Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending Rule 98 To Adopt a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information and Make Conforming Changes to Other Exchange Rules, 19146-19154 [2014-07634]
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19146
Federal Register / Vol. 79, No. 66 / Monday, April 7, 2014 / Notices
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filing, CME plans to operationalize the
fee waiver program on April 1, 2014.
The terms of program are set to expire
on March 31, 2015.
The proposed fee changes are limited
to CME’s business as a derivatives
clearing organization clearing products
under the exclusive jurisdiction of the
Commodity Futures Trading
Commission (‘‘CFTC’’) and do not
materially impact CME’s security-based
swap clearing business in any way. CME
has also certified the proposed rule
changes that are the subject of this filing
to the Commodity Futures Trading
Commission (‘‘CFTC’’) in CFTC
Submission 14–082.
CME believes the proposed rule
changes are consistent with the
requirements of the Exchange Act
including Section 17A of the Exchange
Act.5 More specifically, the proposed
rule changes establish or change a
member due, fee or other charge
imposed by CME under Section
19(b)(3)(A)(ii) 6 of the Securities
Exchange Act of 1934 and Rule 19b–
4(f)(2) 7 thereunder. CME believes that
the proposed fee change is consistent
with the requirements of the Securities
Exchange Act of 1934 and the rules and
regulations thereunder and, in
particular, to 17A(b)(3)(D) 8, because the
proposed fee changes apply equally to
all market participants clearing MXN
OTC IRS in house accounts and
therefore the proposed changes provide
for the equitable allocation of reasonable
dues, fees and other charges among
participants. CME also notes that it
operates in a highly competitive market
in which market participants can
readily direct business to competing
venues. As such, the proposed changes
are appropriately filed pursuant to
Section 19(b)(3)(A) 9 of the Act and
paragraph (f)(2) of Rule 19b–4
thereunder.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CME does not believe that the
proposed rule change will have any
impact, or impose any burden, on
competition. The proposed rule changes
modify pricing for house account
clearing of MXN OTC IRS products.
These products are swaps under the
exclusive jurisdiction of the CFTC, and,
as such, these proposed changes do not
affect the security-based swap clearing
activities of CME in any way and
therefore do not impose any burden on
5 15
U.S.C. 78q–1.
U.S.C. 78s(b)(3)(A)(ii).
7 17 CFR 240.19b–4(f)(2).
8 15 U.S.C. 78q–1(b)(3)(D).
9 15 U.S.C. 78s(b)(3)(A).
6 15
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17:49 Apr 04, 2014
competition that is inappropriate 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
CME has not solicited, and does not
intend to solicit, comments regarding
this proposed rule change. CME has not
received any unsolicited written
comments from interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective upon filing pursuant to Section
19(b)(3)(A) 10 of the Act and paragraph
(f)(2) of Rule 19b–4 thereunder.11 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,
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–
CME–2014–10 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC, 20549–1090.
All submissions should refer to File
Number SR–CME–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 or
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 CME and on CME’s Web site at
https://www.cmegroup.com/marketregulation/rule-filings.html.
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–CME–2014–10 and should
be submitted on or before April 28,
2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–07640 Filed 4–4–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71837; File No. SR–NYSE–
2014–12]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change
Amending Rule 98 To Adopt a
Principles-Based Approach To Prohibit
the Misuse of Material Nonpublic
Information and Make Conforming
Changes to Other Exchange Rules
April 1, 2014.
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 March
18, 2014, 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, II, and III below, which Items
have been prepared by the selfregulatory organization. The
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
10 15
11 17
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CFR 240.19b–4(f)(2)
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Federal Register / Vol. 79, No. 66 / Monday, April 7, 2014 / Notices
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
Rule 98 to adopt a principles-based
approach to prohibit the misuse of
material nonpublic information and
make conforming changes to other
Exchange Rules. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
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
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The Exchange proposes to amend
Rule 98 to adopt a principles-based
approach to prohibit the misuse of
material nonpublic information by a
member organization that operates a
DMM unit and make conforming
changes to other Exchange rules. The
proposed rule changes would provide
more flexibility for how a member
organization may organize its DMM
unit. The Exchange believes that the
proposed rule change adopts an
approach more similar to the rules
governing equity market makers on
NYSE Arca Equities, Inc. (‘‘NYSE
Arca’’), the NASDAQ Stock Market LLC
(‘‘Nasdaq’’), and the BATS Exchange,
Inc. (‘‘BATS’’),4 while maintaining
4 See Securities Exchange Act Release No. 60604
(Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR–
NYSEArca–2009–78) (Order approving elimination
of NYSE Arca rule that required market makers to
establish and maintain specifically prescribed
information barriers, including discussion of NYSE
Arca and Nasdaq rules). See also Securities
Exchange Act Release No. 61574 (Feb. 23, 2010), 75
FR 9455 (Mar. 2, 2010) (SR–BATS–2010–003)
(Order approving amendments to BATS Exchange,
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certain specified protections that reflect
the unique role of DMMs at the
Exchange.5 The proposed changes will
provide member organizations operating
DMM units with the ability to integrate
DMM unit trading with other trading
units, while maintaining narrowly
tailored restrictions to address that
DMMs while on the Trading Floor may
have access to certain Floor-based nonpublic information. The proposed rule
change will also enable DMM units to
maintain procedures and controls to
prevent the misuse of material, nonpublic information that are effective and
appropriate for that member
organization.
As discussed in more detail below,
the Exchange proposes to redefine the
structure of a DMM unit by deleting the
definitions of ‘‘aggregation unit’’ and
cross reference to Rule 200 of
Regulation SHO (‘‘Regulation SHO’’) 6
and ‘‘integrated proprietary aggregation
unit’’ and redefining the term ‘‘DMM
unit.’’ The Exchange believes that these
proposed revisions will enable member
organizations to integrate DMM units
with other trading operations within the
member organization, including, if
applicable, a customer-facing operation,
subject to Exchange and federal rules
that prohibit the misuse of material
nonpublic information. In addition, in
order to streamline the rule, the
Exchange proposes several nonsubstantive clarifying and conforming
changes to the provisions of Rule 98 that
govern these areas. The Exchange also
proposes to eliminate duplicative
provisions in the rule regarding backoffice operations provided by an
approved person or member
organization. Finally, the Exchange
proposes to delete rules relating to the
DMM that are obsolete.
A. Background
Rule 98, which was last amended in
2008,7 incorporates various
organizational structures for operating a
DMM unit. Rule 98(c) provides for the
operation of a ‘‘DMM unit,’’ which can
be either a stand-alone member
organization or an ‘‘aggregation unit’’ 8
Inc. (‘‘BATS’’) Rule 5.5 to move to a principlesbased approach to protecting against the misuse of
material, non-public information, and noting that
the proposed change is consistent with the
approaches of NYSE Arca and Nasdaq).
5 This proposed rule change is not intended to
address the rules governing options market makers.
6 17 CFR Part 242.200.
7 See Securities Exchange Act Release No. 58329
(Aug. 6, 2008), 73 FR 48260 (Aug. 18, 2008) (SR–
NYSE–2008–45).
8 An ‘‘aggregation unit’’ is defined in Rule
98(b)(11) as any trading or market-making
department, division, or desk that meets the
requirements of the definition of ‘‘independent
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19147
within a member organization. As a
general matter, unless otherwise
specified in Rule 98, a DMM unit must
maintain the confidentiality of both
DMM confidential information and nonpublic orders.9 A DMM unit therefore
must not permit either other aggregation
units of the member organization or its
approved person(s) to have access to
DMM confidential information or nonpublic order information.10
Rule 98 defines the terms ‘‘non-public
order information’’ and ‘‘DMM
confidential information’’ separately. In
the case of ‘‘non-public order
information,’’ the Exchange seeks to
protect price-sensitive non-DMM
trading information that is not publicly
available or that is shared with the
DMM with an expectation of privacy.
Thus, this definition captures any
information relating to order flow at the
Exchange, including verbal indications
of interest made with an expectation of
privacy, electronic order interest, equotes, reserve interest, or information
about imbalances at the Exchange, that
is not publicly-available on a real-time
basis via an Exchange-provided
datafeed, such as NYSE OpenBook®,11
or otherwise publicly available.
‘‘DMM confidential information’’
refers to principal or proprietary trading
activity of a DMM unit at the Exchange
in the securities allocated to it pursuant
to Rule 103B, including the unit’s
positions in those securities, decisions
relating to trading or quoting in those
securities, and any algorithm or
computer system that is responsible for
such trading activity and that interfaces
with Exchange systems.
Rule 98(d) permits a member
organization to operate the DMM
business within a larger aggregation unit
referred to as a ‘‘integrated proprietary
aggregation unit,’’ which may only
engage in proprietary trading activity,
including electronic market making.
Rules 98(d) and (f)(2) set forth the types
of information barriers required within
such a unit to separate the DMM trading
at the Exchange from the trading by the
unit’s ‘‘upstairs’’ desk’s trading in
assigned securities in away markets or
trading in related products.12 In
trading unit’’ pursuant to Rule 200 of Regulation
SHO.
9 See Rule 98(c)(2)(A).
10 See Rule 98(c)(2)(A)(i) and (ii).
11 NYSE OpenBook® provides aggregated limitorder volume that has been entered on the
Exchange at price points for all NYSE-traded
securities.
12 ‘‘Related products’’ are defined as any
derivative instruments that are related to a security
allocated to a DMM unit, including options,
warrants, hybrid securities, single-stock futures,
security-based swap agreement, a forward contract,
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particular, the rule requires the DMM
unit to protect both non-public order
information and DMM confidential
information. When providing risk
management to the DMM unit, the
integrated proprietary aggregation unit
may see traded positions of the DMM
unit that have been printed to the
Consolidated Tape, but cannot see
where the DMM unit is quoting.13
When a DMM unit operates within an
integrated proprietary aggregation unit
or engages in off-Floor trading of
products related to securities assigned
to the DMM unit, Rule 98 specifically
prohibits an individual DMM who
moves off of the Floor of the Exchange
from making DMM confidential
information available to off-Floor
personnel or systems of the integrated
proprietary aggregation unit.14 Senior
managers of the approved person or
parent member organization may
provide general oversight to the DMM
unit, provided that if the senior manager
receives any DMM confidential
information or non-public order
information, he or she must not use
such information to directly or
indirectly influence trading based on
that confidential information.15
Rule 98 further provides that
individuals or systems, including
computer algorithms, that are either
responsible for trading in related
products within the DMM unit or
engaging in risk management on behalf
of the DMM unit, are restricted from
having access to DMM confidential
information.16 As noted above, the
limited exceptions permit the persons or
systems responsible for managing the
risk of the DMM unit to have electronic
access to the DMM unit’s trades at the
Exchange in securities allocated to the
DMM unit, provided that such trades
have been printed to the Consolidated
Tape, and to electronically direct the
trading of the DMM unit, subject to the
DMM rules.17
In addition to specifying trading
restrictions, Rule 98(e) provides that a
DMM unit can share non-trading related
services with a parent member
organization or approved persons.
However, to share non-trading related
or any other instrument that is exercisable into or
whose price is based upon or derived from a
security listed on the Exchange. See Rule 98(b)(15).
The Exchange proposes to make non-substantive
edits to this definition to conform to other changes
made to Rule 98, and, as discussed below,
renumber the rule accordingly.
13 See Rule 98(f)(1)(v) and (98(f)(2)(A).
14 See Rule 98(d)(2)(B)(iv) and 98(f)(1)(A)(iii).
15 See Rule 98(c)(2)(E).
16 See Rule 98(f)(1)(A)(i), 98(f)(2)(A), and
98(f)(3)(C)(2).
17 See Rule 98(f)(1)(A)(v), 98(f)(2)(a)(i), and
98(f)(3)(c)(iii) and (iv).
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The Exchange proposes to amend
Rule 98 to adopt a more principlesbased approach that would permit a
member organization operating a DMM
unit to maintain and enforce its own
policies and procedures to, among other
things, prohibit the misuse of material
nonpublic information and eliminate
requirements that specify how a
member organization must organize its
DMM unit within the firm. While the
proposed changes would provide the
ability for member organizations to
integrate their DMM units, the Exchange
does not believe that the amendments
will reduce in any way the protections
against the misuse of material nonpublic
information. Rather, the Exchange
believes that by adding a principlesbased approach that generally prohibits
the misuse of material non-public
information, the amended rule will
provide for broader protections than the
current rule, which protects only certain
defined non-public information.
