Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules To Add New Rule 7.19E, 30770-30774 [2020-10821]
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Federal Register / Vol. 85, No. 98 / Wednesday, May 20, 2020 / Notices
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–
FINRA–2020–013 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–FINRA–2020–013. 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 FINRA. 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–FINRA–
2020–013 and should be submitted on
or before June 10, 2020.
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
association.12 In particular, the
12 In approving this proposed rule change, the
Commission has considered the proposed rule’s
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Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,13 which
requires that FINRA rules be designed to
promote just and equitable principles of
trade, to remove impediments and to
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
Commission also believes that the
proposal is consistent with Sections
15A(b)(2) and 15A(b)(7) of the Exchange
Act,14 which require that FINRA rules
enforce compliance with, and provide
appropriate discipline for, violations of
Commission and FINRA rules. Finally,
the Commission finds that the proposal
is consistent with the public interest,
the protection of investors, or otherwise
in furtherance of the purposes of the
Act, as required by Rule 19d–1(c)(2)
under the Act,15 which governs minor
rule violation plans.
As stated above, FINRA proposes to
add industry member compliance rules
relating to CAT to FINRA’s MRVP.
According to FINRA, FINRA’s current
MRVP includes similar audit trailrelated rules, and FINRA plans to
employ the MRVP for CAT compliance
rules the same way it has for its existing
audit trail-related rules.16 The
Commission believes that the proposed
rule provides a reasonable means of
addressing violations that do not rise to
the level of requiring formal
disciplinary proceedings, while
providing greater flexibility in handling
certain violations. However, the
Commission expects that FINRA will
continue to conduct surveillance with
due diligence and make determinations
based on its findings, on a case-by-case
basis, regarding whether a sanction
under the rule is appropriate, or
whether a violation requires formal
disciplinary action.
For the same reasons discussed above,
the Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,17 for approving the proposed rule
change prior to the thirtieth day after
the date of publication of the notice of
the filing thereof in the Federal
Register. The proposal merely adds
FINRA’s newly adopted CAT industry
member compliance rules to its MRVP,
which already includes similar audit
trail-related rules. Accordingly, the
Commission believes the proposal raises
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
13 15 U.S.C. 78o–3(b)(6).
14 15 U.S.C. 78o–3(b)(2) and 15 U.S.C. 78o–
3(b)(7).
15 17 CFR 240.19d–1(c)(2).
16 See supra note 5 and accompanying text.
17 15 U.S.C. 78s(b)(2).
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no novel or significant issues. Further,
the Commission believes that a full
notice-and-comment period is not
necessary before approving the
proposal.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 18 and Rule
19d–1(c)(2) thereunder,19 that the
proposed rule change (SR–FINRA–
2020–013) be, and hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–10814 Filed 5–19–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88878; File No. SR–
NYSEAMER–2020–38]
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Rules To
Add New Rule 7.19E
May 14, 2020.
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 7,
2020, NYSE American LLC (‘‘NYSE
American’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
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 7.19E (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.
18 15
U.S.C. 78s(b)(2).
CFR 240.19d–1(c)(2).
20 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.
19 17
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Federal Register / Vol. 85, No. 98 / Wednesday, May 20, 2020 / 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
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
In order to assist ETP Holders’ efforts
to manage their risk, the Exchange
proposes to amend its rules to add new
Rule 7.19E (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 an
ETP Holder 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
an ETP Holder that acts as principal for
clearing and settling a trade, whether for
its own account or for an Entering
Firm.5
a. 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
4 See
proposed Rule 7.19E(a)(1).
proposed Rule 7.19E(a)(2). As required by
Rule 7.14E, an ETP Holder is required to give up
the name of the clearing firm through which each
transaction on the Exchange will be cleared.
5 See
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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 (if designated by the
Entering Firm) 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 ETP Holders’ 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 an ETP
Holder’s needs, the controls are not
designed to be the sole means of risk
management, and using these controls
will not necessarily meet an ETP
Holder’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 Commission
rules remains with the ETP Holder.7
b. Proposed Rule Change
Proposed Rule 7.19E(a) would set
forth the definitions that would be used
for purposes of the Rule. In addition to
6 See
17 CFR 240.15c3–5.
Exchange proposes Commentary .01 to Rule
7.19E to provide that ‘‘[t]he pre-trade risk controls
described in this Rule are meant to supplement, and
not replace, the ETP Holder’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 ETP Holder.’’
