Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 98-Equities, 30589-30594 [2016-11538]
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jstallworth on DSK7TPTVN1PROD with NOTICES
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
9. A Fund’s borrowings through the
InterFund Program, as measured on the
day when the most recent loan was
made, will not exceed the greater of
125% of the Fund’s total net cash
redemptions for the preceding seven
calendar days or 102% of a Fund’s sales
fails for the preceding seven calendar
days.
10. Each Interfund Loan may be called
on one business day’s notice by a
lending Fund and may be repaid on any
day by a borrowing Fund.
11. A Fund’s participation in the
InterFund Program must be consistent
with its investment restrictions,
policies, limitations and organizational
documents.
12. The InterFund Program Team will
calculate total Fund borrowing and
lending demand through the InterFund
Program, and allocate Interfund Loans
on an equitable basis among the Funds,
without the intervention of any portfolio
manager. The InterFund Program Team
will not solicit cash for the InterFund
Program from any Fund or prospectively
publish or disseminate loan demand
data to portfolio managers. The
InterFund Program Team will invest all
amounts remaining after satisfaction of
borrowing demand in accordance with
the standing instructions of the relevant
portfolio manager or such remaining
amounts will be invested directly by the
portfolio managers of the Funds.
13. The InterFund Program Team will
monitor the Interfund Loan Rate
charged and the other terms and
conditions of the Interfund Loans and
will make a quarterly report to the
Boards concerning the participation of
the Funds in the InterFund Program and
the terms and other conditions of any
extensions of credit under the InterFund
Program.
14. Each Board, including a majority
of its Independent Board Members, will:
(a) Review, no less frequently than
quarterly, the participation of each Fund
it oversees in the InterFund Program
during the preceding quarter for
compliance with the conditions of any
order permitting such participation;
(b) establish the Bank Loan Rate
formula used to determine the interest
rate on Interfund Loans;
(c) review, no less frequently than
annually, the continuing
appropriateness of the Bank Loan Rate
formula; and
(d) review, no less frequently than
annually, the continuing
appropriateness of the participation in
the InterFund Program by each Fund it
oversees.
15. Each Fund will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
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which any transaction by it under the
InterFund Program occurred, the first
two years in an easily accessible place,
written records of all such transactions
setting forth a description of the terms
of the transaction, including the
amount, the maturity and the Interfund
Loan Rate, the rate of interest available
at the time each Interfund Loan is made
on overnight repurchase agreements and
Bank Borrowings, and such other
information presented to the Boards of
the Funds in connection with the
review required by conditions 13 and
14.
16. In the event an Interfund Loan is
not paid according to its terms and the
default is not cured within two business
days from its maturity or from the time
the lending Fund makes a demand for
payment under the provisions of the
interfund lending agreement, the
Adviser to the lending Fund promptly
will refer the loan for arbitration to an
independent arbitrator selected by the
Board of any Fund involved in the loan
who will serve as arbitrator of disputes
concerning Interfund Loans.3 The
arbitrator will resolve any problem
promptly, and the arbitrator’s decision
will be binding on both Funds. The
arbitrator will submit, at least annually,
a written report to the Board of each
Fund setting forth a description of the
nature of any dispute and the actions
taken by the Funds to resolve the
dispute.
17. The Advisers will prepare and
submit to the Board for review an initial
report describing the operations of the
InterFund Program and the procedures
to be implemented to ensure that all
Funds are treated fairly. After the
commencement of the InterFund
Program, the Advisers will report on the
operations of the InterFund Program at
each Board’s quarterly meetings. Each
Fund’s chief compliance officer, as
defined in rule 38a–1(a)(4) under the
Act, shall prepare an annual report for
its Board each year that the Fund
participates in the InterFund Program,
that evaluates the Fund’s compliance
with the terms and conditions of the
application and the procedures
established to achieve such compliance.
Each Fund’s chief compliance officer
will also annually file a certification
pursuant to Item 77Q3 of Form N–SAR
as such form may be revised, amended
or superseded from time to time, for
each year that the Fund participates in
the InterFund Program, that certifies
that the Fund and its Adviser have
3 If
the dispute involves Funds that do not have
a common Board, the Board of each affected Fund
will select an independent arbitrator that is
satisfactory to each Fund.
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30589
implemented procedures reasonably
designed to achieve compliance with
the terms and conditions of the order. In
particular, such certification will
address procedures designed to achieve
the following objectives:
(a) That the Interfund Loan Rate will
be higher than the Repo Rate but lower
than the Bank Loan Rate;
(b) compliance with the collateral
requirements as set forth in the
application;
(c) compliance with the percentage
limitations on interfund borrowing and
lending;
(d) allocation of interfund borrowing
and lending demand in an equitable
manner and in accordance with
procedures established by the Board;
and
(e) that the Interfund Loan Rate does
not exceed the interest rate on any third
party borrowings of a borrowing Fund at
the time of the Interfund Loan.
Additionally, each Fund’s
independent registered public
accountants, in connection with their
audit examination of the Fund, will
review the operation of the InterFund
Program for compliance with the
conditions of the application and their
review will form the basis, in part, of
the auditor’s report on internal
accounting controls in Form N–SAR.
18. No Fund will participate in the
InterFund Program, upon receipt of
requisite regulatory approval, unless it
has fully disclosed in its registration
statement on Form N–1A (or any
successor form adopted by the
Commission) all material facts about its
intended participation.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–11534 Filed 5–16–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77808; File No. SR–
NYSEMKT–2016–51]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 98—
Equities
May 11, 2016.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
1 15
U.S.C. 78s(b)(1).
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‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on May 2,
2016, NYSE MKT LLC (the ‘‘Exchange’’
or ‘‘NYSE MKT’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 98—Equities to provide that when
Designated Market Makers (‘‘DMM’’)
enter interest for the purpose of
facilitating the execution of customer
orders, such orders would not be
required to be designated as DMM
interest. 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
jstallworth on DSK7TPTVN1PROD with NOTICES
1. Purpose
The Exchange proposes to amend
Rule 98—Equities (‘‘Rule 98’’) to
provide that when DMMs enter interest
on a proprietary basis for the purpose of
facilitating the execution of customer
orders, such orders would not be
required to be designated as DMM
interest.4 This proposed rule change is
based on a recently approved
2 15
U.S.C. 78a.
CFR 240.19b–4.
4 As defined in Rule 2(i)—Equities, the term
‘‘DMM’’ means an individual member, officer,
partner, employee or associated person of a
Designated Market Maker Unit who is approved by
the Exchange to act in the capacity of a DMM.