To achieve the goal of enabling greater
integration of DMM units within a
member organization, the Exchange
proposes to revise the definitions set
forth in Rule 98(b) to eliminate the
various structures and instead use a
single term to refer to DMM operations.
As proposed, the term ‘‘DMM unit’’
would be amended to mean a trading
unit within a member organization that
is approved pursuant to Rule 103 to act
as a DMM unit. Accordingly, the
Exchange proposes to eliminate the
requirement that a DMM unit be an
‘‘aggregation unit’’, which is currently
defined to mean any trading or marketmaking department, division or desk
that meets the requirements of the
definition of ‘‘independent trading unit’’
pursuant to Rule 200 of Regulation
SHO.19
The Exchange proposes to decouple
the Rule 98 definition from Regulation
SHO in part because the two rules seek
to achieve different purposes. Rule
200(f) of Regulation SHO sets forth the
requirements for qualifying as an
‘‘independent trading unit’’ for the
purpose of order marking requirements
under Rule 200. In practice, broker
dealers use information barriers to meet
the requirements of an independent
trading unit under Regulation SHO. By
contrast, Rule 98 does not concern the
netting of position information. While
member organizations operating DMM
units would be required to comply with
Regulation SHO, the Exchange does not
believe that it needs to prescribe in its
rules how a firm must structure its
DMM operations for purposes of
complying with Regulation SHO.
For similar reasons, the Exchange
does not believe it needs to maintain a
definition unique to the Exchange and
DMMs of an ‘‘integrated proprietary
aggregation unit.’’ This definition
contemplates a DMM unit being part of
an aggregation unit that engages in only
proprietary trading activity. While a
member organization may choose to
structure in this manner, the Exchange
does not believe it needs to be required.
Rather, the Exchange believes that Rule
98 should provide flexibility for a
member organization to structure its
business, including any DMM
operations, in a manner that a member
organization believes is appropriate for
its business purposes, subject to
requirements to protect against the
misuse of material, non-public
information, as discussed below.
The Exchange proposes additional
changes to Rule 98(b) to delete
definitions that are no longer necessary
in the revised rule. Specifically, the
Exchange proposes to delete the
definitions for ‘‘DMM API,’’ ‘‘DMM
account,’’ ‘‘customer-facing
department,’’ and ‘‘non-trading related
services.’’ The terms DMM API and
DMM account were based on Rule 104
before it was amended in 2008.
Accordingly, the Exchange believes that
these definitions are now obsolete. In
addition, because the proposed rule
changes are intended to provide
principles-based instruction on how to
operate a DMM unit, the rule no longer
needs to define terms that support the
18 See Rules 98A Former, 99 Former, 104T(a)
(Former), 105(a) Former, 105(b) Former, 105(d)
Former, 105 Guidelines section (m) Former, and
113 Former.
19 The Exchange proposes to delete rule
provisions that reference the terms ‘‘aggregation
unit’’ and ‘‘integrated proprietary aggregation unit.’’
See, e.g., Rule 98(c)(2)(B).
services, a DMM unit must obtain
approval from NYSE Regulation and
show that it has policies and procedures
to maintain the confidentiality of DMM
confidential information and non-public
order information.
Because not all firms were
immediately approved under ‘‘new’’
Rule 98, which was last amended in
2008, the Exchange kept the pre-2008
version of Rule 98 in its rulebook as
‘‘Rule 98 Former.’’ Because Rule 98
Former was referenced in a number of
other Exchange rules, certain Exchange
rules have double references depending
on whether the DMM is approved under
Rule 98 Former or the current rule.18
All DMM firms are now approved to
operate under Rule 98, and are no
longer subject to ‘‘Rule 98 Former.’’
B. Proposed Amendments to Rule 98
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Federal Register / Vol. 79, No. 66 / Monday, April 7, 2014 / Notices
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current, more prescriptive rule text. The
Exchange proposes to delete the
definitions of ‘‘DMM’’ and ‘‘approved
person’’ as duplicative of the definitions
set forth in Rules 2(i) and 2(c). The
Exchange proposes to make nonsubstantive edits to the definition of
‘‘related products.’’ The Exchange also
proposes to make conforming
amendments to Rule 2(j).
With these proposed definition
changes, the Exchange believes that a
member organization operating a DMM
unit would be better positioned to
integrate its DMM operations. For
example, if a member organization
engages in market-making operations on
multiple exchanges, it may be optimal
for a firm to house its DMM operations
together with the other market-making
operations, even if such operations are
customer-facing. Another variation
could be if a firm chooses to include all
of its equity trading, including
customer-facing operations, within a
single independent trading unit. The
Exchange believes that providing
member organizations with the ability to
integrate DMM operations could
promote liquidity at the Exchange
because the DMM operations would be
part of a larger unit with greater sources
of liquidity.20
The Exchange notes that
notwithstanding how a member
organization chooses to structure its
operations, that firm would need to
meet the requirements of Section 15(g)
of the Act,21 which requires every
registered broker or dealer to ‘‘establish,
maintain, and enforce written policies
and procedures reasonably designed,
taking into consideration the nature of
such broker’s or dealer’s business, to
prevent the misuse . . . of material,
nonpublic information by such broker
or dealer or any person associated with
such broker or dealer.’’
Accordingly, the Exchange proposes
to revise current Rule 98(c)(2) and
replace it with new text based on NYSE
Arca Equities Rule 6.3 (Prevention of
the Misuse of Material Nonpublic
Information) and BATS Rule 5.5
20 The Exchange notes that under Regulation
SHO, determination of a seller’s net position is
based on the seller’s position in the security in all
proprietary accounts. See Securities Exchange Act
Release No. 50103 (July 28, 2004), 69 FR 48008,
48010, n.22 (Aug. 6, 2004); see also Securities
Exchange Act Release Not 48709 (Oct. 29, 2003), 68
FR 62972, 62991 and 62994 (Nov. 6, 2003); Letter
from Richard R. Lindsey, Director, Division of
Market Regulation, to Roger D. Blanc, Wilkie Farr
& Gallagher, SEC No-Action Letter, 1998 SEC NoAct. LEXIS 1038, p. 5 (Nov. 23, 1998); Securities
Exchange Act Release No. 30772 (June 3, 1992), 57
FR 24415, 24419 n.47 (June 9, 1992); Securities
Exchange Act Release No. 27938 (Apr. 23, 1990), 55
FR 17949, 17950 (Apr. 30, 1990).
21 15 U.S.C. 78o(g).
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17:49 Apr 04, 2014
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(Prevention of the Misuse of Material,
Non-Public Information) that specifies
that a member organization seeking
approval to operate a DMM unit
pursuant to Rule 98 must maintain and
enforce written policies and procedures
reasonably designed, taking into
consideration the nature of such
member organization’s business, (i) to
prevent the misuse of material, nonpublic information by such member
organizations or persons associated with
such member organization and (ii) to
ensure compliance with applicable
federal laws and regulations and with
Exchange rules.22
Similar to NYSE Arca Equities Rule
6.3, the Exchange further proposes to
add rule text that provides examples of
conduct that would constitute the
misuse of material, non-public
information, including, but not limited
to: (A) Trading in any securities issued
by a corporation, or in any related
products, while in possession of
material-non-public information
concerning the issuer; (B) trading in a
security or related product, while in
possession of material non-public
information concerning imminent
transactions in the security or related
product; or (C) disclosing to another
person or entity any material, nonpublic information involving a
corporation whose shares are publicly
traded or an imminent transaction in an
underlying security or related product
for the purpose of facilitating the
possible misuse of such material, nonpublic information.23
The Exchange believes that with the
proposed change to Rule 98(c)(2),
member organizations will be able to
utilize a flexible, principles-based
approach to modify their policies and
procedures as appropriate to reflect
changes to their business model,
business activities, or to the securities
market itself. Moreover, while specified
information barriers may no longer be
required, a member organization’s
business model or business activities
may dictate that an information barrier
or functional separation be part of the
appropriate set of policies and
procedures that would be reasonably
designed to achieve compliance with
applicable securities laws and
22 The Exchange also proposes to revise Rule
98(c)(1) to replace the term ‘‘NYSE Regulation, Inc.’’
with the term ‘‘Exchange.’’ Pursuant to Rule 0, the
term ‘‘Exchange’’ may also mean FINRA staff
working on behalf of the Exchange and NYSE
Regulation, Inc. pursuant to a regulatory services
agreement.
23 Because Rule 98 defines the term ‘‘related
product,’’ the Exchange proposes to use the term
‘‘related product’’ instead of ‘‘related security,’’
which is the term used in NYSE Arca Equities Rule
6.3.
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19149
regulations, and with applicable
Exchange rules.
More specifically, the Exchange notes
that providing member organizations
with the ability to integrate DMM unit
operations with other equity trading
operations, which may include
customer-facing trading desks, would
enable member organizations to better
manage risk and adopt uniform trading
models across multiple markets.
Currently, because DMM units need to
be walled off from other market-making
desks, the DMM units cannot leverage
quoting models that may have been
developed for the other market-making
desks. And because of the Rule 98mandated separation, member
organizations are restricted in their
ability to manage risk across the DMM
unit and other market-making units. As
a result, the costs associated with
developing separate quoting models and
risk strategies for a stand-alone DMM
unit become prohibitive as compared to
a member organization’s investment in
operating an integrated market-making
unit that may include both internalized
customer flow and registered marketmaking on other exchanges. The
Exchange believes that if DMM units
could be integrated with other marketmaking units, it could not only enable
member organizations to enhance their
overall risk management, but could also
potentially lead to flow that would
otherwise be internalized being directed
instead to the Exchange.
Consistent with the proposal to adopt
a principles-based approach to protect
against the misuse of material nonpublic information generally, the
Exchange proposes to restructure the
defined terms in current Rule 98 that
relate to non-public information. First,
the Exchange proposes to re-define the
definition of ‘‘non-public information’’
as ‘‘Floor-based non-public
information.’’ The Exchange proposes
this redefinition to distinguish this type
of non-public information, which is
non-DMM information to which a DMM
while on the Trading Floor may have
access due to the unique role of DMMs
on the Trading Floor, from any other
non-public information that is covered
by proposed Rule 98(c)(2). As discussed
in more detail below, the Exchange
proposes to maintain restrictions in
proposed Rule 98(c)(3) tailored to the
Floor-based activities of DMM units and
proposes to use the term ‘‘Floor-based
non-public order information’’ to
distinguish which information those
provisions are intended to protect.24
24 The Exchange proposes non-substantive
changes to this definition that better reflect how
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Second, the Exchange proposes to
delete the definition of DMM
confidential information as duplicative
of proposed new Rule 98(c)(2), which
protects against the misuse of material
non-public information. As noted above,
the term ‘‘DMM confidential
information’’ includes position, trading,
and quoting information of the DMM
unit. This information is non-public to
persons or entities that are not part of
the member organization, but critical
information for a member organization
to operate and manage its own risks.
The Exchange believes that the policy
concerns relating to specifying separate
protections for this information are no
longer applicable. Specifically, unlike
specialists, DMMs are not agents for
orders on the Exchange’s book and do
not have any negative obligations.
Instead, DMMs are required to act as
market makers in assigned securities,
subject to affirmative obligations to
maintain a fair and orderly market.25
While the DMM continues to have the
ability to, and does, trade manually
from the Floor, the vast majority of the
DMM’s quotes are entered by means of
algorithms initiated off-Floor. Moreover,
DMM interest manually entered
intraday during a slow state or to
participate in a verbal transaction with
a Floor broker still yields to public
orders.26 In addition, to the extent a
DMM on the Floor may have access to
Floor-based non-public order
information, proposed Rule 98(c)(3)
would continue to specify protections
against the misuse of that information
by the member organization.
