited 

floor-based auction market availability.

---------------------------------------------------------------------------



Proposed Amendment to Rule 103.20

    The Exchange proposes to reduce the total base net liquid assets 

requirement for all DMM units by 50% from $250 million to $125 million, 

and the market risk add-on from three times securities position 

haircuts to one time the haircuts. In addition, the Exchange proposes 

eliminating the VaR market risk add-on alternative, which is currently 

not being used by any DMM units. Based on an analysis of market 

structure changes at NYSE and across the U.S. equities markets 

generally, the Exchange believes that the DMM unit market risk has been 

sufficiently reduced and that the proposed new liquid assets 

requirements will be adequate to support the liquidity needs of DMM 

units to perform their obligations to the market during periods of 

market stress.

    In particular, the Exchange believes that the proposed changes to 

the DMM units' net liquid assets requirements are appropriate given the 

many changes to equity trading in the U.S. since February 2008. For 

example, the implementation of Regulation NMS in 2007 has resulted in 

new exchanges such as BATS Exchange, Inc., BATS Y-Exchange, Inc., and 

Direct Edge's EDGA and EDGX joining the market. These new exchanges, as 

well as the proliferation of off-exchange trading venues, have captured 

trading volume in NYSE-listed securities, which has dramatically 

reduced the Exchange's market share.\12\

---------------------------------------------------------------------------



    \12\ The Commission noted the extraordinary changes in the 

nature of trading in NYSE-listed stocks in its 2010 Concept Release 

on equity market structure. See Securities Exchange Act Release No. 

61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (File No. 

S7-02-10).

---------------------------------------------------------------------------



    In addition, in October 2008, the Exchange adopted the New Market 

Model, which made significant market structure changes, including 

replacing the specialist category of market participant with DMMs.\13\ 

Among other changes, DMMs are not subject to the so-called ``negative 

obligations'' previously applicable to specialists to refrain from 

trading unless reasonably necessary to maintain a fair and orderly 

market. DMMs continue to have affirmative obligations to maintain a 

fair and orderly market in assigned securities. Moreover, to reflect 

the fact that Exchange electronic trading systems execute the vast 

majority of trades, the DMM is not agent for a trading ``book,'' but 

instead trades proprietarily subject to such obligations. DMMs were 

also provided new trading capabilities, including the ability to add 

liquidity to the market through new



[[Page 44393]]



order and quotation types, and parity to execute against incoming 

orders. In addition, NYSE amended Rule 98 to, among other things, 

expand DMM units' ability to hedge intra-day and overnight market risk.

---------------------------------------------------------------------------



    \13\ See supra note 8.

---------------------------------------------------------------------------



    Market-wide changes have also served to dampen volatility and thus 

reduce DMM unit risk. These include the implementation of single-stock 

volatility circuit breakers and short sale price restrictions. The 

single-stock volatility circuit breakers seek to prevent extreme price 

movement by pausing trading in a covered security (currently all S&P 

500 Index and Russell 1000 Index securities) for five minutes if it 

moves more than 10% within a five-minute window.\14\ In addition, 

Regulation SHO short sale price restrictions were implemented on 

February 28, 2010, which help to reduce downside risk in securities 

falling more than 10% from the previous day's close.\15\ The Exchange 

also recently filed with the SEC, together with other markets, a plan 

pursuant to Rule 608 of Regulation NMS under the Act to address 

extraordinary market volatility by adopting market-wide limit up-limit 

down requirements that would prevent trades in individual NMS stocks 

from occurring outside of specified price bands.\16\ If implemented, 

the limit up-limit down plan would help reduce error trades and further 

mitigate risk.

---------------------------------------------------------------------------



    \14\ See NYSE Rule 80C. The Exchange and other markets recently 

filed to extend the single-stock circuit breakers to all other NMS 

stocks, See Securities Exchange Act Release No. 64420 (May 6, 2011), 

76 FR 27675 (May 12, 2011) (SR-NYSE-2011-21).

    \15\ See Securities Exchange Act Release No. 61595 (February 26, 

2010), 75 FR 11232 (March 10, 2010) (File No. S7-08-09; Amendments 

to Regulation SHO) and NYSE Rule 440B.

