[Federal Register Volume 83, Number 173 (Thursday, September 6, 2018)]
[Notices]
[Pages 45289-45297]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19239]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84001; File No. SR-NASDAQ-2018-070]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To List and Trade Corporate
Non-Convertible Bonds on Nasdaq
August 30, 2018.
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 August 27, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 comments 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 proposes to adopt listing and trading requirements and
fees for non-convertible corporate bonds.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is amending its rules to permit the initial and continued
listing of and trading of non-convertible corporate debt securities
(referred to herein as ``bonds'' or ``non-convertible bonds'') on
Nasdaq and to establish fees for listing those bonds. While Nasdaq
rules currently provide for the initial and continued listing of
convertible bonds, Nasdaq believes that there may be a demand from
certain types of investors for Exchange-listed non-convertible bonds.
Nasdaq also believes that this proposal will improve the public market
for non-convertible bonds by promoting the fair and orderly operation
of that market and by increasing the transparency of that market for
securities that are listed pursuant to this proposal. Nasdaq is
therefore amending the relevant listing and trading rules accordingly.
Listing Rules
First, Nasdaq proposes to adopt Rule 5702 to permit the initial
listing of non-convertible bonds. For non-convertible bonds, Nasdaq
proposes to require a minimum principal amount outstanding or market
value of at least $5 million, instead of the minimum $10 million
principal amount outstanding required for convertible debt under Rule
5515(b). Nasdaq notes that this requirement is the same as the initial
listing requirement for bonds on the New York Stock Exchange LLC
(``NYSE'') and NYSE American LLC (``NYSE American''), which both
require that the debt issue have an aggregate market value or principal
amount of no less than $5 million.\3\
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\3\ See Section 102.03 of the NYSE Listed Company Manual and
Section 104 of the NYSE American Company Guide.
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[[Page 45290]]
In addition to Rule 5702(a)(1), Nasdaq also proposes to require
satisfaction of the condition set forth in Rule 5702(a)(2) for non-
convertible bonds to be eligible for listing on the Exchange. This
condition is that the issuer of the bond must have one class of equity
security that is listed on Nasdaq, NYSE, or NYSE American. This
condition is similar to one that NYSE and NYSE American impose.\4\
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\4\ See Section 104 of the NYSE American Company Guide; Section
102.03 of the NYSE Listed Company Manual.
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Nasdaq also proposes to add continued listing requirements under
Rule 5702(b). Proposed Rule 5702(b)(1) would require, for continued
listing, that a non-convertible bond issuance maintain a market value
or principal amount outstanding of at least $400,000.\5\ Proposed Rule
5702(b)(2) would also require an issuer to meet its obligations on the
listed non-convertible bonds, and Nasdaq proposes to amend Rule
5810(c)(1) to provide that a determination by the Exchange's Listings
Qualifications Department that the issuer has failed to meet its
obligations on the bonds would result in their immediate suspension and
the commencement of delisting proceedings. Nasdaq notes that these
proposed continued listing standards for non-convertible bonds are the
same as the listing requirements for bonds imposed by NYSE American.\6\
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\5\ The Exchange proposes to amend Rule 5810(c)(3) to provide
that a failure to meet the continued listing requirements under Rule
5702(b)(1) for a period of 30 consecutive business days will
constitute a deficiency; in the event of a deficiency, the
Exchange's Listings Qualifications Department will promptly notify
the deficient issuer and the issuer shall have a period of 180
calendar days from such notification to regain compliance.
Compliance will be deemed to be regained by meeting the applicable
standard for a minimum of 10 consecutive business days, unless the
Listing Qualifications Department exercises its discretion to extend
this 10 day period as set forth in Rule 5810(c)(3)(G).
\6\ See Section 1003(b)(iv) of the NYSE American Company Guide.
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In addition to these quantitative requirements for listing non-
convertible bonds, the issuer of listed bonds would also have to comply
with other requirements that are generally applicable to companies
listed on Nasdaq pursuant to Rule 5250. Specifically, Rule 5250(a)
allows Nasdaq to request additional information, either public or non-
public, deemed necessary to make a determination regarding a company's
continued listing. Rule 5250(b) requires issuers to make public
disclosure of material information, disclosure of notification of
deficiency, and disclosure of third party director and nominee
compensation. Rule 5250(c) requires companies to file all required
periodic financial reports. Rule 5250(d) requires the distribution of
annual and interim reports. Rule 5250(e) sets forth various corporate
events resulting in material changes that trigger the requirement for
the issuer to submit certain forms to Nasdaq.\7\ Rule 5250(f) requires
the issuers to pay all applicable fees set forth in the Rule 5900
series.
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\7\ The Exchange proposes to amend Rule 5250(e)(3) to require
issuers of non-convertible bonds to provide at least 10 calendar
days advance notice to the Exchange of certain corporate actions,
including redemptions (full or partial calls), tender offers,
changes in par value, and changes in identifier (e.g., CUSIP number
or symbol), by filing the appropriate form as Nasdaq shall
designate.
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In addition to the Exchange's rules that would apply to an issuer
of non-convertible bonds that list on Nasdaq,\8\ the issuers of those
bonds would have to register those securities pursuant to Section 12(a)
of the Act.\9\ Among other things, the issuer is required to disclose
information about the organization, financial structure, information
about the nature of the business, certain information about the
directors, officers and underwriters, material contracts, and balance
sheets. As part of this proposal, Nasdaq is requiring that the issuer
must currently list one class of an equity security on either
Nasdaq,\10\ NYSE, or NYSE American,\11\ and so issuers may already
disclose this information in connection with the listing of those
securities. However, Section 12(a) also requires issuers to disclose
information that is more specific to the security to be listed and
traded on the Exchange, such as the terms, position, rights, and
privileges of the different classes of securities outstanding, and the
terms on which the issuer's securities are to be, and during the
preceding three years have been, offered to the public or otherwise.
Given this requirement, Nasdaq's proposal may increase the amount of
information about non-convertible bonds that will be disclosed by the
issuer than would otherwise be the case.
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\8\ Nasdaq notes that currently, the Rule 5600 Series generally
would apply to securities listed in this proposal. However,
subsequent to this proposal, but prior to listing non-convertible
bonds of issuers that have equity securities listed on NYSE or NYSE
American, Nasdaq plans to submit a proposal to amend Rule 5615(a)(6)
to state that the Rule 5600 Series does not generally apply to
companies listing only preferred or debt securities on the Exchange.