The Exchange believes that the
proposed principles-based approach to
protect against the misuse of material
non-public order information specified
in proposed Rule 98(c)(2) would ensure
that a member organization would be
required to protect against the misuse of
any material non-public information
that currently falls within the definition
of DMM confidential information. As
noted above, this includes refraining
from trading while in possession of
material non-public information
concerning imminent transactions in the
security or related product. The
Exchange believes that moving to a
principles-based approach rather than
prescribing how and when to protect the
DMM’s own quoting and trading
information would provide member
Exchange systems currently operate. Specifically,
the Exchange believes that concept of trading in
‘‘slow mode’’ is duplicative of the remaining rule
text, which covers any order information that is
made available to DMMs but that is not available
to other market participants.
25 See Rule 104.
26 See Rule 72(c)(xi).
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organizations operating DMM units with
appropriate tools to better manage risk
across a firm, including integrating
DMM unit positions and quoting
information with other quotes and
positions by the firm, or as applicable,
by the respective independent trading
unit. Specifically, the Exchange believes
that it is appropriate for risk
management purposes for a member
organization operating a DMM unit to be
able to consider both DMM unit
outstanding quotes as well as traded
positions for purposes of calculating net
positions consistent with Rule 200 of
Regulation SHO, calculating intra-day
net capital positions, and managing risk
both generally as well as in compliance
with Rule 15c3–5 under the Act (the
‘‘Market Access Rule’’).27 The Exchange
notes that any risk management
operations would need to operate
consistent with the requirement to
protect against the misuse of material
non-public information.
The Exchange notes that if DMM units
are integrated with other market-making
operations, they would be subject to
existing rules that prohibit member
organizations from disadvantaging their
customers or other market participants
by improperly capitalizing on a member
organization’s access to the receipt of
material, non-public information. As
such, a member organization that
integrates its DMM unit operations
together with customer-facing
operations would need to protect
customer information consistent with
existing obligations to protect customer
information that already apply to equity
market makers registered on other
exchanges. For example, NYSE Rule
5320, which is substantially similar to
FINRA Rule 5320 and NYSE Arca
Equities Rule 5320 (generally referred to
as the ‘‘Manning Rule.’’), generally
prohibits a member organization from
trading for its own account ahead of
customer orders. Rule 5320(a) further
provides that if a member organization
trades at a price for its own account
ahead of the customer order, it must
execute the customer order up to the
size and at the same or better price at
which it traded for its own account. The
Manning Rule sets forth certain
exceptions to this requirement,
including the Large Orders and
Institutional Account Exceptions
(Supplementary Material .01 to Rule
5320) and the No-Knowledge Exception
(Supplementary Material .02 to Rule
5320). A member organization operating
both a DMM unit, which engages in
trading for its own account, and
customer-facing operations would need
27 17
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to comply with the Manning Rule or
meet one of the specified exceptions.28
In addition, a member organization
operating a DMM unit would also need
to maintain policies and procedures to
assure that it does not engage in any
frontrunning of customer order
information in violation of Exchange,
FINRA, or federal rules. The Exchange
notes that these are existing obligations
that already govern equity marketmaking operations on other exchanges
and therefore integrating DMM
operations with such desks would not
present any novel issues.
Proposed Rule 98(c)(3)–(7) would set
forth the remaining specific restrictions
for member organizations operating a
DMM unit. In recognition of the unique
role of DMMs, including limited Floorbased access to certain non-public order
information,29 the Exchange proposes to
maintain certain prescriptions on how a
DMM unit must operate. To effect this
new structure, the Exchange proposes to
delete subsections (d) and (f) of Rule 98
and move the sections of those rules
that the Exchange proposes to retain to
an amended subsection (c)(3)–(7) of the
Rule, which include the relevant
restrictions on trading within the unit.
As proposed, the rule will no longer
prescribe the type of trading in which a
DMM unit may engage. Rather, the
proposed rule will only specify the
types of trading activities that would be
restricted.
Proposed Rules 98(c)(3)(A)–(D) would
set forth the restrictions specific to
DMM units that address their unique
role at the Exchange. Proposed Rule
98(c)(3)(A) would provide generally that
a member organization shall protect
against the misuse of Floor-based nonpublic order information. The rule
would further specify who may have
access to such Floor-based non-public
order information (as permitted
pursuant to Rule 104), which, as
proposed, would be the Floor-based
employees of the DMM unit and
individuals responsible for the direct
supervision of the DMM unit’s Floorbased operations. The Exchange
believes that the proposed rule change
specifies in a more straight-forward
manner who may have access to have
non-public order information, and
replaces the multiple references in the
current Rule 98 to the same concept.30
28 The Exchange notes that FINRA already
monitors member organizations for compliance
with Rule 5320.
29 See Rule 104(j)(ii).
30 See, e.g., Rules 98(c)(2)(A)(i)–(ii), (d)(2)(B)(i)–
(iii), (f)(1)(A)(i), (f)(3)(C)(ii). The current rule is
structured as to who may not have access. The
Exchange believes it is clearer to specify who may
have access to such information.
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Proposed Rule 98(c)(3)(B) would
specify the restrictions applicable to
employees of the DMM unit while on
the Trading Floor. First, while on the
Trading Floor of the Exchange,
employees of the DMM unit, except as
provided for in Rule 36.30, may trade
only DMM securities and only on or
through the systems and facilities of the
Exchange, as permitted by Exchange
Rules.31 Second, while on the Trading
Floor, Floor-based employees may not
communicate with individuals or
systems responsible for making trading
decisions for related products or for
away-market trading in DMM
securities.32 Finally, because a DMM
unit may be part of a larger trading unit
that includes customer-facing
operations, the Exchange proposes to
add a new restriction that while on the
Trading Floor, employees of the DMM
unit shall not have access to customer
information or the DMM unit’s position
in related products.33 The Exchange
believes that these proposed restrictions
will ensure that while on the Floor,
employees of a DMM unit will not be
quoting or trading based on material
non-public information related to
customer information or trading in
related products.
As with the current rule, the
Exchange proposes to maintain
restrictions on what happens if a nonFloor based individual becomes aware
of Floor-based non-public order
information. The Exchange proposes to
consolidate the current rule concerning
wall-crossing provisions into proposed
Rule 98(c)(3)(C), which would provide
that when a Floor-based employee of a
DMM unit moves to a location off of the
Trading Floor of the Exchange or if any
person that provides risk management
oversight or supervision of the Floorbased operations of the DMM unit is
aware of Floor-based non-public order
information, he or she shall not (1) make
such information available to customers,
(2) make such information available to
individuals or systems responsible for
31 Compare proposed Rule 98(c)(3)(A) with Rule
98(f)(1)(A)(ii). The Exchange also proposes to
replace the term ‘‘Floor’’ with the term ‘‘Trading
Floor’’ to reflect the use of that term in Rules 6A
and 36.
32 Compare proposed Rule 98(c)(3)(B) with Rule
98(d)(2)(B)(iii).
33 Compare proposed Rule 98(c)(3)(B)(iii) with
Rule 98(f)(1)(A)(ii). In addition, the Exchange
believes that proposed Rule 98(c)(3)(B)(iii) replaces
the concerns expressed in current Rule 98(c)(2)(C)
that the DMM unit not have access to material nonpublic information that is in possession of other
aggregation unit. The Exchange does not believe it
needs to maintain Rule 98(c)(2)(C) because it
restates the general concept of how aggregation
units under Regulation SHO are structured, and as
noted above, Rule 98 no longer follows the
aggregation unit model.
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making trading decisions in DMM
securities in away markets or related
products, or (2) use any such
information in connection with making
trading decisions in DMM securities in
away markets or related products.
The Exchange believes that
consolidating the wall-crossing
provisions into a single provision
achieves the same purpose as the
current rule, which states the same
concept in multiple places.34 The
proposed rule is augmented by adding
that Floor-based non-public order
information cannot be made available to
customers. The proposed rule would
cover any individual, whether it is an
individual that leaves the Floor or a
manager providing oversight of Floor
operations, to neither use nor make
available any non-public order
information that the individual becomes
aware of. The Exchange believes that
replacing the concept of ‘‘access to’’
information with ‘‘aware of’’
information provides a clearer standard
for member organizations and is
generally more consistent with federal
rules.35 Specifically, because the
provision is intended to ensure that
information is not used inappropriately,
inappropriate use of such information
could only occur if someone is aware of
that information.
For example, a DMM unit could be
part of a larger trading unit that engages
in customer-facing market making
activities on multiple exchanges. With
the proposed changes to Rule 98
generally, a manager within that unit
would be able to monitor risk across the
unit, including positions from trading as
a DMM at the Exchange, without
breaching any prohibitions against the
misuse of material nonpublic
information. Assume that a Floor-based
DMM needs to take on a larger risk
profile in a security because of a
proposed Floor broker transaction and
needs to discuss this proposed
transaction with the off-Floor manager.
Once this topic is discussed with the
off-Floor manager, that manager is now
aware of Floor-based non-public order
information, and therefore must protect
against the misuse of this information.
This type of wall-crossing procedure is
consistent with current practices within
member organizations.
As with the current rule, but with
new rule numbering, the Exchange
34 See Rules 98(c)(2)(E)(i), 98(d)(2)(B)(iv), and
(f)(1)(A)(3).
35 See 17 CFR 240.10b5–1(b) (specifying that a
purchase or sale of securities constitutes trading on
the basis of material nonpublic information when
the person making the purchase or sale was aware
of the material nonpublic information when the
person made the purchase or sale).
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19151
proposes to maintain that the DMM unit
may make available to a Floor broker
associated with or affiliated with an
approved person or member
organization any information that the
DMM would be permitted to provide
under Exchange rules to an unaffiliated
Floor broker.36
To ensure that all trading activity by
a DMM unit in DMM securities at the
Exchange is available for review, the
Exchange proposes to add a provision
that any interest entered by the DMM
unit in DMM securities at the Exchange
must be entered through systems that
identify such interest as DMM
interest.37 As proposed, because the
Exchange’s trading systems continue to
evolve, the Exchange believes it is
unnecessary to specify which system(s)
a DMM unit must use. However, this
rule would require the DMM unit to use
a system that would enable such interest
to be identified as DMM trading interest.
The Exchange notes that the Rule 104
obligations that relate to whether a
DMM is long or short, i.e., Rules
104(g)(i)(A)(III) and (h), are applicable to
the DMM unit’s position in DMM
securities together with any position of
a Regulation SHO independent trading
unit of which the DMM unit may be
included. For example, if a DMM unit
is combined with market-making desks
that are trading on away markets, it
would be the position of that entire unit
in DMM securities, and not just the
DMM’s Exchange-traded positions, that
would be relevant for those rules. To
ensure that the Exchange can monitor
for compliance with these rules, the
Exchange proposes to add to Rule 98
that the member organization must
provide the Exchange with real-time
unit position information for any
trading in DMM securities by the DMM
unit and any independent trading unit
of which it is a part.38 For example, if
a DMM unit is part of an independent
trading unit that engages in trading on
other markets in DMM securities, the
real-time position update would need to
incorporate any away-market
transactions in DMM securities by that
independent trading unit.
Currently, Rule 98 permits an
integrated proprietary aggregation unit
to engage in options market making
36 Compare proposed Rule 98(c)(3)(D) with Rule
98(c)(2)(A)(ii). The Exchange proposes to replace
the term ‘‘DMM’’ with ‘‘DMM unit’’ to be clear that
the proposed rule covers any staff of the DMM unit
located on the Trading Floor.
37 See proposed Rule 98(c)(4).
38 See proposed Rule 98(c)(5). The Exchange
proposes to delete Rule 98(d)(4) and subparagraphs
from the rule both because the Exchange does not
believe it needs to separately identify DMM audit
trail requirements and because Rule 132B no longer
exists.
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(electronic only), provided that the
DMM unit is walled off from the options
market making trading desk. Similar to
NYSE Arca Equities, the Exchange
proposes to eliminate prescriptive rules
regarding how to structure DMM
operations together with other marketmaking operations, and instead believes
that the principles-based approach set
forth in proposed Rule 98(c)(2) should
protect against the misuse of material
nonpublic information.39 The Exchange
proposes to amend Rule 98 to specify
restrictions that are unique to the
Exchange by virtue of the close physical
proximity of the NYSE MKT LLC
options trading floor. As proposed, the
DMM unit may not operate as a
specialist or market maker on the
Exchange or the NYSE MKT LLC
(‘‘NYSE MKT’’) equities or options
trading floors in related products, unless
specifically permitted in Exchange
rules.40 The Exchange notes that a
member organization that operates a
DMM unit may be a specialist or market
maker on NYSE MKT provided that it
maintains appropriate information
barriers.