3 17
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amendment to New York Stock
Exchange LLC (‘‘NYSE’’) Rule 98.5
Background
In 2014, the Exchange amended 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.6 Those rule changes
provide member organizations operating
DMM units with the ability to integrate
DMM unit trading with other trading
units, while maintaining tailored
restrictions to address that DMMs while
on the Trading Floor may have access to
certain Floor-based non-public
information. By removing prescriptive
restrictions, the 2014 Filing was
designed to enable a member
organization that engages in marketmaking operations on multiple
exchanges to house its DMM operations
together with the other market-making
operations, even if such operations are
customer-facing, or, to enable a member
organization to consolidate all equity
trading, including customer-facing
operations and the DMM unit, within a
single independent trading unit.
Rule 98(c) sets forth specified
restrictions to operating a DMM unit.7
Among other requirements, Rule
98(c)(4) provides that any interest
entered into Exchange systems by the
DMM unit in DMM securities 8 must be
identifiable as DMM unit interest.
Current Rule 98(c)(4) was designed to
ensure that all trading activity by a
DMM unit in DMM securities at the
Exchange is available for review. As
discussed below, under Rule 98(c)(5),
DMMs would continue to be required to
submit information to the Exchange to
make available to the Exchange for
review all trading activity by a DMM
unit in DMM securities. The Exchange
did not specify which system(s) a DMM
unit must use because, as the
Exchange’s trading systems continue to
evolve, the manner by which interest
would be identified as DMM interest
could change. Accordingly, the current
rule requires any trading for the account
5 See Securities Exchange Act Release No. 77708
(April 26, 2016) (SR–NYSE–2016–16) (NYSE Rule
98 Approval Order).
6 See Securities Exchange Act Release Nos. 72535
(July 3, 2014), 79 FR 39024 (July 9, 2014) (Approval
Order) and 71838 (April 1, 2014), 79 FR 19131
(April 7, 2014) (‘‘2014 Notice’’) (SR–NYSEMKT–
2014–22) (‘‘2014 Filing’’).
7 As defined in Rule 98(b)(1), the term ‘‘DMM
unit’’ means a trading unit within a member
organization that is approved pursuant to Rule
103—Equities to act as a DMM unit.
8 As defined in Rule 98(b)(2), the term ‘‘DMM
securities’’ means any securities allocated to the
DMM unit pursuant to Rule 103B—Equities or other
applicable rules.
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of the DMM unit in DMM securities at
the Exchange to be identifiable as DMM
interest.
Rule 98(c)(5) provides that a member
organization must provide the Exchange
with real-time net position information
for trading in DMM securities by the
DMM unit and any independent trading
unit of which it is a part, at such times
and in the manner prescribed by the
Exchange. Rule 98(d) further specifies
that the DMM rules 9 will apply only to
a DMM unit’s quoting or trading in its
DMM securities for its own accounts at
the Exchange. Accordingly, the DMM
rules do not apply to any customer
orders that a member organization that
operates a DMM unit sends to the
Exchange as agent.10
Because Rule 98(c)(4) currently
requires that any interest entered into
Exchange systems by the DMM unit in
DMM securities be identifiable as DMM
interest, a DMM unit integrated with a
customer-facing unit that would send
customer orders in DMM securities to
the Exchange as proprietary interest
must identify it as DMM interest. As a
result, although agency orders are not
subject to DMM rules, customer-driven
interest entered on a proprietary basis is
subject to all DMM rules.
To date, none of the member
organizations operating a DMM have
integrated a DMM unit with a customerfacing trading unit and the Exchange
believes that the current rule requiring
customer-driven orders that are
represented on a proprietary basis be
designated as DMM interest has served
as a barrier to achieving such
integration.11 Specifically, there are
certain scenarios when the rules
governing DMMs may conflict with a
member organization’s obligations to its
customers. For example, DMMs are not
permitted to enter Market Orders, MOO
Orders, CO Orders, MOC Order, LOC
Orders, or orders with Sell ‘‘Plus’’—Buy
‘‘Minus’’ Instructions.12 But to meet
9 As defined in Rule 98(b)(3), the term ‘‘DMM
rules’’ means any rules that govern DMM or DMM
unit conduct or trading.
10 See 2014 Notice, supra note 5 [sic] at 19137
(specifying that Rule 98(d) was added because
DMM rules are not applicable to any customer
orders routed to the Exchange by a member
organization as agent).
11 The Exchange understands it is a common
practice among market makers that operate as
wholesalers, and thus have their own customer
orders as well as retail order flow from another
broker dealer, to facilitate the execution of customer
order flow by representing it on a proprietary basis
when such orders are routed to an exchange. Once
a customer-driven order that has been represented
on a proprietary basis on an exchange has been
executed, the market maker uses the position
acquired on the Exchange to fill the customer order
either on a riskless-principal basis or with price
improvement to the customer.
12 See Rule 104(b)(vi)—Equities.
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jstallworth on DSK7TPTVN1PROD with NOTICES
customer instructions, a customerdriven order entered by a member
organization on a proprietary basis may
need to be one of these order types. As
another example, DMMs are restricted
from engaging in specified trading in the
last ten minutes of trading before the
close of trading.13 But a member
organization may have a best execution
obligation to route a customer-driven
order to the Exchange in the last ten
minutes of trading.
Proposed Amendments
The Exchange proposes to amend
Rule 98 to better reflect how member
organizations that integrate DMM unit
operations with customer-facing
operations may facilitate customerdriven order flow to the Exchange in
DMM securities. As noted above, one of
the intended goals of the 2014 Filing
was to permit member organizations to
integrate DMM unit operations with
other market-making operations,
including customer-facing units.
However, as discussed above, subjecting
customer order flow that is entered on
a proprietary basis to DMM rules may be
inconsistent with a member
organization’s obligations to its
customers, and thus continue to serve as
a barrier to integrating DMM units
within a member organization.
Accordingly, the Exchange proposes to
amend Rule 98 to facilitate better
integration of DMM units with a
member organization’s existing
customer-facing market-making trading
units by specifying that, as with agency
orders, customer-driven orders that are
entered on a proprietary basis by the
DMM unit would not be required to be
designated as DMM interest.