Under this proposal, companies listing only non-convertible bonds
would be exempt from the Rules relating to Independent Directors
(Rule 5605(b)), Audit Committee Requirements (Rule 5605(c)),
Compensation Committee Requirements (Rule 5605(d)), Independent
Director Oversight of Director Nominations (Rule 5605(e)), Code of
Conduct (Rule 5610), Meetings of Shareholders (Rule 5620), Review of
Related Party Transactions (Rule 5630), Shareholder Approval (Rule
5635), and Voting Rights (Rule 5640). However, Rule 5615(a)(6) would
state that such companies still must comply with Rule 5625, pursuant
to which an issuer would provide Nasdaq with prompt notification
after an executive officer of the company becomes aware of any
noncompliance by the company with the requirements of the Rule 5600
Series. In addition, this amended Rule would require issuers of
listed non-convertible bonds to comply with Rule 5605(c), which sets
forth the requirements of the company's audit committee, including
its charter, composition, responsibilities and authority, to the
extent required by Exchange Act Rule 10A-3. The Rule thereby would
apply the requirements of Rule 10A-3 to the issuer's audit
committee. The Rule also would impose on the issuer the obligation
to promptly notify Nasdaq after an executive officer of the issuer
becomes aware of any noncompliance by the issuer with the
requirements of the Rule 5600 series, such as noncompliance with the
audit committee provisions that are required by Rule 10A-3 and set
forth in Rule 5605(c). Nasdaq also notes that NYSE and NYSE American
have adopted similar exemptions for both companies that list only
preferred and debt securities. See Section 303A of the NYSE Listed
Company Manual; see also Section 801(g) of the NYSE American Company
Guide. Finally, Nasdaq notes that the foregoing proposal would not
apply to issuers of non-convertible bonds that have equity
securities listed on Nasdaq.
\9\ Specifically, Section 12(a) requires that, in order for an
exchange member, broker or dealer to effect a transaction in a
security on a national securities exchange, a registration must be
effective ``as to such security for such exchange.'' See 15 U.S.C.
78(l)(a).
\10\ For purposes of the listing requirement that the non-
convertible bond issuer also list a class of equity securities on
Nasdaq, the issuer may list an equity security on the Nasdaq Capital
Market, the Nasdaq Global Market, or the Nasdaq Global Select
Market.
\11\ The Exchange notes that upon the effective date of the
proposal, it only expects to be capable of listing and trading non-
convertible bonds of issuers that currently list equity securities
on Nasdaq. The Exchange expects to be ready to list and trade bonds
of issuers with equity securities listed on NYSE or NYSE American by
the Second Quarter of 2019. The Exchange will issue a trader alert
at least seven days in advance of accepting applications to list and
trade bonds of issuers with equity securities listed on NYSE or NYSE
American.
The Exchange proposes to include language to this effect in the
rule text, which it will then propose to remove after the Exchange
begins listing and trading non-convertible bonds of issuers with
equity securities listed on NYSE and NYSE American.
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Nasdaq proposes to amend Rule 5515(b)(4) to change references from
the American Stock Exchange to NYSE American to reflect the name change
of that exchange.\12\
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\12\ See Securities Exchange Act Release No. 80283 (Mar. 21,
2017), 82 FR 15244 (Mar. 27, 2017) (SR-NYSEMKT-2017-14).
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Nasdaq also proposes to amend the definition of a ``substitution
listing event'' in Rule 5005 to include an additional event related to
the listing of bonds. Specifically, Rule 5005(a)(40) will include a
change in the obligor of a listed debt security as a ``substitution
listing event.'' A Substitution Listing Event triggers certain
reporting requirements to the Exchange.\13\ Nasdaq is proposing to make
this change to both convertible and non-convertible bonds,
[[Page 45291]]
as both types of securities could potentially be subject to a change in
the obligor of that bond, which Nasdaq believes should qualify as a
substitution listing event.
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\13\ See Rule 5250(e)(4).
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Nasdaq proposes to add fees in connection with listing non-
convertible bonds. Specifically, Nasdaq proposes to add Rule 5935 to
impose a non-refundable application fee of $5,000 to list a class of
non-convertible bonds pursuant to Rule 5702. Nasdaq proposes to waive
this application fee if, in connection with a company's application to
list non-convertible bonds on Nasdaq, the company will be switching the
listing market for such bonds from NYSE or NYSE American to Nasdaq.
Nasdaq notes that NYSE American imposes an initial listing fee of $100
per $1 million principal amount (or fraction thereof) for listed bonds,
with a minimum fee of $5,000 and a maximum fee of $10,000,\14\ while
NYSE imposes an initial listing fee of $25,000 on all listed bonds of
NYSE equity issuers.\15\
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\14\ See NYSE American Company Guide Section 140.
\15\ See NYSE Listed Company Manual Section 902.08.
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Nasdaq also proposes to add an annual fee in connection with
listing non-convertible bonds. Nasdaq proposes to add Rule 5935(b) to
state that the issuer of each class of non-convertible bonds listed
pursuant to Rule 5702 shall pay to Nasdaq an annual fee of $5,000.
Moreover, the proposed Rule states that a company that switches its
listing market for its non-convertible bonds from the New York Stock
Exchange or NYSE American to Nasdaq will not be liable for the annual
fee until January 1 of the calendar year following the effective date
of the non-convertible bonds listing on Nasdaq. Nasdaq notes that NYSE
American assesses an annual listing fee of $5,000 for listed bonds and
debentures of companies whose equity securities are not listed on NYSE
American,\16\ while NYSE assesses an annual listing fee of $25,000 for
listed bonds of NYSE equity issuers and affiliated companies.\17\
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\16\ See NYSE American Company Guide Section 141.
\17\ See Section 902.08 of the NYSE Listed Company Manual.
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Nasdaq also proposes to clarify rule text relating to the listing
fees for convertible bonds. Specifically, Rule 5920(a)(2) specifies a
fee of $1,000 or $50 per million dollars face amount of bonds
outstanding, whichever is higher. Nasdaq proposes to clarify that this
is an entry fee, and that it applies to convertible bonds only. Nasdaq
is not charging an entry fee for non-convertible bonds, as it believes
that the proposed application fee will allow the Exchange to adequately
recoup the expenses incurred by the Exchange in processing an issuer's
application to list those securities.
Nasdaq believes that this proposal will improve the public debt
market by increasing transparency for non-convertible bonds that are
listed pursuant to this proposal and the orderliness of the market for
those securities. For example, Rule 5250(b)(1) requires listed
companies to, except in unusual circumstances, disclose promptly to the
public through any Regulation FD compliant method (or combination of
methods) any material information that would reasonably be expected to
affect the value of their securities or influence investors'
decisions.\18\ Nasdaq-listed companies must notify Nasdaq's MarketWatch
Department prior to the distribution of certain material news at least
ten minutes prior to public announcement of the news when the public
release of the information is made, from 7:00 a.m. to 8:00 p.m. E.T. As
set forth in IM-5250-1, such events may include: (1) Financial-related
disclosures, including quarterly or yearly earnings, earnings
restatements, pre-announcements or guidance; (2) corporate
reorganizations and acquisitions, including mergers, tender offers,
asset transactions and bankruptcies or receiverships; (3) new products
or discoveries, or developments regarding customers or suppliers (e.g.,
significant developments in clinical or customer trials, and receipt or
cancellation of a material contract or order); (4) senior management
changes of a material nature or a change in control; (5) resignation or
termination of independent auditors, or withdrawal of a previously
issued audit report; (6) events regarding the Company's securities,
such as defaults on senior securities, calls of securities for
redemption, repurchase plans, stock splits or changes in dividends,
changes to the rights of security holders, or public or private sales
of additional securities; (7) significant legal or regulatory
developments; or (8) any event requiring the filing of a Form 8-K.