The Exchange also proposes to
maintain the existing requirement that
the member organization maintain
information barriers between the DMM
unit and any investment banking or
research departments.41 The amended
rule would also continue to provide that
no DMM or DMM unit may be directly
supervised or controlled by an
individual associated with an approved
person or the member organization who
is assigned to any investment banking or
research departments.42 The only
difference between the proposed rule
text and the current rule is that the
Exchange proposes to delete that a
DMM unit may not be supervised or
controlled by an individual assigned to
a customer-facing department. As noted
above, the Exchange believes that
member organizations should not be
restricted in their ability to combine
DMM operations with customer-facing
operations, subject to the restrictions
enumerated in amended Rule 98 and the
proposed Exchange and federal
39 See
footnote 4.
proposed Rule 98(c)(6). The Exchange
notes that currently, the only time that a DMM unit
may engage in market making in a related products
under Exchange rules is on the NYSE MKT
exchange, pursuant to NYSE MKT Rule 504(b)(5)—
Equities. The NYSE does not have a similar
exception.
41 Compare proposed Rule 98(c)(7) with
98(c)(2)(A)(i) and (c)(2)((C). Investment banking
activities include activities such as underwriting,
tender offers, mergers, acquisitions,
recapitalizations, etc. See Rule 98(f)(1).
42 Compare proposed Rule 98(c)(7) with Rule
98(c)(2)(E)(ii).
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40 See
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proposes conforming amendments to
Rule 36.30.
Because of the proposed restructuring
of the rule, Rule 98(g) will be
renumbered as Rule 98(e), Rule 98(h)
will be renumbered as Rule 98(f), and
Rule 98(j) will be renumbered as Rule
98(g). The Exchange is proposing
conforming changes to these sections,
including updating cross-references and
changing the reference from the
Division of Market Surveillance and
NYSE Regulation to the Exchange.44
requirements that prohibit the misuse of
material nonpublic information,
discussed above.
The Exchange also proposes to
provide in proposed Rule 98(d) that the
DMM rules will apply only to the DMM
unit’s quoting or trading in their DMM
securities for their own accounts at the
Exchange.43 The Exchange has added
that this restriction is only applicable to
DMM unit trading for their own account
to be clear that the DMM rule
restrictions are not applicable to any
customer orders routed to the Exchange
by that member organization as agent.
The Exchange believes that by
restructuring the rule to focus on
protecting against the misuse of material
non-public information, Rule 98 no
longer needs to specify how a member
organization or an approved person
provides back-office support operations,
such as clearing, stock loan, and
compliance, for the DMM unit. Rather,
the Exchange believes that how a
member organization or approved
person provides back-office operations
to the DMM unit should not differ from
how such services are provided to other
trading units within that member
organization or approved person. In
addition, as proposed, amended Rule
98(c)(2) would require the member
organization to protect against the
misuse of material non-public
information, which would govern all
aspects of a member organization’s
operations. Accordingly, the Exchange
proposes to delete in its entirety Rule
98(e).
The Exchange notes that if a person in
the member organization or an approved
person is providing non-trading related
services to the DMM unit, and as a
result of such relationship, becomes
aware of Floor-based non-public order
information, such person would be
subject to the wall-crossing provisions
of proposed Rule 98(c)(3)(C), which is
applicable to any person who is aware
of such information. Because these
protections for Floor-based non-public
order information are retained in the
proposed revisions to Rule 98, and are
applicable to approved persons
pursuant to proposed amended Rule
98(a)(1), the Exchange believes that Rule
98(e), which concerns the sharing of
non-trading related services, is
redundant of existing regulatory
requirements governing the operations
of a broker-dealer. The Exchange
C. Other Proposed Amendments
As noted above, all DMM firms for
which Rule 98 is applicable are now
under the auspices of Rule 98.
Accordingly, Rule 98 Former no longer
has any application for any DMM units.
The Exchange therefore proposes to
delete Rule 98 Former and any rule that
either references Rule 98 Former, i.e.,
Rules 98A Former, 99 Former, and
104T(a)(Former) and supplementary
material .13 (Former), or references a
rule that is being proposed for deletion,
e.g., Rule 900. The Exchange also
proposes to amend Rule 98(a) and 105
to delete references to Rule 98 Former.
In addition, the Exchange proposes to
amend Rule 105 to delete Rule 105(b)–
(d) and the Guidelines for DMM’s
Registered Security Option and Single
Stock Futures Transactions Pursuant to
Rule 105 (‘‘Rule 105 Guidelines’’) and
make conforming amendments to Rule
36.30.45 Rule 105 currently sets forth
hedging guidelines to permit the DMM
to trade listed options or single-stock
futures that overlay DMM securities
from the Trading Floor. Under Rule
98(f)(1), a DMM unit can obtain an
exemption from the Rule 105 Guidelines
to trade options or futures, provided
that such trading is conducted by a
walled-off, off-Floor trading desk.
Under proposed revisions to Rule 98,
a DMM unit would no longer need to
apply for an exemption from Rule 105
trading restrictions because, as
discussed above, while on the Trading
Floor, Floor-based employees may trade
only DMM securities, i.e., no related
products, and only on or through the
systems and facilities of the Exchange.
Because there would not be any Floorbased trading in listed options or singlestock futures, the Rule 105 Guidelines
specifying how such Floor-based trading
may occur are now moot. Accordingly,
the Exchange proposes to delete these
rules. To conform other Exchange rules
43 Compare proposed Rule 98(d) with Rules
98(c)(3) and (d)(3). As defined in proposed Rule
98(b)(3) (formerly, Rule 98(b)(5)), the DMM rules
mean any rules that govern DMM conduct or
trading. These would include, for example, Rules
36.30, 103, 103A, 103B, and 104.
44 Pursuant to Rule 0, the reference to the
Exchange in this rule may also mean FINRA.
45 The Exchange proposes to amend Rule 105(a)
to clarify that the restriction on pool dealing applies
to the DMM unit for securities registered to that
unit.
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to this proposal, the Exchange also
proposes to delete section (b) from each
of Rules 1300 (streetTRACKS Gold
Shares), 1300A (Currency Trust Shares),
and 1300B (Commodity Trust Shares).
Each of these subsections crossreference Rule 105 Guidelines
subsection (m) and would similarly be
mooted by proposed Rule 98(c)(2)(B)(i).
The Exchange proposes further
conforming amendments to Rules 900(b)
and (d).
In addition, because DMM units no
longer have customer relationships, the
Exchange proposes to delete in its
entirety the DMM Booth Wire Policy,
which is set forth in Rule 123B, as
obsolete.
The Exchange notes that all member
organizations currently operating DMM
units already have in place written
policies and procedures to comply with
Rule 98, and such policies and
procedures have been approved by
NYSE Regulation.46 In addition, FINRA
has an exam program that reviews
member organizations operating DMM
units for compliance with such
procedures. Because the proposed Rule
98 amendments would continue to
require Exchange approval of any
policies and procedures to protect
against the misuse of material nonpublic
information, if a member organization
chooses to modify how it operates its
DMM operations consistent with
amended Rule 98, such revised policies
and procedures would be subject to
Exchange review before they could be
implemented. In addition, once
implemented, FINRA would continue to
monitor a member organization’s
compliance with those policies and
procedures consistent with the current
exam-based regulatory program
associated with Rule 98.
In addition, FINRA already has in
place surveillances designed to monitor
for manipulative activity and the
Exchange believes that because DMM
market-making activity is not materially
different from market-making on other
exchanges, these existing programs are
reasonably designed to address any
concerns that may be raised by a DMM
unit being integrated with existing
market-making operations.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 47 that an
Exchange have rules that are designed to
promote the just and equitable
46 FINRA currently approves Rule 98 procedures
on behalf of NYSE Regulation, Inc. pursuant to a
regulatory services agreement. See supra footnote
22.
47 15 U.S.C. 78f(b)(5).
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principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. The Exchange believes
that the proposed rule change would
remove impediments to and perfect the
mechanism of a free and open market by
adopting a principles-based approach to
permit a member organization operating
a DMM unit to maintain and enforce
policies and procedures to, among other
things, prohibit the misuse of material
non-public information and eliminating
restrictions on how a member
organization structures its DMM unit
operations. The proposed amendments
maintain the existing Rule 98
restrictions that are specific to the
unique role of the DMM and also
maintain the information barrier
requirements between the DMM unit
and any investment banking or research
departments. Member organizations
operating DMM units will continue to
be subject to federal and Exchange
requirements for protecting material
non-public order information 48 and
protecting customer orders that are the
consistent with the existing rules
governing broker dealers that operate as
equity market makers on other
registered exchanges.49
Accordingly, while certain
prescriptive elements of Rule 98 are
being deleted, the Exchange notes that
the rule will still require that member
organizations maintain and enforce
policies and procedures reasonably
designed to ensure compliance with
applicable federal securities laws and
regulations and with Exchange rules.
The Exchange notes that such written
policies and procedures will continue to
be subject to oversight by the Exchange
and therefore the elimination of
prescribed restrictions should not
reduce the effectiveness of the Exchange
rules to protect against the misuse of
material non-public information. Rather,
member organizations will be able to
utilize a flexible, principles-based
approach to modify their policies and
procedures as appropriate to reflect
changes to their business model,
business activities, or to the securities
market itself. Moreover, while specified
information barriers may no longer be
required, a member organization’s
business model or business activities
may dictate that an information barrier
or functional separation be part of the
appropriate set of policies and
procedures that would be reasonably
48 See 15 U.S.C. 78o(g) and proposed Rule
98(c)(2).
49 See Rule 5320.
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19153
designed to achieve compliance with
applicable securities laws and
regulations, and with applicable
Exchange rules. The Exchange therefore
believes that the proposed rule change
will maintain the existing protection of
investors and the public interest that is
currently set forth in Rule 98, while at
the same time removing impediments to
and perfecting a free and open market
by moving to a principles-based
approach to protect against the misuse
of material non-public information.
The Exchange similarly believes that
deleting the definition of ‘‘DMM
confidential information’’ removes
impediments to and perfects the
mechanism of a free and open market as
it will enable a member organization to
share quoting and position information
as may be necessary to meet order
marking requirements under Regulation
SHO or to comply with the Market
Access Rule. The Exchange further
believes that the proposed adoption of
a principles-based approach to protect
against the misuse of material nonpublic information, including
specifically requiring refraining from
trading based on material non-public
information regarding imminent
transactions in a security or related
product, will protect investors and the
public interest because it will assure the
protection against the misuse of material
non-public information and delete
prescribed rules that may no longer
meet this goal.
The Exchange also believes that
amending Rule 98 to apply wallcrossing procedures to any individual
who is aware of non-public order
information both broadens the
protection of the rule to any individual,
while at the same time narrowly tailors
the rule to when such protections
should apply, i.e., when an individual is
aware of non-public order information
and therefore could be in a position to
make a purchase or sale of securities on
the basis of such material nonpublic
information. The Exchange believes that
such clarifying changes remove
impediments to and perfect the
mechanism of a free and open market by
assuring that the protections are applied
when necessary.
In addition, the Exchange believes
that deleting Rule 98 Former and all
references thereto in Exchange rules
removes impediments to and perfects
the mechanism of a free and open
market because Rule 98 Former no
longer governs any member
organizations or approved persons that
operate a DMM unit, nor would it be
applicable to any new DMM units, and
therefore deleting the rule reduces any
potential confusion of which version of
E:\FR\FM\07APN1.SGM
07APN1
19154
Federal Register / Vol. 79, No. 66 / Monday, April 7, 2014 / Notices
Rule 98 is applicable. For similar
reasons, because DMMs would not be
permitted to trade in related products
while on the Trading Floor, the
Exchange believes that the Rule 105
Guidelines are now moot, and deleting
such rule reduces any potential
confusion of which rules govern DMM
unit trading in related products. Finally,
the Exchange believes that deleting the
Booth Wire Policy reduces confusion as
such policy is now moot given that
DMMs do not have public customers.
