Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Amend Its Rules To Add New Rule 7.19 (Pre-Trade Risk Controls), 68995-68999 [2019-27082]

Download as PDF Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices jbell on DSKJLSW7X2PROD with NOTICES Rules 17Ad–22(e)(4)(i) and (iii) under the Exchange Act require that a covered clearing agency’s policies and procedures meet the requirements of Rule 17Ad–22(e)(4) by maintaining financial resources at the minimum to enable OCC to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the participant family that would potentially cause the largest aggregate credit exposure for OCC in extreme but plausible market conditions.28 Further, Rule 17Ad–22(e)(4)(vi) under the Exchange Act requires that a covered clearing agency’s policies and procedures meet the requirements of Rule 17Ad–22(e)(4) by testing the sufficiency of a covered clearing agency’s total financial resources available to meet the minimum financial resource requirements under Rules 17Ad–22(e)(4)(i) through (iii).29 As described above and discussed below, the proposed SWWR Add-on is designed to measure and manage OCC’s credit exposures to Clearing Members to the extent those exposures arise out of SWWR related to cleared positions. One component of the SWWR Add-on—the SWWR ETN Charge—would not, however, fully cover OCC’s potential exposure through margin because it would not assume a complete loss of value for ETNs issued by the Clearing Member or its affiliates. To address the potential credit exposure represented by the value of ETNs issued by the Clearing Member or its affiliates going to zero, OCC proposes to introduce the new SWWR Sufficiency Scenarios described above. OCC would use the SWWR Sufficiency Scenarios to test its total financial resources and to call for additional resources as necessary to ensure the resources it holds would be sufficient to enable OCC to cover exposures arising under the relevant stress scenarios. Accordingly, and for the reasons stated above, the Commission believes the changes proposed in the Proposed Rule Change are consistent with Rule 17Ad– 22(e)(4)(i), (iii), and (vi) under the Exchange Act.30 C. Consistency With Rule 17Ad–22(e)(6) Under the Exchange Act Rule 17Ad–22(e)(6)(i) under the Exchange Act requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to 28 17 CFR 240.17Ad–22(e)(4)(i) and 17 CFR 240.17Ad–22(e)(4)(iii). 29 17 CFR 240.17Ad–22(e)(4)(vi). 30 17 CFR 240.17Ad–22(e)(4)(i); 17 CFR 240.17Ad–22(e)(4)(iii); 17 CFR 240.17Ad– 22(e)(4)(vi). VerDate Sep<11>2014 18:15 Dec 16, 2019 Jkt 250001 cover, if the covered clearing agency provides central counterparty services, its credit exposure to participants by establishing a risk-based margin system that, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.31 As noted above, OCC faces SWWR to the extent that the value of a Clearing Member’s positions is positively correlated with the creditworthiness of the Clearing Member. OCC proposes to cover its exposure to such SWWR posted by its Clearing Members through the introduction of the SWWR Add-on. The SWWR Add-on consists of three components. Two of those components—the SWWR Equity Charge and SWWR ETN Charge—are designed to produce margin levels commensurate with the particular attributes of certain products that OCC clears in terms of the likely recovery available in the event of a default by the issuing Clearing Member. Further, the SWWR Residual would ensure that the introduction of the SWWR Add-on could not inadvertently weaken OCC’s current margin methodology due to the potential existence of ‘‘right-way risk’’ in a Clearing Member’s accounts.32 Accordingly, and for the reasons stated above, the Commission believes the adoption of a margin add-on charge designed to cover exposures arising out of SWWR is consistent with Rule 17Ad– 22(e)(6)(i) under the Exchange Act.33 IV. Conclusion On the basis of the foregoing, the Commission finds that the Proposed Rule Change is consistent with the requirements of the Exchange Act, and in particular, the requirements of Section 17A of the Exchange Act 34 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,35 that the Proposed Rule Change (SR– OCC–2019–010) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–27087 Filed 12–16–19; 8:45 am] BILLING CODE 8011–01–P 31 17 CFR 240.17Ad–22(e)(6)(i). supra at note 13. 33 17 CFR 240.17Ad–22(e)(6)(i). 34 In approving this Proposed Rule Change, the Commission has considered the proposed rules’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 35 15 U.S.C. 78s(b)(2). 36 17 CFR 200.30–3(a)(12). 32 See PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 68995 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87715; File No. SR–NYSE– 2019–68] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Amend Its Rules To Add New Rule 7.19 (Pre-Trade Risk Controls) December 11, 2019. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on November 27, 2019, New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘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 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 rules to add new Rule 7.19 (Pre-Trade Risk Controls). The proposed rule change is available on the Exchange’s website 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 Statutory Basis for, the Proposed Rule Change 1. Purpose In order to assist member organizations’ efforts to manage their risk, the Exchange proposes to amend 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 E:\FR\FM\17DEN1.SGM 17DEN1 68996 Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices jbell on DSKJLSW7X2PROD with NOTICES its rules to add new Rule 7.19 (PreTrade Risk Controls) to establish a set of pre-trade risk controls by which Entering Firms and their designated Clearing Firms (as defined below) may set credit limits and other pre-trade risk controls for an Entering Firm’s trading on the Exchange and authorize the Exchange to take action if those credit limits or other pre-trade risk controls are exceeded. For purposes of this proposed rule change, the Exchange proposes to define the term ‘‘Entering Firm’’ to mean a member organization that either has a correspondent relationship with a Clearing Firm whereby it executes trades and the clearing function is the responsibility of the Clearing Firm or clears for its own account 4 and to define the term ‘‘Clearing Firm’’ to mean a member organization that acts as principal for clearing and settling a trade, whether for its own account or for an Entering Firm.5 1. Overview In order to help firms manage their risk, the Exchange proposes to offer optional pre-trade risk controls that would authorize the Exchange to take automated actions if a designated credit limit or other pre-trade risk control for a firm is breached. Because Clearing Firms bear the risk on behalf of their correspondent Entering Firms, the Exchange proposes to make the proposed pre-trade risk controls available not only to Entering Firms, but also to their Clearing Firms, if so authorized by the Entering Firm. These pre-trade risk controls would provide Entering Firms and their Clearing Firms with enhanced abilities to manage their risk with respect to orders on the Exchange. As proposed, these optional controls would allow Entering Firms and their Clearing Firms to each define different pre-set risk thresholds and to choose the automated action the Exchange would take if those thresholds are breached, which would range from notifying the Entering Firm and Clearing Firm that a limit has been breached, blocking new orders, or canceling orders until the Entering Firm has been reinstated to trade on the Exchange. Although use of the proposed Exchange-provided pre-trade risk controls are optional, all orders on the Exchange will pass through risk checks. As such, an Entering Firm that does not choose to set limits or permit its 4 See proposed Rule 7.19(a)(1). proposed Rule 7.19(a)(2). As required by Rule 7.14, a member organization is required to give up the name of the clearing firm through which each transaction on the Exchange will be cleared. 