    \16\ See Securities Exchange Act Release No. 64547 (May 25, 

2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).

---------------------------------------------------------------------------



    A comparison of recent data against the 2007 data that was used to 

support the reduction in the net liquid assets test in February 2008, 

illustrates the degree to which the developments noted above have 

reduced overall DMM risk.



    1. Market fragmentation has reduced the amount of trading on the 

NYSE from 48% market share in 2007 to 24% market share in 2010, and 

the amount of NYSE dollar value traded declined by half over the 

same period. There are 13 competing exchanges trading NYSE-listed 

securities and one third of NYSE consolidated volume is traded off-

exchange on over 30 dark pools and over 200 upstairs trading desks. 

The net liquid asset requirement should be correlated to the amount 

of trading that DMM units transact within the NYSE's market share 

and dollar value traded. As NYSE share and dollar volume has 

declined, the amount of net liquid assets required to meet the DMM 

unit's obligations should similarly decline.

    2. End-of-day DMM/specialist inventory positions on average have 

declined 80% from 2007 to present, reducing overnight risk exposure. 

DMM unit inventory positions fell from an average of $280 million 

during the week of September 10-14, 2007 (the time period used in 

the 2008 filing to support the previous reduction) to $57 million 

based on the 6-month average in the second half of 2010. Looking at 

May 2010, a volatile period, the DMM's average daily inventory was 

$78 million, 72% lower than the week of September 10-14, 2007.

    3. DMM units are putting fewer dollars at risk on a given trade, 

and less capital is needed to support the resultant positions. The 

average dollar value per trade for DMMs declined 70% from $15,000 in 

2007 to $4,600 in 2010. This trend partly reflects the decline in 

the average NYSE stock price (down 35% from 2007 to 2010), but is 

largely the result of the DMM units' increased use of algorithms to 

trade in smaller order sizes to reduce risk exposure. Algorithms are 

increasingly used by many market participants to trade in retail-

sized increments and, as a result, the average NYSE trade size was 

only 357 shares ($9,924) in 2010.

    4. The DMM units increasing use of trading technology and faster 

NYSE execution speeds enable DMMs to reduce order exposure time and 

better manage the risks of positions held. Faster NYSE executions 

speeds and DMM units' use of algorithms allow them to adjust 

positions quickly in response to changing market dynamics. NYSE has 

also reduced the time needed to incorporate market information into 

quotes, thereby allowing for better risk controls mechanisms by 

DMMs.



    Based on the foregoing, the Exchange believes that it is 

appropriate to require DMM units to maintain base net liquid assets of 

$125 million, plus market risk add-ons. As proposed, the individual DMM 

unit percentage of this requirement will be fixed monthly based on a 

fraction for which the denominator is the total dollar value of all 

Exchange traded securities for the 20 trading days preceding the first 

day of a calendar month and the numerator is the DMM unit's total 

dollar value of securities traded for such period. In addition, the 

market risk add-on under Rule 103.20(b)(i)(B)(2), currently amounting 

to three times the average of the prior twenty business days securities 

haircut on its DMM unit positions computed pursuant to SEA Rule 15c3-

1(2)(v)(1), exclusive of paragraph (N), as proposed would be set at 

one-times these haircuts and renumbered 103.20(b)(i)(B). Finally, 

because no DMM unit uses the VaR methodology to determine the market 

risk add-on, the Exchange proposes to remove this alternative.

    The Exchange notes that FINRA will continue to assess DMM capital 

requirements in relationship to the New Market Model and monitor their 

capital positions on a daily basis.

    The Exchange will notify DMM units of the implementation date of 

this rule change via a Member Education Bulletin.