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\18\ Nasdaq will determine compliance with the listing
requirements for non-convertible bonds based upon information it
receives directly from issuers as well as data that it obtains from
third party data providers.
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Nasdaq's MarketWatch Department monitors real time trading in all
Nasdaq securities during the trading day for price and volume activity.
In the event of certain price and volume movements, the MarketWatch
Department may contact a company in order to ascertain the cause of the
unusual market activity.
For non-convertible bonds that are listed under this proposal, the
issuer will be required to comply with these disclosure requirements
and to update Nasdaq accordingly on any material information that would
reasonably be expected to affect the value of their bonds or influence
investors' decisions. Depending on the nature of the event and the
company's views regarding the business advisability of disclosing the
information, the MarketWatch Department may work with the company to
accomplish a timely release of the information. Furthermore, depending
on the materiality of the information and the anticipated effect of the
information on the price of the Company's bonds, the MarketWatch
Department may advise the Company that a temporary trading halt is
appropriate to allow for full dissemination of the information and to
maintain an orderly market. For non-convertible bonds that are listed
on Nasdaq pursuant to this proposal, a trading halt will be initiated
by the Exchange, pursuant to proposed Rule 4000B(i). In these ways,
Nasdaq believes that the proposal will increase transparency for bonds
that are listed pursuant to this proposal and the orderliness of the
market for those bonds.\19\
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\19\ Nasdaq notes that it also proposes to amend Rule 5250(e)(3)
to require an issuer to provide at least 10 calendar days advance
notice to Nasdaq of certain corporate actions relating to non-
convertible bonds listed on the Nasdaq Bond Exchange, including
redemptions (full or partial calls), tender offers, changes in par
value, and changes in identifier (e.g., CUSIP number or symbol), by
filing the appropriate form as designated by Nasdaq. These
disclosures will aid the Listings Qualification Department in
assessing an issuer's compliance with the continuing listing
standards set forth in proposed Rule 5702.
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Nasdaq also believes that this proposal will benefit market
participants by making non-convertible bonds more accessible to certain
kinds of investors. For example, in the European Union, certain
investors, such as so-called UCITS investment funds,\20\ may generally
only hold 10% of assets in securities that are not listed on an
[[Page 45292]]
exchange or other regulated market meeting certain standards.
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\20\ UCITS (Undertakings for Collective Investment in
Transferable Securities) is a harmonized regime throughout Europe
for the management and sale of mutual funds. A UCITS fund is
essentially a mutual fund based in the European Union that meets
these requirements and is therefore exempt from national regulation
in individual European countries. Under UCITS III, a UCITS fund can
invest in transferable securities, such as listed and publicly
traded equities and bonds, deposits and money market instruments,
other mutual funds, and financial derivative instruments, subject to
diversification requirements.
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Trading Rules
In conjunction with its proposal to adopt rules to list non-
convertible bonds on Nasdaq, the Exchange also proposes rules that will
provide for the trading of such listed bonds. The Exchange notes that
its proposed non-convertible bond trading system--to be known as the
``Nasdaq Bond Exchange''--will offer Members,\21\ at its inception,
certain core trading functionality that will be competitive with NYSE
Bonds. However, the Exchange will reserve more sophisticated and
elaborate functionality until such time as the Exchange observes that a
sufficient demand exists for it.\22\
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\21\ A ``Member'' means any registered broker or dealer that has
been admitted to membership in Nasdaq. See Rule 0120(i).
\22\ The Nasdaq Bond Exchange will only trade non-convertible
bonds that are listed on Nasdaq.
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In many respects, the proposed trading system and the proposed
rules that govern it are a pared down version of the NYSE Bonds system
and NYSE Rule 86. That is, like NYSE Bonds, the Nasdaq Bond Exchange
will be an electronic system for receiving, processing, executing, and
reporting bids, offers and executions in bonds. Like NYSE Bonds, the
Nasdaq Bond Exchange will display, match, and execute buy and sell
orders on a price/time basis. The Exchange, like NYSE and NYSE
American, will also accept good-for-day limit orders and fill-or-kill
orders, and it will trade bonds of issuers that have at least one class
of equity securities listed on Nasdaq and NYSE or NYSE American.\23\
However, at its inception, the Nasdaq Bond Exchange will not have--as
does NYSE Bonds--market makers, sponsored access, auctions, price
collars, or certain order types (e.g., reserve orders, minimum quantity
orders, good-til-cancelled orders, and timed orders). The Nasdaq Bond
Exchange also will have only one trading session each day as opposed to
NYSE Bonds, which has three sessions. Again, the Exchange may add such
features and functionalities to the Nasdaq Bond Exchange in the future
to the extent that it determines that a demand exists for them. The
Exchange observes that users of NYSE Bonds do not appear to avail
themselves of many of these features and functionalities, such that the
Exchange does not believe that including them in the Nasdaq Bond
Exchange is necessary for it to compete with NYSE Bonds.
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\23\ As noted earlier, at the launch date of the Nasdaq Bond
Exchange, the Exchange expects that the system will be only capable
of trading bonds of issuers that currently list equity securities on
Nasdaq. The Exchange expects to be ready to list and trade bonds of
issuers with equity securities listed on NYSE or NYSE American by
the Second Quarter of 2019. See n.11, supra.
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Order Types
The proposed rules designate the types of orders that could be
entered into the Nasdaq Bond Exchange. Initially, Users \24\ of the
Nasdaq Bond Exchange will be allowed to enter good-for-day limit orders
(``Nasdaq Bond Exchange Good for Day Limit Orders''), which are orders
to buy or sell a stated quantity of units of bonds at a specified price
or at a better price that, if not executed or cancelled, will expire at
the end of the trading session on the day on which they are entered.
Users will also be able to enter a Nasdaq Bond Exchange Fill-or-Kill
All-Or-None Order (``Nasdaq Bond Exchange FOK-AON Order''), which is an
order that is to be executed immediately in its entirety against one or
more contra parties at the best price available, or if it is not
executed immediately in its entirety, it is cancelled. All orders on
the Nasdaq Bond Exchange will be displayed and will be anonymous. The
Exchange will file a proposed rule change with the Commission and
notify its members if and when additional order types become available
for use.
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\24\ Proposed Rule 4000B defines a ``User'' as any Nasdaq Member
that has elected, pursuant to the process described below, to
receive access to the Nasdaq Bond Exchange.
