[Federal Register Volume 83, Number 190 (Monday, October 1, 2018)]
[Notices]
[Pages 49434-49437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21231]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84284; File No. SR-NYSEArca-2018-68]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Modify Rule 6.15-O Regarding the Give Up of
a Clearing Member by OTP Holders and OTP Firms and Conforming Changes
to Rule 6.46-O
September 25, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on September 11, 2018, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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 modify Rule 6.15-O regarding the Give Up
of a Clearing Member by OTP Holders and OTP Firms and proposes
conforming changes to Rule 6.46-O. The proposed change is available on
the Exchange's website at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
[[Page 49435]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to modify Rule 6.15-O regarding the
Give Up of a Clearing Member \4\ by OTP Holders and OTP Firms (each an
``OTP,'' collectively, ``OTPs'') and to make conforming changes to Rule
6.46-O.
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\4\ Rule 6.1-O(2) defines ``Clearing Member'' as an Exchange OTP
which has been admitted to membership in the Options Clearing
Corporation pursuant to the provisions of the Rules of the Options
Clearing Corporation.
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Rule 6.15-O: Current Process to Give Up a Clearing Member
In 2015 the Exchange adopted its current ``give up'' procedure for
OTPs executing transactions on the Exchange.\5\ Per Rule 6.15-O, an OTP
may give up a ``Designated Give Up'' or its ``Guarantor,'' as defined
in the Rule and described below.
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\5\ See Securities and Exchange Act Release No. 75641 (August 7,
2015), 80 FR 48577 (August 13, 2015) (SR-NYSEArca-2015-65).
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The Rule defines ``Designated Give Up'' as any Clearing Member that
an OTP Holder (other than a Market Maker \6\) identifies to the
Exchange, in writing, as a Clearing Member the OTP requests the ability
to give up. To designate a ``Designated Give Up,'' an OTP must submit
written notification to the Exchange. Specifically, the Exchange uses a
standardized form (``Notification Form''). An OTP may currently
designate any Clearing Member as a Designated Give Up. Additionally,
there is no minimum or maximum number of Designated Give Ups that an
OTP must identify. Similarly, should an OTP no longer want the ability
to give up a particular Designated Give Up, the OTP informs the
Exchange in writing.
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\6\ For purposes of this rule, references to ``Market Maker''
refer to OTPs acting in the capacity of a Market Maker and include
all Exchange Market Maker capacities e.g., Lead Market Makers. As
explained below, Market Makers give up Guarantors that have executed
a Letter of Guarantee on behalf of the Marker Maker, pursuant to
Rule 6.36-O; Market Makers need not give up Designated Give Ups.
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Rule 6.15-O also requires that the Exchange notify a Clearing
Member, in writing and as soon as practicable, of each OTP that has
identified it as a Designated Give Up. However, the Exchange will not
accept any instructions from a Clearing Member to prohibit an OTP from
designating the Clearing Member as a Designated Give Up. Additionally,
there is no subjective evaluation of an OTP's list of Designated Give
Ups by the Exchange. The Rule does, however, provide that a Designated
Give Up may determine to not accept a trade on which its name was given
up so long as it believes in good faith that it has a valid reason not
to accept the trade.\7\
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\7\ See Rule 6.15-O(f)(1) (setting forth procedures for
rejecting a trade). An example of a valid reason to reject a trade
may be that the Designated Give Up does not have a customer for that
particular trade.
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The Rule defines ``Guarantor'' as a Clearing Member that has issued
a Letter of Guarantee or Letter of Authorization for the executing OTP,
pursuant to Rules of the Exchange \8\ that is in effect at the time of
the execution of the applicable trade. An executing OTP may give up its
Guarantor without such Guarantor being a ``Designated Give Up.''
Additionally, Rule 6.36 provides that a Letter of Guarantee is required
to be issued and filed by each Clearing Member through which a Market
Maker clears transactions. Accordingly, a Market Maker is enabled to
give up only a Guarantor that had executed a Letter of Guarantee on its
behalf pursuant to Rule 6.36-O; a Market Maker does not need to
identify any Designated Give Ups. Like Designated Give Ups, Guarantors
likewise have the ability to reject a trade.\9\
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\8\ See Rule 6.36-O (Letters of Guarantee); Rule 6.45-O (Letters
of Authorization).
\9\ See Rule 6.15-O(f)(2) (providing that a Guarantor may
``change the give up to another Clearing Member that has agreed to
be the give up on the subject trade, provided such Clearing Member
has notified the Exchange and the executing OTP Holder or OTP Firm
in writing of its intent to accept the trade'').
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Beginning in early 2018, certain Clearing Firms (in conjunction
with the Securities Industry and Financial Markets Association
(``SIFMA'')) expressed concerns related to the process by which
executing brokers on U.S. options exchanges (the ``Exchanges'') are
allowed to designate or `give up' a clearing firm for purposes of
clearing particular transactions. The SIFMA-affiliated Clearing Members
indicated that the Federal Reserve has recently identified the current
give-up process as a significant source of risk for clearing firms.