5 See VerDate Sep<11>2014 18:15 Dec 16, 2019 Jkt 250001 Clearing Firm to set limits on its behalf will not achieve any latency advantage with respect to its trading activity on the Exchange. In addition, the Exchange expects that any latency added by the pre-trade risk controls will be de minimis. The proposed pre-trade risk controls described are meant to supplement, and not replace, the member organizations’ own internal systems, monitoring and procedures related to risk management. The Exchange does not guarantee that these controls will be sufficiently comprehensive to meet all of a member organization’s needs, the controls are not designed to be the sole means of risk management, and using these controls will not necessarily meet a member organization’s obligations required by Exchange or federal rules (including, without limitation, the Rule 15c3–5 under the Act 6 (‘‘Rule 15c3–5’’)). Use of the Exchange’s pre-trade risk controls will not automatically constitute compliance with Exchange or federal rules and responsibility for compliance with all Exchange and SEC rules remains with the member organization.7 2. Proposed Rule Change Proposed Rule 7.19(a) would set forth the definitions that would be used for purposes of the Rule. In addition to the defined terms of ‘‘Entering Firm’’ and ‘‘Clearing Firm,’’ as described above, the Exchange proposes the following definitions: • The term ‘‘Single Order Maximum Notional Value Risk Limit’’ would mean a pre-established maximum dollar amount for a single order before it can be traded. • The term ‘‘Single Order Maximum Quantity Risk Limit’’ would mean a preestablished maximum number of shares that may be included in a single order before it can be traded. • The term ‘‘Gross Credit Risk Limit’’ would mean a pre-established maximum daily dollar amount for purchases and sales across all symbols, where both buy and sell orders are counted as positive values. For purposes of calculating the Gross Credit Risk Limit, unexecuted orders in the Exchange Book,8 orders routed on 6 See 17 CFR 240.15c3–5. Exchange proposes Commentary .01 to Rule 7.19 to provide that ‘‘[t]he pre-trade risk controls described in this Rule are meant to supplement, and not replace, the member organization’s own internal systems, monitoring and procedures related to risk management and are not designed for compliance with Rule 15c3–5 under the Exchange Act. Responsibility for compliance with all Exchange and SEC rules remains with the member organization.’’ 8 The term ‘‘Exchange Book’’ is defined in Rule 1.1(k) to refer to the Exchange’s electronic file of 7 The PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 arrival pursuant to Rule 7.37(a)(1), and executed orders are included. The Exchange proposes to separately calculate Gross Credit Risk Limits for: (i) All unexecuted and executed orders; (ii) unexecuted orders only; and (iii) executed orders only. Proposed Rule 7.19(b) would set forth the Pre-Trade Risk Controls that would be available to Entering Firms and Clearing Firms. Under proposed Rule 7.19(b)(1), an Entering Firm may select one or more of the following optional pre-trade risk controls with respect to its trading activity on the Exchange: (i) One or more Gross Credit Risk Limits; (ii) Single Order Maximum Notional Value Risk Limits; and (iii) Single Order Maximum Quantity Risk Limits, which would collectively be referred to as the ‘‘Pre-Trade Risk Controls.’’ In addition, under proposed Rule 7.19(b)(2)(A), an Entering Firm that does not self-clear may designate its Clearing Firm to (i) view any Pre-Trade Risk Controls set by the Entering Firm, or (ii) set one or more Pre-Trade Risk Controls on the Entering Firm’s behalf, or both. Proposed Rule 7.19(b)(2)(B) provides that an Entering Firm would be able to view any Pre-Trade Risk Controls that its Clearing Firm sets with respect to the Entering Firm’s trading activity on the Exchange. Because both an Entering Firm and Clearing Firm would be able to access information about Pre-Trade Risk Controls, this mechanism would foster transparency between an Entering Firm and its Clearing Firm regarding which Pre-Trade Risk Control limits may have been set. For example, if an Entering Firm designates its Clearing Firm to view the Pre-Trade Risk Controls set by that Entering Firm, its Clearing Firm may determine that it does not need to separately set PreTrade Risk Controls on behalf of such Entering Firm. Because the Entering Firm is the member organization that is entering orders on the Exchange, the Exchange will not take action based on a Clearing Firm’s instructions about the Entering Firm’s trading activities on the Exchange without first receiving consent from the Entering Firm. Accordingly, proposed Rule 7.19(b)(2)(C) would provide that if an Entering Firm designates a Clearing Firm to set Pre-Trade Risk Controls for the Entering Firm, the Entering Firm would be consenting to the Exchange taking certain prescribed actions (discussed further below) with respect to the Entering Firm’s trading activity as provided for in proposed Rules 7.19(c) orders, which contains all orders entered on the Exchange. E:\FR\FM\17DEN1.SGM 17DEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices and (d), described below. The Exchange would consider an Entering Firm to provide such consent by authorizing a Clearing Firm to enter Pre-Trade Risk Controls via the risk management tool that will be provided to Entering Firms in connection with this proposed rule change. Once such authorization is provided by the Entering Firm, the Clearing Firm would have access to the Pre-Trade Risk Controls on behalf of that Entering Firm. The proposed Rule makes clear that by designating a Clearing Firm to set limits on its trading activities, the Entering Firm will have authorized the Exchange to act pursuant to the Clearing Firm’s instructions if the limits set by the Clearing Firm are breached. Proposed Rule 7.19(b)(3) would set forth how the Pre-Trade Risk Controls could be set or adjusted. Proposed Rule 7.19(b)(3)(A) would provide that PreTrade Risk Controls may be set before the beginning of a trading day and may be adjusted during the trading day. Proposed Rule 7.19(b)(3)(B) would provide that Entering Firms and Clearing Firms may set Pre-Trade Risk Controls at the MPID level or at a subID of an MPID, as designated by an Entering Firm. The Exchange believes that supporting Pre-Trade Risk Controls at both an MPID and sub-ID level would provide both Entering Firms, and if designated, their Clearing Firms, more granular control over how such risk controls are determined and monitored. Proposed Rule 7.19(b)(4) would provide that with respect to Gross Credit Risk Limits, both an Entering Firm and its designated Clearing Firm may enable alerts to signal when an Entering Firm is approaching its designated credit limit(s). The Exchange believes that by providing such alerts, the Entering Firm, and if designated, its Clearing Firm, would have advance notice that the Entering Firm is approaching a designated limit and could take steps to mitigate the potential that an automated breach action would be triggered. Proposed Rule 7.19(c) would set forth the actions the Exchange would be authorized to take when a Pre-Trade Risk Control set by an Entering Firm or a Clearing Firm is breached, which would be referred to as ‘‘Automated Breach Actions.’’ These proposed actions would be automated; if a PreTrade Risk Control is breached, the Exchange would automatically take the designated action and would not need further direction from either the Entering Firm or Clearing Firm to take such action. At the outset, proposed Rule 7.19(c)(1) would provide that if both an Entering Firm and its Clearing Firm set VerDate Sep<11>2014 18:15 Dec 16, 2019 Jkt 250001 the same type of Pre-Trade Risk Control for the Entering Firm but have set different limits, the Exchange would enforce the more restrictive limit. For example, if an Entering Firm sets a Single Order Maximum Notional Value Risk Limit of $20 million and its Clearing Firm sets the same risk limit at $15 million, the Exchange will take action when the more restrictive limit is breached—i.e., $15 million. Proposed Rule 7.19(c)(2) would set forth the Automated Breach Action the Exchange would take if an order would breach the designated limit of either a Single Order Maximum Notional Value Risk Limit or Single Order Maximum Quantity Risk Limit. As proposed, the Exchange would reject the incoming order that would have breached the applicable limit. Proposed Rule 7.19(c)(3)(A) would set forth the Automated Breach Actions the Exchange would take if a designated Gross Credit Risk Limit is breached. The Exchange proposes to provide options of which Automated Breach Action the Exchange would be authorized to take if a Gross Credit Risk Limit is breached. Such Automated Breach Actions would be taken at the MPID or sub-ID level that is associated with the designated Gross Credit Risk Limit. As proposed, when setting Gross Credit Risk Limits, the Entering Firm or Clearing Firm setting the limit would be required to indicate one of the following actions that the Exchange would take if such limit is breached: • ‘‘Notification Only.’’ As set forth in proposed Rule 7.19(c)(3)(A)(i), if this option is selected, the Exchange would notify the Entering Firm or Clearing Firm that a limit has been breached and continue to accept new orders and order instructions and would not cancel any unexecuted orders in the Exchange Book. • ‘‘Block Only.’’ As set forth in proposed Rule 7.19(c)(3)(A)(ii), if this option is selected, the Exchange would reject new orders and order instructions but would not cancel any unexecuted orders in the Exchange Book. The Exchange would continue to accept instructions from the Entering Firm to cancel one or more orders in full (including Auction-Only Orders) or any instructions specified in proposed Rule 7.19(e) (described below), but would not take any automated action to cancel orders. • ‘‘Cancel and Block.’’ As set forth in proposed Rule 7.19(c)(3)(A)(iii), if this option is selected, in addition to the Block actions described above, the Exchange would also cancel all unexecuted orders in the Exchange Book other than Auction-Only Orders. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 68997 If an Entering Firm and its Clearing Firm each set different limits for a Gross Credit Risk Limit for the Entering Firm’s activities on the Exchange, proposed Rule 7.19(c)(3)(B) would provide that the Exchange would enforce the action that was chosen by the party that set the limit that was breached. For example, if a Clearing Firm sets a lower limit and designates the ‘‘Cancel and Block’’ Automated Breach Action, if that limit is breached, the Exchange will implement that ‘‘Cancel and Block’’ action even if the Entering Firm designated a different Automated Breach Action. Proposed Rule 7.19(c)(3)(C) would provide that if both the Entering Firm and Clearing Firm set the same Gross Credit Risk Limit and that limit is breached, the Exchange would enforce the most restrictive Automated Breach Action. As further proposed, for purposes of this Rule, the ‘‘Cancel and Block’’ action would be more restrictive than ‘‘Block Only,’’ which would be more restrictive than ‘‘Notification Only.’’ For example, if the Entering Firm selects the ‘‘Block Only’’ action for a Gross Credit Risk Limit and its Clearing Firm selects the ‘‘Cancel and Block’’ action for the same Gross Credit Risk Limit, if the limit is breached, the Exchange would take the ‘‘Cancel and Block’’ action for the Entering Firm’s orders. Proposed Rule 7.19(d) concerns how an Entering Firm’s ability to enter orders and order instructions would be reinstated after a ‘‘Block Only’’ or ‘‘Cancel and Block’’ Automated Breach Action has been triggered. In such case, proposed Rule 7.19(d) provides that the Exchange would not reinstate the Entering Firm’s ability to enter orders and order instructions on the Exchange (other than instructions to cancel one or more orders (including Auction-Only Orders) in full) until it has received notification that the Entering Firm can be reinstated. Proposed Rule 7.19(d)(1) provides that if the Gross Credit Risk Limit that was breached was set by the Entering Firm, the Entering Firm must seek reinstatement on the Exchange. Proposed Rule 7.19(d)(2) provides that if the Gross Credit Risk Limit that was breached was set by a Clearing Firm, the Entering Firm must seek reinstatement on the Exchange, unless the Clearing Firm designates that it must approve the Entering Firm’s reinstatement, in which case both the Entering Firm and Clearing Firm must seek reinstatement. The Exchange proposes to include this functionality because the Clearing Firm bears the risk of any exposure of its correspondent Entering Firms. E:\FR\FM\17DEN1.SGM 17DEN1 jbell on DSKJLSW7X2PROD with NOTICES 68998 Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices Finally, proposed Rule 7.19(e) would set forth member organization-directed actions, i.e., ‘‘kill switch’’ functionality. As proposed, member organizations would be provided with the ability to direct the Exchange to take bulk action with respect to orders, which differs from the Automated Breach Actions described above. The Exchange previously filed a proposed rule change describing risk management tools designed to allow member organizations to monitor and address exposure to risk.9 Those tools function on a posttrade basis: Member organizations that choose to use this tool can monitor exposure as their trades execute, set limits, and receive alerts if such limits are breached. However, if a limit is breached, the member organization needs to direct the Exchange to take an action, which could include either a bulk block or bulk cancel message, or both. The Exchange proposes to specify certain member organization-directed actions in proposed Rule 7.19(e). As described above, the risk management tool that would be provided to member organizations in connection with this proposed rule change would include information about an Entering Firm’s Gross Credit Risk Limits at either an MPID or sub-ID level (at the direction of the Entering Firm). As further described above, these limits would be updated with information about an Entering Firm’s unexecuted orders in the Exchange Book, orders routed on arrival, and executed orders. Because this tool would provide information to member organizations to determine whether to direct the Exchange to take action with respect to their orders, the Exchange proposes that proposed Rule 7.19 would supersede and replace the description of risk controls as set forth in the 2013 Risk Control Filing. More specifically, proposed Rule 7.19(e) would specify that an Entering Firm, or if authorized pursuant to proposed Rule 7.19(b)(2)(A), its Clearing Firm, could direct the Exchange to take one or more of the following actions with respect to orders at either an MPID, or if designated, sub-ID Level: (1) Cancel all Auction-Only Orders; (2) Cancel all unexecuted orders in the Exchange Book other than Auction-Only Orders; or (3) Reject entry of any new orders and order instructions, provided that the Exchange would continue to accept instructions from Entering Firms to 9 See Securities Exchange Act Release No. 71164 (December 20, 2013), 78 FR 79044 (December 27, 2013) (SR–NYSE–2013–80) (Notice of filing and immediate effectiveness of proposed rule change) (the ‘‘2013 Risk Control Filing’’). VerDate Sep<11>2014 18:15 Dec 16, 2019 Jkt 250001 cancel one or more orders (including Auction-Only Orders) in full. A member organization can currently direct the Exchange to take these actions with respect to its orders and with this proposed rule change, Clearing Firms designated by the Entering Firm could also take such action. A member organization that wants more control over when and which actions are taken with respect to its orders may choose to use these controls instead of the ‘‘Block’’ or ‘‘Cancel and Block’’ Automated Breach Actions described above. For example, for a member organization that selects the ‘‘Notification Only’’ Automated Breach Action, if it receives notification of a credit breach, it could choose to direct the Exchange to take an action described in proposed Rule 7.19(e). 