Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Add a Risk Management Tool Commonly Known as a “Kill Switch”, 10216-10217 [2014-03797]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 36 (Monday, February 24, 2014)]
[Notices]
[Pages 10216-10217]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03797]



[[Page 10216]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71559; File No. SR-PHLX-2014-10]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Add a 
Risk Management Tool Commonly Known as a ``Kill Switch''

February 18, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 4, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    A proposed rule change to add a risk management tool commonly known 
as a ``Kill Switch'' as set forth in proposed PHLX Rule 3316. The new 
Kill Switch feature will be optional and will be offered at no charge 
effective March 1, 2014.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

3316. PHLX Kill Switch

    (a) Definition. The PHLX Kill Switch is an optional tool offered at 
no charge that enables members to establish a pre-determined level of 
Net Notional Risk Exposure (``NNRE''), to receive notifications as the 
value of executed orders approaches the NNRE level, and to have order 
entry ports disabled and open orders administratively cancelled when 
the value of executed orderss exceeds the NNRE level.
    (b) Net Notional Risk Exposure. Members may set a NNRE for each 
MPID individually. Each member is responsible for establishing and 
maintaining its NNRE. Members may adjust NNRE values intra-day.
    (c) Notification. Members will receive notifications when the total 
value of executed orders associated with an MPID exceeds 50, 75, 85, 
90, and 95 percent of the NNRE value. When the NNRE is exceeded, the 
notification will include the total number of orders cancelled and 
remaining open in the System.
    (d) Operation. When triggered, a Kill Switch shall result in the 
immediate cancellation of all open orders of any type or duration 
entered by the member via the affected MPID, and in the immediate 
prevention of order entry of any type via the affected MPID. The member 
must request reactivation of the MPID before trading will be 
reauthorized.
* * * * *

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 Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Background. PHLX currently offers a Pre-Trade Risk Management 
(``PRM'') toolset to assist members' efforts to control risk and comply 
with the SEC Market Access Rule.\3\ PRM provides member firms with the 
ability to set a wide range of parameters for orders to facilitate pre-
trade protection by creating a PRM module defined to represent checks 
desired. Using PRM, firms can increase controls on their trading 
activity and the trading activity of their clients and customers at the 
order level, including the opportunity to prevent potentially erroneous 
transactions. PRM validates orders entered on PRM-enabled ports prior 
to allowing those orders into its matching engine and, using parameters 
set by the subscriber, determines if the order should be sent for 
fulfillment. PRM users may choose to set PRM Order Checks, Aggregate 
Total Checks within a PRM Module, and subscribe to PRM Workstation Add-
ons to an existing PHLX Workstation or WeblinkACT 2.0. PRM manages risk 
by checking each order, before it is accepted into the system, against 
certain parameters pre-specified by the user within a module, such as 
maximum order size or value, order type restrictions, market session 
restrictions (pre/post market), security restrictions, including per-
security limits, restricted stock lists, and certain other criteria.
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    \3\ SEC Rule 15c3-5.
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    In order for a member firm to subscribe, at least one PRM Module 
per market participant ID (``MPID'') is required, but a user may have 
multiple PRM Module subscriptions per MPID, depending on the type and 
number of ports designated as PRM ports. A PRM Module is created to 
validate individual orders against pre-specified parameters. Aggregate 
Total Checks allow users to limit overall daily trading activity based 
on Buy, Sell, and/or Net trading limits. These daily trading activity 
limits may be established at an aggregate limit and/or security 
specific limit per PRM Module. Member firms may subscribe to the PRM 
Workstation Add-on to an existing PHLX Workstation or WeblinkACT 2.0 
for a fee.
    Current Proposal. PHLX will provide a tool to allow market 
participants to control, for each Market Participant Identifier 
(``MPID''), the total Net Notional Risk Exposure (``NNRE'') they are 
prepared to accept per trading session, from 8:00 a.m. to 8:00 p.m. 
EST. If a market participant exceeds their pre-established NNRE the 
access ports associated with that MPID will be disabled and open 
exposure on the PHLX market under that MPID will be administratively 
cancelled.
    The Kill Switch tool will operate on an MPID level, meaning that 
members will need to set a unique NNRE for each MPID used for order 
entry. Members can set limits for none, one, some, or all MPIDs 
registered to their firm. The tool will operate on all orders 
attributable to each MPID. Therefore, members that utilize a single 
MPID for multiple trading desks will be unable to establish a different 
NNRE for each trading desk. Members may adjust their NNRE values 
intraday. The NNRE will be calculated daily, meaning that it will reset 
at the start of each trading day.
    The Kill Switch will operate at all times and on all orders when 
the PHLX system is open (i.e., 8:00 a.m. to 8:00 p.m.) and it will 
cancel all open interest of all order types and all time-in-force 
durations.
    The tool will generate and send an email to a market participant as 
it approaches and then exceeds the pre-determined NNRE for an MPID. As 
a market participant executes trades during the trading session, an 
email will be sent to associated Infocenter accounts

[[Page 10217]]

containing their current proximity to the NNRE limit they had 
previously established. Such notification will occur when the executed 
value reaches 50, 75, 85, 90, and 95 percent of the pre-determined NNRE 
limit.
    In the event the NNRE limit is exceeded, the order entry port 
associated with the affected MPID will be disabled and open orders in 
the System will be administratively cancelled. A notification will be 
sent that indicates that the breach has occurred and that order flow 
from that port has been stopped. It will also include a count of the 
total number of orders cancelled. The notification will also be 
delivered to PHLX's trading operations team so that PHLX personnel are 
aware and can assist members in managing their risk exposure.
    After a Kill Switch has been triggered, the member will be required 
to contact PHLX operations staff in order to re-authorize trading under 
the affected MPID. Members will be required to explain why a Kill 
Switch was triggered and why it is safe for the Exchange to re-
authorize the MPID for order entry. Upon such request, PHLX operations 
staff will reactivate the order entry port associated with the affected 
MPID.
    PHLX plans to offer the Kill Switch functionality by March 1, 2014.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\4\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\5\ 
because it would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, and, in general, protect investors and 
the public interest. The Kill Switch is designed to protect firms and 
investors alike by limiting the risk and damage of potential 
technological or other erroneous trading activity. As such, the Kill 
Switch is an important compliance tool that members may use to help 
maintain the regulatory integrity of the markets.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PHLX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
the Exchange does not believe that the provision of Kill Switch 
functionality should be the subject of competitive analysis. In that 
regard, the Exchange notes that it has coordinated with other national 
securities exchanges and the Financial Industry Regulatory Authority to 
deliver a standard level of risk management functionality commonly 
known as the Kill Switch.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \6\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \7\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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.
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

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 Email to rule-comments@sec.gov. Please include 
File No. SR-PHLX-2014-10 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-PHLX-2014-10. This 
file number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. Copies of such 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-PHLX-2014-10 and should be 
submitted by March 17, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Kevin M. O'Neill,
Deputy Secretary.
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    \8\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-03797 Filed 2-21-14; 8:45 am]
BILLING CODE 8011-01-P