[Federal Register Volume 79, Number 103 (Thursday, May 29, 2014)]
[Notices]
[Pages 30914-30917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72227; File No. SR-NSX-2014-15]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Amend Certain Requirements Pertaining to Sponsored Access Under Rules 
11.9 and 11.17

May 22, 2014.
    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 May 8, 2014, National Stock Exchange, Inc. (``NSX[supreg]'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change, as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comment on the proposed 
rule change 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 is proposing certain amendments to Rule 11.9, titled 
``Access'' and to Rule 11.17, titled ``Clearance and Settlement.'' The 
text of the proposed rule change is available on the Exchange's Web 
site at http://www.nsx.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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The Exchange is proposing certain amendments to Rule 11.9, 
paragraph (b) governing the requirements for a Sponsored Participant 
\3\ to obtain access to the Exchange's trading system (the ``System'') 
\4\ through a Sponsoring ETP Holder.\5\ First, the Exchange is 
proposing to amend paragraph (b) of Rule 11.9 to eliminate a provision 
that a Sponsored Participant may obtain access to the System ``. . . 
only if such participant is a registered broker or dealer and a self-
clearing member of a Qualified Clearing Agency. . . .'' The Exchange 
proposes to make a conforming amendment to paragraph (a) of Rule 11.17 
to eliminate the parallel provision that ``[e]ach Sponsored Participant 
must be a member of a Qualified Clearing Agency . . . .;''
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    \3\ A ``Sponsored Participant'' is defined in Exchange Rule 
1.5S.(1) as ``. . . a person who has entered into a sponsorship 
arrangement with a Sponsoring ETP Holder pursuant to Rule 11.9.''
    \4\ The ``System'' is defined in Exchange Rule 1.5S.(4) as ``. . 
. the electronic securities communications and trading facility 
designated by the Board [of Directors of the Exchange] through which 
the orders of Users are consolidated for ranking and execution.''
    \5\ A ``Sponsoring ETP Holder'' is defined in Exchange Rule 
1.5S(2) as ``. . . a broker-dealer that has been issued an ETP by 
the Exchange who has been designated by a Sponsored Participant to 
execute, clear and settle transactions resulting from the System. 
The Sponsoring ETP Holder shall be either (i) a clearing firm with 
membership in a clearing agency registered with the Commission that 
maintains facilities through which transactions may be cleared or 
(ii) a correspondent firm with a clearing arrangement with any such 
clearing firm.''
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    The Exchange submits that the import of these two rule provisions 
was to assure that a Sponsored Participant accessing the Exchange was 
an entity subject to the risk, capital and compliance requirements 
applicable to brokers and dealers under the federal securities laws, 
the regulations promulgated thereunder, and the rules of the self-
regulatory organizations to which such a broker or dealer belonged. The 
additional requirement that the Sponsored Participant be a self-
clearing member of a Qualified Clearing Agency operated to assure that 
trades executed by the Sponsored Participant in the NSX marketplace 
would settle and clear without risk to counter-parties, to the 
Exchange, or to the wider market. These considerations were 
particularly important to the extent that a Sponsored Participant may 
have had an arrangement with the Sponsoring ETP Holder whereby the 
Sponsored Participant's orders bypassed the Sponsoring ETP Holder's 
trading systems and were routed orders directly to the Exchange.
    The Exchange submits that the requirement of Rule 11.9 that a 
Sponsored Participant must be a registered broker or dealer and a self-
clearing member of a Qualified Clearing Agency is no longer necessary 
in view of the significant changes to the regulations governing market 
access that have been enacted since Rule 11.9 was last amended in 
2006.\6\ Most notably, in November 2010, the Commission adopted Rule 
15c3-5, Risk Management Controls for Brokers or Dealers with Market 
Access \7\ Rule 15c3-5 requires, inter alia, that a broker or dealer 
with market access,\8\ or that provides a customer or any other person 
with access to an exchange through the use