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. The
Exchange operates the only-Floor-based
equities market with DMMs. As such,
any changes to Rule 98 would not
impact any other markets. However, the
Exchange believes Rule 98 currently
imposes a burden on competition for the
Exchange because it requires member
organizations that operate a DMM unit
to operate in a manner that the
Exchange believes is more restrictive
than necessary for the protection of
investors or the public interest. The
Exchange believes that the proposed
rule change is pro-competitive because
it adopts a principles-based approach
that prohibit the misuse of material nonpublic information that is consistent
with the rules of NYSE Arca, BATS, and
Nasdaq governing equity market makers
and should provide greater flexibility
for how a member organization could
structure its operations.
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.
mstockstill on DSK4VPTVN1PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
17:49 Apr 04, 2014
Jkt 232001
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Kevin M. O’Neill,
Deputy Secretary.
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:
[FR Doc. 2014–07634 Filed 4–4–14; 8:45 am]
Electronic Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
VerDate Mar<15>2010
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
[Release No. 34–71839; File No. SR–
NYSEArca–2014–25]
• 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 Number SR–
NYSE–2014–12 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2014–12. 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 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 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–
2014–12 and should be submitted on or
before April 28,2014.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To Make Permanent Its
Pilot Program Regarding Minimum
Value Sizes for Opening Transactions
in New Series of Flexible Exchange
Options and Establish New Minimum
Value Sizes Applicable to Other FLEX
Transactions and FLEX Quotes
April 1, 2014.
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 March
18, 2014, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory 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 make
permanent its pilot program (‘‘Pilot
Program’’) regarding minimum value
sizes for opening transactions in flexible
exchange options (‘‘FLEX Options’’ or
‘‘FLEX’’), currently scheduled to expire
on March 31, 2014 and establish new
minimum value sizes applicable to
other FLEX transactions and FLEX
Quotes. The text of the proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
50 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00110
Fmt 4703
Sfmt 4703
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07APN1
]]>Agencies
[Federal Register Volume 79, Number 66 (Monday, April 7, 2014)]
[Notices]
[Pages 19146-19154]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07634]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71837; File No. SR-NYSE-2014-12]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Amending Rule 98 To Adopt a
Principles-Based Approach To Prohibit the Misuse of Material Nonpublic
Information and Make Conforming Changes to Other Exchange Rules
April 1, 2014.
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 March 18, 2014, 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,
II, and III below, which Items have been prepared by the self-
regulatory organization. The
[[Page 19147]]
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 Rule 98 to adopt a principles-based
approach to prohibit the misuse of material nonpublic information and
make conforming changes to other Exchange Rules. The text of the
proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
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 98 to adopt a principles-based
approach to prohibit the misuse of material nonpublic information by a
member organization that operates a DMM unit and make conforming
changes to other Exchange rules. The proposed rule changes would
provide more flexibility for how a member organization may organize its
DMM unit. The Exchange believes that the proposed rule change adopts an
approach more similar to the rules governing equity market makers on
NYSE Arca Equities, Inc. (``NYSE Arca''), the NASDAQ Stock Market LLC
(``Nasdaq''), and the BATS Exchange, Inc. (``BATS''),\4\ while
maintaining certain specified protections that reflect the unique role
of DMMs at the Exchange.\5\ The proposed changes will provide member
organizations operating DMM units with the ability to integrate DMM
unit trading with other trading units, while maintaining narrowly
tailored restrictions to address that DMMs while on the Trading Floor
may have access to certain Floor-based non-public information. The
proposed rule change will also enable DMM units to maintain procedures
and controls to prevent the misuse of material, non-public information
that are effective and appropriate for that member organization.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 60604 (Sept. 2,
2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order
approving elimination of NYSE Arca rule that required market makers
to establish and maintain specifically prescribed information
barriers, including discussion of NYSE Arca and Nasdaq rules). See
also Securities Exchange Act Release No. 61574 (Feb. 23, 2010), 75
FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003) (Order approving
amendments to BATS Exchange, Inc. (``BATS'') Rule 5.5 to move to a
principles-based approach to protecting against the misuse of
material, non-public information, and noting that the proposed
change is consistent with the approaches of NYSE Arca and Nasdaq).
\5\ This proposed rule change is not intended to address the
rules governing options market makers.
---------------------------------------------------------------------------
As discussed in more detail below, the Exchange proposes to
redefine the structure of a DMM unit by deleting the definitions of
``aggregation unit'' and cross reference to Rule 200 of Regulation SHO
(``Regulation SHO'') \6\ and ``integrated proprietary aggregation
unit'' and redefining the term ``DMM unit.'' The Exchange believes that
these proposed revisions will enable member organizations to integrate
DMM units with other trading operations within the member organization,
including, if applicable, a customer-facing operation, subject to
Exchange and federal rules that prohibit the misuse of material
nonpublic information. In addition, in order to streamline the rule,
the Exchange proposes several non-substantive clarifying and conforming
changes to the provisions of Rule 98 that govern these areas. The
Exchange also proposes to eliminate duplicative provisions in the rule
regarding back-office operations provided by an approved person or
member organization. Finally, the Exchange proposes to delete rules
relating to the DMM that are obsolete.
---------------------------------------------------------------------------
\6\ 17 CFR Part 242.200.
---------------------------------------------------------------------------
A. Background
Rule 98, which was last amended in 2008,\7\ incorporates various
organizational structures for operating a DMM unit. Rule 98(c) provides
for the operation of a ``DMM unit,'' which can be either a stand-alone
member organization or an ``aggregation unit'' \8\ within a member
organization. As a general matter, unless otherwise specified in Rule
98, a DMM unit must maintain the confidentiality of both DMM
confidential information and non-public orders.\9\ A DMM unit therefore
must not permit either other aggregation units of the member
organization or its approved person(s) to have access to DMM
confidential information or non-public order information.\10\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 58329 (Aug. 6,
2008), 73 FR 48260 (Aug. 18, 2008) (SR-NYSE-2008-45).
\8\ An ``aggregation unit'' is defined in Rule 98(b)(11) as any
trading or market-making department, division, or desk that meets
the requirements of the definition of ``independent trading unit''
pursuant to Rule 200 of Regulation SHO.
\9\ See Rule 98(c)(2)(A).
\10\ See Rule 98(c)(2)(A)(i) and (ii).
---------------------------------------------------------------------------
Rule 98 defines the terms ``non-public order information'' and
``DMM confidential information'' separately. In the case of ``non-
public order information,'' the Exchange seeks to protect price-
sensitive non-DMM trading information that is not publicly available or
that is shared with the DMM with an expectation of privacy. Thus, this
definition captures any information relating to order flow at the
Exchange, including verbal indications of interest made with an
expectation of privacy, electronic order interest, e-quotes, reserve
interest, or information about imbalances at the Exchange, that is not
publicly-available on a real-time basis via an Exchange-provided
datafeed, such as NYSE OpenBook[supreg],\11\ or otherwise publicly
available.
---------------------------------------------------------------------------
\11\ NYSE OpenBook[supreg] provides aggregated limit-order
volume that has been entered on the Exchange at price points for all
NYSE-traded securities.
---------------------------------------------------------------------------
``DMM confidential information'' refers to principal or proprietary
trading activity of a DMM unit at the Exchange in the securities
allocated to it pursuant to Rule 103B, including the unit's positions
in those securities, decisions relating to trading or quoting in those
securities, and any algorithm or computer system that is responsible
for such trading activity and that interfaces with Exchange systems.
Rule 98(d) permits a member organization to operate the DMM
business within a larger aggregation unit referred to as a ``integrated
proprietary aggregation unit,'' which may only engage in proprietary
trading activity, including electronic market making. Rules 98(d) and
(f)(2) set forth the types of information barriers required within such
a unit to separate the DMM trading at the Exchange from the trading by
the unit's ``upstairs'' desk's trading in assigned securities in away
markets or trading in related products.\12\ In
[[Page 19148]]
particular, the rule requires the DMM unit to protect both non-public
order information and DMM confidential information. When providing risk
management to the DMM unit, the integrated proprietary aggregation unit
may see traded positions of the DMM unit that have been printed to the
Consolidated Tape, but cannot see where the DMM unit is quoting.\13\
---------------------------------------------------------------------------
\12\ ``Related products'' are defined as any derivative
instruments that are related to a security allocated to a DMM unit,
including options, warrants, hybrid securities, single-stock
futures, security-based swap agreement, a forward contract, or any
other instrument that is exercisable into or whose price is based
upon or derived from a security listed on the Exchange. See Rule
98(b)(15). The Exchange proposes to make non-substantive edits to
this definition to conform to other changes made to Rule 98, and, as
discussed below, renumber the rule accordingly.
\13\ See Rule 98(f)(1)(v) and (98(f)(2)(A).
---------------------------------------------------------------------------
When a DMM unit operates within an integrated proprietary
aggregation unit or engages in off-Floor trading of products related to
securities assigned to the DMM unit, Rule 98 specifically prohibits an
individual DMM who moves off of the Floor of the Exchange from making
DMM confidential information available to off-Floor personnel or
systems of the integrated proprietary aggregation unit.\14\ Senior
managers of the approved person or parent member organization may
provide general oversight to the DMM unit, provided that if the senior
manager receives any DMM confidential information or non-public order
information, he or she must not use such information to directly or
indirectly influence trading based on that confidential
information.\15\
---------------------------------------------------------------------------
\14\ See Rule 98(d)(2)(B)(iv) and 98(f)(1)(A)(iii).
\15\ See Rule 98(c)(2)(E).
---------------------------------------------------------------------------
Rule 98 further provides that individuals or systems, including
computer algorithms, that are either responsible for trading in related
products within the DMM unit or engaging in risk management on behalf
of the DMM unit, are restricted from having access to DMM confidential
information.\16\ As noted above, the limited exceptions permit the
persons or systems responsible for managing the risk of the DMM unit to
have electronic access to the DMM unit's trades at the Exchange in
securities allocated to the DMM unit, provided that such trades have
been printed to the Consolidated Tape, and to electronically direct the
trading of the DMM unit, subject to the DMM rules.\17\
---------------------------------------------------------------------------
\16\ See Rule 98(f)(1)(A)(i), 98(f)(2)(A), and 98(f)(3)(C)(2).
\17\ See Rule 98(f)(1)(A)(v), 98(f)(2)(a)(i), and
98(f)(3)(c)(iii) and (iv).
---------------------------------------------------------------------------
In addition to specifying trading restrictions, Rule 98(e) provides
that a DMM unit can share non-trading related services with a parent
member organization or approved persons. However, to share non-trading
related services, a DMM unit must obtain approval from NYSE Regulation
and show that it has policies and procedures to maintain the
confidentiality of DMM confidential information and non-public order
information.
Because not all firms were immediately approved under ``new'' Rule
98, which was last amended in 2008, the Exchange kept the pre-2008
version of Rule 98 in its rulebook as ``Rule 98 Former.'' Because Rule
98 Former was referenced in a number of other Exchange rules, certain
Exchange rules have double references depending on whether the DMM is
approved under Rule 98 Former or the current rule.\18\
---------------------------------------------------------------------------
\18\ See Rules 98A Former, 99 Former, 104T(a) (Former), 105(a)
Former, 105(b) Former, 105(d) Former, 105 Guidelines section (m)
Former, and 113 Former.
---------------------------------------------------------------------------
All DMM firms are now approved to operate under Rule 98, and are no
longer subject to ``Rule 98 Former.''
B. Proposed Amendments to Rule 98
The Exchange proposes to amend Rule 98 to adopt a more principles-
based approach that would permit a member organization operating a DMM
unit to maintain and enforce its own policies and procedures to, among
other things, prohibit the misuse of material nonpublic information and
eliminate requirements that specify how a member organization must
organize its DMM unit within the firm. While the proposed changes would
provide the ability for member organizations to integrate their DMM
units, the Exchange does not believe that the amendments will reduce in
any way the protections against the misuse of material nonpublic
information. Rather, the Exchange believes that by adding a principles-
based approach that generally prohibits the misuse of material non-
public information, the amended rule will provide for broader
protections than the current rule, which protects only certain defined
non-public information.
