[Federal Register Volume 77, Number 131 (Monday, July 9, 2012)]
[Notices]
[Pages 40392-40394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-16623]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67331; File No. SR-EDGX-2012-24]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Changes To Amend EDGX Rules Regarding Market 
Access

July 2, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 22, 2012, the EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule changes 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 changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 11.3 to (1) delete those 
provisions that the Exchange believes have been rendered superfluous 
and unnecessary in light of the adoption by the Commission of Rule 
15c3-5 under the Act; and (2) add a requirement for Sponsoring Members 
\3\ to maintain a list of Sponsored Participants \4\ which the 
Sponsoring Member has authorized to obtain access to the Exchange's 
System,\5\ and to provide the list of Sponsored Participants to the 
Exchange upon request. The Exchange is also proposing amendments to 
Rule 11.3(b)(1) and Rule 1.5(z) to align the definition of Sponsored 
Participant with the terminology used in Rule 15c3-5 to describe such 
arrangements.
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    \3\ As defined in EDGX Rule 1.5(aa).
    \4\ As defined in EDGX Rule 1.5(z).
    \5\ As defined in EDGX Rule 1.5(cc).
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    The text of the proposed rule changes is attached as Exhibit 5 and 
is available on the Exchange's Web site at www.directedge.com, at the 
Exchange's principal office and at the Public Reference Room of the 
Commission.

[[Page 40393]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule changes and 
discussed any comments it received on the proposed rule changes. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
Background on Market Access Rule
    On November 3, 2010, the Commission adopted Rule 15c3-5 (the 
``Market Access Rule''). The Market Access Rule governs risk management 
controls by broker-dealers with market access. The Market Access Rule 
had an effective date of January 14, 2011, with phased-in compliance 
dates of July 14, 2011, and November 30, 2011.\6\
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    \6\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2011) [sic] (File No. S7-03-10). 
See also Securities Exchange Act Release No. 64798 [sic] (June 27, 
2011), 76 FR 38293 (June 30, 2011) (File No. S7-03-10) (providing 
limited extension of compliance date for certain requirements); 
Securities Exchange Act Release No. 65132 (August 15, 2011), 76 FR 
51457 (August 18, 2011) (exempting floor broker operations of 
certain broker-dealers with market access from automated controls 
requirement of Rule 15c3-5).
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    Among other things, the Market Access Rule requires that any 
broker-dealer with market access,\7\ or that provides a customer or any 
other person with market access, must establish, document and maintain 
a system of risk management controls and supervisory procedures that 
are reasonably designed to manage the financial, regulatory and other 
risks of this business activity. These controls include financial risk 
management controls reasonably designed to prevent the entry of orders 
that exceed appropriate pre-set credit or capital thresholds in the 
aggregate for each customer and the broker-dealer itself, and to 
prevent the entry of erroneous orders. In addition, the Market Access 
Rule requires certain regulatory risk management controls that, among 
other things, prevent the entry of orders unless compliance with 
applicable regulatory requirements has been satisfied on a pre-order 
entry basis, and restrict access to trading systems and technology that 
provide market access to persons and accounts that have been pre-
approved and authorized by the broker-dealer. These regulatory risk 
management controls also include measures designed to prevent the entry 
of orders for a broker-dealer, customer or other person if such person 
is restricted from trading those securities, and to assure that 
appropriate surveillance personnel receive immediate, post-trade 
execution reports that result from market access.
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    \7\ The term ``market access'' is defined in Rule 15c3-5(a)(1) 
to include, inter alia, access to trading in securities on an 
exchange or alternative trading system (``ATS'') as a result of 
being a member or subscriber of the exchange or ATS, respectively.
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    These risk management controls and associated supervisory 
procedures must be under the direct and exclusive control of the 
broker-dealer that is subject to the Market Access Rule. While a 
broker-dealer can use third-party providers to satisfy some or all of 
these requirements, the broker-dealer is nonetheless required to ensure 
that whatever technology or other services are provided by such third-
parties are under such broker-dealer's direct and exclusive control.
Rule 11.3(b): Sponsored Participants
    Rule 11.3(b) sets forth the requirements for Sponsored Participants 
to obtain authorized access to the System through one or more 
Sponsoring Members by entering into and maintaining customer agreements 
with one or more Sponsoring Members through which the Sponsored 
Participant may trade on the System. Such agreements must incorporate 
the provisions set forth in Rule 11.3(b)(2). These contractual 
provisions include, inter alia, that: (1) Sponsored Participants must 
enter into and maintain an agreement with the Exchange; (2) Sponsoring 
Members must acknowledge and agree that all orders entered by their 
Sponsored Participants are binding in all respects on the Sponsoring 
Member; (3) Sponsoring Members must acknowledge responsibility for any 
and all actions taken by their Sponsored Participants; (4) Sponsored 
Participants of Sponsoring Members must take reasonable security 
precautions to prevent unauthorized use or access to the System, 
including unauthorized entry of information into the System, or the 
information and data made available therein; and (5) Sponsored 
Participants of Sponsoring Members must maintain, keep current and 
provide to the Sponsoring Member and to the Exchange, upon request, a 
list of Authorized Traders (``ATs'') \8\ who may obtain access to the 
System on behalf of such Sponsored Participant. In addition, the 
Sponsoring Member must provide the Exchange with a written statement in 
form and substance acceptable to the Exchange, identifying each 
Sponsored Participant by name and acknowledging its responsibility for 
the orders, executions and actions of such Sponsored Participants.
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    \8\ As defined in EDGX Rule 1.5(c).
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    The Exchange believes that, as a result of the controls established 
under the Market Access Rule, which apply directly to Sponsoring 
Members, the contractual provisions contained in Rule 11.3(b) have been 
rendered superfluous and unnecessary. In particular, the Exchange 
believes that the Market Access Rule's provisions requiring that 
Sponsoring Members establish, document and maintain a system of risk 
management controls and supervisory procedures that are reasonably 
designed to manage the financial, regulatory and other risks of this 
business activity clearly establish the obligations and 
responsibilities of Members acting as Sponsoring Members to Sponsored 
Participants. The contractual provisions required under Rule 11.3(b), 
therefore, are not only superfluous and unnecessary but might also 
cause confusion on the part of Sponsoring Members as to the obligations 
that have been squarely imposed upon them by the Market Access Rule. 
Therefore, the Exchange is proposing to delete the provisions in 
current Rule 11.3(b)(2)(A)-(I), the second sentence of Rule 11.3(b)(1) 
and Rule 11.3(b)(3) and replace them with the provisions described 
below. In addition, the Exchange is making conforming amendments to 
Rule 11.3(a) to require that only Members, and not Users (which term is 
defined to include not only Members but their Sponsored Participants), 
enter into agreements with the Exchange. Additional conforming 
amendments are being proposed to the definition of Sponsored 
Participant (Rules 1.5(z) and 11.3(b)(1)) to align such definition with 
the terminology used in the Market Access Rule.
    The Exchange is retaining the requirement in Rule 11.4(a) that all 
Members shall maintain a list of ATs who may obtain access to the 
System on behalf of the Member or the Member's Sponsored Participants. 
Members must continue to provide such list of ATs to the Exchange upon 
request. This requirement is being retained in order to ensure that 
Sponsoring Members continue to track whom they grant access to their 
systems and to enable the

