Self-Regulatory Organizations; NYSE Chicago, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules To Add New Rule 7.19, 31578-31582 [2020-11134]
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Federal Register / Vol. 85, No. 101 / Tuesday, May 26, 2020 / Notices
Act permitting the use of equity
compensation as well as prior
exemptive relief granted by the
Commission under section 23(c) of the
Act.
Applicant’s Conditions
Applicant agrees that the order
granting the requested relief will be
subject to the following conditions:
1. The Amended Plan will be
authorized by Applicant’s stockholders.
2. Each issuance of Restricted Shares
to a Participant will be approved by the
Required Majority of Applicant’s
directors on the basis that such grant is
in the best interest of Applicant and its
stockholders.
3. The amount of voting securities
that would result from the exercise of all
of Applicant’s outstanding warrants,
options and rights, together with any
Restricted Shares issued under the
Amended Plan, at the time of issuance
shall not exceed 25 percent of the
outstanding voting securities of
Applicant, except that if the amount of
voting securities that would result from
the exercise of all of Applicant’s
outstanding warrants, options and rights
issued to Applicant’s directors, officers
and employees, together with any
Restricted Shares issued pursuant to the
Amended Plan, would exceed 15
percent of the outstanding voting
securities of Applicant, then the total
amount of voting securities that would
result from the exercise of all
outstanding warrants, options and
rights, together with any Restricted
Shares issued pursuant to the Amended
Plan, at the time of issuance shall not
exceed 20 percent of the outstanding
voting securities of Applicant.
4. The amount of Restricted Shares
issued and outstanding will not at the
time of issuance of any Restricted
Shares exceed ten percent of
Applicant’s outstanding voting
securities.
5. The Board will review the
Amended Plan at least annually. In
addition, the Board will review
periodically the potential impact that
the issuance of Restricted Shares under
the Amended Plan could have on
Applicant’s earnings and net asset value
per share, such review to take place
prior to any decisions to grant Restricted
Shares under the Amended Plan, but in
no event less frequently than annually.
Adequate procedures and records will
be maintained to permit such review.
The Board will be authorized to take
appropriate steps to ensure that the
issuance of Restricted Shares under the
Amended Plan will be in the best
interests of Applicant’s stockholders.
This authority will include the authority
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to prevent or limit the granting of
additional Restricted Shares under the
Amended Plan. All records maintained
pursuant to this condition will be
subject to examination by the
Commission and its staff.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–11139 Filed 5–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88903; File No. SR–
NYSECHX–2020–14]
Self-Regulatory Organizations; NYSE
Chicago, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Rules To
Add New Rule 7.19
May 19, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 8,
2020, the NYSE Chicago, Inc. (‘‘NYSE
Chicago’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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.
1
2
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15 U.S.C. 78s(b)(1).
17 CFR 240.19b–4.
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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 Participants’ efforts
to manage their risk, the Exchange
proposes to amend 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
Participant 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 3 and to
define the term ‘‘Clearing Firm’’ to mean
a Participant that acts as principal for
clearing and settling a trade, whether for
its own account or for an Entering
Firm.4
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 (if designated by the
Entering Firm) to each define different
pre-set risk thresholds and to choose the
See proposed Rule 7.19(a)(1).
See proposed Rule 7.19(a)(2). As required by
Article 21, Rule 1, a Participant is required to give
up the name of the clearing firm through which
each transaction on the Exchange will be cleared.
3
4
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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 Participants’ 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
Participant’s needs, the controls are not
designed to be the sole means of risk
management, and using these controls
will not necessarily meet a Participant’s
obligations required by Exchange or
federal rules (including, without
limitation, the Rule 15c3–5 under the
Act 5 (‘‘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 Participant.6
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
See 17 CFR 240.15c3–5.
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 Participant’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 Participant.’’
5
6
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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,7 orders routed on
arrival pursuant to Rule 7.37(a)(1), and
executed orders are included.
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)
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 ‘‘PreTrade 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 (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
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
Participant 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
7 The term ‘‘Exchange Book’’ is defined in Rule
1.1(j) to refer to the Exchange’s electronic file of
orders, which contains all orders entered on the
Exchange.
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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)
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 7.19(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 or Clearing
Firms may set Pre-Trade Risk Controls
at the MPID level or at one or more subIDs associated with that MPID.8 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 7.19(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 7.19(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
8 Entering Firms may request that the Exchange
create sub-IDs associated with their MPIDs.
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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
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
continue to accept new orders and order
instructions and would not cancel any
unexecuted orders in the Exchange
Book. Proposed Rule 7.19(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.
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• ‘‘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(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
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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 7.19(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) 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 7.19(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 7.19(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) 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.
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The Exchange proposes that the Kill
Switch functionality proposed in Rule
7.19(e) would supersede and replace the
Exchange’s previously filed proposed
rule change,9 which provided certain
post-trade risk management tools to
Participants, 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 7.19(e).
3. Proposed Rule Commentary
The Exchange proposes Commentary
.01 to Rule 7.19 to specify that the PreTrade Risk Controls described in this
Rule are meant to supplement, and not
replace, the Participant’s own internal
systems, monitoring and procedures
related to risk management and are not
designed for compliance with Rule
15c3–5 under the Act.10 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 Participant. The
Exchange does not guarantee that these
controls will be sufficiently
comprehensive to meet all of a
Participant’s needs, the controls are not
designed to be the sole means of risk
management, and using these controls
will not necessarily meet a Participant’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,11 in general, and
furthers the objectives of Section 6(b)(5)
9 See Securities Exchange Act Release No. 74000
(January 27, 2014), 79 FR 5502 (January 31, 2014)
(SR–CHX–2014–02) (Notice of filing and immediate
effectiveness of proposed rule change) (the ‘‘2013
Risk Control Filing’’).