7 The
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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
arrival pursuant to Rule 7.37E(a)(1), and
executed orders are included.
Proposed Rule 7.19E(b) would set
forth the Pre-Trade Risk Controls that
would be available to Entering Firms
and Clearing Firms. Under proposed
Rule 7.19E(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) 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
7.19E(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 7.19E(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 (if
so designated by the Entering 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 PreTrade 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
8 The term ‘‘Exchange Book’’ is defined in Rule
1.1E to refer to the Exchange’s electronic file of
orders, which contains all orders entered on the
Exchange.
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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 ETP
Holder 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 7.19E(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 7.19E(c)
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 that the
Entering Firm designates. 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 7.19E(b)(3) would set
forth how the Pre-Trade Risk Controls
could be set or adjusted. Proposed Rule
7.19E(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 7.19E(b)(3)(B) would
provide that Entering Firms or Clearing
Firms may set Pre-Trade Risk Controls
at the MPID level or at one or more subIDs associated with that MPID.9 The
Exchange believes that supporting PreTrade 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 7.19E(b)(4) would
provide that with respect to Gross Credit
Risk Limits, an Entering Firm and, if so
designated, its Clearing Firm, will
receive notifications when the Entering
Firm is approaching or has breached a
limit set by itself or by the Clearing
Firm. The Exchange believes that by
9 Entering Firms may request that the Exchange
create sub-IDs associated with their MPIDs.
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providing such notifications, 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 7.19E(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
7.19E(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 7.19E(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 7.19E(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 7.19E(c)(3)(A)(i), if this
option is selected, the Exchange would
continue to accept new orders and order
instructions and would not cancel any
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unexecuted orders in the Exchange
Book. Proposed Rule 7.19E(b)(4),
described above, sets forth the
notifications that would be provided to
an Entering Firm, and if designated, a
Clearing Firm regarding the Pre-Trade
Risk Controls that have been set. With
the ‘‘Notification Only’’ action, the
Exchange would provide such
notifications, but would not take any
other automated actions with respect to
new or unexecuted orders.
• ‘‘Block Only.’’ As set forth in
proposed Rule 7.19E(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
7.19E(e) (described below), but would
not take any automated action to cancel
orders.
• ‘‘Cancel and Block.’’ As set forth in
proposed Rule 7.19E(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 7.19E(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 7.19E(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.
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Proposed Rule 7.19E(c)(4) would
provide that if a Pre-Trade Risk Control
set at the MPID level is breached, the
Automated Breach Action specified at
the MPID level would be applied to all
sub-IDs associated with that MPID. For
instance, if a Clearing Firm sets a Gross
Credit Risk Limit for an MPID at $500
million and the Entering Firm sets Gross
Credit Risk Limits for each of three subIDs associated with that MPID at $500
million each, if two of the sub-IDs reach
a $250 million limit, which combined is
the Gross Credit Risk Limit at the MPID
level, the Automated Breach Action
associated with the limit at the MPID
level would be triggered and would
apply also to the associated sub-IDs,
even though none of the sub-IDs have
breached their separate $500 million
limits. This functionality ensures that
an Entering Firm cannot effectively
override a Pre-Trade Risk Control set at
the MPID level by setting risk limits for
each of the MPID’s associated sub-IDs
that cumulatively equal more than the
MPID’s total Gross Credit Risk Limit.
Proposed Rule 7.19E(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 7.19E(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) without the consent of
(1) the Entering Firm, and (2) the
Clearing Firm, if the Entering Firm has
designated that the Clearing Firm’s
consent is required. The Exchange
proposes to include this functionality
because the Clearing Firm bears the risk
of any exposure of its correspondent
Entering Firms.
Finally, proposed Rule 7.19E(e)
would set forth ‘‘kill switch’’
functionality, which would allow an
Entering Firm or its designated Clearing
Firm to direct the Exchange to take
certain bulk Kill Switch Actions with
respect to orders. In contrast to the
Automated Breach Actions described
above, which the Exchange would take
automatically after the breach of a credit
limit, the Exchange would not take any
of the Kill Switch Actions without
express direction from the Entering
Firm or its designated Clearing Firm.
