[Federal Register Volume 85, Number 87 (Tuesday, May 5, 2020)]
[Notices]
[Pages 26768-26771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09528]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88776; File No. SR-NYSE-2020-17]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change To Amend Its Rules To Add New Rule 
7.19

April 29, 2020.

I. Introduction

    On March 10, 2020, New York Stock Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
provide members certain optional risk settings under proposed Rule 
7.19. The proposed rule change was published for comment in the Federal 
Register on March 18, 2020.\3\ The Commission received no comment 
letters on the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 88376 (March 12, 
2020), 85 FR 15526 (``Notice'').
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II. Description of the Proposal

    In order to assist member organizations' efforts to manage their 
risk, the Exchange proposes to amend its rules to add new Rule 7.19 
(Pre-Trade Risk Controls) to establish a set of pre-trade risk controls 
by which Entering Firms \4\ and their designated Clearing Firms \5\ may 
set credit limits and other pre-trade risk controls for an Entering 
Firm's trading on the Exchange and authorize the Exchange to take 
action if those credit limits or other pre-trade risk controls are 
exceeded.\6\
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    \4\ The Exchange proposes to define the term ``Entering Firm'' 
to mean a member organization that either has a correspondent 
relationship with a Clearing Firm whereby it executes trades and the 
clearing function is the responsibility of the Clearing Firm or 
clears for its own account. See proposed Rule 7.19(a)(1).
    \5\ The Exchange proposes to define the term ``Clearing Firm'' 
to mean a member organization that acts as principal for clearing 
and settling a trade, whether for its own account or for an Entering 
Firm. See proposed Rule 7.19(a)(2).
    \6\ See Notice, supra note 3, at 15526. The Exchange initially 
filed a proposed rule change to add new Rule 7.19 relating to pre-
trade risk controls on November 27, 2019. See Securities Exchange 
Act Release No. 87715 (December 11, 2019), 84 FR 68995 (December 17, 
2020 (Notice of Filing) (SR-NYSE-2019-68) (``Original Filing''). The 
Exchange withdrew the Original Filing and filed this proposed rule 
change as its replacement. Comments received on the Original Filing 
are available on the Commission's website at https://www.sec.gov/comments/sr-nyse-2019-68/srnyse201968.htm. This filing is 
substantially the same as the Original Filing and proposes the same 
functionality. It differs because it includes proposed Commentary 
.02 through .04, which provides additional detail specific to Floor 
Brokers and Designated Market Makers, and makes minor, clarifying 
changes to the proposed rule text as compared to the Original 
Filing.
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    Proposed Rule 7.19(a) would set forth the definitions that would be 
used for purposes of the Rule. In addition to the defined terms of 
``Entering Firm'' and ``Clearing Firm,'' as described above, the 
Exchange proposes the following definitions:
     The term ``Single Order Maximum Notional Value Risk 
Limit'' would mean a pre-established maximum dollar amount for a single 
order before it can be traded.
     The term ``Single Order Maximum Quantity Risk Limit'' 
would mean a pre-established maximum number of shares that may be 
included in a single order before it can be traded.
     The term ``Gross Credit Risk Limit'' would mean a pre-
established maximum daily dollar amount for purchases and sales across 
all symbols, where both buy and sell orders are counted as positive 
values. For purposes of calculating the Gross Credit Risk Limit, 
unexecuted orders in the Exchange Book,\7\ orders routed on arrival 