[[Page 30915]]

of its mnemonic or market participant identifier or otherwise, 
establish, document and maintain a system of risk management controls 
and supervisory procedures reasonably designed to manage the financial, 
regulatory and other risks, such as legal and operational risks, 
related to market access.\9\ Rule 15c3-5 requires that a broker or 
dealer's financial risk management controls and supervisory procedures 
be reasonably designed to systematically limit the financial exposure 
that could arise as a result of market access, including preventing the 
entry of orders that exceed pre-set credit or capital thresholds and 
rejecting erroneous or duplicative orders.\10\ A broker-dealer's 
regulatory risk management controls and supervisory procedures must be 
reasonably designed to ensure compliance with all regulatory 
requirements, including preventing the entry of orders unless there has 
been compliance with all regulatory requirements that must be satisfied 
on a pre-order entry basis.\11\ The Rule further requires that the 
broker or dealer with market access have direct and exclusive control 
of the risk management controls and supervisory procedures.\12\
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    \6\ See Exchange Act Release No. 54391 (August 31, 2006); 71 FR 
52836 (September 7, 2006)(SR-NSX-2006-08).
    \7\ 17 CFR 240.15c3-5; Securities Exchange Act Release No. 63241 
(November 3, 2010), 75 FR 69791 (November 15, 2010).
    \8\ Rule 15c3-5(a)(1) defines market access as access to trading 
in securities on an exchange or alternative trading system as a 
result of being a member or subscriber of the exchange or 
alternative trading system, or access to trading in securities on an 
alternative trading system provided by a broker-dealer operator of 
an alternative trading system to a non-broker-dealer. See 17 CFR 
240.15c3-5(a)(1).
    \9\ 17 CFR 240.15c3-5(b).
    \10\ 17 CFR 240.15c3-5(c)(1).
    \11\ 17 CFR 240.15c3-5(b) and (c).
    \12\ 17 CFR 240.15c3-5(d).
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    The Exchange submits that the provisions of Rule 15c3-5, which 
operate to prohibit ``unfiltered'' or ``naked'' access where a 
customer's order flow does not pass through an ETP Holder's systems or 
filters prior to entry on the Exchange, render the requirement of Rule 
11.9(b) that a Sponsored Participant be a self-clearing broker-dealer, 
and its parallel requirement in the text of Rule 11.17(a), to be 
extraneous. Moreover, the Exchange notes that an examination of the 
requirements for Sponsored Participants under the rules of other 
national equity security exchanges discloses that they do not contain a 
similar requirement that a Sponsored Participant be a registered, self-
clearing broker-dealer.\13\ Thus, by this proposed amendment, the 
Exchange will bring the requirements of Rule 11.9(b) into alignment 
with the rules of other exchanges. The Exchange believes that this 
change will operate to enhance efficiencies by eliminating the need for 
ETP Holders to impose special requirements on its Sponsored 
Participants for purposes of accessing the Exchange when such special 
requirements are not required for purposes of sponsored access to other 
exchanges.
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    \13\ See, e.g., New York Stock Exchange LLC (``NYSE) Rule 
123B.10(c); NYSE Arca Equities, Inc. (``NYSE Arca'') Rule 7.29(b); 
BATS Exchange, Inc. (``BATS'') Rule 11.3; EDGA Exchange, Inc. 
(``EDGA'') Rule 11.3(b).
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    The Exchange also proposes to amend subparagraph (b)(2)(D) of Rule 
11.9 that requires, in relevant part, that a Sponsored Participant 
provide ``upon request'' a list of Authorized Traders who may obtain 
access to the System on behalf of the Sponsored Participant to the 
Sponsoring ETP Holder and to the Exchange. Under the Exchange's 
proposed amendment, the Sponsored Participant would be required to 
provide a list of Authorized Traders to the Sponsoring ETP Holder, but 
would not limit this requirement to instances where a request is made 
by the Sponsoring ETP Holder to do so.\14\ The Exchange believes that 