To achieve the goal of enabling greater integration of DMM units
within a member organization, the Exchange proposes to revise the
definitions set forth in Rule 98(b) to eliminate the various structures
and instead use a single term to refer to DMM operations. As proposed,
the term ``DMM unit'' would be amended to mean a trading unit within a
member organization that is approved pursuant to Rule 103 to act as a
DMM unit. Accordingly, the Exchange proposes to eliminate the
requirement that a DMM unit be an ``aggregation unit'', which is
currently defined to mean any trading or market-making department,
division or desk that meets the requirements of the definition of
``independent trading unit'' pursuant to Rule 200 of Regulation
SHO.\19\
---------------------------------------------------------------------------
\19\ The Exchange proposes to delete rule provisions that
reference the terms ``aggregation unit'' and ``integrated
proprietary aggregation unit.'' See, e.g., Rule 98(c)(2)(B).
---------------------------------------------------------------------------
The Exchange proposes to decouple the Rule 98 definition from
Regulation SHO in part because the two rules seek to achieve different
purposes. Rule 200(f) of Regulation SHO sets forth the requirements for
qualifying as an ``independent trading unit'' for the purpose of order
marking requirements under Rule 200. In practice, broker dealers use
information barriers to meet the requirements of an independent trading
unit under Regulation SHO. By contrast, Rule 98 does not concern the
netting of position information. While member organizations operating
DMM units would be required to comply with Regulation SHO, the Exchange
does not believe that it needs to prescribe in its rules how a firm
must structure its DMM operations for purposes of complying with
Regulation SHO.
For similar reasons, the Exchange does not believe it needs to
maintain a definition unique to the Exchange and DMMs of an
``integrated proprietary aggregation unit.'' This definition
contemplates a DMM unit being part of an aggregation unit that engages
in only proprietary trading activity. While a member organization may
choose to structure in this manner, the Exchange does not believe it
needs to be required. Rather, the Exchange believes that Rule 98 should
provide flexibility for a member organization to structure its
business, including any DMM operations, in a manner that a member
organization believes is appropriate for its business purposes, subject
to requirements to protect against the misuse of material, non-public
information, as discussed below.
The Exchange proposes additional changes to Rule 98(b) to delete
definitions that are no longer necessary in the revised rule.
Specifically, the Exchange proposes to delete the definitions for ``DMM
API,'' ``DMM account,'' ``customer-facing department,'' and ``non-
trading related services.'' The terms DMM API and DMM account were
based on Rule 104 before it was amended in 2008. Accordingly, the
Exchange believes that these definitions are now obsolete. In addition,
because the proposed rule changes are intended to provide principles-
based instruction on how to operate a DMM unit, the rule no longer
needs to define terms that support the
[[Page 19149]]
current, more prescriptive rule text. The Exchange proposes to delete
the definitions of ``DMM'' and ``approved person'' as duplicative of
the definitions set forth in Rules 2(i) and 2(c). The Exchange proposes
to make non-substantive edits to the definition of ``related
products.'' The Exchange also proposes to make conforming amendments to
Rule 2(j).
With these proposed definition changes, the Exchange believes that
a member organization operating a DMM unit would be better positioned
to integrate its DMM operations. For example, if a member organization
engages in market-making operations on multiple exchanges, it may be
optimal for a firm to house its DMM operations together with the other
market-making operations, even if such operations are customer-facing.
Another variation could be if a firm chooses to include all of its
equity trading, including customer-facing operations, within a single
independent trading unit. The Exchange believes that providing member
organizations with the ability to integrate DMM operations could
promote liquidity at the Exchange because the DMM operations would be
part of a larger unit with greater sources of liquidity.\20\
---------------------------------------------------------------------------
\20\ The Exchange notes that under Regulation SHO, determination
of a seller's net position is based on the seller's position in the
security in all proprietary accounts. See Securities Exchange Act
Release No. 50103 (July 28, 2004), 69 FR 48008, 48010, n.22 (Aug. 6,
2004); see also Securities Exchange Act Release Not 48709 (Oct. 29,
2003), 68 FR 62972, 62991 and 62994 (Nov. 6, 2003); Letter from
Richard R. Lindsey, Director, Division of Market Regulation, to
Roger D. Blanc, Wilkie Farr & Gallagher, SEC No-Action Letter, 1998
SEC No-Act. LEXIS 1038, p. 5 (Nov. 23, 1998); Securities Exchange
Act Release No. 30772 (June 3, 1992), 57 FR 24415, 24419 n.47 (June
9, 1992); Securities Exchange Act Release No. 27938 (Apr. 23, 1990),
55 FR 17949, 17950 (Apr. 30, 1990).
---------------------------------------------------------------------------
The Exchange notes that notwithstanding how a member organization
chooses to structure its operations, that firm would need to meet the
requirements of Section 15(g) of the Act,\21\ which requires every
registered broker or dealer to ``establish, maintain, and enforce
written policies and procedures reasonably designed, taking into
consideration the nature of such broker's or dealer's business, to
prevent the misuse . . . of material, nonpublic information by such
broker or dealer or any person associated with such broker or dealer.''
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------
Accordingly, the Exchange proposes to revise current Rule 98(c)(2)
and replace it with new text based on NYSE Arca Equities Rule 6.3
(Prevention of the Misuse of Material Nonpublic Information) and BATS
Rule 5.5 (Prevention of the Misuse of Material, Non-Public Information)
that specifies that a member organization seeking approval to operate a
DMM unit pursuant to Rule 98 must maintain and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of such member organization's business, (i) to prevent the
misuse of material, non-public information by such member organizations
or persons associated with such member organization and (ii) to ensure
compliance with applicable federal laws and regulations and with
Exchange rules.\22\
---------------------------------------------------------------------------
\22\ The Exchange also proposes to revise Rule 98(c)(1) to
replace the term ``NYSE Regulation, Inc.'' with the term
``Exchange.'' Pursuant to Rule 0, the term ``Exchange'' may also
mean FINRA staff working on behalf of the Exchange and NYSE
Regulation, Inc. pursuant to a regulatory services agreement.
---------------------------------------------------------------------------
Similar to NYSE Arca Equities Rule 6.3, the Exchange further
proposes to add rule text that provides examples of conduct that would
constitute the misuse of material, non-public information, including,
but not limited to: (A) Trading in any securities issued by a
corporation, or in any related products, while in possession of
material-non-public information concerning the issuer; (B) trading in a
security or related product, while in possession of material non-public
information concerning imminent transactions in the security or related
product; or (C) disclosing to another person or entity any material,
non-public information involving a corporation whose shares are
publicly traded or an imminent transaction in an underlying security or
related product for the purpose of facilitating the possible misuse of
such material, non-public information.\23\
---------------------------------------------------------------------------
\23\ Because Rule 98 defines the term ``related product,'' the
Exchange proposes to use the term ``related product'' instead of
``related security,'' which is the term used in NYSE Arca Equities
Rule 6.3.
---------------------------------------------------------------------------
The Exchange believes that with the proposed change to Rule
98(c)(2), member organizations will be able to utilize a flexible,
principles-based approach to modify their policies and procedures as
appropriate to reflect changes to their business model, business
activities, or to the securities market itself. Moreover, while
specified information barriers may no longer be required, a member
organization's business model or business activities may dictate that
an information barrier or functional separation be part of the
appropriate set of policies and procedures that would be reasonably
designed to achieve compliance with applicable securities laws and
regulations, and with applicable Exchange rules.
More specifically, the Exchange notes that providing member
organizations with the ability to integrate DMM unit operations with
other equity trading operations, which may include customer-facing
trading desks, would enable member organizations to better manage risk
and adopt uniform trading models across multiple markets. Currently,
because DMM units need to be walled off from other market-making desks,
the DMM units cannot leverage quoting models that may have been
developed for the other market-making desks. And because of the Rule
98-mandated separation, member organizations are restricted in their
ability to manage risk across the DMM unit and other market-making
units. As a result, the costs associated with developing separate
quoting models and risk strategies for a stand-alone DMM unit become
prohibitive as compared to a member organization's investment in
operating an integrated market-making unit that may include both
internalized customer flow and registered market-making on other
exchanges. The Exchange believes that if DMM units could be integrated
with other market-making units, it could not only enable member
organizations to enhance their overall risk management, but could also
potentially lead to flow that would otherwise be internalized being
directed instead to the Exchange.
Consistent with the proposal to adopt a principles-based approach
to protect against the misuse of material non-public information
generally, the Exchange proposes to restructure the defined terms in
current Rule 98 that relate to non-public information. First, the
Exchange proposes to re-define the definition of ``non-public
information'' as ``Floor-based non-public information.'' The Exchange
proposes this redefinition to distinguish this type of non-public
information, which is non-DMM information to which a DMM while on the
Trading Floor may have access due to the unique role of DMMs on the
Trading Floor, from any other non-public information that is covered by
proposed Rule 98(c)(2). As discussed in more detail below, the Exchange
proposes to maintain restrictions in proposed Rule 98(c)(3) tailored to
the Floor-based activities of DMM units and proposes to use the term
``Floor-based non-public order information'' to distinguish which
information those provisions are intended to protect.\24\
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\24\ The Exchange proposes non-substantive changes to this
definition that better reflect how Exchange systems currently
operate. Specifically, the Exchange believes that concept of trading
in ``slow mode'' is duplicative of the remaining rule text, which
covers any order information that is made available to DMMs but that
is not available to other market participants.
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[[Page 19150]]
Second, the Exchange proposes to delete the definition of DMM
confidential information as duplicative of proposed new Rule 98(c)(2),
which protects against the misuse of material non-public information.
As noted above, the term ``DMM confidential information'' includes
position, trading, and quoting information of the DMM unit. This
information is non-public to persons or entities that are not part of
the member organization, but critical information for a member
organization to operate and manage its own risks. The Exchange believes
that the policy concerns relating to specifying separate protections
for this information are no longer applicable. Specifically, unlike
specialists, DMMs are not agents for orders on the Exchange's book and
do not have any negative obligations. Instead, DMMs are required to act
as market makers in assigned securities, subject to affirmative
obligations to maintain a fair and orderly market.\25\ While the DMM
continues to have the ability to, and does, trade manually from the
Floor, the vast majority of the DMM's quotes are entered by means of
algorithms initiated off-Floor. Moreover, DMM interest manually entered
intraday during a slow state or to participate in a verbal transaction
with a Floor broker still yields to public orders.\26\ In addition, to
the extent a DMM on the Floor may have access to Floor-based non-public
order information, proposed Rule 98(c)(3) would continue to specify
protections against the misuse of that information by the member
organization.
---------------------------------------------------------------------------
\25\ See Rule 104.
\26\ See Rule 72(c)(xi).
---------------------------------------------------------------------------
The Exchange believes that the proposed principles-based approach
to protect against the misuse of material non-public order information
specified in proposed Rule 98(c)(2) would ensure that a member
organization would be required to protect against the misuse of any
material non-public information that currently falls within the
definition of DMM confidential information. As noted above, this
includes refraining from trading while in possession of material non-
public information concerning imminent transactions in the security or
related product. The Exchange believes that moving to a principles-
based approach rather than prescribing how and when to protect the
DMM's own quoting and trading information would provide member
organizations operating DMM units with appropriate tools to better
manage risk across a firm, including integrating DMM unit positions and
quoting information with other quotes and positions by the firm, or as
applicable, by the respective independent trading unit. Specifically,
the Exchange believes that it is appropriate for risk management
purposes for a member organization operating a DMM unit to be able to
consider both DMM unit outstanding quotes as well as traded positions
for purposes of calculating net positions consistent with Rule 200 of
Regulation SHO, calculating intra-day net capital positions, and
managing risk both generally as well as in compliance with Rule 15c3-5
under the Act (the ``Market Access Rule'').\27\ The Exchange notes that
any risk management operations would need to operate consistent with
the requirement to protect against the misuse of material non-public
information.