pursuant to Rule 7.37(a)(1), and executed orders are included.
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    \7\ The term ``Exchange Book'' is defined in Rule 1.1(k) to 
refer to the Exchange's electronic file of orders, which contains 
all orders entered on the Exchange.
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    Proposed Rule 7.19(b) would set forth the Pre-Trade Risk Controls 
that would be available to Entering Firms and Clearing Firms. Under 
proposed Rule 7.19(b)(1), an Entering Firm may select one or more of 
the following optional pre-trade risk controls with respect to its 
trading activity on the Exchange: (i) Gross Credit Risk Limits; (ii) 
Single Order Maximum Notional Value Risk Limits; and (iii) Single Order 
Maximum Quantity Risk Limits, which would collectively be referred to 
as the ``Pre-Trade Risk Controls.''
    In addition, under proposed Rule 7.19(b)(2)(A), an Entering Firm 
that does not self-clear may designate its Clearing Firm to (i) view 
any Pre-Trade Risk Controls set by the Entering Firm, or (ii) set one 
or more Pre-Trade Risk Controls on the Entering Firm's behalf, or both. 
Proposed Rule 7.19(b)(2)(B) provides that an Entering Firm would be 
able to view any Pre-Trade Risk Controls that its Clearing Firm sets 
with respect to the Entering Firm's trading activity on the Exchange. 
According to the Exchange, because both an Entering Firm and Clearing 
Firm (if so designated by the Entering Firm) would be able to access 
information about Pre-Trade Risk Controls, this mechanism would foster 
transparency between an Entering Firm and its Clearing Firm regarding 
which Pre-Trade Risk Control limits may have been set.\8\ For example, 
if an Entering Firm designates its Clearing Firm to view the Pre-Trade 
Risk Controls set by that Entering Firm, its Clearing Firm may 
determine that it does not need to separately set Pre-Trade Risk 
Controls on behalf of such Entering Firm.
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    \8\ See Notice, supra note 3, at 15527.
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    Because the Entering Firm is the member organization that is 
entering orders on the Exchange, the Exchange will not take action 
based on a Clearing Firm's instructions about the Entering Firm's 
trading activities on the Exchange without first receiving consent from 
the Entering Firm. Accordingly, proposed Rule 7.19(b)(2)(C) would 
provide that if an Entering Firm designates a Clearing Firm to set Pre-
Trade Risk Controls for the Entering Firm, the Entering Firm would be 
consenting to the Exchange taking certain prescribed actions (discussed 
further below) with respect to the Entering Firm's trading activity as 
provided for in proposed Rules 7.19(c) and (d), described below. The 
Exchange would consider an Entering Firm to provide such consent by 
authorizing a Clearing Firm to enter Pre-Trade Risk Controls via the 
risk management tool that will be provided to Entering Firms in 
connection with this proposed rule change. Once such authorization is 
provided by the Entering Firm, the Clearing Firm would have access to 
the Pre-Trade Risk Controls that the Entering Firm designates. The 
proposed Rule makes clear that by designating a Clearing Firm to set 
limits on its trading activities, the Entering Firm will have 
authorized the Exchange to act pursuant to the Clearing Firm's 
instructions if the limits set by the Clearing Firm are breached.
    Proposed Rule 7.19(b)(3) would set forth how the Pre-Trade Risk 
Controls could be set or adjusted. Proposed Rule 7.19(b)(3)(A) would 
provide that Pre-Trade Risk Controls may be set before the beginning of 
a trading day and may be adjusted during the trading day. Proposed Rule 
7.19(b)(3)(B) would provide that Entering Firms or Clearing Firms may 
set Pre-Trade Risk Controls

