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
<![CDATA[
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 (https://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 (https://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 (https://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 https://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 (https://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:
https://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 https://
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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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 (https://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 (https://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 https://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\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-18686 Filed 7-22-11; 8:45 am]
BILLING CODE 8011-01-P