---------------------------------------------------------------------------
\27\ 17 CFR Part 240.15c3-5.
---------------------------------------------------------------------------
The Exchange notes that if DMM units are integrated with other
market-making operations, they would be subject to existing rules that
prohibit member organizations from disadvantaging their customers or
other market participants by improperly capitalizing on a member
organization's access to the receipt of material, non-public
information. As such, a member organization that integrates its DMM
unit operations together with customer-facing operations would need to
protect customer information consistent with existing obligations to
protect customer information that already apply to equity market makers
registered on other exchanges. For example, NYSE Rule 5320, which is
substantially similar to FINRA Rule 5320 and NYSE Arca Equities Rule
5320 (generally referred to as the ``Manning Rule.''), generally
prohibits a member organization from trading for its own account ahead
of customer orders. Rule 5320(a) further provides that if a member
organization trades at a price for its own account ahead of the
customer order, it must execute the customer order up to the size and
at the same or better price at which it traded for its own account. The
Manning Rule sets forth certain exceptions to this requirement,
including the Large Orders and Institutional Account Exceptions
(Supplementary Material .01 to Rule 5320) and the No-Knowledge
Exception (Supplementary Material .02 to Rule 5320). A member
organization operating both a DMM unit, which engages in trading for
its own account, and customer-facing operations would need to comply
with the Manning Rule or meet one of the specified exceptions.\28\ In
addition, a member organization operating a DMM unit would also need to
maintain policies and procedures to assure that it does not engage in
any frontrunning of customer order information in violation of
Exchange, FINRA, or federal rules. The Exchange notes that these are
existing obligations that already govern equity market-making
operations on other exchanges and therefore integrating DMM operations
with such desks would not present any novel issues.
---------------------------------------------------------------------------
\28\ The Exchange notes that FINRA already monitors member
organizations for compliance with Rule 5320.
---------------------------------------------------------------------------
Proposed Rule 98(c)(3)-(7) would set forth the remaining specific
restrictions for member organizations operating a DMM unit. In
recognition of the unique role of DMMs, including limited Floor-based
access to certain non-public order information,\29\ the Exchange
proposes to maintain certain prescriptions on how a DMM unit must
operate. To effect this new structure, the Exchange proposes to delete
subsections (d) and (f) of Rule 98 and move the sections of those rules
that the Exchange proposes to retain to an amended subsection (c)(3)-
(7) of the Rule, which include the relevant restrictions on trading
within the unit. As proposed, the rule will no longer prescribe the
type of trading in which a DMM unit may engage. Rather, the proposed
rule will only specify the types of trading activities that would be
restricted.
---------------------------------------------------------------------------
\29\ See Rule 104(j)(ii).
---------------------------------------------------------------------------
Proposed Rules 98(c)(3)(A)-(D) would set forth the restrictions
specific to DMM units that address their unique role at the Exchange.
Proposed Rule 98(c)(3)(A) would provide generally that a member
organization shall protect against the misuse of Floor-based non-public
order information. The rule would further specify who may have access
to such Floor-based non-public order information (as permitted pursuant
to Rule 104), which, as proposed, would be the Floor-based employees of
the DMM unit and individuals responsible for the direct supervision of
the DMM unit's Floor-based operations. The Exchange believes that the
proposed rule change specifies in a more straight-forward manner who
may have access to have non-public order information, and replaces the
multiple references in the current Rule 98 to the same concept.\30\
---------------------------------------------------------------------------
\30\ See, e.g., Rules 98(c)(2)(A)(i)-(ii), (d)(2)(B)(i)-(iii),
(f)(1)(A)(i), (f)(3)(C)(ii). The current rule is structured as to
who may not have access. The Exchange believes it is clearer to
specify who may have access to such information.
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[[Page 19151]]
Proposed Rule 98(c)(3)(B) would specify the restrictions applicable
to employees of the DMM unit while on the Trading Floor. First, while
on the Trading Floor of the Exchange, employees of the DMM unit, except
as provided for in Rule 36.30, may trade only DMM securities and only
on or through the systems and facilities of the Exchange, as permitted
by Exchange Rules.\31\ Second, while on the Trading Floor, Floor-based
employees may not communicate with individuals or systems responsible
for making trading decisions for related products or for away-market
trading in DMM securities.\32\ Finally, because a DMM unit may be part
of a larger trading unit that includes customer-facing operations, the
Exchange proposes to add a new restriction that while on the Trading
Floor, employees of the DMM unit shall not have access to customer
information or the DMM unit's position in related products.\33\ The
Exchange believes that these proposed restrictions will ensure that
while on the Floor, employees of a DMM unit will not be quoting or
trading based on material non-public information related to customer
information or trading in related products.
---------------------------------------------------------------------------
\31\ Compare proposed Rule 98(c)(3)(A) with Rule
98(f)(1)(A)(ii). The Exchange also proposes to replace the term
``Floor'' with the term ``Trading Floor'' to reflect the use of that
term in Rules 6A and 36.
\32\ Compare proposed Rule 98(c)(3)(B) with Rule
98(d)(2)(B)(iii).
\33\ Compare proposed Rule 98(c)(3)(B)(iii) with Rule
98(f)(1)(A)(ii). In addition, the Exchange believes that proposed
Rule 98(c)(3)(B)(iii) replaces the concerns expressed in current
Rule 98(c)(2)(C) that the DMM unit not have access to material non-
public information that is in possession of other aggregation unit.
The Exchange does not believe it needs to maintain Rule 98(c)(2)(C)
because it restates the general concept of how aggregation units
under Regulation SHO are structured, and as noted above, Rule 98 no
longer follows the aggregation unit model.
---------------------------------------------------------------------------
As with the current rule, the Exchange proposes to maintain
restrictions on what happens if a non-Floor based individual becomes
aware of Floor-based non-public order information. The Exchange
proposes to consolidate the current rule concerning wall-crossing
provisions into proposed Rule 98(c)(3)(C), which would provide that
when a Floor-based employee of a DMM unit moves to a location off of
the Trading Floor of the Exchange or if any person that provides risk
management oversight or supervision of the Floor-based operations of
the DMM unit is aware of Floor-based non-public order information, he
or she shall not (1) make such information available to customers, (2)
make such information available to individuals or systems responsible
for making trading decisions in DMM securities in away markets or
related products, or (2) use any such information in connection with
making trading decisions in DMM securities in away markets or related
products.
The Exchange believes that consolidating the wall-crossing
provisions into a single provision achieves the same purpose as the
current rule, which states the same concept in multiple places.\34\ The
proposed rule is augmented by adding that Floor-based non-public order
information cannot be made available to customers. The proposed rule
would cover any individual, whether it is an individual that leaves the
Floor or a manager providing oversight of Floor operations, to neither
use nor make available any non-public order information that the
individual becomes aware of. The Exchange believes that replacing the
concept of ``access to'' information with ``aware of'' information
provides a clearer standard for member organizations and is generally
more consistent with federal rules.\35\ Specifically, because the
provision is intended to ensure that information is not used
inappropriately, inappropriate use of such information could only occur
if someone is aware of that information.
---------------------------------------------------------------------------
\34\ See Rules 98(c)(2)(E)(i), 98(d)(2)(B)(iv), and
(f)(1)(A)(3).
\35\ See 17 CFR 240.10b5-1(b) (specifying that a purchase or
sale of securities constitutes trading on the basis of material
nonpublic information when the person making the purchase or sale
was aware of the material nonpublic information when the person made
the purchase or sale).
---------------------------------------------------------------------------
For example, a DMM unit could be part of a larger trading unit that
engages in customer-facing market making activities on multiple
exchanges. With the proposed changes to Rule 98 generally, a manager
within that unit would be able to monitor risk across the unit,
including positions from trading as a DMM at the Exchange, without
breaching any prohibitions against the misuse of material nonpublic
information. Assume that a Floor-based DMM needs to take on a larger
risk profile in a security because of a proposed Floor broker
transaction and needs to discuss this proposed transaction with the
off-Floor manager. Once this topic is discussed with the off-Floor
manager, that manager is now aware of Floor-based non-public order
information, and therefore must protect against the misuse of this
information. This type of wall-crossing procedure is consistent with
current practices within member organizations.
As with the current rule, but with new rule numbering, the Exchange
proposes to maintain that the DMM unit may make available to a Floor
broker associated with or affiliated with an approved person or member
organization any information that the DMM would be permitted to provide
under Exchange rules to an unaffiliated Floor broker.\36\
---------------------------------------------------------------------------
\36\ Compare proposed Rule 98(c)(3)(D) with Rule
98(c)(2)(A)(ii). The Exchange proposes to replace the term ``DMM''
with ``DMM unit'' to be clear that the proposed rule covers any
staff of the DMM unit located on the Trading Floor.
---------------------------------------------------------------------------
To ensure that all trading activity by a DMM unit in DMM securities
at the Exchange is available for review, the Exchange proposes to add a
provision that any interest entered by the DMM unit in DMM securities
at the Exchange must be entered through systems that identify such
interest as DMM interest.\37\ As proposed, because the Exchange's
trading systems continue to evolve, the Exchange believes it is
unnecessary to specify which system(s) a DMM unit must use. However,
this rule would require the DMM unit to use a system that would enable
such interest to be identified as DMM trading interest.
---------------------------------------------------------------------------
\37\ See proposed Rule 98(c)(4).
---------------------------------------------------------------------------
The Exchange notes that the Rule 104 obligations that relate to
whether a DMM is long or short, i.e., Rules 104(g)(i)(A)(III) and (h),
are applicable to the DMM unit's position in DMM securities together
with any position of a Regulation SHO independent trading unit of which
the DMM unit may be included. For example, if a DMM unit is combined
with market-making desks that are trading on away markets, it would be
the position of that entire unit in DMM securities, and not just the
DMM's Exchange-traded positions, that would be relevant for those
rules. To ensure that the Exchange can monitor for compliance with
these rules, the Exchange proposes to add to Rule 98 that the member
organization must provide the Exchange with real-time unit position
information for any trading in DMM securities by the DMM unit and any
independent trading unit of which it is a part.\38\ For example, if a
DMM unit is part of an independent trading unit that engages in trading
on other markets in DMM securities, the real-time position update would
need to incorporate any away-market transactions in DMM securities by
that independent trading unit.
---------------------------------------------------------------------------
\38\ See proposed Rule 98(c)(5). The Exchange proposes to delete
Rule 98(d)(4) and subparagraphs from the rule both because the
Exchange does not believe it needs to separately identify DMM audit
trail requirements and because Rule 132B no longer exists.
---------------------------------------------------------------------------
Currently, Rule 98 permits an integrated proprietary aggregation
unit to engage in options market making
[[Page 19152]]
(electronic only), provided that the DMM unit is walled off from the
options market making trading desk. Similar to NYSE Arca Equities, the
Exchange proposes to eliminate prescriptive rules regarding how to
structure DMM operations together with other market-making operations,
and instead believes that the principles-based approach set forth in
proposed Rule 98(c)(2) should protect against the misuse of material
nonpublic information.\39\ The Exchange proposes to amend Rule 98 to
specify restrictions that are unique to the Exchange by virtue of the
close physical proximity of the NYSE MKT LLC options trading floor. As
proposed, the DMM unit may not operate as a specialist or market maker
on the Exchange or the NYSE MKT LLC (``NYSE MKT'') equities or options
trading floors in related products, unless specifically permitted in
Exchange rules.\40\ The Exchange notes that a member organization that
operates a DMM unit may be a specialist or market maker on NYSE MKT
provided that it maintains appropriate information barriers.
---------------------------------------------------------------------------
\39\ See footnote 4.
\40\ See proposed Rule 98(c)(6). The Exchange notes that
currently, the only time that a DMM unit may engage in market making
in a related products under Exchange rules is on the NYSE MKT
exchange, pursuant to NYSE MKT Rule 504(b)(5)--Equities. The NYSE
does not have a similar exception.
---------------------------------------------------------------------------
The Exchange also proposes to maintain the existing requirement
that the member organization maintain information barriers between the
DMM unit and any investment banking or research departments.\41\ The
amended rule would also continue to provide that no DMM or DMM unit may
be directly supervised or controlled by an individual associated with
an approved person or the member organization who is assigned to any
investment banking or research departments.\42\ The only difference
between the proposed rule text and the current rule is that the
Exchange proposes to delete that a DMM unit may not be supervised or
controlled by an individual assigned to a customer-facing department.