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,10 in general, and furthers the objectives of Section 6(b)(5) of the Act,11 in particular, because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to 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, and because it is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Specifically, the Exchange believes that the proposed rule will remove impediments to and perfect the mechanism of a free and open market and a national market system because the proposed optional Pre-Trade Risk Controls would provide both Entering Firms, and if designated, Clearing Firms, with the ability to manage risk, while also providing an alert system that would help to ensure that such firms are aware of developing issues. In addition, the Pre-Trade Risk Controls would provide Clearing Firms, who have assumed certain risks of the Entering Firms, greater control and flexibility over setting risk tolerance and exposure on behalf of their correspondent Entering Firms. As such, the Exchange believes that the Pre-Trade Risk Controls would provide a means to address potentially market-impacting 10 15 11 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00124 Fmt 4703 Sfmt 4703 events, helping to ensure the proper functioning of the market. In addition, the Exchange believes that the proposed rule change is designed to protect investors and the public interest because the Pre-Trade Risk Controls are a form of impact mitigation that will aid Entering Firms and Clearing Firms in minimizing their risk exposure and reduce the potential for disruptive, market-wide events. The Exchange understands that member organizations implement a number of different risk-based controls, including those required by Rule 15c3–5. The proposed controls will serve as an additional tool for Entering Firms and Clearing Firms to assist them in identifying any risk exposure. The Exchange believes the Pre-Trade Risk Controls will assist Entering Firms and Clearing Firms in managing their financial exposure which, in turn, could enhance the integrity of trading on the securities markets and help to assure the stability of the financial system. Further, the Exchange believes that the proposed rule will foster cooperation and coordination with persons facilitating transactions in securities because the Exchange will provide alerts to Entering Firms and their Clearing Firms when the Entering Firm’s trading reaches certain thresholds. As such, the Exchange will help Clearing Firms monitor the risk levels of their correspondent Entering Firms and provide tools for Clearing Firms, if designated, to take action. Finally, the Exchange believes that the proposed rule change does not unfairly discriminate among the Exchange’s member organizations because use of the Pre-Trade Risk Controls is optional and is not a prerequisite for participation on the Exchange. In addition, because all orders on the Exchange would pass through the risk checks, there would be no difference in the latency experienced by member organizations who have opted to use the Pre-Trade Risk Controls versus those who have not opted to use them. 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. In fact, the Exchange believes that the proposal will have a positive effect on competition because, by providing Entering Firms and their Clearing Firms additional means to monitor and control risk, the proposed rule will increase confidence in the proper functioning of the markets. E:\FR\FM\17DEN1.SGM 17DEN1 Federal Register / Vol. 84, No. 242 / Tuesday, December 17, 2019 / Notices The Exchange believes the proposed Pre-Trade Risk Controls will assist Entering Firms and Clearing Firms in managing their financial exposure which, in turn, could enhance the integrity of trading on the securities markets and help to assure the stability of the financial system. As a result, the level of competition should increase as public confidence in the markets is solidified. 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. jbell on DSKJLSW7X2PROD 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 up to 90 days (i) as the Commission may designate 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. 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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2019–68 and should be submitted on or before January 7, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 J. Matthew DeLesDernier, Assistant Secretary. 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: [FR Doc. 2019–27082 Filed 12–16–19; 8:45 am] 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–2019–68 on the subject line. Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Clearbridge Focus Value ETF Under Currently Proposed Rule 14.11(k) 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–2019–68. 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 website (https://www.sec.gov/ Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 27, 2019, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) 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 Exchange. The VerDate Sep<11>2014 18:15 Dec 16, 2019 Jkt 250001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87719; File No. SR– CboeBZX–2019–102] December 11, 2019. 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 68999 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 a rule change to list and trade shares of the Clearbridge Focus Value ETF under currently proposed Rule 14.11(k). The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, 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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange has submitted a proposal and four subsequent amendments to add new Rule 14.11(k) for the purpose of permitting the listing and trading of Managed Portfolio Shares, which are securities issued by an actively managed open-end management investment company.3 3 As proposed, the term ‘‘Managed Portfolio Share’’ means a security that (a) represents an interest in an investment company registered under the Investment Company Act of 1940 (‘‘Investment Company’’) organized as an open-end management investment company, that invests in a portfolio of securities selected by the Investment Company’s investment adviser consistent with the Investment Company’s investment objectives and policies; (b) is issued in a Creation Unit, or multiples thereof, in return for a designated portfolio of instruments (and/or an amount of cash) with a value equal to the next determined net asset value and delivered to the Authorized Participant (as defined in the Investment Company’s Form N–1A filed with the SEC) through a Confidential Account; (c) when aggregated into a Redemption Unit, or multiples thereof, may be redeemed for a designated portfolio of instruments (and/or an amount of cash) with a value equal to the next determined net asset value delivered to the Confidential Account for the benefit of the Authorized Participant; and (d) the Continued E:\FR\FM\17DEN1.SGM 17DEN1