The Exchange proposes to amend
Rule 98 to provide that proprietary
interest that is entered by a DMM unit
for the purposes of facilitating customer
orders would not be required to be
designated as DMM interest. The
Exchange proposes to replace the phrase
‘‘any interest’’ with the phrase
‘‘proprietary interest’’ in Rule 98(c)(4) to
clarify that the existing rule only
governs proprietary interest of a DMM
unit, i.e., interest for the account of the
member organization. As further
proposed, the Exchange would amend
Rule 98(c)(4) to provide that proprietary
interest entered into Exchange systems
by the DMM unit in DMM securities
13 See
Rule 104(g)(i)(A)(III)—Equities (defining
Prohibited Transactions). Specifically, a DMM with
a long position in a security is prohibited from
making a purchase in a security that results in a
new high price on the Exchange for the day, and
a DMM with a short position in a security is
prohibited from making a sale in such security that
results in a new low price for the day.
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would not be required to be identifiable
as DMM unit interest if such interest is
(1) on a riskless principal basis, or on
a principal basis to provide price
improvement to the customer, and (2)
for the purposes of facilitating the
execution of an order received from a
customer (whether its own customer or
the customer of another broker-dealer).
The Exchange proposes to define such
interest as a ‘‘customer-driven order.’’
The proposed definition of
‘‘customer-driven order’’ is not a novel
concept in that other SROs rules define
the concept of a proprietary order being
entered to facilitate a customer order.
For example, Supplementary Material
.03 to FINRA Rule 5320 defines the term
‘‘facilitated order’’ to mean a proprietary
trade that is for the purposes of
facilitating the execution, on a riskless
principal basis, of an order from a
customer (whether its own customer or
another broker-dealer).14 The Exchange
proposes a distinction for the definition
of ‘‘customer-driven order’’ in Rule 98
as compared to the Rule 5320 definition
of ‘‘facilitated order’’ because, as
proposed, a customer-driven order
could be entered, not only on a riskless
principal basis, but also on a principal
basis so the member organization could
provide price improvement to the
customer. In either case, the member
organization entering the customerdriven order would need to have
received a customer order before
entering a customer-driven order at the
Exchange.15
The proposed rule change is designed
to reflect how member organizations
handle customer orders, which in many
circumstances, are routed to an
exchange on a proprietary basis to
facilitate execution of a customer’s
order. Therefore, the Exchange believes
that the proposed amendment is
consistent with the current rule, which
does not require agency orders entered
by the member organization that
operates a DMM unit to be subject to
DMM rules.16
The Exchange further proposes to
amend Rule 98(c)(4) to specify that a
DMM unit must use unique mnemonics
that identify to the Exchange its
customer-driven orders in DMM
securities. Such mnemonics may not be
used for trading activity at the Exchange
in DMM securities that are not
14 See also Supplementary Material .03 to Rule
5320—Equities.
15 If a customer-driven order, as defined in Rule
98(c)(4), is not handled on a riskless principal basis,
it would not be eligible for the riskless principal
exception to the prohibition against trading ahead
of customer orders as specified in Rule 5320—
Equities.
16 See supra note 10.
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30591
customer-driven orders, but may be
used for trading activities in securities
not assigned to the DMM. The Exchange
believes that requiring a separate
mnemonic for customer-driven orders
would assist the Exchange in
monitoring DMM unit compliance with
the proposed rule.17
The Exchange further proposes to
amend Rule 98(d) to specify which rules
would be applicable to trading by the
DMM unit. As proposed, the rules, fees,
or credits applicable to DMM quoting or
trading activity would apply only to a
DMM unit’s quoting or trading in its
DMM securities for its own account at
the Exchange that has been identified as
DMM interest. In addition, consistent
with the proposal that customer-driven
orders would not be required to be
designated as DMM interest, the
Exchange proposes to add text to Rule
98(d) to state that customer-driven
orders for the account of a DMM unit
that have not been identified as DMM
interest would not be subject to DMM
rules or be eligible for any fees or credits
applicable to DMM quoting or trading
activity.18 In addition, such customerdriven orders could not be aggregated
with interest that has been identified as
DMM interest for purposes of any DMMrelated fees or credits or DMM quoting
obligations specified in Rule 104(a).
This proposed rule text would provide
that customer-driven orders not
designated as DMM interest would not
be subject to DMM rules, which, as
described above, include restrictions on
availability of certain order types and
entry of specified orders during the last
ten minutes of trading. Because a
customer-driven order that has not been
designated as DMM interest would not
be subject to DMM rules, it would also
not be eligible for a parity allocation
applicable for DMMs pursuant to Rule
72(c) or be used to assist a DMM in
meeting its quoting or market
maintenance obligations, or be eligible
for DMM fees or credits.
17 The Exchange requires a member to use a
different mnemonic for its SLP-Prop trading activity
in assigned SLP securities than it uses for such
member’s trading in assigned SLP securities that is
not SLP-Prop trading. Using different mnemonics
allows the Exchange to identify SLP-Prop trading
activity in a member organization’s assigned SLP
securities. A member organization may use the
same mnemonic for its trading activity in securities
not assigned to an SLP as it uses for its SLP-Prop
trading in assigned SLP securities. See Rule
107B(c)(2)—Equities.
18 Customer-driven orders would be eligible for
any fees or credits applicable to equity transactions
at the Exchange that are not DMM or Floor broker
trades. See NYSE MKT Equities Price List, available
here: https://www.nyse.com/publicdocs/nyse/
markets/nyse-mkt/
NYSE_MKT_Equities_Price_List.pdf.
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jstallworth on DSK7TPTVN1PROD with NOTICES
The Rule 98(c)(5) obligation to
provide the Exchange with real-time net
position information in DMM securities
would continue to be 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, regardless of whether they are
positions resulting from trades in away
markets, trades as a result of DMM
interest entered at the Exchange, or
customer-driven orders routed to the
Exchange that were not identified as
DMM interest.19 For example, if a DMM
unit is combined with market-making
desks that are trading on away markets
and that route customer-driven orders to
the Exchange in DMM securities that are
not identified as DMM interest, the
member organization would be required
to report the position of the entire DMM
unit in DMM securities, not only the
DMM’s Exchange-traded positions
resulting from DMM interest. The
Exchange also proposes a nonsubstantive amendment to Rule 98(c)(5)
to delete the term ‘‘for trading,’’ which
the Exchange believes is extraneous rule
text.