Specifically, Proposed Rule 7.19E(e)
would specify that an Entering Firm, or
if authorized pursuant to proposed Rule
7.19E(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
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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) Block the 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, and later,
reverse that block.
The Exchange proposes that the Kill
Switch functionality proposed in Rule
7.19E(e) would supersede and replace
the Exchange’s previously filed
proposed rule change,10 which provided
certain post-trade risk management tools
to ETP Holders, but not to their Clearing
Firms.
The Exchange proposes to provide
these post-trade Kill Switch Actions in
addition to the pre-trade Automated
Breach Actions described above in order
to give Entering Firms and their
Clearing Firms more flexibility in
setting risk controls. An Entering Firm
that wants more control over when and
which actions are taken with respect to
its orders may choose to use these Kill
Switch Actions instead of the ‘‘Block’’
or ‘‘Cancel and Block’’ Automated
Breach Actions described above. For
example, for an Entering Firm 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 a
Kill Switch Action described in
proposed Rule 7.19E(e).
c. Proposed Rule Commentary
The Exchange proposes Commentary
.01 to Rule 7.19E to specify that the PreTrade Risk Controls described in this
Rule are meant to supplement, and not
replace, the ETP Holder’s own internal
systems, monitoring and procedures
related to risk management and are not
designed for compliance with Rule
15c3–5 under the Act.11 This proposed
Commentary specifies that use of the
Exchange’s pre-trade risk controls
would not automatically constitute
compliance with Exchange or federal
rules and responsibility for compliance
with all Exchange and SEC rules
remains with the ETP Holder. The
Exchange does not guarantee that these
controls will be sufficiently
comprehensive to meet all of an ETP
Holder’s needs, the controls are not
designed to be the sole means of risk
management, and using these controls
10 See Securities Exchange Act Release No. 71165
(December 20, 2013), 78 FR 79053 (December 27,
2013) (SR–NYSEMKT–2013–102) (Notice of filing
and immediate effectiveness of proposed rule
change) (the ‘‘2013 Risk Control Filing’’).
11 See 17 CFR 240.15c3–5.
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30773
will not necessarily meet an ETP
Holder’s obligations required by
Exchange or federal rules (including,
without limitation, the Rule 15c3–5).
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,12 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,13 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
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 ETP Holders
implement a number of different riskbased controls, including those required
by Rule 15c3–5. The proposed controls
will serve as an additional tool for
Entering Firms and Clearing Firms to
12 15
13 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
20MYN1
30774
Federal Register / Vol. 85, No. 98 / Wednesday, May 20, 2020 / Notices
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.
The Exchange believes that proposed
Commentary .01 to Rule 7.19 is
designed to prevent fraudulent and
manipulative acts and practices and
promote just and equitable principles of
trade because it provides clarity in
Exchange rules that the proposed PreTrade Risk Controls are intended to
supplement, and not replace, an ETP
Holder’s own internal systems,
monitoring, and procedures related to
compliance with Rule 15c3–5.
Finally, the Exchange believes that
the proposed rule change does not
unfairly discriminate among the
Exchange’s ETP Holders 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 ETP Holders
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.
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
VerDate Sep<11>2014
17:51 May 19, 2020
Jkt 250001
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
Because the foregoing proposed rule
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate if
consistent with the protection of
investors and the public interest,
provided that the self-regulatory
organization has given the Commission
written notice of its intent to file 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,14 the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 15 and
Rule 19b–4(f)(6) thereunder.16
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) 17 of the Act to
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:
14 The
Exchange has fulfilled this requirement.
U.S.C. 78s(b)(3)(A).
16 17 CFR 240.19b–4(f)(6).
17 15 U.S.C. 78s(b)(2)(B).
15 15
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
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–
NYSEAMER–2020–38 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–NYSEAMER–2020–38. 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–NYSEAMER–2020–38 and
should be submitted on or before June
10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–10821 Filed 5–19–20; 8:45 am]
BILLING CODE 8011–01–P
18 17
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]]>Agencies
[Federal Register Volume 85, Number 98 (Wednesday, May 20, 2020)]
[Notices]
[Pages 30770-30774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10821]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88878; File No. SR-NYSEAMER-2020-38]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its
Rules To Add New Rule 7.19E
May 14, 2020.
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 7, 2020, NYSE American LLC (``NYSE American'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The 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 7.19E
(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.