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Trading Units
The minimum unit of trading in the Nasdaq Bond Exchange is one bond
unless the issuer otherwise specifies a larger minimum unit of trading
in the bond indenture agreement. The Nasdaq Bond Exchange will accept
and display bids and offers in bonds priced to three decimal places, as
per market standard.
Order Entry and Execution
To post an order in a particular bond on the Nasdaq Bond Exchange,
a User will be required to enter certain basic information including:
CUSIP number, order quantity, order type (i.e., Nasdaq Bond Exchange
Good for Day Limit Order); price (up to three decimals); and whether
the order is buy or sell.
The Nasdaq Bond Exchange will be an electronic order-driven
matching system. Nasdaq Bond Exchange orders submitted by Users will be
displayed, matched, and executed on a price/time priority basis. Orders
that are marketable at the time of entry will be matched and executed.
An order will be marketable when it entered the Nasdaq Bond Exchange
system if contra side interest is available at that price or a better
price. Nasdaq Bond Exchange Good for Day Limit Orders that are not
marketable at the time of entry would post to the Nasdaq Bond Exchange
order ``book.''
The Nasdaq Bond Exchange will provide an exception to its normal
price/time system to allow Users to avoid internalizing orders. Users
may be interested in self-match prevention in order to run multiple
strategies at once that may sit on opposite sides of the book. Pursuant
to the proposed Rule 4000B(h)(1)(C), which the Exchange adapts from
Nasdaq Rule 4757(a)(4), Nasdaq will permit Users to direct that orders
entered into the Nasdaq Bond Exchange will not execute against orders
entered under the same MPID. In addition, the proposed Rule provides
that Users using the FIX order entry protocol (discussed below) may
assign to orders entered through a specific order entry port a unique
group identification modifier that will prevent orders with such
modifier from executing against each other. In such a case, the
proposed Rule states that a User may elect from the following options:
(i) Regardless of the size of the interacting orders, cancelling the
oldest order in full; or (ii) regardless of the size of the interacting
orders, cancelling the most recent of the orders in full. The foregoing
options may be applied to all orders entered through a specific order
entry port.
An order designated for execution in the Bond Trading Session may
be cancelled at any time as long as the order had not been executed.
The Exchange will charge no fees for posting orders or executing
trades on the Nasdaq Bond Exchange. If the Exchange decides to charge
any such fees in the future, then the Exchange will submit a rule
filing proposal to that effect to the Commission.
Clearing
Most orders matched on the Nasdaq Bond Exchange will be locked-in
trades and will be submitted without an omnibus account to the National
Securities Clearing Corporation using Universal Trade Capture and then
to the Depository Trust Company (``DTC'') for clearance and settlement.
Settlement of corporate bond trades will be consistent with current
convention, i.e., two day settlement. Bonds that are not eligible for
settlement at DTC will be settled manually (``ex-clearing'') between
the two counterparties.
Bond Trading Session
The Nasdaq Bond Exchange would have one trading session per trading
day from 8:30 a.m. until 4:00 p.m. E.T. (the
[[Page 45293]]
``Bond Trading Session''). There will be no pre-market or post-market
session. Instead, the Nasdaq Bond Exchange will immediately start
processing orders as they are entered upon opening. Orders submitted
outside of the Bond Trading Session will not be accepted.
Clearly Erroneous Executions
Bond trades on the Nasdaq Bond Exchange would be made subject to
Exchange Rule 11890, which governs the process for addressing clearly
erroneous trades. Within the context of bond trading on the Nasdaq Bond
Exchange, a ``clearly erroneous execution'' will be one where there is
an obvious error in any term, such as price, unit of trading, or
identification of the bond.'' \25\ A User that receives an erroneous
execution may request the Exchange review the transaction or the
President of the Exchange, a senior level employee thereof, or a
designated officer (a ``Senior Official'') may review an execution on
their own initiative. A request for review of an execution must include
certain information, including in pertinent part, information
concerning the time of the transaction, security symbol, number of
bonds, price, and factual basis for believing that the trade is clearly
erroneous.\26\ The request for review would have to be submitted within
30 minutes of the trade in question.\27\ The other party (or parties)
to the trade will be notified of the request for review.\28\
Thereafter, an Exchange official would review the transaction and would
make a determination as to whether it was clearly erroneous.\29\ The
reviewer could make this determination with or without supporting
documentation from any party to the transaction.\30\ Pursuant to
proposed Rule 11890(a)(2)(C)(4), determinations of a clearly erroneous
execution will be made on a case-by-case basis, considering factors
that include, but are not limited to, the following: (i) Execution
price; (ii) volume and volatility of a bond; (iii) news released for
the issuer or the bond and/or the related equity security; (iv) trading
halts; (v) corporate actions; (vi) general market conditions; (vii) the
rating of the bond; (viii) interest and/or coupon rate; (ix) maturity
date; (x) yield curves; (xi) prior print, if available within a
reasonable time frame; (xii) executions inconsistent with the trading
pattern of a bond; (xiii) current day's trading high/low; (xiv) recent
day's and week's trading high/low; (xv) executions outside the 52 week
high/low; (xvi) effect of a single large order creating several prints
at various prices; and (xvii) quotes and executions of other market
centers.\31\
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\25\ See proposed Rule 4000B(b)(2)(C).
\26\ See Rule 11890(a)(2).
\27\ See id.
\28\ See id.
\29\ See id.
\30\ See id.
\31\ The criteria to be used to determine clearly erroneous
executions of non-convertible bonds, which are set forth in proposed
Rule 11890(a)(2)(C)(4), are in lieu of the criteria presently used
to determine clearly erroneous executions of equity securities,
which are set forth in Rule 11890(a)(2)(C)(1)-(C)(3).
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If the reviewer determines that the execution was not clearly
erroneous, then no corrective action will be taken in relation to the
transaction. If the reviewer determines that the transaction were
clearly erroneous, the transaction will be deemed null and void.\32\ If
one party does not agree with the determination, then that party may
request further review or an appeal to the Nasdaq Review Council
pursuant to the procedures set forth in Rule 11890(c). Depending on the
outcome of the appeal, the transaction would either remain unchanged or
be deemed null and void.\33\
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\32\ See Rule 11890(a)(2)(B).
\33\ The Exchange notes that, pursuant to Article VI of the By-
Laws of the Nasdaq Stock Market, LLC, at least 20 percent of the
Nasdaq Review Council must consist of representatives of Members of
the Exchange. Although the By-Laws do not specify any specific
categories of Members that must be represented on the Review
Council, the Exchange expects that the existing Member
representatives will adequately represent the interests of Users in
appeals of clearly erroneous determinations. If it becomes apparent
to the Exchange that roster of the Nasdaq Review Council does not
adequately represent the interests of Users, then it will, at the
appropriate time, consider nominating one or more Users to the
Council.