19 Under Regulation SHO, determination of a
seller’s net position is based on the seller’s position
in the security in all of its accounts, absent
aggregation unit treatment under Rule 200(f) of
Regulation SHO. 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 No. 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). The Commission
adopted a narrow exception to Regulation SHO’s
‘‘locate’’ requirement only for market makers
engaged in bona-fide market making in the security
at the time they effect the short sale. See 17 CFR
242.203(b)(2)(iii); see also Securities Exchange Act
Release No. 50103 (July 28, 2004), 69 FR 48008,
48015 (Aug. 6, 2004); Securities Exchange Act
Release No. 58775 (Oct. 14, 2008), 73 FR 61690,
61698–9 (Oct. 17, 2008). Broker-dealers would not
be able to rely on the Exchange’s or any selfregulatory organization’s designation of market
marking for eligibility for the bona-fide market
making exception to the ‘‘locate’’ requirement, as
such designations are distinct and independent
from Regulation SHO. Further, the Exchange’s
designation of proprietary interest or any exclusion
from proprietary interest for purposes of NYSE
rules is not relevant for purposes of Regulation
SHO. Eligibility for the bona-fide market making
exception depends on the facts and circumstances
and a determination of bona-fide market making is
based on the Commission’s factors outlined in the
aforementioned Regulation SHO releases. It should
also be noted that a determination of bona-fide
market making is relevant for the purposes of the
close-out obligations under Rule 204 of Regulation
SHO. See 17 CFR 242.204(a)(3).
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2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 20 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
providing greater specificity in Rule 98
regarding which proprietary interest
would be required to be entered as
DMM interest.
The Exchange believes that the
proposed amendment to define the term
‘‘customer-driven order’’ to be
proprietary interest of a DMM that is for
the purposes of facilitating the
execution of an order received from a
customer (whether its own customer or
the customer of another broker-dealer)
on a riskless principal basis or on a
principal basis to provide price
improvement to the customer reflects
the current reality of how broker-dealers
facilitate customer orders that are routed
to an exchange. Specifically, after
receiving a customer order, such
customer order is routed to an exchange
on a proprietary basis, and once an
execution is received from an exchange,
the execution is provided to the
customer either on a riskless principal
basis or with price improvement.
Facilitating customer orders on a
proprietary basis is not a novel concept
and serves as the basis of the definition
of the term ‘‘facilitated order’’ in
Supplementary Material .03 to FINRA
Rule 5320. While the Exchange
proposes that customer-driven orders
for the purposes of Rule 98 would not
be required to be executed only on a
riskless principal basis, but could also
be executed on a principal basis to
provide price improvement to the
customer, this difference does not alter
the premise of how member
organizations facilitate customer orders,
as already established in Rule 5320.03.
Because the proposed definition is
narrowly defined to reflect how
customer orders are facilitated on a
proprietary basis when routed to an
exchange, the Exchange believes that
the proposed amendment to Rule
98(c)(4) to define the term ‘‘customerdriven order’’ would remove
impediments to and perfect the
mechanism of a free and open market.
The Exchange believes that requiring
a DMM unit to use unique mnemonics
to identify customer-driven orders in
DMM securities would promote just and
equitable principles of trade because
requiring such orders to be entered
using unique mnemonics would assist
the Exchange in monitoring DMM unit
compliance with the proposed rule.
The Exchange further believes that
providing DMM units with a choice of
whether to designate a customer-driven
order as DMM interest would remove
impediments to and perfect the
mechanism of a free and open market
because certain DMM rules may conflict
with a broker-dealer’s obligation to its
customers. As discussed in the 2014
Filing, agency orders entered by a
member organization that operates a
DMM unit are not subject to DMM
rules.21 Yet, if that same customer order
were routed to the Exchange on a
proprietary basis, which is the manner
by which broker-dealers may handle
customer order flow, it would be subject
to DMM rules. Accordingly, because
Rule 98 does not currently require
agency flow to be subject to DMM rules,
the Exchange believes it is consistent
with the protection of investors and the
public interest that agency flow that is
facilitated by a member organization on
a proprietary basis at the Exchange
would similarly not be required to be
subject to DMM rules.
The proposed rule change would
further be consistent with the protection
of investors and the public interest
because it would enable customerdriven orders to not be subject to DMM
rules and eliminate any conflict with
customer instructions or best execution
obligations. The Exchange notes that
this proposed rule change would not
alter in any way a member
organization’s existing obligations under
Section 15(g) of the Act,22 Regulation
SHO,23 Rule 5320, or to maintain
policies and procedures to assure that a
member organization does not engage in
any frontrunning of customer order
information in violation of Exchange,
FINRA, or federal securities laws.
The Exchange further believes that the
proposed amendments to Rule 98(d)
would remove impediments to and
perfect the mechanism of a free and
open market by promoting transparency
in Exchange rules regarding which
rules, fees or credits applicable to DMM
quoting or trading activity would be
applicable to which interest. More
specifically, the Exchange believes that
it would remove impediments to and
21 See
supra note 10.
U.S.C. 78o(g).
23 17 CFR 242.201.
22 15
20 15
PO 00000
U.S.C. 78f(b)(5).
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Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
perfect the mechanism of a free and
open market to provide specificity in
Exchange rules that customer-driven
orders that have not been designated as
DMM interest would not be subject to
the DMM rules and also would not be
eligible for DMM fees or credits or to be
aggregated with DMM interest for
purposes of any DMM-related fees or
credits or DMM quoting obligations.
Finally, the Exchange believes that
the proposed amendment to Rule
98(c)(5) would remove impediments to
and perfect the mechanism of a free and
open market by removing extraneous
rule text, thus promoting simplicity in
Exchange rules.
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
proposed rule change is designed to be
pro-competitive because it would
remove a restriction unique to DMMs as
specified in Rule 98, thus enabling
existing customer-facing market making
units to operate as a DMM unit at the
Exchange without needing to change the
manner by which they may facilitate
customer orders on a proprietary basis
at an exchange. The proposed rule
change would also harmonize the
Exchange’s rules with recently approved
amendments to NYSE Rule 98.24
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A) of the Act 25 and Rule 19b–
4(f)(6) thereunder.26 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
24 See
NYSE Rule 98 Approval Order, supra note
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 27 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b4(f)(6)(iii),28 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative
immediately upon filing. The Exchange
notes that the merits of the proposed
rule change have already been
considered by the Commission in the
context of a substantively identical
filing by the NYSE, which the
Commission approved.29 The Exchange
also believes that waiver is appropriate
so that DMM units that are registered in
both Exchange-listed and NYSE-listed
securities will again, without delay, be
subject to consistent rules across the
two exchanges. The Commission
believes that the proposed rule change
is consistent with the protection of
investors and the public interest,
because the proposal is substantively
identical to the NYSE proposal that was
recently approved by the Commission,
and because waiver of the operative
delay will provide for consistent rules
between NYSE and the Exchange.