[[Page 40394]]

Exchange to request such information upon request, if necessary. In 
addition, in order to maintain transparency into who is accessing the 
Exchange's System, the Exchange is also amending Rule 11.3(b)(2) to 
require Sponsoring Members to maintain a list of Sponsored Participants 
whom the Sponsoring Member has authorized to obtain access to the 
System pursuant to Rule 11.3. The amended rule will also provide that 
the Sponsoring Member shall update the list of Sponsored Participants 
as necessary, and provide the list to the Exchange upon request. The 
Exchange also proposes to amend Rule 11.3(b)(3) to require that 
Sponsoring Members shall comply with all requirements under the Market 
Access Rule with regard to market access arrangements with Sponsored 
Participants.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \9\ and further the objectives of Section 
6(b)(5) of the Act,\10\ in that they are 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed rule changes are consistent with these obligations 
because they are designed to eliminate superfluous and unnecessary 
regulatory requirements, and thereby avoid potential confusion. 
Additionally, the proposed rule changes are designed to make the 
Exchange's Rules clearer and more transparent to Members by eliminating 
provisions that have been rendered superfluous and unnecessary by the 
Market Access Rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice or within 
such longer period (i) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-EDGX-2012-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2012-24. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://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 changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2012-24 and should be 
submitted on or before July 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16623 Filed 7-6-12; 8:45 am]
BILLING CODE 8011-01-P