Agencies

[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Notices]
[Pages 68995-68999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27082]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87715; File No. SR-NYSE-2019-68]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Amend Its Rules To Add New 
Rule 7.19 (Pre-Trade Risk Controls)

December 11, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on November 27, 2019, New York Stock Exchange LLC (``NYSE'' or 
``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 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 its rules to add new Rule 7.19 (Pre-
Trade Risk Controls). The proposed rule change is available on the 
Exchange's website 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In order to assist member organizations' efforts to manage their 
risk, the Exchange proposes to amend

[[Page 68996]]

its rules to add new Rule 7.19 (Pre-Trade Risk Controls) to establish a 
set of pre-trade risk controls by which Entering Firms and their 
designated Clearing Firms (as defined below) may set credit limits and 
other pre-trade risk controls for an Entering Firm's trading on the 
Exchange and authorize the Exchange to take action if those credit 
limits or other pre-trade risk controls are exceeded.
    For purposes of this proposed rule change, the Exchange proposes to 
define the term ``Entering Firm'' to mean a member organization that 
either has a correspondent relationship with a Clearing Firm whereby it 
executes trades and the clearing function is the responsibility of the 
Clearing Firm or clears for its own account \4\ and to define the term 
``Clearing Firm'' to mean a member organization that acts as principal 
for clearing and settling a trade, whether for its own account or for 
an Entering Firm.\5\
---------------------------------------------------------------------------

    \4\ See proposed Rule 7.19(a)(1).
    \5\ See proposed Rule 7.19(a)(2). As required by Rule 7.14, a 
member organization is required to give up the name of the clearing 
firm through which each transaction on the Exchange will be cleared.
---------------------------------------------------------------------------

1. Overview
    In order to help firms manage their risk, the Exchange proposes to 
offer optional pre-trade risk controls that would authorize the 
Exchange to take automated actions if a designated credit limit or 
other pre-trade risk control for a firm is breached. Because Clearing 
Firms bear the risk on behalf of their correspondent Entering Firms, 
the Exchange proposes to make the proposed pre-trade risk controls 
available not only to Entering Firms, but also to their Clearing Firms, 
if so authorized by the Entering Firm. These pre-trade risk controls 
would provide Entering Firms and their Clearing Firms with enhanced 
abilities to manage their risk with respect to orders on the Exchange.
    As proposed, these optional controls would allow Entering Firms and 
their Clearing Firms to each define different pre-set risk thresholds 
and to choose the automated action the Exchange would take if those 
thresholds are breached, which would range from notifying the Entering 
Firm and Clearing Firm that a limit has been breached, blocking new 
orders, or canceling orders until the Entering Firm has been reinstated 
to trade on the Exchange.
    Although use of the proposed Exchange-provided pre-trade risk 
controls are optional, all orders on the Exchange will pass through 
risk checks. As such, an Entering Firm that does not choose to set 
limits or permit its Clearing Firm to set limits on its behalf will not 
achieve any latency advantage with respect to its trading activity on 
the Exchange. In addition, the Exchange expects that any latency added 
by the pre-trade risk controls will be de minimis.
    The proposed pre-trade risk controls described are meant to 
supplement, and not replace, the member organizations' own internal 
systems, monitoring and procedures related to risk management. The 
Exchange does not guarantee that these controls will be sufficiently 
comprehensive to meet all of a member organization's needs, the 
controls are not designed to be the sole means of risk management, and 
using these controls will not necessarily meet a member organization's 
obligations required by Exchange or federal rules (including, without 
limitation, the Rule 15c3-5 under the Act \6\ (``Rule 15c3-5'')). Use 
of the Exchange's pre-trade risk controls will not automatically 
constitute compliance with Exchange or federal rules and responsibility 
for compliance with all Exchange and SEC rules remains with the member 
organization.\7\
---------------------------------------------------------------------------