Accordingly, the Commission hereby
waives the 30-day operative delay and
designates the proposal operative upon
filing.30
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 31 of the Act to
jstallworth on DSK7TPTVN1PROD with NOTICES
5.
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
27 17
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6)(iii).
29 See NYSE Rule 98 Approval Order, supra note
25 15
28 17
26 17
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15:32 May 16, 2016
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5.
30 For purposes only of accelerating the operative
date of this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
31 15 U.S.C. 78s(b)(2)(B).
PO 00000
Frm 00079
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Sfmt 4703
30593
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEMKT–2016–51 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEMKT–2016–51. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEMKT–2016–51 and should be
submitted on or before June 7, 2016.
E:\FR\FM\17MYN1.SGM
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30594
Federal Register / Vol. 81, No. 95 / Tuesday, May 17, 2016 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–11538 Filed 5–16–16; 8:45 am]
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77812; File No. SR–NYSE–
2016–34]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Its
Price List To Make a Clarifying Change
Regarding the Rebate Program
Recently Implemented by the
Exchange for the NYSE Bonds System
May 11, 2016.
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 May 3,
2016, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Price List to make a clarifying change
regarding the rebate program recently
implemented by the Exchange for the
NYSE BondsSM system. 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.
jstallworth on DSK7TPTVN1PROD with NOTICES
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
32 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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15:32 May 16, 2016
Jkt 238001
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.
1. Purpose
The Exchange proposes to amend its
Price List to make a clarifying change
regarding the rebate program recently
implemented by the Exchange for the
NYSE Bonds system.4 The purpose of
this proposed rule change is to clarify
the application of the rebate program
only. The Exchange is not proposing to
change in any way the manner in which
the rebate program operates.
Pursuant to the Liquidity Provider
Incentive Program, a voluntary rebate
program, the Exchange pays Users 5 of
NYSE Bonds a monthly rebate provided
Users who opt into the rebate program
meet specified quoting requirements.
Under the program, the rebate payable
is based on the number of CUSIPs 6 a
User quotes.
The rebate amount is tiered based on
the number of CUSIPs quoted by a User,
as follows:
participating User’s quoting
performance beginning each month on a
daily basis, up to and including the last
trading day of a calendar month, to
determine at the end of each month
each User’s monthly average. Under the
program, Users must provide a twosided quote for a minimum of hundred
(100) bonds per side of the market with
an average spread of half-point ($0.50)
or less in CUSIPs whose average
maturity is at least five (5) years as of
the date the User provides a quote. The
Exchange proposes to make a clarifying
change to the rule text to note that in
order for a CUSIP to qualify for
inclusion in the rebate calculation, a
User must provide continuous twosided quotes in a CUSIP, whether it’s for
eighty percent (80%) or fifty percent
(50%) of the time, as applicable, for a
minimum of hundred (100) bonds per
side of the market that has an average
spread of half-point ($0.50) or less and
whose average maturity is at least five
(5) years as of the date the User provides
the quote.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,8 in general, and
furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,9 in
LIQUIDITY PROVIDER INCENTIVE
particular, because it provides for the
PROGRAM
equitable allocation of reasonable dues,
fees, and other charges among its
Monthly
members, issuers and other persons
Number of CUSIPs
rebate
using its facilities and does not unfairly
400–599 ....................................
$10,000 discriminate between customers,
600–799 ....................................
20,000 issuers, brokers or dealers. The
800 or more ..............................
30,000 Exchange believes that the clarifying
change to the current rule text is
To qualify for a rebate, a User is
reasonable as it will clarify the
required to provide continuous twoapplication of the rebate program and
sided quotes for at least eighty percent
will help to avoid confusion for Users
(80%) of the time during the Core Bond
that opt into the rebate program. The
Trading Session for an entire calendar
Exchange notes that the proposed
month.7 The Exchange calculates each
change is not designed to amend any
rebate, nor alter the manner in which it
4 See Securities Exchange Act Release No. 77591
calculates rebates under the program.
(April 12, 2016), 81 FR 22656 (April 18, 2016) (SR–
The Exchange believes the proposed
NYSE–2016–26).
5 Rule 86(b)(2)(M) defines a User as any Member
amendment is intended to make the
or Member Organization, Sponsored Participant, or
Price List clearer and less confusing for
Authorized Trader that is authorized to access
investors and eliminate potential
NYSE Bonds.
6 CUSIP stands for Committee on Uniform
investor confusion, thereby removing
Securities Identification Procedures. A CUSIP
impediments to and perfecting the
number identifies most financial instruments,
mechanism of a free and open market
including: stocks of all registered U.S. and
and a national market system, and, in
Canadian companies, commercial paper, and U.S.
general, protecting investors and the
government and municipal bonds. The CUSIP
system—owned by the American Bankers
public interest.
Association and managed by Standard & Poor’s—
facilitates the clearance and settlement process of
securities. See https://www.sec.gov/answers/
cusip.htm.
7 For the first calendar month after a User opts in,
the User is required to provide continuous two-
PO 00000
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Fmt 4703
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sided quotes for fifty percent (50%) of the time
during the Core Bond Trading Session.
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(4), (5).
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]]>Agencies
[Federal Register Volume 81, Number 95 (Tuesday, May 17, 2016)]
[Notices]
[Pages 30589-30594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11538]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77808; File No. SR-NYSEMKT-2016-51]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend Rule 98--
Equities
May 11, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the
[[Page 30590]]
``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that
on May 2, 2016, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I and II, below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 98--Equities to provide that
when Designated Market Makers (``DMM'') enter interest for the purpose
of facilitating the execution of customer orders, such orders would not
be required to be designated as DMM interest. 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--Equities (``Rule 98'') to
provide that when DMMs enter interest on a proprietary basis for the
purpose of facilitating the execution of customer orders, such orders
would not be required to be designated as DMM interest.\4\ This
proposed rule change is based on a recently approved amendment to New
York Stock Exchange LLC (``NYSE'') Rule 98.\5\
---------------------------------------------------------------------------
\4\ As defined in Rule 2(i)--Equities, the term ``DMM'' means an
individual member, officer, partner, employee or associated person
of a Designated Market Maker Unit who is approved by the Exchange to
act in the capacity of a DMM.
\5\ See Securities Exchange Act Release No. 77708 (April 26,
2016) (SR-NYSE-2016-16) (NYSE Rule 98 Approval Order).