it is important for a Sponsoring ETP Holder to have a current list of 
its Sponsored Participants' Authorized Traders and, since other 
exchanges have the same requirement, the amendment as proposed would 
enhance the ability of the Sponsoring ETP Holder to comply with market 
access requirements while not imposing any greater compliance burden.
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    \14\ The Exchange's proposed amendment to require that a 
Sponsored Participant furnish a list of its Authorized Traders to 
its Sponsoring ETP Holder mirrors the same requirement found in NYSE 
Arca Rule 7.29(b)(2)(D) and BATS Rule 11.3(b)(2)(D).
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    The Exchange also proposes to delete from paragraph (b)(3) of Rule 
11.9 the provision that it is the responsibility of the Sponsoring ETP 
Holder, without limitation to clear and settle the Sponsored 
Participant's trades in the event that the Sponsored Participant or its 
Qualified Clearing Agency does not accept any such trades. The Exchange 
believes that deletion of this text is consistent with the proposed 
removal of the requirement under Rule 11.9 that a Sponsored Participant 
must be a self-clearing broker or dealer and notes that the preceding 
sentence of Rule 11.9(b)(3), which will remain unchanged under the 
Exchange's proposal, requires a written statement from the Sponsoring 
ETP Holder that it is responsible for the ``orders, executions and 
actions of its Sponsored Participant at issue.'' The Exchange also 
notes that Rule 1.5S.(2) defines ``Sponsoring ETP Holder'' as a broker-
dealer that has been designated by a Sponsored Participant to ``. . . 
execute, clear and settle transactions resulting from the System. . . 
.'' The Exchange does not believe that the text it proposes to remove 
impacts in any way the respective obligations of the Sponsoring ETP 
Holder or Sponsored Participant with respect to the clearing and 
settlement of the Sponsored Participant's executions on the Exchange.
2. Statutory Basis
    The Exchange believes that the proposed amendments to Rules 11.9 
and 11.17 are consistent with the requirements of the Act and the rules 
and regulations thereunder that are applicable to a national securities 
exchange and, in particular, with the requirements of Section 6(b) of 
the Act.\15\ In particular, the Exchange submits that its proposal is 
consistent with Section 6(b)(5) of the Act,\16\ because it would 
promote just and equitable principles of trade and remove impediments 
to, and perfect the mechanism of, a free and open market and a national 
market system and, in general, protect investors and the public 
interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that amending Rule 11.9(b) to remove the 
requirement that a Sponsored Participant must be a registered, self-
clearing broker or dealer, along with the parallel requirement 
contained in Rule 11.17(a), is consistent with Section 6(b)(5), in that 
it would remove from the Exchange's rules provisions that, while 
intended as salutary requirements intended to protect investors and the 
public interest, are now extraneous to that goal because of the 
significant changes to the regulatory and compliance structure for 
market access that have resulted from the implementation of Rule 15c3-
5. Accordingly, the Exchange submits that considerations of investor 
protection and the public interest are no longer effectively served by 
placing the additional requirement on prospective Sponsored 
Participants that they meet the criterion of being a self-clearing 
broker-dealer, as well as satisfying the other requirements of Rule 
11.9, before they can access the Exchange's marketplace.
    The Exchange further believes that its proposal to eliminate the 
self-clearing broker-dealer requirement for Sponsored Participants from 
Rule 11.9(b)(2) and 11.17(a) would operate to promote just and 
equitable principles of trade and remove impediments to and perfect the 
mechanism of a free and open market and national market system. The 
Exchange's proposal aligns the Exchange's rules with those of other 
national securities exchanges, which do not have the same requirements 
in their respective sponsored access and