SIFMA-affiliated Clearing Members subsequently requested that the
Exchanges alleviate this risk by amending Exchange rules governing the
give up process.\10\
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\10\ Cboe Exchange, Inc. (``CBOE'') recently filed to amend its
give up procedure to require CBOE Trading Permit Holders (each a
``TPH'') to receive written authorization from a Clearing TPH
(``CTPH'') before it may give up that CTPH. See Securities and
Exchange Act Release No. 83872 (August 17, 2018), 83 FR 42751
(August 23, 2018) (SR-CBOE-2018-55). The Exchange's proposal leads
to the same result of providing Clearing Members the ability to
control risk, but it differs in process.
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Proposed Amendment to Rules 6.15-O and 6.46-O
The Exchange proposes to amend Rule 6.15-O to provide a means for a
Designated Give Up to opt out of acting as the give up for certain
OTPs. As proposed, Rule 6.15-O b)(4) would be revised to provide that
the Exchange would ``accept instruction from a Clearing Member not to
permit an OTP to designate the Clearing Member as the Designated Give
Up.'' The Exchange further proposes to add language to Rule 6.15-
O(b)(7) to provide that ``[i]f a Clearing Member no longer wants to be
a Designated Give Up of a particular [OTP], the Clearing Member must
notify the Exchange, in a form and manner prescribed by the Exchange.''
In practice, a Clearing Member that has been designated as the
Designated Give Up need only tell the Exchange that it refuses this
designation.
Consistent with this proposed change, the Exchange also proposes to
amend Rule 6.46-O(g) regarding the responsibilities of Floor Brokers to
maintain error accounts ``for the purposes of correcting bona fide
errors, as provided in Rule 6.14-O.'' As proposed, the Exchange would
specify that ``it will not be a violation of this provision if a trade
is transferred away from an error account through the CMTA process at
OCC.'' \11\ This additional language would enable an executing OTP that
has executed an order to CMTA that order through its own clearing
relationship. For example, assume a Floor Broker executes a trade
giving up Firm A (a Clearing Member that is one of its Designated Give
Ups) and, after the execution, the Floor Broker is informed that a
portion of the trade needs to be changed to give-up Firm B (a Clearing
Member that is not
[[Page 49436]]
one of the Floor Broker's Designated Give Ups). The proposed language
would enable the Floor Broker to CMTA the trade to Firm B through its
own clearing arrangement (i.e., error account/Letter of Authorization)
rather than nullifying or busting the trade.
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\11\ See proposed Rule 6.46-O(g). The Exchange also proposes to
delete as obsolete reference to Rule 4.21-O, which is currently
``Reserved,'' and therefore an outdated cross-reference. See id.
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Implementation
The Exchange proposes to announce the implementation date of the
proposed rule change via Trader Notice, to be published no later than
thirty (30) days following Commission approval. The implementation date
will be no later than sixty (60) days following Commission approval.
This additional time would afford the Exchange and OTP the time to make
any changes current give up designations.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \12\ of
the Act, in general, and furthers the objectives of Section
6(b)(5),\13\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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Particularly, as discussed above, several Clearing Firms affiliated
with SIFMA have recently expressed concerns relating to the current
give up process that permits OTPs to identify any Clearing Members as a
Designated Give Up for purposes of clearing particular transactions.
Also as noted above, the Clearing Members have relayed that the Federal
Reserve has recently identified the current give-up process (i.e., a
process that lacks authorization) as a significant source of risk for
clearing firms. The Exchange believes the proposed changes to Rule
6.15-O would help alleviate this risk by enabling Clearing Members to
refuse to act as a Designated Give Up for certain OTPs, which would
afford Clearing Members a measure of control. The Exchange believes its
proposal addresses concerns raised by Clearing Members, while
maintaining the basic give up process. The Exchange does not anticipate
Clearing Members to routinely refuse the role of Designated Give Up,
but rather to utilize this option only when there is a valid reason and
good faith basis to do so. The Exchange notes that Clearing Member
would still have the ability to reject trades on an ad hoc basis for
OTPs for which it has not refused to be a Designated Give Up.
Accordingly, the Exchange believes the proposed rule change is
reasonable and continues to provide certainty that a Clearing Member
would be responsible for a trade, which protects investors and the
public interest.
The Exchange also believes that the proposed change to Rule 6.46-O
would protect investors because it would permit an executing OTP to
utilize its error account to CMTA an order through its own clearing
relationship. This would preserve executions while accommodating the
proposed rule change that could result in an executing OTP not being
permissioned to for a particular give-up.
Thus, this proposal would foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and remove
impediments to and perfect the mechanism of a free and open market and
a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that this proposed rule change would
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that the proposed rule change would impose an unnecessary burden on
intramarket competition because it would apply equally to all similarly
situated OTPs. The Exchange also notes that, should the proposed
changes make the Exchange more attractive for trading, market
participants trading on other exchanges can always elect to become OTPs
on the Exchange to take advantage of the trading opportunities.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the 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-NYSEArca-2018-68 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-NYSEArca-2018-68. 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-NYSEArca-2018-68, and
[[Page 49437]]
should be submitted on or before October 22, 2018.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21231 Filed 9-28-18; 8:45 am]
BILLING CODE 8011-01-P