---------------------------------------------------------------------------
Background
In 2014, the Exchange amended 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.\6\ Those rule changes provide member
organizations operating DMM units with the ability to integrate DMM
unit trading with other trading units, while maintaining tailored
restrictions to address that DMMs while on the Trading Floor may have
access to certain Floor-based non-public information. By removing
prescriptive restrictions, the 2014 Filing was designed to enable a
member organization that engages in market-making operations on
multiple exchanges to house its DMM operations together with the other
market-making operations, even if such operations are customer-facing,
or, to enable a member organization to consolidate all equity trading,
including customer-facing operations and the DMM unit, within a single
independent trading unit.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release Nos. 72535 (July 3,
2014), 79 FR 39024 (July 9, 2014) (Approval Order) and 71838 (April
1, 2014), 79 FR 19131 (April 7, 2014) (``2014 Notice'') (SR-NYSEMKT-
2014-22) (``2014 Filing'').
---------------------------------------------------------------------------
Rule 98(c) sets forth specified restrictions to operating a DMM
unit.\7\ Among other requirements, Rule 98(c)(4) provides that any
interest entered into Exchange systems by the DMM unit in DMM
securities \8\ must be identifiable as DMM unit interest. Current Rule
98(c)(4) was designed to ensure that all trading activity by a DMM unit
in DMM securities at the Exchange is available for review. As discussed
below, under Rule 98(c)(5), DMMs would continue to be required to
submit information to the Exchange to make available to the Exchange
for review all trading activity by a DMM unit in DMM securities. The
Exchange did not specify which system(s) a DMM unit must use because,
as the Exchange's trading systems continue to evolve, the manner by
which interest would be identified as DMM interest could change.
Accordingly, the current rule requires any trading for the account of
the DMM unit in DMM securities at the Exchange to be identifiable as
DMM interest.
---------------------------------------------------------------------------
\7\ As defined in Rule 98(b)(1), the term ``DMM unit'' means a
trading unit within a member organization that is approved pursuant
to Rule 103--Equities to act as a DMM unit.
\8\ As defined in Rule 98(b)(2), the term ``DMM securities''
means any securities allocated to the DMM unit pursuant to Rule
103B--Equities or other applicable rules.
---------------------------------------------------------------------------
Rule 98(c)(5) provides that a member organization must provide the
Exchange with real-time net position information for trading in DMM
securities by the DMM unit and any independent trading unit of which it
is a part, at such times and in the manner prescribed by the Exchange.
Rule 98(d) further specifies that the DMM rules \9\ will apply only to
a DMM unit's quoting or trading in its DMM securities for its own
accounts at the Exchange. Accordingly, the DMM rules do not apply to
any customer orders that a member organization that operates a DMM unit
sends to the Exchange as agent.\10\
---------------------------------------------------------------------------
\9\ As defined in Rule 98(b)(3), the term ``DMM rules'' means
any rules that govern DMM or DMM unit conduct or trading.
\10\ See 2014 Notice, supra note 5 [sic] at 19137 (specifying
that Rule 98(d) was added because DMM rules are not applicable to
any customer orders routed to the Exchange by a member organization
as agent).
---------------------------------------------------------------------------
Because Rule 98(c)(4) currently requires that any interest entered
into Exchange systems by the DMM unit in DMM securities be identifiable
as DMM interest, a DMM unit integrated with a customer-facing unit that
would send customer orders in DMM securities to the Exchange as
proprietary interest must identify it as DMM interest. As a result,
although agency orders are not subject to DMM rules, customer-driven
interest entered on a proprietary basis is subject to all DMM rules.
To date, none of the member organizations operating a DMM have
integrated a DMM unit with a customer-facing trading unit and the
Exchange believes that the current rule requiring customer-driven
orders that are represented on a proprietary basis be designated as DMM
interest has served as a barrier to achieving such integration.\11\
Specifically, there are certain scenarios when the rules governing DMMs
may conflict with a member organization's obligations to its customers.
For example, DMMs are not permitted to enter Market Orders, MOO Orders,
CO Orders, MOC Order, LOC Orders, or orders with Sell ``Plus''--Buy
``Minus'' Instructions.\12\ But to meet
[[Page 30591]]
customer instructions, a customer-driven order entered by a member
organization on a proprietary basis may need to be one of these order
types. As another example, DMMs are restricted from engaging in
specified trading in the last ten minutes of trading before the close
of trading.\13\ But a member organization may have a best execution
obligation to route a customer-driven order to the Exchange in the last
ten minutes of trading.
---------------------------------------------------------------------------
\11\ The Exchange understands it is a common practice among
market makers that operate as wholesalers, and thus have their own
customer orders as well as retail order flow from another broker
dealer, to facilitate the execution of customer order flow by
representing it on a proprietary basis when such orders are routed
to an exchange. Once a customer-driven order that has been
represented on a proprietary basis on an exchange has been executed,
the market maker uses the position acquired on the Exchange to fill
the customer order either on a riskless-principal basis or with
price improvement to the customer.
\12\ See Rule 104(b)(vi)--Equities.
\13\ See Rule 104(g)(i)(A)(III)--Equities (defining Prohibited
Transactions). Specifically, a DMM with a long position in a
security is prohibited from making a purchase in a security that
results in a new high price on the Exchange for the day, and a DMM
with a short position in a security is prohibited from making a sale
in such security that results in a new low price for the day.
---------------------------------------------------------------------------
Proposed Amendments
The Exchange proposes to amend Rule 98 to better reflect how member
organizations that integrate DMM unit operations with customer-facing
operations may facilitate customer-driven order flow to the Exchange in
DMM securities. As noted above, one of the intended goals of the 2014
Filing was to permit member organizations to integrate DMM unit
operations with other market-making operations, including customer-
facing units. However, as discussed above, subjecting customer order
flow that is entered on a proprietary basis to DMM rules may be
inconsistent with a member organization's obligations to its customers,
and thus continue to serve as a barrier to integrating DMM units within
a member organization. Accordingly, the Exchange proposes to amend Rule
98 to facilitate better integration of DMM units with a member
organization's existing customer-facing market-making trading units by
specifying that, as with agency orders, customer-driven orders that are
entered on a proprietary basis by the DMM unit would not be required to
be designated as DMM interest.
The Exchange proposes to amend Rule 98 to provide that proprietary
interest that is entered by a DMM unit for the purposes of facilitating
customer orders would not be required to be designated as DMM interest.