[[Page 26769]]

at the MPID level or at one or more sub-IDs associated with that 
MPID.\9\
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    \9\ Entering Firms may request that the Exchange create sub-IDs 
associated with their MPIDs. If an Entering Firm uses a Floor broker 
to enter orders on the Exchange, it can assign a sub-ID that would 
be used for the entry of orders by that Floor broker on the Entering 
Firm's behalf.
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    Proposed Rule 7.19(b)(4) would provide that with respect to Gross 
Credit Risk Limits, an Entering Firm and, if so designated, its 
Clearing Firm, will receive notifications when the Entering Firm is 
approaching or has breached a limit set by itself or by the Clearing 
Firm. The Exchange believes that by providing such notifications, the 
Entering Firm, and if designated, its Clearing Firm, would have advance 
notice that the Entering Firm is approaching a designated limit and 
could take steps to mitigate the potential that an automated breach 
action would be triggered.
    Proposed Rule 7.19(c) would set forth the actions the Exchange 
would be authorized to take when a Pre-Trade Risk Control set by an 
Entering Firm or a Clearing Firm is breached, which would be referred 
to as ``Automated Breach Actions.'' These proposed actions would be 
automated; if a Pre-Trade Risk Control is breached, the Exchange would 
automatically take the designated action and would not need further 
direction from either the Entering Firm or Clearing Firm to take such 
action.
    Proposed Rule 7.19(c)(1) would provide that if both an Entering 
Firm and its Clearing Firm set the same type of Pre-Trade Risk Control 
for the Entering Firm but have set different limits, the Exchange would 
enforce the more restrictive limit. For example, if an Entering Firm 
sets a Single Order Maximum Notional Value Risk Limit of $20 million 
and its Clearing Firm sets the same risk limit at $15 million, the 
Exchange will take action when the more restrictive limit is breached--
i.e., $15 million.
    Proposed Rule 7.19(c)(2) would set forth the Automated Breach 
Action the Exchange would take if an order would breach the designated 
limit of either a Single Order Maximum Notional Value Risk Limit or 
Single Order Maximum Quantity Risk Limit. As proposed, the Exchange 
would reject the incoming order that would have breached the applicable 
limit.
    Proposed Rule 7.19(c)(3)(A) would set forth the Automated Breach 
Actions the Exchange would take if a designated Gross Credit Risk Limit 
is breached. The Exchange proposes to provide options of which 
Automated Breach Action the Exchange would be authorized to take if a 
Gross Credit Risk Limit is breached. Such Automated Breach Actions 
would be taken at the MPID or sub-ID level that is associated with the 
designated Gross Credit Risk Limit. As proposed, when setting Gross 
Credit Risk Limits, the Entering Firm or Clearing Firm setting the 
limit would be required to indicate one of the following actions that 
the Exchange would take if such limit is breached:
     ``Notification Only.'' As set forth in proposed Rule 
7.19(c)(3)(A)(i), if this option is selected, the Exchange would 
continue to accept new orders and order instructions and would not 
cancel any unexecuted orders in the Exchange Book. Proposed Rule 
7.19(b)(4), described above, sets forth the notifications that would be 
provided to an Entering Firm, and if designated, a Clearing Firm 
regarding the Pre-Trade Risk Controls that have been set. With the 
``Notification Only'' action, the Exchange would provide such 
notifications, but would not take any other automated actions with 
respect to new or unexecuted orders.
     ``Block Only.'' As set forth in proposed Rule 
7.19(c)(3)(A)(ii), if this option is selected, the Exchange would 
reject new orders and order instructions but would not cancel any 
unexecuted orders in the Exchange Book. The Exchange would continue to 