[[Page 30771]]
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
In order to assist ETP Holders' efforts to manage their risk, the
Exchange proposes to amend its rules to add new Rule 7.19E (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 an ETP Holder 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 an ETP Holder 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 7.19E(a)(1).
\5\ See proposed Rule 7.19E(a)(2). As required by Rule 7.14E, an
ETP Holder is required to give up the name of the clearing firm
through which each transaction on the Exchange will be cleared.
---------------------------------------------------------------------------
a. 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 (if designated by the Entering Firm) 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 ETP Holders' 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 an ETP Holder's needs, the controls are not designed to be
the sole means of risk management, and using these controls will not
necessarily meet an ETP Holder'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
Commission rules remains with the ETP Holder.\7\
---------------------------------------------------------------------------
\6\ See 17 CFR 240.15c3-5.
\7\ The Exchange proposes Commentary .01 to Rule 7.19E to
provide that ``[t]he pre-trade risk controls described in this Rule
are meant to supplement, and not replace, the ETP Holder'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 ETP Holder.''
---------------------------------------------------------------------------
b. Proposed Rule Change
Proposed Rule 7.19E(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 7.37E(a)(1), and executed orders are included.
---------------------------------------------------------------------------
\8\ The term ``Exchange Book'' is defined in Rule 1.1E to refer
to the Exchange's electronic file of orders, which contains all
orders entered on the Exchange.
---------------------------------------------------------------------------
Proposed Rule 7.19E(b) would set forth the Pre-Trade Risk Controls
that would be available to Entering Firms and Clearing Firms. Under
proposed Rule 7.19E(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) 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 7.19E(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 7.19E(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 (if so designated by
the Entering 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
[[Page 30772]]
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 ETP Holder 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 7.19E(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 7.19E(c) 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 that the Entering Firm designates. 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 7.19E(b)(3) would set forth how the Pre-Trade Risk
Controls could be set or adjusted. Proposed Rule 7.19E(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
7.19E(b)(3)(B) would provide that Entering Firms or Clearing Firms may
set Pre-Trade Risk Controls at the MPID level or at one or more sub-IDs
associated with that MPID.\9\ 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.
---------------------------------------------------------------------------
\9\ Entering Firms may request that the Exchange create sub-IDs
associated with their MPIDs.
---------------------------------------------------------------------------
Proposed Rule 7.19E(b)(4) would provide that with respect to Gross
Credit Risk Limits, an Entering Firm and, if so designated, its
Clearing Firm, will receive notifications when the Entering Firm is
approaching or has breached a limit set by itself or by the Clearing
Firm. The Exchange believes that by providing such notifications, 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 7.19E(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 7.19E(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 7.19E(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 7.19E(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
7.19E(c)(3)(A)(i), if this option is selected, the Exchange would
continue to accept new orders and order instructions and would not
cancel any unexecuted orders in the Exchange Book. Proposed Rule
7.19E(b)(4), described above, sets forth the notifications that would
be provided to an Entering Firm, and if designated, a Clearing Firm
regarding the Pre-Trade Risk Controls that have been set. With the
``Notification Only'' action, the Exchange would provide such
notifications, but would not take any other automated actions with
respect to new or unexecuted orders.
``Block Only.'' As set forth in proposed Rule
7.19E(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 7.19E(e) (described below), but would not take any
automated action to cancel orders.
``Cancel and Block.'' As set forth in proposed Rule
7.19E(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 7.19E(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 7.19E(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.
[[Page 30773]]
Proposed Rule 7.19E(c)(4) would provide that if a Pre-Trade Risk
Control set at the MPID level is breached, the Automated Breach Action
specified at the MPID level would be applied to all sub-IDs associated
with that MPID. For instance, if a Clearing Firm sets a Gross Credit
Risk Limit for an MPID at $500 million and the Entering Firm sets Gross
Credit Risk Limits for each of three sub-IDs associated with that MPID
at $500 million each, if two of the sub-IDs reach a $250 million limit,
which combined is the Gross Credit Risk Limit at the MPID level, the
Automated Breach Action associated with the limit at the MPID level
would be triggered and would apply also to the associated sub-IDs, even
though none of the sub-IDs have breached their separate $500 million
limits. This functionality ensures that an Entering Firm cannot
effectively override a Pre-Trade Risk Control set at the MPID level by
setting risk limits for each of the MPID's associated sub-IDs that
cumulatively equal more than the MPID's total Gross Credit Risk Limit.