The Exchange proposes to replace the phrase ``any interest'' with the
phrase ``proprietary interest'' in Rule 98(c)(4) to clarify that the
existing rule only governs proprietary interest of a DMM unit, i.e.,
interest for the account of the member organization. As further
proposed, the Exchange would amend Rule 98(c)(4) to provide that
proprietary interest entered into Exchange systems by the DMM unit in
DMM securities would not be required to be identifiable as DMM unit
interest if such interest is (1) on a riskless principal basis, or on a
principal basis to provide price improvement to the customer, and (2)
for the purposes of facilitating the execution of an order received
from a customer (whether its own customer or the customer of another
broker-dealer). The Exchange proposes to define such interest as a
``customer-driven order.''
The proposed definition of ``customer-driven order'' is not a novel
concept in that other SROs rules define the concept of a proprietary
order being entered to facilitate a customer order. For example,
Supplementary Material .03 to FINRA Rule 5320 defines the term
``facilitated order'' to mean a proprietary trade that is for the
purposes of facilitating the execution, on a riskless principal basis,
of an order from a customer (whether its own customer or another
broker-dealer).\14\ The Exchange proposes a distinction for the
definition of ``customer-driven order'' in Rule 98 as compared to the
Rule 5320 definition of ``facilitated order'' because, as proposed, a
customer-driven order could be entered, not only on a riskless
principal basis, but also on a principal basis so the member
organization could provide price improvement to the customer. In either
case, the member organization entering the customer-driven order would
need to have received a customer order before entering a customer-
driven order at the Exchange.\15\
---------------------------------------------------------------------------
\14\ See also Supplementary Material .03 to Rule 5320--Equities.
\15\ If a customer-driven order, as defined in Rule 98(c)(4), is
not handled on a riskless principal basis, it would not be eligible
for the riskless principal exception to the prohibition against
trading ahead of customer orders as specified in Rule 5320--
Equities.
---------------------------------------------------------------------------
The proposed rule change is designed to reflect how member
organizations handle customer orders, which in many circumstances, are
routed to an exchange on a proprietary basis to facilitate execution of
a customer's order. Therefore, the Exchange believes that the proposed
amendment is consistent with the current rule, which does not require
agency orders entered by the member organization that operates a DMM
unit to be subject to DMM rules.\16\
---------------------------------------------------------------------------
\16\ See supra note 10.
---------------------------------------------------------------------------
The Exchange further proposes to amend Rule 98(c)(4) to specify
that a DMM unit must use unique mnemonics that identify to the Exchange
its customer-driven orders in DMM securities. Such mnemonics may not be
used for trading activity at the Exchange in DMM securities that are
not customer-driven orders, but may be used for trading activities in
securities not assigned to the DMM. The Exchange believes that
requiring a separate mnemonic for customer-driven orders would assist
the Exchange in monitoring DMM unit compliance with the proposed
rule.\17\
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\17\ The Exchange requires a member to use a different mnemonic
for its SLP-Prop trading activity in assigned SLP securities than it
uses for such member's trading in assigned SLP securities that is
not SLP-Prop trading. Using different mnemonics allows the Exchange
to identify SLP-Prop trading activity in a member organization's
assigned SLP securities. A member organization may use the same
mnemonic for its trading activity in securities not assigned to an
SLP as it uses for its SLP-Prop trading in assigned SLP securities.
See Rule 107B(c)(2)--Equities.
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The Exchange further proposes to amend Rule 98(d) to specify which
rules would be applicable to trading by the DMM unit. As proposed, the
rules, fees, or credits applicable to DMM quoting or trading activity
would apply only to a DMM unit's quoting or trading in its DMM
securities for its own account at the Exchange that has been identified
as DMM interest. In addition, consistent with the proposal that
customer-driven orders would not be required to be designated as DMM
interest, the Exchange proposes to add text to Rule 98(d) to state that
customer-driven orders for the account of a DMM unit that have not been
identified as DMM interest would not be subject to DMM rules or be
eligible for any fees or credits applicable to DMM quoting or trading
activity.\18\ In addition, such customer-driven orders could not be
aggregated with interest that has been identified as DMM interest for
purposes of any DMM-related fees or credits or DMM quoting obligations
specified in Rule 104(a). This proposed rule text would provide that
customer-driven orders not designated as DMM interest would not be
subject to DMM rules, which, as described above, include restrictions
on availability of certain order types and entry of specified orders
during the last ten minutes of trading. Because a customer-driven order
that has not been designated as DMM interest would not be subject to
DMM rules, it would also not be eligible for a parity allocation
applicable for DMMs pursuant to Rule 72(c) or be used to assist a DMM
in meeting its quoting or market maintenance obligations, or be
eligible for DMM fees or credits.
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\18\ Customer-driven orders would be eligible for any fees or
credits applicable to equity transactions at the Exchange that are
not DMM or Floor broker trades. See NYSE MKT Equities Price List,
available here: https://www.nyse.com/publicdocs/nyse/markets/nyse-mkt/NYSE_MKT_Equities_Price_List.pdf.
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[[Page 30592]]
The Rule 98(c)(5) obligation to provide the Exchange with real-time
net position information in DMM securities would continue to be
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, regardless of whether they are positions
resulting from trades in away markets, trades as a result of DMM
interest entered at the Exchange, or customer-driven orders routed to
the Exchange that were not identified as DMM interest.\19\ For example,
if a DMM unit is combined with market-making desks that are trading on
away markets and that route customer-driven orders to the Exchange in
DMM securities that are not identified as DMM interest, the member
organization would be required to report the position of the entire DMM
unit in DMM securities, not only the DMM's Exchange-traded positions
resulting from DMM interest. The Exchange also proposes a non-
substantive amendment to Rule 98(c)(5) to delete the term ``for
trading,'' which the Exchange believes is extraneous rule text.
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\19\ Under Regulation SHO, determination of a seller's net
position is based on the seller's position in the security in all of
its accounts, absent aggregation unit treatment under Rule 200(f) of
Regulation SHO. 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 No. 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 Commission adopted a narrow
exception to Regulation SHO's ``locate'' requirement only for market
makers engaged in bona-fide market making in the security at the
time they effect the short sale. See 17 CFR 242.203(b)(2)(iii); see
also Securities Exchange Act Release No. 50103 (July 28, 2004), 69
FR 48008, 48015 (Aug. 6, 2004); Securities Exchange Act Release No.