[[Page 30916]]

clearance and settlement rules.\17\ The Exchange thereby aspires to 
promote the consistency of its rules with other Exchanges by removing a 
requirement that other exchanges do not have and which can be deemed an 
impediment to a free and open market and national market system.
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    \17\ See footnote 13, supra.
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    Similarly, the Exchange believes that its proposal to amend 
subparagraph (b)(2)(D) of Rule 11.9 to require that a Sponsored 
Participant shall provide a list of its Authorized Traders to the 
Sponsoring ETP Holder is consistent with Section 6(b)(5) of the Act in 
that it promotes just and equitable principles of trade and the 
protection of investors. The Exchange believes that it is important for 
a Sponsoring ETP Holder to have a current list of its Sponsored 
Participants' Authorized Traders and not confine that requirement to 
instances where the Sponsoring ETP Holder requests such a list. 
Moreover, as other exchanges have the same requirement, the amendment 
as proposed would enhance the ability of the Sponsoring ETP Holder to 
comply with market access requirements while not imposing any greater 
compliance burden.\18\
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    \18\ Id.
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    The Exchange's proposed amendment deleting from paragraph (b)(3) of 
Rule 11.9 the provision that it is the responsibility of the Sponsoring 
ETP Holder, without limitation to clear and settle the Sponsored 
Participant's trades in the event that the Sponsored Participant or its 
Qualified Clearing Agency does not accept any such trades, is 
consistent with Section 6(b)(5). The Exchange submits that the text 
proposed for deletion was apposite within the context of the 
requirement that a Sponsored Participant must be a self-clearing 
registered broker or dealer, which is also proposed for deletion. The 
Exchange notes that the preceding sentence of Rule 11.9(b)(3), which 
will remain unchanged under the Exchange's proposal, requires a written 
statement from the Sponsoring ETP Holder that it is responsible for the 
``orders, executions and actions of its Sponsored Participant at 
issue'' and that Rule 1.5S.(2) defines ``Sponsoring ETP Holder'' as a 
broker-dealer that has been designated by a Sponsored Participant to 
``. . . execute, clear and settle transactions resulting from the 
System. . . .'' The Exchange believes that its proposal will operate to 
clarify and impart consistency within its rules, which is consistent 
with the requirements of Section 6(b)(5) of the Act that the rules of 
the Exchange promote just and equitable principles of trade and the 
protection of investors and the public interest.

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

    The Exchange believes that the proposed amendments to Rules 11.9 
and 11.17 are in accordance with Section 6(b)(8) of the Act in that 
they will not place any burden on competition that is not necessary or 
appropriate in furtherance of the Act. In fact, the Exchange believes 
that its proposed amendment will promote competition by removing from 
Rule 11.9 the requirement that a Sponsored Participant seeking to 
attain access to the Exchange's marketplace through a Sponsoring ETP 
Holder must itself be a self-clearing registered broker or dealer. 
Since the access rules of other national securities exchanges do not 
contain a similar requirement, its proposed removal from Rule 11.9 will 
make access to the Exchange subject to meeting similar terms and 
conditions as required by other exchanges and not imposing special or 
unique provisions that operate as a barrier to obtaining access on the 
Exchange. The Exchange believes that the proposed amendments will 
therefore promote competition rather than impede it in any way.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from ETP Holders or other interested parties.

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

    Because the foregoing proposed rule change does not:

A. Significantly affect the protection of investors or the public 
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate;

it has become effective pursuant to Section 19(b)(3)(A) \19\ of the 
Exchange Act and Rule 19b-4(f)(6) \20\ thereunder. In addition, the 
Exchange provided the Commission with written notice of its intent to 
file the proposed rule change, along with a brief description and text 
of the proposed rule change, at least five business days prior to the 
date of filing, or such shorter time as designated by the 
Commission.\21\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange requests that the Commission waive the 30-day 
operative delay so that the proposed rule change may become effective 
and operative upon filing with the Commission pursuant to Section 
19(b)(3)(A) of the Act \22\ and paragraph (f)(6) of Rule 19b-4 
thereunder.\23\
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
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    The Commission finds that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. In 
particular, the proposed rule change will align the NSX sponsored 
access requirements with that of other exchanges. Further, waiver of 
the operative delay would allow Exchange ETP Holders to enter sponsored 
access arrangements immediately. Accordingly, the Commission designates 
the proposal operative upon filing.\24\
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    \24\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the 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.

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-NSX-2014-15 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 No. SR-NSX-2014-15. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review

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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 change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. eastern time. 
Copies of such filings will also 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-NSX-2014-15 and should be submitted on 
or before June 19, 2014.

    For the Commission by the Division of Trading and Markets, 
pursuant to the delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12423 Filed 5-28-14; 8:45 am]
BILLING CODE 8011-01-P