    \6\ See 17 CFR 240.15c3-5.
    \7\ The Exchange proposes Commentary .01 to Rule 7.19 to provide 
that ``[t]he pre-trade risk controls described in this Rule are 
meant to supplement, and not replace, the member organization's own 
internal systems, monitoring and procedures related to risk 
management and are not designed for compliance with Rule 15c3-5 
under the Exchange Act. Responsibility for compliance with all 
Exchange and SEC rules remains with the member organization.''
---------------------------------------------------------------------------

2. Proposed Rule Change
    Proposed Rule 7.19(a) would set forth the definitions that would be 
used for purposes of the Rule. In addition to the defined terms of 
``Entering Firm'' and ``Clearing Firm,'' as described above, the 
Exchange proposes the following definitions:
     The term ``Single Order Maximum Notional Value Risk 
Limit'' would mean a pre-established maximum dollar amount for a single 
order before it can be traded.
     The term ``Single Order Maximum Quantity Risk Limit'' 
would mean a pre-established maximum number of shares that may be 
included in a single order before it can be traded.
     The term ``Gross Credit Risk Limit'' would mean a pre-
established maximum daily dollar amount for purchases and sales across 
all symbols, where both buy and sell orders are counted as positive 
values. For purposes of calculating the Gross Credit Risk Limit, 
unexecuted orders in the Exchange Book,\8\ orders routed on arrival 
pursuant to Rule 7.37(a)(1), and executed orders are included.
---------------------------------------------------------------------------

    \8\ The term ``Exchange Book'' is defined in Rule 1.1(k) to 
refer to the Exchange's electronic file of orders, which contains 
all orders entered on the Exchange.
---------------------------------------------------------------------------

    The Exchange proposes to separately calculate Gross Credit Risk 
Limits for: (i) All unexecuted and executed orders; (ii) unexecuted 
orders only; and (iii) executed orders only.
    Proposed Rule 7.19(b) would set forth the Pre-Trade Risk Controls 
that would be available to Entering Firms and Clearing Firms. Under 
proposed Rule 7.19(b)(1), an Entering Firm may select one or more of 
the following optional pre-trade risk controls with respect to its 
trading activity on the Exchange: (i) One or more Gross Credit Risk 
Limits; (ii) Single Order Maximum Notional Value Risk Limits; and (iii) 
Single Order Maximum Quantity Risk Limits, which would collectively be 
referred to as the ``Pre-Trade Risk Controls.''
    In addition, under proposed Rule 7.19(b)(2)(A), an Entering Firm 
that does not self-clear may designate its Clearing Firm to (i) view 
any Pre-Trade Risk Controls set by the Entering Firm, or (ii) set one 
or more Pre-Trade Risk Controls on the Entering Firm's behalf, or both. 
Proposed Rule 7.19(b)(2)(B) provides that an Entering Firm would be 
able to view any Pre-Trade Risk Controls that its Clearing Firm sets 
with respect to the Entering Firm's trading activity on the Exchange. 
Because both an Entering Firm and Clearing Firm would be able to access 
information about Pre-Trade Risk Controls, this mechanism would foster 
transparency between an Entering Firm and its Clearing Firm regarding 
which Pre-Trade Risk Control limits may have been set. For example, if 
an Entering Firm designates its Clearing Firm to view the Pre-Trade 
Risk Controls set by that Entering Firm, its Clearing Firm may 
determine that it does not need to separately set Pre-Trade Risk 
Controls on behalf of such Entering Firm.
    Because the Entering Firm is the member organization that is 
entering orders on the Exchange, the Exchange will not take action 
based on a Clearing Firm's instructions about the Entering Firm's 
trading activities on the Exchange without first receiving consent from 
the Entering Firm. Accordingly, proposed Rule 7.19(b)(2)(C) would 
provide that if an Entering Firm designates a Clearing Firm to set Pre-
Trade Risk Controls for the Entering Firm, the Entering Firm would be 
consenting to the Exchange taking certain prescribed actions (discussed 
further below) with respect to the Entering Firm's trading activity as 
provided for in proposed Rules 7.19(c)

[[Page 68997]]