58775 (Oct. 14, 2008), 73 FR 61690, 61698-9 (Oct. 17, 2008). Broker-
dealers would not be able to rely on the Exchange's or any self-
regulatory organization's designation of market marking for
eligibility for the bona-fide market making exception to the
``locate'' requirement, as such designations are distinct and
independent from Regulation SHO. Further, the Exchange's designation
of proprietary interest or any exclusion from proprietary interest
for purposes of NYSE rules is not relevant for purposes of
Regulation SHO. Eligibility for the bona-fide market making
exception depends on the facts and circumstances and a determination
of bona-fide market making is based on the Commission's factors
outlined in the aforementioned Regulation SHO releases. It should
also be noted that a determination of bona-fide market making is
relevant for the purposes of the close-out obligations under Rule
204 of Regulation SHO. See 17 CFR 242.204(a)(3).
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2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \20\ 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 providing greater specificity in
Rule 98 regarding which proprietary interest would be required to be
entered as DMM interest.
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\20\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendment to define the
term ``customer-driven order'' to be proprietary interest of a DMM that
is for the purposes of facilitating the execution of an order received
from a customer (whether its own customer or the customer of another
broker-dealer) on a riskless principal basis or on a principal basis to
provide price improvement to the customer reflects the current reality
of how broker-dealers facilitate customer orders that are routed to an
exchange. Specifically, after receiving a customer order, such customer
order is routed to an exchange on a proprietary basis, and once an
execution is received from an exchange, the execution is provided to
the customer either on a riskless principal basis or with price
improvement. Facilitating customer orders on a proprietary basis is not
a novel concept and serves as the basis of the definition of the term
``facilitated order'' in Supplementary Material .03 to FINRA Rule 5320.
While the Exchange proposes that customer-driven orders for the
purposes of Rule 98 would not be required to be executed only on a
riskless principal basis, but could also be executed on a principal
basis to provide price improvement to the customer, this difference
does not alter the premise of how member organizations facilitate
customer orders, as already established in Rule 5320.03. Because the
proposed definition is narrowly defined to reflect how customer orders
are facilitated on a proprietary basis when routed to an exchange, the
Exchange believes that the proposed amendment to Rule 98(c)(4) to
define the term ``customer-driven order'' would remove impediments to
and perfect the mechanism of a free and open market.
The Exchange believes that requiring a DMM unit to use unique
mnemonics to identify customer-driven orders in DMM securities would
promote just and equitable principles of trade because requiring such
orders to be entered using unique mnemonics would assist the Exchange
in monitoring DMM unit compliance with the proposed rule.
The Exchange further believes that providing DMM units with a
choice of whether to designate a customer-driven order as DMM interest
would remove impediments to and perfect the mechanism of a free and
open market because certain DMM rules may conflict with a broker-
dealer's obligation to its customers. As discussed in the 2014 Filing,
agency orders entered by a member organization that operates a DMM unit
are not subject to DMM rules.\21\ Yet, if that same customer order were
routed to the Exchange on a proprietary basis, which is the manner by
which broker-dealers may handle customer order flow, it would be
subject to DMM rules. Accordingly, because Rule 98 does not currently
require agency flow to be subject to DMM rules, the Exchange believes
it is consistent with the protection of investors and the public
interest that agency flow that is facilitated by a member organization
on a proprietary basis at the Exchange would similarly not be required
to be subject to DMM rules.
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\21\ See supra note 10.
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The proposed rule change would further be consistent with the
protection of investors and the public interest because it would enable
customer-driven orders to not be subject to DMM rules and eliminate any
conflict with customer instructions or best execution obligations. The
Exchange notes that this proposed rule change would not alter in any
way a member organization's existing obligations under Section 15(g) of
the Act,\22\ Regulation SHO,\23\ Rule 5320, or to maintain policies and
procedures to assure that a member organization does not engage in any
frontrunning of customer order information in violation of Exchange,
FINRA, or federal securities laws.
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\22\ 15 U.S.C. 78o(g).
\23\ 17 CFR 242.201.
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The Exchange further believes that the proposed amendments to Rule
98(d) would remove impediments to and perfect the mechanism of a free
and open market by promoting transparency in Exchange rules regarding
which rules, fees or credits applicable to DMM quoting or trading
activity would be applicable to which interest. More specifically, the
Exchange believes that it would remove impediments to and
[[Page 30593]]
perfect the mechanism of a free and open market to provide specificity
in Exchange rules that customer-driven orders that have not been
designated as DMM interest would not be subject to the DMM rules and
also would not be eligible for DMM fees or credits or to be aggregated
with DMM interest for purposes of any DMM-related fees or credits or
DMM quoting obligations.
Finally, the Exchange believes that the proposed amendment to Rule
98(c)(5) would remove impediments to and perfect the mechanism of a
free and open market by removing extraneous rule text, thus promoting
simplicity in Exchange rules.
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 proposed rule change is
designed to be pro-competitive because it would remove a restriction
unique to DMMs as specified in Rule 98, thus enabling existing
customer-facing market making units to operate as a DMM unit at the
Exchange without needing to change the manner by which they may
facilitate customer orders on a proprietary basis at an exchange. The
proposed rule change would also harmonize the Exchange's rules with
recently approved amendments to NYSE Rule 98.\24\
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\24\ See NYSE Rule 98 Approval Order, supra note 5.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \27\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\28\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange notes that
the merits of the proposed rule change have already been considered by
the Commission in the context of a substantively identical filing by
the NYSE, which the Commission approved.\29\ The Exchange also believes
that waiver is appropriate so that DMM units that are registered in
both Exchange-listed and NYSE-listed securities will again, without
delay, be subject to consistent rules across the two exchanges. The
Commission believes that the proposed rule change is consistent with
the protection of investors and the public interest, because the
proposal is substantively identical to the NYSE proposal that was
recently approved by the Commission, and because waiver of the
operative delay will provide for consistent rules between NYSE and the
Exchange. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposal operative upon filing.\30\
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\27\ 17 CFR 240.19b-4(f)(6).
\28\ 17 CFR 240.19b-4(f)(6)(iii).
\29\ See NYSE Rule 98 Approval Order, supra note 5.
\30\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \31\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\31\ 15 U.S.C. 78s(b)(2)(B).
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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-NYSEMKT-2016-51 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2016-51. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2016-51 and should
be submitted on or before June 7, 2016.
[[Page 30594]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
Robert W. Errett,
Deputy Secretary.
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\32\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-11538 Filed 5-16-16; 8:45 am]
BILLING CODE 8011-01-P