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Nasdaq Bond Exchange System Disruption or Malfunction or Equipment
Changeover
Rule 11890(b) further provides that, in the event of any system
disruption, malfunction, or equipment changeover in the Nasdaq Bond
Exchange trading facility, a Senior Official may, without the need for
a request for review, review transactions affected by a system
disruption, malfunction, or equipment changeover and decide if any
transactions are erroneous.\34\ In such situations, the Senior Official
could declare the transaction to be unchanged or null and void,
appropriate.\35\ The Rule also provides that, absent extraordinary
circumstances, any such action of the Senior Official shall be taken
within 30 minutes of detection of the system disruption, malfunction,
or equipment changeover, or an erroneous transaction resulting from
such system problem.\36\ If an erroneous transaction occurred as a
result of a system disruption, system malfunction, or equipment
changeover, each party to the erroneous transaction will be notified of
the situation and the specific action as soon as practicable.\37\
Thereafter, the User aggrieved by the action could appeal such
action.\38\
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\34\ See Rule 11890(b)(i).
\35\ See id.
\36\ See id.
\37\ See id.
\38\ See id.
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Halting and Suspending Bond Trading on the Exchange
Proposed Rule 4000B(i)(1) provides that the Exchange may halt or
suspend trading in non-convertible bonds listed on the Nasdaq Bond
Exchange when: (1) In the Exchange's regulatory capacity, it is
necessary or appropriate to maintain a fair and orderly market, to
protect investors, or is in the public interest, due to extraordinary
circumstances or unusual market conditions; (2) a class of equity that
is issued by the same issuer as the non-convertible bond has been
halted or suspended by, or de-listed from, the Exchange or by its
primary listing market (NYSE or NYSE American), as applicable, for
regulatory purposes; (3) news reports have a material impact on a non-
convertible bond, its issuer, or related stock of its issuer; or (4)
the non-convertible bond is to be called for redemption or will mature
or become subject to retirement, and thereafter it will be subject to
de-listing, in which case the Exchange shall cease trading the non-
convertible bond, effective not less than 10 days before the date when
such de-listing becomes effective, pursuant to a de-listing application
that the Exchange submits to the Commission on Form 25 and consistent
with SEC Rule 12d2-2 \39\ and the Act.
---------------------------------------------------------------------------
\39\ See 17 CFR 240.12d2-2.
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Pursuant to proposed Rule 4000B(i)(2), when bond trading is halted
under any of the circumstance described above, a halt message at the
beginning and end of the halt will be disseminated to all Nasdaq Bond
Market Users. This trading halt will be referred to as a ``Bond Halt.''
\40\ Upon commencement of a Bond Halt, all pending orders in the Nasdaq
Bond Exchange will be cancelled.\41\ The Nasdaq Bond Exchange will
resume accepting orders and trading once the Exchange declares an end
to a Bond Halt.\42\
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\40\ See Rule 4000B(i)(2).
\41\ See Id.
\42\ See Id.
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Dissemination of Trading Information
The Exchange proposes to publicly disseminate a real-time bond data
feed,
[[Page 45294]]
which will be referred to as ``Nasdaq Corporates Totalview.'' \43\ The
Nasdaq Corporates Totalview data feed would reflect all orders in time
sequence in the Nasdaq Bond Exchange order ``book.'' Because the Nasdaq
Bond Exchange will be a purely order-driven system, the Exchange would
not disseminate any information on a particular bond if there are no
orders posted in the ``book'' for such bond. In addition to the Nasdaq
Bond Exchange order ``book,'' the data feed also would include the last
sale price as executions occur. The Nasdaq Corporates Totalview data
feed will be available on a standalone basis free of charge to market
participants, third-party data vendors, and other interested parties
who request access and agree to the Exchange's terms. If the Exchange
decides to establish fees for the Nasdaq Corporates Totalview product
at a later date, it will submit a separate rule filing.
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\43\ Pursuant to FINRA Rule 6730(e)(2), transactions on the
Nasdaq Bond Exchange need not be reported to FINRA's Trade Reporting
and Compliance Engine because only bonds listed on Nasdaq, a
national securities exchange, may be traded on the Bond Exchange,
and because bond transaction information will be disseminated
publicly.
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Access to the Nasdaq Bond Exchange System
Only Members of the Exchange that have entered into a written
service agreement with the Exchange (i.e., the ``Nasdaq U.S. Services
Agreement'') and that elect to receive access to the Nasdaq Bond
Exchange on their Member application form, will be duly authorized
Users that may receive such access. Existing Members of the Exchange
will not be required to amend their Nasdaq U.S. Services Agreements to
become Users and obtain access to the Nasdaq Bond Exchange; instead,
existing Members simply will be required to complete a form, attached
hereto as Exhibit 3 [sic], that indicates their interest in becoming
Users and obtaining access.
Users of the Nasdaq Bond Exchange will gain access to the system
via direct or indirect electronic linkages utilizing the Financial
Information Exchange or ``FIX'' protocol. The FIX protocol is already
used and widely accepted by Nasdaq market participants and will be used
by the Nasdaq Bond Exchange Users for order entry, modification and
cancellation, and message transmittal for all non-convertible bonds
traded through the Nasdaq Bond Exchange. All of the communications
protocols will be publicly available to allow Users and service bureaus
to develop their own front-end software. Users will have the ability to
establish connectivity to the Nasdaq Bond Exchange directly or through
third-party connectivity providers, including a range of extranets and
service bureaus, as set forth in General 8 of the Nasdaq Rules.\44\ The
Exchange will not charge any fees for FIX port connectivity to the
Nasdaq Bond Exchange or for connectivity to the Bond Exchange's
disaster recovery system.\45\
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\44\ The Exchange notes that Users that already purchase FIX
port connectivity to the Nasdaq Stock Exchange will need to obtain
one or more additional FIX ports to connect to the Nasdaq Bond
Exchange.
\45\ Separately from port connectivity, the Exchange notes that
Users will need to establish physical connections to the Nasdaq Bond
Exchange, as set forth in General 8 of the Nasdaq Rules. To the
extent that a User already purchases physical connectivity to the
Nasdaq Stock Exchange, that purchase will also provide for the User
to connect to the Nasdaq Bond Exchange, such that the User will
incur no additional fee for the new connection. New Users that do
not already purchase physical connectivity to Nasdaq will need to do
so, pursuant to General 8 of the Nasdaq Rules.
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Reports and Recordkeeping
Users of the Nasdaq Bond Exchange would have to comply with all
relevant rules of the Exchange and the Commission in relation to
reports and recordkeeping of transactions on the Nasdaq Bond Exchange,
including Rules 17a-3 and 17a-4 under the Act.\46\
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\46\ 17 CFR 240.17a-3 and 240.17a-4.