and (d), described below. The Exchange would consider an Entering Firm 
to provide such consent by authorizing a Clearing Firm to enter Pre-
Trade Risk Controls via the risk management tool that will be provided 
to Entering Firms in connection with this proposed rule change. Once 
such authorization is provided by the Entering Firm, the Clearing Firm 
would have access to the Pre-Trade Risk Controls on behalf of that 
Entering Firm. The proposed Rule makes clear that by designating a 
Clearing Firm to set limits on its trading activities, the Entering 
Firm will have authorized the Exchange to act pursuant to the Clearing 
Firm's instructions if the limits set by the Clearing Firm are 
breached.
    Proposed Rule 7.19(b)(3) would set forth how the Pre-Trade Risk 
Controls could be set or adjusted. Proposed Rule 7.19(b)(3)(A) would 
provide that Pre-Trade Risk Controls may be set before the beginning of 
a trading day and may be adjusted during the trading day. Proposed Rule 
7.19(b)(3)(B) would provide that Entering Firms and Clearing Firms may 
set Pre-Trade Risk Controls at the MPID level or at a sub-ID of an 
MPID, as designated by an Entering Firm. The Exchange believes that 
supporting Pre-Trade Risk Controls at both an MPID and sub-ID level 
would provide both Entering Firms, and if designated, their Clearing 
Firms, more granular control over how such risk controls are determined 
and monitored.
    Proposed Rule 7.19(b)(4) would provide that with respect to Gross 
Credit Risk Limits, both an Entering Firm and its designated Clearing 
Firm may enable alerts to signal when an Entering Firm is approaching 
its designated credit limit(s). The Exchange believes that by providing 
such alerts, the Entering Firm, and if designated, its Clearing Firm, 
would have advance notice that the Entering Firm is approaching a 
designated limit and could take steps to mitigate the potential that an 
automated breach action would be triggered.
    Proposed Rule 7.19(c) would set forth the actions the Exchange 
would be authorized to take when a Pre-Trade Risk Control set by an 
Entering Firm or a Clearing Firm is breached, which would be referred 
to as ``Automated Breach Actions.'' These proposed actions would be 
automated; if a Pre-Trade Risk Control is breached, the Exchange would 
automatically take the designated action and would not need further 
direction from either the Entering Firm or Clearing Firm to take such 
action.
    At the outset, proposed Rule 7.19(c)(1) would provide that if both 
an Entering Firm and its Clearing Firm set the same type of Pre-Trade 
Risk Control for the Entering Firm but have set different limits, the 
Exchange would enforce the more restrictive limit. For example, if an 
Entering Firm sets a Single Order Maximum Notional Value Risk Limit of 
$20 million and its Clearing Firm sets the same risk limit at $15 
million, the Exchange will take action when the more restrictive limit 
is breached--i.e., $15 million.
    Proposed Rule 7.19(c)(2) would set forth the Automated Breach 
Action the Exchange would take if an order would breach the designated 
limit of either a Single Order Maximum Notional Value Risk Limit or 
Single Order Maximum Quantity Risk Limit. As proposed, the Exchange 
would reject the incoming order that would have breached the applicable 
limit.
    Proposed Rule 7.19(c)(3)(A) would set forth the Automated Breach 
Actions the Exchange would take if a designated Gross Credit Risk Limit 
is breached. The Exchange proposes to provide options of which 
Automated Breach Action the Exchange would be authorized to take if a 
Gross Credit Risk Limit is breached. Such Automated Breach Actions 
would be taken at the MPID or sub-ID level that is associated with the 
designated Gross Credit Risk Limit. As proposed, when setting Gross 
Credit Risk Limits, the Entering Firm or Clearing Firm setting the 
limit would be required to indicate one of the following actions that 
the Exchange would take if such limit is breached:
     ``Notification Only.'' As set forth in proposed Rule 
7.19(c)(3)(A)(i), if this option is selected, the Exchange would notify 
the Entering Firm or Clearing Firm that a limit has been breached and 
continue to accept new orders and order instructions and would not 
cancel any unexecuted orders in the Exchange Book.
     ``Block Only.'' As set forth in proposed Rule 
7.19(c)(3)(A)(ii), if this option is selected, the Exchange would 
reject new orders and order instructions but would not cancel any 
unexecuted orders in the Exchange Book. The Exchange would continue to 
accept instructions from the Entering Firm to cancel one or more orders 
in full (including Auction-Only Orders) or any instructions specified 
in proposed Rule 7.19(e) (described below), but would not take any 
automated action to cancel orders.
     ``Cancel and Block.'' As set forth in proposed Rule 
7.19(c)(3)(A)(iii), if this option is selected, in addition to the 
Block actions described above, the Exchange would also cancel all 
unexecuted orders in the Exchange Book other than Auction-Only Orders.
    If an Entering Firm and its Clearing Firm each set different limits 
for a Gross Credit Risk Limit for the Entering Firm's activities on the 
Exchange, proposed Rule 7.19(c)(3)(B) would provide that the Exchange 
would enforce the action that was chosen by the party that set the 
limit that was breached. For example, if a Clearing Firm sets a lower 
limit and designates the ``Cancel and Block'' Automated Breach Action, 
if that limit is breached, the Exchange will implement that ``Cancel 
and Block'' action even if the Entering Firm designated a different 
Automated Breach Action.
    Proposed Rule 7.19(c)(3)(C) would provide that if both the Entering 
Firm and Clearing Firm set the same Gross Credit Risk Limit and that 
limit is breached, the Exchange would enforce the most restrictive 
Automated Breach Action. As further proposed, for purposes of this 
Rule, the ``Cancel and Block'' action would be more restrictive than 
``Block Only,'' which would be more restrictive than ``Notification 
Only.'' For example, if the Entering Firm selects the ``Block Only'' 
action for a Gross Credit Risk Limit and its Clearing Firm selects the 
``Cancel and Block'' action for the same Gross Credit Risk Limit, if 
the limit is breached, the Exchange would take the ``Cancel and Block'' 
action for the Entering Firm's orders.
    Proposed Rule 7.19(d) concerns how an Entering Firm's ability to 
enter orders and order instructions would be reinstated after a ``Block 
Only'' or ``Cancel and Block'' Automated Breach Action has been 
triggered. In such case, proposed Rule 7.19(d) provides that the 
Exchange would not reinstate the Entering Firm's ability to enter 
orders and order instructions on the Exchange (other than instructions 
to cancel one or more orders (including Auction-Only Orders) in full) 
until it has received notification that the Entering Firm can be 
reinstated. Proposed Rule 7.19(d)(1) provides that if the Gross Credit 
Risk Limit that was breached was set by the Entering Firm, the Entering 
Firm must seek reinstatement on the Exchange. Proposed Rule 7.19(d)(2) 
provides that if the Gross Credit Risk Limit that was breached was set 
by a Clearing Firm, the Entering Firm must seek reinstatement on the 
Exchange, unless the Clearing Firm designates that it must approve the 
Entering Firm's reinstatement, in which case both the Entering Firm and 
Clearing Firm must seek reinstatement. The Exchange proposes to include 
this functionality because the Clearing Firm bears the risk of any 
exposure of its correspondent Entering Firms.