accept instructions from the Entering Firm to cancel one or more orders 
in full (including Auction-Only Orders) or any instructions specified 
in proposed Rule 7.19(e) (described below), but would not take any 
automated action to cancel orders.
     ``Cancel and Block.'' As set forth in proposed Rule 
7.19(c)(3)(A)(iii), if this option is selected, in addition to the 
Block actions described above, the Exchange would also cancel all 
unexecuted orders in the Exchange Book other than Auction-Only Orders.
    If an Entering Firm and its Clearing Firm each set different limits 
for a Gross Credit Risk Limit for the Entering Firm's activities on the 
Exchange, proposed Rule 7.19(c)(3)(B) would provide that the Exchange 
would enforce the action that was chosen by the party that set the 
limit that was breached. For example, if a Clearing Firm sets a lower 
limit and designates the ``Cancel and Block'' Automated Breach Action, 
if that limit is breached, the Exchange will implement that ``Cancel 
and Block'' action even if the Entering Firm designated a different 
Automated Breach Action.
    Proposed Rule 7.19(c)(3)(C) would provide that if both the Entering 
Firm and Clearing Firm set the same Gross Credit Risk Limit and that 
limit is breached, the Exchange would enforce the most restrictive 
Automated Breach Action. As further proposed, for purposes of this 
Rule, the ``Cancel and Block'' action would be more restrictive than 
``Block Only,'' which would be more restrictive than ``Notification 
Only.'' For example, if the Entering Firm selects the ``Block Only'' 
action for a Gross Credit Risk Limit and its Clearing Firm selects the 
``Cancel and Block'' action for the same Gross Credit Risk Limit, if 
the limit is breached, the Exchange would take the ``Cancel and Block'' 
action for the Entering Firm's orders.
    Proposed Rule 7.19(c)(4) would provide that if a Pre-Trade Risk 
Control set at the MPID level is breached, the Automated Breach Action 
specified at the MPID level would be applied to all sub-IDs associated 
with that MPID. For instance, if a Clearing Firm sets a Gross Credit 
Risk Limit for an MPID at $500 million and the Entering Firm sets Gross 
Credit Risk Limits for each of three sub-IDs associated with that MPID 
at $500 million each, if two of the sub-IDs reach a $250 million limit, 
which combined is the Gross Credit Risk Limit at the MPID level, the 
Automated Breach Action associated with the limit at the MPID level 
would be triggered and would apply also to the associated sub-IDs, even 
though none of the sub-IDs have breached their separate $500 million 
limits. This functionality ensures that an Entering Firm cannot 
effectively override a Pre-Trade Risk Control set at the MPID level by 
setting risk limits for each of the MPID's associated sub-IDs that 
cumulatively equal more than the MPID's total Gross Credit Risk Limit.
    Proposed Rule 7.19(d) concerns how an Entering Firm's ability to 
enter orders and order instructions would be reinstated after a ``Block 
Only'' or ``Cancel and Block'' Automated Breach Action has been 
triggered. In such case, proposed Rule 7.19(d) provides that the 
Exchange would not reinstate the Entering Firm's ability to enter 
orders and order instructions on the Exchange (other than instructions 
to cancel one or more orders (including Auction-Only Orders) in full) 
without the consent of (1) the Entering Firm, and (2) the Clearing 
Firm, if the Entering Firm has designated that the Clearing Firm's 
consent is required. The Exchange proposes to include this 
functionality because the Clearing Firm bears the risk of any exposure 
of its correspondent Entering Firms.\10\
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    \10\ See Notice, supra note 3, at 15528.
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    Finally, proposed Rule 7.19(e) would set forth ``kill switch'' 
functionality, which would allow an Entering Firm or