2. Statutory Basis

    The statutory basis for the proposed rule change is Section 6(b)(5) 

of the Exchange Act \17\ which requires, among other things, that the 

rules of the Exchange are designed to prevent fraudulent and 

manipulative acts and practices, to promote just and equitable 

principles of trade, to foster cooperation and coordination with 

persons engaged in regulating, clearing, settling, processing 

information with respect to, and facilitating transactions in 

securities, to remove impediments to perfect the mechanism of a free 

and open market and national market system, and in general to protect 

investors and the public interest. The Exchange believes that the 

proposed rule change will reduce the burden on DMM units to maintain 

net liquidity while still ensuring adequate protection of DMM units 

during periods of market stress. Each of the DMM units have sources of 

funding that will provide necessary liquidity during a period of market 

stress and thus, it is no longer necessary for this liquidity to be 

maintained as capital, as DMM unit positions and the likelihood of 

losses have been reduced dramatically due to changes in the structure 

of the market.

---------------------------------------------------------------------------



    \17\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------



B. Self-Regulatory Organization's Statement on Burden on Competition



    The Exchange does not believe that the proposed rule change will 

impose any burden on competition that is not necessary or appropriate 

in furtherance of the purposes of the Act.



C. Self-Regulatory Organization's Statement on Comments on the Proposed 

Rule Change Received From Members, Participants, or Others



    No written comments were solicited or received with respect to the 

proposed rule change.



III. Date of Effectiveness of the Proposed Rule Change and Timing for 

Commission Action



    The Exchange has filed the proposed rule change pursuant to Section 

19(b)(3)(A)(iii) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\ 

Because the proposed rule change does not: (i) Significantly affect the 

protection of investors or the public interest; (ii) impose any 

significant burden on



[[Page 44394]]



competition; and (iii) become operative prior to 30 days from the date 

on which it was filed, or such shorter time as the Commission may 

designate, if consistent with the protection of investors and the 

public interest, the proposed rule change has become effective pursuant 

to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder.

---------------------------------------------------------------------------



    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).

    \19\ 17 CFR 240.19b-4(f)(6).

---------------------------------------------------------------------------



    A proposed rule change filed under Rule 19b-4(f)(6)\20\ normally 

does not become operative prior to 30 days after the date of the 

filing. However, pursuant to Rule 19b4(f)(6)(iii),\21\ the Commission 

may designate a shorter time if such action is consistent with the 

protection of investors and the public interest.

---------------------------------------------------------------------------



    \20\ 17 CFR 240.19b-4(f)(6).

    \21\ 17 CFR 240.19b-4(f)(6)(iii).

---------------------------------------------------------------------------



    At any time within 60 days of the filing of such proposed rule 

change, the Commission summarily may temporarily suspend such rule 

change if it appears to the Commission that such action is necessary or 

appropriate in the public interest, for the protection of investors, or 

otherwise in furtherance of the purposes of the Act.



IV. Solicitation of Comments



    Interested persons are invited to submit written data, views, and 

arguments concerning the foregoing, including whether the proposed rule 

change is consistent with the Act. Comments may be submitted by any of 

the following methods:



Electronic Comments



     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2011-35 on the subject line.



Paper Comments



     Send paper comments in triplicate to Elizabeth M. Murphy, 

Secretary, Securities and Exchange Commission, 100 F Street, NE., 

Washington, DC 20549-1090.



All submissions should refer to File Number SR-NYSE-2011-35. This file 

number should be included on the subject line if e-mail is used. To 

help the Commission process and review your comments more efficiently, 

please use only one method. The Commission will post all comments on 

the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 

filed with the Commission, and all written communications relating to 

the proposed rule change between the Commission and any person, other 

than those that may be withheld from the public in accordance with the 

provisions of 5 U.S.C. 552, will be available for Web site viewing and 

printing in the Commission's Public Reference Section, 100 F Street, 

NE., Washington, DC 20549-1090. Copies of the filing will also be 

available for inspection and copying at the NYSE's principal office and 

on its Internet Web site at http://www.nyse.com. All comments received 

will be posted without change; the Commission does not edit personal 

identifying information from submissions.

    You should submit only information that you wish to make available 

publicly. All submissions should refer to File Number SR-NYSE-2011-35 

and should be submitted on or before August 15, 2011.



    For the Commission, by the Division of Trading and Markets, 

pursuant to delegated authority.\22\

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    \22\ 17 CFR 200.30-3(a)(12).

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Elizabeth M. Murphy,

Secretary.

[FR Doc. 2011-18686 Filed 7-22-11; 8:45 am]

BILLING CODE 8011-01-P