10 See 17 CFR 240.15c3–5.
11 15 U.S.C. 78f(b).
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19:08 May 22, 2020
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of the Act,12 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 Participants
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
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
12
PO 00000
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, a
Participant’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 Participants 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 Participants
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.
15 U.S.C. 78f(b)(5).
Frm 00151
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Federal Register / Vol. 85, No. 101 / Tuesday, May 26, 2020 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 13 and Rule
19b–4(f)(6) thereunder.14 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
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) 15 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:
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–
NYSECHX–2020–14 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
15 U.S.C. 78s(b)(3)(A)(iii).
14 17 CFR 240.19b–4(f)(6).
15 15 U.S.C. 78s(b)(2)(B).
13
VerDate Sep<11>2014
19:08 May 22, 2020
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSECHX–2020–14. 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–NYSECHX–2020–14, and
should be submitted on or before June
16, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–11134 Filed 5–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88905; File No. SR–
NYSENAT–2020–17]
Self-Regulatory Organizations; NYSE
National, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Rules To
Add New Rule 7.19
May 19, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on May 8,
2020, NYSE National, Inc. (‘‘NYSE
National’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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 ETP Holders’ efforts
to manage their risk, the Exchange
proposes to amend 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 an
ETP Holder that either has a
correspondent relationship with a
Clearing Firm whereby it executes
1
16
Jkt 250001
PO 00000
17 CFR 200.30–3(a)(12).
Frm 00152
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15 U.S.C. 78s(b)(1).
17 CFR 240.19b–4.
E:\FR\FM\26MYN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 101 (Tuesday, May 26, 2020)]
[Notices]
[Pages 31578-31582]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11134]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88903; File No. SR-NYSECHX-2020-14]
Self-Regulatory Organizations; NYSE Chicago, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its
Rules To Add New Rule 7.19
May 19, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 8, 2020, the NYSE Chicago, Inc. (``NYSE Chicago'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 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 Participants' efforts to manage their risk, the
Exchange proposes to amend 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 Participant 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 \3\ and to define the term
``Clearing Firm'' to mean a Participant that acts as principal for
clearing and settling a trade, whether for its own account or for an
Entering Firm.\4\
---------------------------------------------------------------------------
\3\ See proposed Rule 7.19(a)(1).
\4\ See proposed Rule 7.19(a)(2). As required by Article 21,
Rule 1, a Participant 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 (if designated by the Entering Firm) to each
define different pre-set risk thresholds and to choose the
[[Page 31579]]
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 Participants' 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 Participant's needs, the controls are not designed to be
the sole means of risk management, and using these controls will not
necessarily meet a Participant's obligations required by Exchange or
federal rules (including, without limitation, the Rule 15c3-5 under the
Act \5\ (``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 Participant.\6\
---------------------------------------------------------------------------
\5\ See 17 CFR 240.15c3-5.
\6\ 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 Participant'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 Participant.''
---------------------------------------------------------------------------
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,\7\ orders routed on arrival
pursuant to Rule 7.37(a)(1), and executed orders are included.
---------------------------------------------------------------------------
\7\ The term ``Exchange Book'' is defined in Rule 1.1(j) to
refer to the Exchange's electronic file of orders, which contains
all orders entered on the Exchange.
---------------------------------------------------------------------------
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) 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 (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 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 Participant 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) 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 7.19(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 or Clearing Firms may
set Pre-Trade Risk Controls at the MPID level or at one or more sub-IDs
associated with that MPID.\8\ 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.
---------------------------------------------------------------------------
\8\ Entering Firms may request that the Exchange create sub-IDs
associated with their MPIDs.
---------------------------------------------------------------------------
Proposed Rule 7.19(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 7.19(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
[[Page 31580]]
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
continue to accept new orders and order instructions and would not
cancel any unexecuted orders in the Exchange Book. Proposed Rule
7.19(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
7.19(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(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 7.19(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)
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 7.19(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 7.19(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) 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.
[[Page 31581]]
The Exchange proposes that the Kill Switch functionality proposed
in Rule 7.19(e) would supersede and replace the Exchange's previously
filed proposed rule change,\9\ which provided certain post-trade risk
management tools to Participants, but not to their Clearing Firms.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 74000 (January 27,
2014), 79 FR 5502 (January 31, 2014) (SR-CHX-2014-02) (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 7.19(e).
3. Proposed Rule Commentary
The Exchange proposes Commentary .01 to Rule 7.19 to specify that
the Pre-Trade Risk Controls described in this Rule are meant to
supplement, and not replace, the Participant's own internal systems,
monitoring and procedures related to risk management and are not
designed for compliance with Rule 15c3-5 under the Act.\10\ 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 Participant. The Exchange does not guarantee
that these controls will be sufficiently comprehensive to meet all of a
Participant's needs, the controls are not designed to be the sole means
of risk management, and using these controls will not necessarily meet
a Participant's obligations required by Exchange or federal rules
(including, without limitation, the Rule 15c3-5).
---------------------------------------------------------------------------
\10\ 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,\11\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\12\ 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.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 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 Participants 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.
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, a Participant'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 Participants 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 Participants 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.
[[Page 31582]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\13\ 15 U.S.C. 78s(b)(3)(A)(iii).
\14\ 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) \15\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\15\ 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-NYSECHX-2020-14 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-NYSECHX-2020-14. 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-NYSECHX-2020-14, and should be submitted
on or before June 16, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11134 Filed 5-22-20; 8:45 am]
BILLING CODE 8011-01-P