[[Page 68998]]

    Finally, proposed Rule 7.19(e) would set forth member organization-
directed actions, i.e., ``kill switch'' functionality. As proposed, 
member organizations would be provided with the ability to direct the 
Exchange to take bulk action with respect to orders, which differs from 
the Automated Breach Actions described above. The Exchange previously 
filed a proposed rule change describing risk management tools designed 
to allow member organizations to monitor and address exposure to 
risk.\9\ Those tools function on a post-trade basis: Member 
organizations that choose to use this tool can monitor exposure as 
their trades execute, set limits, and receive alerts if such limits are 
breached. However, if a limit is breached, the member organization 
needs to direct the Exchange to take an action, which could include 
either a bulk block or bulk cancel message, or both.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 71164 (December 20, 
2013), 78 FR 79044 (December 27, 2013) (SR-NYSE-2013-80) (Notice of 
filing and immediate effectiveness of proposed rule change) (the 
``2013 Risk Control Filing'').
---------------------------------------------------------------------------

    The Exchange proposes to specify certain member organization-
directed actions in proposed Rule 7.19(e). As described above, the risk 
management tool that would be provided to member organizations in 
connection with this proposed rule change would include information 
about an Entering Firm's Gross Credit Risk Limits at either an MPID or 
sub-ID level (at the direction of the Entering Firm). As further 
described above, these limits would be updated with information about 
an Entering Firm's unexecuted orders in the Exchange Book, orders 
routed on arrival, and executed orders. Because this tool would provide 
information to member organizations to determine whether to direct the 
Exchange to take action with respect to their orders, the Exchange 
proposes that proposed Rule 7.19 would supersede and replace the 
description of risk controls as set forth in the 2013 Risk Control 
Filing.
    More specifically, proposed Rule 7.19(e) would specify that an 
Entering Firm, or if authorized pursuant to proposed Rule 
7.19(b)(2)(A), its Clearing Firm, could direct the Exchange to take one 
or more of the following actions with respect to orders at either an 
MPID, or if designated, sub-ID Level: (1) Cancel all Auction-Only 
Orders; (2) Cancel all unexecuted orders in the Exchange Book other 
than Auction-Only Orders; or (3) Reject entry of any new orders and 
order instructions, provided that the Exchange would continue to accept 
instructions from Entering Firms to cancel one or more orders 
(including Auction-Only Orders) in full.
    A member organization can currently direct the Exchange to take 
these actions with respect to its orders and with this proposed rule 
change, Clearing Firms designated by the Entering Firm could also take 
such action. A member organization that wants more control over when 
and which actions are taken with respect to its orders may choose to 
use these controls instead of the ``Block'' or ``Cancel and Block'' 
Automated Breach Actions described above. For example, for a member 
organization that selects the ``Notification Only'' Automated Breach 
Action, if it receives notification of a credit breach, it could choose 
to direct the Exchange to take an action described in proposed Rule 
7.19(e).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to 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, 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed rule will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because the proposed optional Pre-
Trade Risk Controls would provide both Entering Firms, and if 
designated, Clearing Firms, with the ability to manage risk, while also 
providing an alert system that would help to ensure that such firms are 
aware of developing issues. In addition, the Pre-Trade Risk Controls 
would provide Clearing Firms, who have assumed certain risks of the 
Entering Firms, greater control and flexibility over setting risk 
tolerance and exposure on behalf of their correspondent Entering Firms. 
As such, the Exchange believes that the Pre-Trade Risk Controls would 
provide a means to address potentially market-impacting events, helping 
to ensure the proper functioning of the market.
    In addition, the Exchange believes that the proposed rule change is 
designed to protect investors and the public interest because the Pre-
Trade Risk Controls are a form of impact mitigation that will aid 
Entering Firms and Clearing Firms in minimizing their risk exposure and 
reduce the potential for disruptive, market-wide events. The Exchange 
understands that member organizations implement a number of different 
risk-based controls, including those required by Rule 15c3-5. The 
proposed controls will serve as an additional tool for Entering Firms 
and Clearing Firms to assist them in identifying any risk exposure. The 
Exchange believes the Pre-Trade Risk Controls will assist Entering 
Firms and Clearing Firms in managing their financial exposure which, in 
turn, could enhance the integrity of trading on the securities markets 
and help to assure the stability of the financial system.
    Further, the Exchange believes that the proposed rule will foster 
cooperation and coordination with persons facilitating transactions in 
securities because the Exchange will provide alerts to Entering Firms 
and their Clearing Firms when the Entering Firm's trading reaches 
certain thresholds. As such, the Exchange will help Clearing Firms 
monitor the risk levels of their correspondent Entering Firms and 
provide tools for Clearing Firms, if designated, to take action.
    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's member organizations 
because use of the Pre-Trade Risk Controls is optional and is not a 
prerequisite for participation on the Exchange. In addition, because 
all orders on the Exchange would pass through the risk checks, there 
would be no difference in the latency experienced by member 
organizations who have opted to use the Pre-Trade Risk Controls versus 
those who have not opted to use them.

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. In fact, the Exchange 
believes that the proposal will have a positive effect on competition 
because, by providing Entering Firms and their Clearing Firms 
additional means to monitor and control risk, the proposed rule will 
increase confidence in the proper functioning of the markets.

[[Page 68999]]

The Exchange believes the proposed Pre-Trade Risk Controls will assist 
Entering Firms and Clearing Firms in managing their financial exposure 
which, in turn, could enhance the integrity of trading on the 
securities markets and help to assure the stability of the financial 
system. As a result, the level of competition should increase as public 
confidence in the markets is solidified.

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 up to 90 days (i) as the Commission may designate 
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 [email protected]. Please include 
File Number SR-NYSE-2019-68 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-2019-68. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2019-68 and should be submitted on 
or before January 7, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27082 Filed 12-16-19; 8:45 am]
 BILLING CODE 8011-01-P
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