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Regulation
The Exchange will leverage its existing infrastructure to operate a
national securities exchange in compliance with Section 6 of the
Exchange Act, and Section 6(b)(7) in particular,\47\ to regulate its
non-convertible bonds trading business and to enforce compliance with
its Rules. Nasdaq's existing disciplinary rules and processes, set
forth in its Rule 8000 and 9000 Series, will govern the discipline of
Members that participate in corporate bond trading, just as it does for
equities regulation, and Nasdaq will perform bond listing regulation as
well as real-time surveillance of bond trading as it does today for
equities.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f(b)(7).
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In particular, MarketWatch will perform real-time surveillance of
the Nasdaq Bond Exchange for the purpose of maintaining a fair and
orderly market at all times. As it does with Nasdaq's equities trading,
MarketWatch will monitor trading on the Nasdaq Bond Exchange market on
a real-time basis to identify unusual trading patterns and determine
whether particular trading activity requires further regulatory
investigation. In addition, Nasdaq Regulation will oversee the process
for determining and implementing trade halts and identifying and
responding to unusual market conditions.
System Information
The Nasdaq Bond Exchange will operate out of the same data center
in Carteret, New Jersey as does the Nasdaq Stock Market and other
exchanges owned by Nasdaq, Inc., but it will use equipment that is
separate from the equipment used by those exchanges. In addition, the
Nasdaq Bond Exchange will have a backup data center that will be
geographically diverse from the Carteret data center and that will be
designed to resume operations of the Nasdaq Bond Exchange, in the event
of a system failure, in accordance with the requirements of Regulation
Systems Compliance and Integrity.\48\ The Nasdaq Bond Exchange will use
Nasdaq's flexible INET technology, which is easily scalable to higher
volumes through the addition of more equipment in the data center. The
Nasdaq Bond Exchange will be protected from unauthorized access through
the same robust firewall protection already in use at Nasdaq, Inc.'s
data centers.
---------------------------------------------------------------------------
\48\ See 17 CFR 242.1001, .1004.
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Applicability of Section 11(a) and (b) of the Act
Section 11(a) of the Act \49\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion,
unless an exception applies. This general prohibition would not impact
trading on the Nasdaq Bond Exchange because Rule 11a1-4(T) under the
Act \50\ deems transactions in bonds on a national securities exchange
for a member's own account to be consistent with Section 11(a).
Similarly, Section 11(b) of the Act\51\ and Rule 11b-1 thereunder,\52\
which pertain to specialists and market-makers, would not be implicated
because there will be no specialists or market makers on the Nasdaq
Bond Exchange.
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\49\ 15 U.S.C. 78k(a).
\50\ 17 CFR 240.11a1-4(T).
\51\ 15 U.S.C. 78k(b).
\52\ 17 CFR 240.11b-1.
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2. Statutory Basis
Nasdaq believes that its proposal is consistent with Section 6(b)
of the Act \53\ in general, and furthers the objectives of Sections
6(b)(4), (b)(5), and (b)(7) of the Act,\54\ in particular. As discussed
below, Nasdaq believes the proposal is consistent with Section 6(b)(4)
of the
[[Page 45295]]
Act \55\ in that it provides for the equitable allocation of reasonable
dues, fees, and other charges, and that it is consistent with Section
6(b)(5) of the Act \56\ in that it is designed to promote just and
equitable principles of trade, 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 are not
designed to permit unfair discrimination. Finally, the Exchange
believes that the proposal is consistent with Section 6(b)(7) of the
Act \57\ in that it provides a fair procedure of discipline for those
listing and trading non-convertible bonds on Nasdaq.
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\53\ 15 U.S.C. 78f(b).
\54\ 15 U.S.C. 78f(b)(4), (5), and (7).
\55\ 15 U.S.C. 78f(b)(4).
\56\ 15 U.S.C. 78f(b)(5).
\57\ 15 U.S.C. 78f(b)(7).
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Listing Rules
The Exchange believes that its proposal to list non-convertible
bonds will improve the quality of the public market for bonds by
improving the transparency and the orderliness of the market. As
discussed above, an issuer that lists bonds pursuant to this proposal
will be required to disclose any material information that would
reasonably be expected to affect the value of their securities or
influence investors' decisions, except in unusual circumstances.\58\
Through this requirement, Nasdaq will be able to evaluate such
disclosure to determine if, among other things, a Bond Halt should be
declared for that security.\59\ This proposal, in connection with
Nasdaq's proposal to trade such bonds, would also increase the amount
of bond-specific information that would disclosed by issuers in
fulfillment of the requirements of Section 12 of the Act.
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\58\ As noted above, Nasdaq proposes to amend Rule 5250(e)(3) to
require an issuer to provide at least 10 calendar days advance
notice to Nasdaq of certain corporate actions relating to non-
convertible bonds listed on the Nasdaq Bond Exchange, including
redemptions (full or partial calls), tender offers, changes in par
value, and changes in identifier (e.g., CUSIP number or symbol), by
filing the appropriate form as designated by Nasdaq. This proposal
is consistent with the Act because it aid the Listings Qualification
Department in assessing an issuer's compliance with the continuing
listing standards set forth in proposed Rule 5702.
\59\ Nasdaq is limiting this proposal to an issuer that is
currently listing one class of an equity security on either Nasdaq,
NYSE, or NYSE American. While the issuer may be required to make
similar disclosures in connection with its listed equity security,
Nasdaq may not receive such disclosures if the listing venue for
that equity security is NYSE or NYSE American. As such, this
proposal provides the Exchange with additional information related
to listed companies that it may otherwise not possess.
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Nasdaq also believes that its proposed listing standards are
consistent with the Act. Nasdaq notes that its proposed initial listing
standards, set forth in Rule 5702(a)--which require a minimum principal
amount outstanding of the non-convertible bond or a market value of at
least $5 million and the issuer of the non-convertible bond also having
a class of equity listed on Nasdaq, NYSE, or NYSE American--are similar
to the initial listing requirements for bonds listed on NYSE and NYSE
American. Similarly, the continued listing requirement under Rule
5702(b)(1) that a non-convertible bond maintain a market value or
principal amount of bonds outstanding of at least $400,000 is similar
to the listing requirement for bonds imposed by NYSE American. Nasdaq
notes that, pursuant to Rule 5702(b)(2), an issuer would also be
required to meet its obligations on the listed non-convertible bonds,
and that Nasdaq would initiate proceedings immediately under Rule 5810
(Notification of Deficiency by the Listing Qualifications Department)
if the issuer were unable to meet its obligations on its non-
convertible bonds. Nasdaq believes that it is consistent with the Act
to immediately institute immediate de-listing proceedings in this
instance, rather than to first afford the issuer a time period during
which it may regain compliance (i.e., the 180 calendar day period it
proposes to provide when a bond fails to meet the quantitative
requirements under Rule 5702(b)(1)) because a violation of a covenant,
a default on interest payments, or another failure of an issuer to meet
its obligations under a bond indenture, constitutes a breach of an
issuer's legal obligations to bondholders, and signals that a bond is
not appropriate for continued listing on the Exchange.