As noted above, the Exchange believes that member organizations should
not be restricted in their ability to combine DMM operations with
customer-facing operations, subject to the restrictions enumerated in
amended Rule 98 and the proposed Exchange and federal requirements that
prohibit the misuse of material nonpublic information, discussed above.
---------------------------------------------------------------------------
\41\ Compare proposed Rule 98(c)(7) with 98(c)(2)(A)(i) and
(c)(2)((C). Investment banking activities include activities such as
underwriting, tender offers, mergers, acquisitions,
recapitalizations, etc. See Rule 98(f)(1).
\42\ Compare proposed Rule 98(c)(7) with Rule 98(c)(2)(E)(ii).
---------------------------------------------------------------------------
The Exchange also proposes to provide in proposed Rule 98(d) that
the DMM rules will apply only to the DMM unit's quoting or trading in
their DMM securities for their own accounts at the Exchange.\43\ The
Exchange has added that this restriction is only applicable to DMM unit
trading for their own account to be clear that the DMM rule
restrictions are not applicable to any customer orders routed to the
Exchange by that member organization as agent.
---------------------------------------------------------------------------
\43\ Compare proposed Rule 98(d) with Rules 98(c)(3) and (d)(3).
As defined in proposed Rule 98(b)(3) (formerly, Rule 98(b)(5)), the
DMM rules mean any rules that govern DMM conduct or trading. These
would include, for example, Rules 36.30, 103, 103A, 103B, and 104.
---------------------------------------------------------------------------
The Exchange believes that by restructuring the rule to focus on
protecting against the misuse of material non-public information, Rule
98 no longer needs to specify how a member organization or an approved
person provides back-office support operations, such as clearing, stock
loan, and compliance, for the DMM unit. Rather, the Exchange believes
that how a member organization or approved person provides back-office
operations to the DMM unit should not differ from how such services are
provided to other trading units within that member organization or
approved person. In addition, as proposed, amended Rule 98(c)(2) would
require the member organization to protect against the misuse of
material non-public information, which would govern all aspects of a
member organization's operations. Accordingly, the Exchange proposes to
delete in its entirety Rule 98(e).
The Exchange notes that if a person in the member organization or
an approved person is providing non-trading related services to the DMM
unit, and as a result of such relationship, becomes aware of Floor-
based non-public order information, such person would be subject to the
wall-crossing provisions of proposed Rule 98(c)(3)(C), which is
applicable to any person who is aware of such information. Because
these protections for Floor-based non-public order information are
retained in the proposed revisions to Rule 98, and are applicable to
approved persons pursuant to proposed amended Rule 98(a)(1), the
Exchange believes that Rule 98(e), which concerns the sharing of non-
trading related services, is redundant of existing regulatory
requirements governing the operations of a broker-dealer. The Exchange
proposes conforming amendments to Rule 36.30.
Because of the proposed restructuring of the rule, Rule 98(g) will
be renumbered as Rule 98(e), Rule 98(h) will be renumbered as Rule
98(f), and Rule 98(j) will be renumbered as Rule 98(g). The Exchange is
proposing conforming changes to these sections, including updating
cross-references and changing the reference from the Division of Market
Surveillance and NYSE Regulation to the Exchange.\44\
---------------------------------------------------------------------------
\44\ Pursuant to Rule 0, the reference to the Exchange in this
rule may also mean FINRA.
---------------------------------------------------------------------------
C. Other Proposed Amendments
As noted above, all DMM firms for which Rule 98 is applicable are
now under the auspices of Rule 98. Accordingly, Rule 98 Former no
longer has any application for any DMM units. The Exchange therefore
proposes to delete Rule 98 Former and any rule that either references
Rule 98 Former, i.e., Rules 98A Former, 99 Former, and 104T(a)(Former)
and supplementary material .13 (Former), or references a rule that is
being proposed for deletion, e.g., Rule 900. The Exchange also proposes
to amend Rule 98(a) and 105 to delete references to Rule 98 Former.
In addition, the Exchange proposes to amend Rule 105 to delete Rule
105(b)-(d) and the Guidelines for DMM's Registered Security Option and
Single Stock Futures Transactions Pursuant to Rule 105 (``Rule 105
Guidelines'') and make conforming amendments to Rule 36.30.\45\ Rule
105 currently sets forth hedging guidelines to permit the DMM to trade
listed options or single-stock futures that overlay DMM securities from
the Trading Floor. Under Rule 98(f)(1), a DMM unit can obtain an
exemption from the Rule 105 Guidelines to trade options or futures,
provided that such trading is conducted by a walled-off, off-Floor
trading desk.
---------------------------------------------------------------------------
\45\ The Exchange proposes to amend Rule 105(a) to clarify that
the restriction on pool dealing applies to the DMM unit for
securities registered to that unit.
---------------------------------------------------------------------------
Under proposed revisions to Rule 98, a DMM unit would no longer
need to apply for an exemption from Rule 105 trading restrictions
because, as discussed above, while on the Trading Floor, Floor-based
employees may trade only DMM securities, i.e., no related products, and
only on or through the systems and facilities of the Exchange. Because
there would not be any Floor-based trading in listed options or single-
stock futures, the Rule 105 Guidelines specifying how such Floor-based
trading may occur are now moot. Accordingly, the Exchange proposes to
delete these rules. To conform other Exchange rules
[[Page 19153]]
to this proposal, the Exchange also proposes to delete section (b) from
each of Rules 1300 (streetTRACKS Gold Shares), 1300A (Currency Trust
Shares), and 1300B (Commodity Trust Shares). Each of these subsections
cross-reference Rule 105 Guidelines subsection (m) and would similarly
be mooted by proposed Rule 98(c)(2)(B)(i). The Exchange proposes
further conforming amendments to Rules 900(b) and (d).
In addition, because DMM units no longer have customer
relationships, the Exchange proposes to delete in its entirety the DMM
Booth Wire Policy, which is set forth in Rule 123B, as obsolete.
The Exchange notes that all member organizations currently
operating DMM units already have in place written policies and
procedures to comply with Rule 98, and such policies and procedures
have been approved by NYSE Regulation.\46\ In addition, FINRA has an
exam program that reviews member organizations operating DMM units for
compliance with such procedures. Because the proposed Rule 98
amendments would continue to require Exchange approval of any policies
and procedures to protect against the misuse of material nonpublic
information, if a member organization chooses to modify how it operates
its DMM operations consistent with amended Rule 98, such revised
policies and procedures would be subject to Exchange review before they
could be implemented. In addition, once implemented, FINRA would
continue to monitor a member organization's compliance with those
policies and procedures consistent with the current exam-based
regulatory program associated with Rule 98.
---------------------------------------------------------------------------
\46\ FINRA currently approves Rule 98 procedures on behalf of
NYSE Regulation, Inc. pursuant to a regulatory services agreement.
See supra footnote 22.
---------------------------------------------------------------------------
In addition, FINRA already has in place surveillances designed to
monitor for manipulative activity and the Exchange believes that
because DMM market-making activity is not materially different from
market-making on other exchanges, these existing programs are
reasonably designed to address any concerns that may be raised by a DMM
unit being integrated with existing market-making operations.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \47\ that an Exchange have rules that
are designed to promote the just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest. The Exchange believes that the
proposed rule change would remove impediments to and perfect the
mechanism of a free and open market by adopting a principles-based
approach to permit a member organization operating a DMM unit to
maintain and enforce policies and procedures to, among other things,
prohibit the misuse of material non-public information and eliminating
restrictions on how a member organization structures its DMM unit
operations. The proposed amendments maintain the existing Rule 98
restrictions that are specific to the unique role of the DMM and also
maintain the information barrier requirements between the DMM unit and
any investment banking or research departments. Member organizations
operating DMM units will continue to be subject to federal and Exchange
requirements for protecting material non-public order information \48\
and protecting customer orders that are the consistent with the
existing rules governing broker dealers that operate as equity market
makers on other registered exchanges.\49\
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f(b)(5).
\48\ See 15 U.S.C. 78o(g) and proposed Rule 98(c)(2).
\49\ See Rule 5320.
---------------------------------------------------------------------------
Accordingly, while certain prescriptive elements of Rule 98 are
being deleted, the Exchange notes that the rule will still require that
member organizations maintain and enforce policies and procedures
reasonably designed to ensure compliance with applicable federal
securities laws and regulations and with Exchange rules. The Exchange
notes that such written policies and procedures will continue to be
subject to oversight by the Exchange and therefore the elimination of
prescribed restrictions should not reduce the effectiveness of the
Exchange rules to protect against the misuse of material non-public
information. Rather, member organizations will be able to utilize a
flexible, principles-based approach to modify their policies and
procedures as appropriate to reflect changes to their business model,
business activities, or to the securities market itself. Moreover,
while specified information barriers may no longer be required, a
member organization's business model or business activities may dictate
that an information barrier or functional separation be part of the
appropriate set of policies and procedures that would be reasonably
designed to achieve compliance with applicable securities laws and
regulations, and with applicable Exchange rules. The Exchange therefore
believes that the proposed rule change will maintain the existing
protection of investors and the public interest that is currently set
forth in Rule 98, while at the same time removing impediments to and
perfecting a free and open market by moving to a principles-based
approach to protect against the misuse of material non-public
information.
The Exchange similarly believes that deleting the definition of
``DMM confidential information'' removes impediments to and perfects
the mechanism of a free and open market as it will enable a member
organization to share quoting and position information as may be
necessary to meet order marking requirements under Regulation SHO or to
comply with the Market Access Rule. The Exchange further believes that
the proposed adoption of a principles-based approach to protect against
the misuse of material non-public information, including specifically
requiring refraining from trading based on material non-public
information regarding imminent transactions in a security or related
product, will protect investors and the public interest because it will
assure the protection against the misuse of material non-public
information and delete prescribed rules that may no longer meet this
goal.
The Exchange also believes that amending Rule 98 to apply wall-
crossing procedures to any individual who is aware of non-public order
information both broadens the protection of the rule to any individual,
while at the same time narrowly tailors the rule to when such
protections should apply, i.e., when an individual is aware of non-
public order information and therefore could be in a position to make a
purchase or sale of securities on the basis of such material nonpublic
information. The Exchange believes that such clarifying changes remove
impediments to and perfect the mechanism of a free and open market by
assuring that the protections are applied when necessary.
In addition, the Exchange believes that deleting Rule 98 Former and
all references thereto in Exchange rules removes impediments to and
perfects the mechanism of a free and open market because Rule 98 Former
no longer governs any member organizations or approved persons that
operate a DMM unit, nor would it be applicable to any new DMM units,
and therefore deleting the rule reduces any potential confusion of
which version of
[[Page 19154]]
Rule 98 is applicable. For similar reasons, because DMMs would not be
permitted to trade in related products while on the Trading Floor, the
Exchange believes that the Rule 105 Guidelines are now moot, and
deleting such rule reduces any potential confusion of which rules
govern DMM unit trading in related products. Finally, the Exchange
believes that deleting the Booth Wire Policy reduces confusion as such
policy is now moot given that DMMs do not have public customers.
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. The Exchange operates the
only-Floor-based equities market with DMMs. As such, any changes to
Rule 98 would not impact any other markets. However, the Exchange
believes Rule 98 currently imposes a burden on competition for the
Exchange because it requires member organizations that operate a DMM
unit to operate in a manner that the Exchange believes is more
restrictive than necessary for the protection of investors or the
public interest. The Exchange believes that the proposed rule change is
pro-competitive because it adopts a principles-based approach that
prohibit the misuse of material non-public information that is
consistent with the rules of NYSE Arca, BATS, and Nasdaq governing
equity market makers and should provide greater flexibility for how a
member organization could structure its operations.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be 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 Number SR-NYSE-2014-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2014-12. 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 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 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-2014-12 and should be submitted on or before April
28, 2014.
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\50\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07634 Filed 4-4-14; 8:45 am]
BILLING CODE 8011-01-P