Proposed Rule 7.19E(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 7.19E(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)
without the consent of (1) the Entering Firm, and (2) the Clearing
Firm, if the Entering Firm has designated that the Clearing Firm's
consent is required. The Exchange proposes to include this
functionality because the Clearing Firm bears the risk of any exposure
of its correspondent Entering Firms.
Finally, proposed Rule 7.19E(e) would set forth ``kill switch''
functionality, which would allow an Entering Firm or its designated
Clearing Firm to direct the Exchange to take certain bulk Kill Switch
Actions with respect to orders. In contrast to the Automated Breach
Actions described above, which the Exchange would take automatically
after the breach of a credit limit, the Exchange would not take any of
the Kill Switch Actions without express direction from the Entering
Firm or its designated Clearing Firm.
Specifically, Proposed Rule 7.19E(e) would specify that an Entering
Firm, or if authorized pursuant to proposed Rule 7.19E(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) Block the 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, and later, reverse that block.
The Exchange proposes that the Kill Switch functionality proposed
in Rule 7.19E(e) would supersede and replace the Exchange's previously
filed proposed rule change,\10\ which provided certain post-trade risk
management tools to ETP Holders, but not to their Clearing Firms.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 71165 (December 20,
2013), 78 FR 79053 (December 27, 2013) (SR-NYSEMKT-2013-102) (Notice
of filing and immediate effectiveness of proposed rule change) (the
``2013 Risk Control Filing'').
---------------------------------------------------------------------------
The Exchange proposes to provide these post-trade Kill Switch
Actions in addition to the pre-trade Automated Breach Actions described
above in order to give Entering Firms and their Clearing Firms more
flexibility in setting risk controls. An Entering Firm that wants more
control over when and which actions are taken with respect to its
orders may choose to use these Kill Switch Actions instead of the
``Block'' or ``Cancel and Block'' Automated Breach Actions described
above. For example, for an Entering Firm 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 a Kill Switch Action described in proposed Rule 7.19E(e).
c. Proposed Rule Commentary
The Exchange proposes Commentary .01 to Rule 7.19E to specify that
the Pre-Trade Risk Controls described in this Rule are meant to
supplement, and not replace, the ETP Holder's own internal systems,
monitoring and procedures related to risk management and are not
designed for compliance with Rule 15c3-5 under the Act.\11\ This
proposed Commentary specifies that use of the Exchange's pre-trade risk
controls would not automatically constitute compliance with Exchange or
federal rules and responsibility for compliance with all Exchange and
SEC rules remains with the ETP Holder. The Exchange does not guarantee
that these controls will be sufficiently comprehensive to meet all of
an ETP Holder's needs, the controls are not designed to be the sole
means of risk management, and using these controls will not necessarily
meet an ETP Holder's obligations required by Exchange or federal rules
(including, without limitation, the Rule 15c3-5).
---------------------------------------------------------------------------
\11\ See 17 CFR 240.15c3-5.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\12\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\13\ 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.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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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 ETP Holders 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
[[Page 30774]]
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.
The Exchange believes that proposed Commentary .01 to Rule 7.19 is
designed to prevent fraudulent and manipulative acts and practices and
promote just and equitable principles of trade because it provides
clarity in Exchange rules that the proposed Pre-Trade Risk Controls are
intended to supplement, and not replace, an ETP Holder's own internal
systems, monitoring, and procedures related to compliance with Rule
15c3-5.
Finally, the Exchange believes that the proposed rule change does
not unfairly discriminate among the Exchange's ETP Holders 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 ETP Holders 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. 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
Because the foregoing proposed rule does not (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate if consistent with the protection of
investors and the public interest, provided that the self-regulatory
organization has given the Commission written notice of its intent to
file 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,\14\ the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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\14\ The Exchange has fulfilled this requirement.
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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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) \17\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\17\ 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 [email protected]. Please include
File Number SR-NYSEAMER-2020-38 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-NYSEAMER-2020-38. 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-NYSEAMER-2020-38 and should be submitted
on or before June 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10821 Filed 5-19-20; 8:45 am]
BILLING CODE 8011-01-P