Nasdaq also believes that the change to the definition of a
``substitution listing event'' to include a change in the obligor of a
listed non-convertible bond is consistent with the Act. Nasdaq is
proposing to make this change to both convertible and non-convertible
bonds, as both types of securities could potentially be subject to a
change in the obligor of that bond, which Nasdaq believes should
qualify as a substitution listing event.
Likewise, it is consistent with the Act to amend Rule 5515(b)(4) to
change existing references from the American Stock Exchange to NYSE
American to ensure that our Rules regarding convertible debt are
current and accurate with respect to the names of the exchanges they
reference.
Nasdaq believes that the proposed rule change is consistent with
Section 6(b)(4) in that it provides for the equitable allocation of
reasonable dues, fees, and other charges among its members, issuers and
other persons using its facilities. The proposed $5,000 application fee
and $5,000 annual fee will be equally applicable to any issuer seeking
to list non-convertible bonds on Nasdaq, other than for those issuers
that propose to switch their listings from NYSE or NYSE American to
Nasdaq. Nasdaq's proposal to waive the application fee and the first
year's annual fee for issuers that switch their listings to Nasdaq from
NYSE or NYSE American is reasonable and equitable because such fees
will otherwise serve as disincentives for issuers to switch their
listings, particularly if they have already paid their annual fees to
NYSE or NYSE American for the year in which a switch would otherwise
occur.\60\ The waiver of the application fee is also equitable because
it is Nasdaq's experience that less work is required to process a
listing application for a security that is already listed on another
exchange than it is to process an application for listing a new
security. The application and annual fees are also reasonable and
equitable because they will support Nasdaq's regulatory program to
review and qualify debt issuances for listing.
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\60\ Nasdaq notes that it presently waives entry fees for
listing equity securities that transfer to Nasdaq from another
national security exchange. See Rule 5910(a)(7)(i) (Nasdaq Global
and Global Select Markets); Rule 5920(a)(7)(i) (Nasdaq Capital
Market); Rule 5940(a)(5)(i)(Exchange Traded Products). It also
waives a portion of the annual fee for securities whose listings
transfer from a national securities exchange to Nasdaq on an
exclusive basis. See IM-5900-4. Nasdaq's rationale for employing
waivers in those instances is similar to that which Nasdaq asserts
for its corporate bond listing programs. See, e.g., Securities
Exchange Act Release No. 34-70418 (Sept. 16, 2013), 78 FR 57909
(Sept. 20, 2013) (SR-NASDAQ-2013-115).
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The proposed application and annual fees are competitive with the
initial and annual fees that are currently assessed by NYSE and NYSE
American for the listing of bonds.\61\
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\61\ NYSE American charges an initial listing fee for bonds of
$100 per $1 million principal amount (or fraction thereof) with a
minimum fee of $5,000 and a maximum fee of $10,000. NYSE American
also charges an annual fee of $5,000 for listed bonds and debentures
of companies whose equity securities are not listed on NYSE
American. See NYSE American Listed Company Guide Sections 140 and
141. Meanwhile, NYSE charges an initial listing fee of $25,000 and
an annual fee of $25,000 for listed debt of NYSE equity issuers and
an initial listing fee of $45,000 and an annual listing fee of
$45,000 for listed debt of non-NYSE equity issuers. See Section
902.08 of the NYSE Listed Company Manual.
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Nasdaq also notes that the proposed $5,000 initial listing fee is
the same as the application fee it charges for convertible bonds.
However, Nasdaq will not charge an entry fee (as it does for
convertible bonds under the
[[Page 45296]]
proposed amendment to Rule 5920(a)(2)) because Nasdaq believes that the
proposed application fee will allow the Exchange to adequately recoup
its expenses incurred in processing an issuer's application to list
those bonds. Nasdaq proposes a flat $5,000 annual fee for non-
convertible bonds in lieu of the variable annual fee that Nasdaq
charges to issuers of convertible bonds ($500 or $25 per million
dollars face amount of debentures outstanding, whichever is greater,
pursuant to Rule 5920(c)(B)(2)) because the Exchange believes that
issuers will prefer the simplicity and predictability of a flat fee.
Moreover, the Exchange expects to list large issuances of non-
convertible bonds, in which cases the annual fees for such bonds will
be comparable to, if not lower than, the annual fees that Nasdaq
charges for convertible bonds.
These proposed listing fees for non-convertible bonds are lower
than Nasdaq's initial and annual fees for equity securities, which
range from $50,000--$75,000 for initial listing of equity securities,
and from $32,000--$45,000 for annual listing of equity securities.\62\
Nasdaq competes for the listing of securities, including bonds, with
NYSE and NYSE American, and the differential between its proposed
listing fees for non-convertible bonds and its current listing fees for
equity securities is similar to the differential for listing debt and
equity securities on NYSE American.\63\
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\62\ See Rule 5920(a)-(c).
\63\ See, e.g. NYSE American Listed Company Guide Sections 140
and 141 (NYSE American charges an initial listing fee for common
stock that ranges from $50,000-$75,000 and an annual fee of between
$40,000 and $50,000).
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Nasdaq also believes that the proposed listing rules are consistent
with Section 6(b)(5) of the Act \64\ in that they serve the interests
of the public and investors by facilitating competition in the market
for listing corporate non-convertible bonds. The proposed listing rules
also are similar to those of NYSE and NYSE American, which the
Commission has recognized as being equitable and adequately protective
of the public interest. Furthermore, the Exchange believes that the
proposed listing fees are equitable for the reasons set forth above.
Meanwhile, the proposed waivers of application and first year annual
fees for listings of non-convertible bonds that switch to Nasdaq from
NYSE or NYSE American are not unfairly discriminatory because, in
absence of such waivers, issuers that have already paid such fees to
list their bonds on another exchange would have a significant
disincentive to switch their listing to Nasdaq as they would be
required to pay twice for similar listing services. The proposed waiver
of the application fee for bonds that switch to Nasdaq from another
exchange is fair because it reflects the fact that less work is
required by Nasdaq to process such applications than is required to
process applications for newly-listed securities. Finally, as is
discussed above, Nasdaq already employs similar fee waivers for
listings of equity securities and exchange traded products.\65\
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\64\ 15 U.S.C. 78f(b)(5).
\65\ See n.60, supra.
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Finally, Nasdaq notes that it will apply the surveillance and
enforcement infrastructure that it utilizes for listings on its other
markets to ensure that issuers comply with initial and continuing
listing requirements for non-convertible corporate bonds and that the
Exchange will take fair and appropriate action under the Nasdaq Rule
5800 Series to address violations of those listing Rules.
Trading Rules
Nasdaq's proposal to establish the Nasdaq Bond Exchange system to
trade non-convertible corporate bonds listed on Nasdaq is also
consistent with the Act. Nasdaq has designed the Nasdaq Bond Exchange
to operate in accordance with the Act, the applicable rules of the
Commission and of the Exchange, and the high standards that Nasdaq
believes to be in evidence at all of Nasdaq, Inc.'s exchanges. The
proposal will offer Users opportunities to trade non-convertible bonds
through a fair, open, and well-regulated market. The proposal will
promote the interests of the public and investors by providing for the
entry into the marketplace of a new exchange venue for trading non-
convertible corporate bonds. Such bonds presently are tradeable, other
than on an over-the-counter basis, only on NYSE and NYSE American. The
Nasdaq Bond Exchange will introduce competition into this space, and
that competition will spur innovation, which in turn will benefit
issuers, traders, and investors alike.
The Nasdaq Bond Exchange is also designed to be a free, open, and
fair marketplace. All Nasdaq Members will be eligible to become Users
simply by electing to receive access. Moreover, Nasdaq proposes simple
and straightforward rules to govern the operation of the Bond Exchange,
including a familiar price-time allocation methodology, two basic order
types, a single Bond Trading Session with no after-hours trading, and
market data feed that will be disseminated, for free, to any member of
the public that requests it and agrees to the Exchange's terms and
conditions of use. At the same time, the proposal will also include
provisions that are endemic to orderly and well-regulated markets,
including authority to impose trading halts and suspensions, in
appropriate circumstances, and to unwind clearly erroneous trades
pursuant to established procedures under Nasdaq Rule 11890 and bond-
specific criteria adapted from NYSE Rule 86.
Nasdaq will also leverage the conduct rules, surveillance
technology, and enforcement infrastructure that it utilizes with
respect to its other markets to ensure that the Nasdaq Bond Exchange
operates in a fair and orderly fashion and that Nasdaq prevents,
detects, and addresses fraudulent and manipulative acts and practices.
For example, Nasdaq's MarketWatch Department will surveil the market
and employ its SMARTS technology to detect suspicious or non-compliant
behavior. Nasdaq's existing disciplinary rules, as set forth in the
Nasdaq Rule 8000 and 9000 Series, will apply to Users of the Nasdaq
Bond Exchange, and Nasdaq's Regulation Department will, pursuant to
these disciplinary rules, investigate and take fair and appropriate
enforcement action to address violations of rules relevant to trading
on the Nasdaq Bond Exchange or the conduct of Users.
Moreover, the proposal provides for the equitable allocation of
reasonable dues, fees, and other charges among its members, issuers and
other persons using its facilities. Nasdaq will charge no fees to trade
non-convertible bonds on the Nasdaq Bond Exchange, to obtain the FIX
ports that are necessary to connect to the Nasdaq Bond Market, or to
receive the Nasdaq Corporates Totalview data feed product.
Additionally, to the extent that a User already purchases physical
connectivity to Nasdaq pursuant to General 8, Sections 1 and 2 of the
Nasdaq Rules, such a User could utilize its existing connectivity to
connect to the Bond Exchange without any incurring additional fees to
do so.
Finally, Nasdaq notes that it has designed the Nasdaq Bond Exchange
system to facilitate transactions in corporate bonds in a manner that
is similar to, and competitive with, the existing NYSE Bonds trading
system. The Commission has already deemed the design of NYSE Bonds to
be consistent with the Act.\66\ Indeed, much of the language in
proposed Rule 4000B, which will govern the Nasdaq Bond Exchange, is
adapted from NYSE Rule
[[Page 45297]]
86, which governs NYSE Bonds. That is, like NYSE Bonds, the Nasdaq Bond
Exchange will be an electronic system for receiving, processing,
executing, and reporting bids, offers and executions in bonds. Like
NYSE Bonds, the Nasdaq Bond Exchange will display, match and execute
buy and sell orders on a price/time basis. The Exchange, like NYSE,
will also accept good-for-day limit orders and kill-or-fill orders, and
it will trade bonds of issuers that have at least one class of equity
securities listed on Nasdaq, NYSE, or NYSE American.\67\
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\66\ See Securities Exchange Act Release No. 34-55496 (Mar. 20,
2007), 72 FR 14631 (Mar. 28, 2007).
\67\ See n.11, supra.
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To the extent that the Nasdaq Bond Exchange will differ from NYSE
Bonds, these differences will render the Nasdaq Bond Exchange simpler
than NYSE Bonds. At its inception, the Nasdaq Bond Exchange will not
have--as does NYSE Bonds--market makers, sponsored access, auctions,
price collars, or certain order types (e.g., reserve orders, minimum
quantity orders, good-til-cancelled orders, and timed orders). The
Nasdaq Bond Exchange also will have only one trading session each day
as opposed to NYSE Bonds, which has three sessions. Although the Nasdaq
Bond Exchange will initially lack these features of NYSE Bonds, Nasdaq
believes that the platform nevertheless will have the features it needs
to compete effectively with NYSE Bonds. The Exchange observes that
Users of NYSE Bonds do not appear to avail themselves of many of its
features and functionalities, such that the Exchange does not believe
that the Nasdaq Bond Exchange needs these features and functionalities
to compete with NYSE Bonds. In any event, the Exchange is committed to
adding new features to the Nasdaq Bond Exchange in the future to the
extent that Nasdaq determines that a demand exists for those features
and that adding them will help the Nasdaq Bond Exchange compete
successfully in the marketplace.
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 not necessary or appropriate in
furtherance of the purposes of the Act. Rather, the proposed rule
change will promote competition among exchanges by allowing Nasdaq to
list and trade non-convertible bonds, which can currently be listed
only on NYSE and NYSE American. The proposals will have the pro-
competitive effect of spurring further initiative and innovation among
market centers and market participants.
Nasdaq notes that its proposed listing standards are consistent
with the standards for initial and continued listing of bonds on NYSE
and NYSE American. If issuers are unsatisfied with Nasdaq's listing
program or the fees charged for that program, these issuers can choose
to list on these other markets.
Likewise, the Exchange notes that its proposed system for trading
non-convertible bonds listed on Nasdaq--the Nasdaq Bond Exchange--will
be competitive with NYSE Bonds. Although initially, the Nasdaq Bond
Exchange will have more limited functionality than does NYSE Bonds,
including with respect to order types, auctions, the number of trading
sessions, and the use of market makers, the Exchange believes that the
Nasdaq Bond Exchange will be competitive with NYSE Bonds because the
Exchange has incorporated into the Nasdaq Bond Exchange those features
of NYSE Bonds that its Users actually want and need when trading bonds
and it excluded those they do not actually utilize. That said, the
Exchange will add additional functionality and features to the Nasdaq
Bond Exchange as demand warrants it to do so and to the extent that the
Exchange deems it necessary to remain competitive with NYSE Bonds.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (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-NASDAQ-2018-070 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-NASDAQ-2018-070. 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 (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 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-NASDAQ-2018-070 and should be submitted
on or before September 27, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19239 Filed 9-5-18; 8:45 am]
BILLING CODE 8011-01-P