[[Page 26770]]

its designated Clearing Firm to direct the Exchange to take certain 
bulk Kill Switch Actions with respect to orders. In contrast to the 
Automated Breach Actions described above, which the Exchange would take 
automatically after the breach of a credit limit, the Exchange would 
not take any of the Kill Switch Actions without express direction from 
the Entering Firm or its designated Clearing Firm.
    Specifically, Proposed Rule 7.19(e) would specify that an Entering 
Firm, or if authorized pursuant to proposed Rule 7.19(b)(2)(A), its 
Clearing Firm, could direct the Exchange to take one or more of the 
following actions with respect to orders at either an MPID, or if 
designated, sub-ID Level: (1) Cancel all Auction-Only Orders; (2) 
Cancel all unexecuted orders in the Exchange Book other than Auction-
Only Orders; or (3) Block the entry of any new orders and order 
instructions, provided that the Exchange would continue to accept 
instructions from Entering Firms to cancel one or more orders 
(including Auction-Only Orders) in full, and later, reverse that block.
    The Exchange proposes that the Kill Switch functionality proposed 
in Rule 7.19(e) would supersede and replace the Exchange's previously 
filed proposed rule change,\11\ which provided certain post-trade risk 
management tools to member organizations, but not to their Clearing 
Firms.
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    \11\ See Securities Exchange Act Release No. 71164 (December 20, 
2013), 78 FR 79044 (December 27, 2013) (SR-NYSE-2013-80).
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    The Exchange proposes to provide these post-trade Kill Switch 
Actions in addition to the pre-trade Automated Breach Actions described 
above in order to give Entering Firms and their Clearing Firms more 
flexibility in setting risk controls.\12\ An Entering Firm that wants 
more control over when and which actions are taken with respect to its 
orders may choose to use these Kill Switch Actions instead of the 
``Block'' or ``Cancel and Block'' Automated Breach Actions described 
above. For example, for an Entering Firm that selects the 
``Notification Only'' Automated Breach Action, if it receives 
notification of a credit breach, it could choose to direct the Exchange 
to take a Kill Switch Action described in proposed Rule 7.19(e).
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    \12\ See Notice, supra note 3, at 15528.
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    The Exchange proposes Commentary .01 to Rule 7.19 to specify that 
the Pre-Trade Risk Controls described in this Rule are meant to 
supplement, and not replace, the member organization's own internal 
systems, monitoring and procedures related to risk management and are 
not designed for compliance with Rule 15c3-5 under the Act (``Rule 
15c3-5'').\13\ This proposed Commentary specifies that use of the 
Exchange's pre-trade risk controls would not automatically constitute 
compliance with Exchange or federal rules and responsibility for 
compliance with all Exchange and SEC rules remains with the member 
organization. The Exchange does not guarantee that these controls will 
be sufficiently comprehensive to meet all of a member organization's 
needs, the controls are not designed to be the sole means of risk 
management, and using these controls will not necessarily meet a member 
organization's obligations required by Exchange or federal rules 
(including, without limitation, the Rule 15c3-5).
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    \13\ See 17 CFR 240.15c3-5.
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    Proposed Commentary .02 would provide that when a customer of a 
Floor broker firm is a member organization (``Customer''), both the 
Customer and the Floor broker firm would be considered an ``Entering 
Firm'' for purposes of setting Pre-Trade Risk Controls or Kill Switch 
Actions for that Floor broker's trading activity on the Exchange on 
behalf of that Customer. There would be no differences in the Pre-Trade 
Risk Controls available to the Customer and Floor broker.
    Proposed Commentary .03 would provide that manual transactions by a 
Floor broker and crossing transactions pursuant to Rule 76 will be 
excluded from Pre-Trade Risk Controls. The Exchange proposes this 
exception because the proposed Pre-Trade Risk Controls would be 
incorporated into the Exchange's matching engine systems, and neither 
manual transactions nor crossing transactions pursuant to Rule 76 are 
processed in such systems.\14\ Floor brokers representing such orders 
would continue to have their independent obligation to comply with Rule 
15c3-5 with respect to these orders.
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    \14\ See Notice, supra note 3, at 15529.
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    Proposed Commentary .04 would specify how the proposed Pre-Trade 
Risk Controls would apply to Designated Market Makers (``DMMs'') on the 
Exchange. The proposed commentary would provide that if either a 
``Block Only'' or a ``Cancel and Block'' Automated Breach Action has 
been triggered by an Entering Firm acting as a DMM in an assigned 
security, such DMM would be prevented from facilitating an auction that 
would include any DMM Interest, as defined in Rule 7.35(a)(8).\15\ If 
the DMM has not yet been reinstated, the DMM can facilitate an auction 
if it does not include DMM Interest. This restriction would apply 
whether the DMM attempted to facilitate the auction electronically or 
manually; if the DMM attempted to electronically facilitate the auction 
and include DMM Interest, the Exchange would reject the attempt. 
However, the DMM would still have an opportunity to facilitate such 
auction manually without DMM Interest. The Exchange anticipates that a 
DMM will set Gross Credit Risk Limits at levels that would not result 
in Automated Breach Actions, and if they do trigger a ``Block Only'' or 
a ``Cancel and Block'' Automated Breach Action, they would promptly 
reinstate themselves to avoid such a situation.
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    \15\ DMMs have an affirmative obligation to facilitate openings, 
reopenings, and the close of trading for each of the securities in 
which the DMM is registered as required by Exchange rules. See Rule 
104(a)(2) and (3).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \16\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change is reasonably 
designed to provide members with optional tools to manage their credit 
risk. The Commission notes that other exchanges have established risk 
protection controls that are similar in many respects to the Exchange's 
proposal.\18\ The Commission believes that the proposed rule change 
would provide additional options for members to manage their risk while 
transacting

[[Page 26771]]

on the Exchange. The Commission also believes that the proposed rule 
change is reasonably designed to assist clearing members in monitoring 
and managing the potential risks that they assume when clearing for 
members of the Exchange, as well as to provide clearing members with 
greater control over their risk tolerance and exposure on behalf of 
their correspondent members, while also providing notification options 
designed to help ensure that both members and clearing members are made 
aware of developing issues.
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    \18\ See, e.g., Cboe BZX Exchange, Inc. Rule 11.13, Commentary 
.03 and Investors Exchange LLC Rule 11.380.
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    The Commission notes that the proposed Pre-Trade Risk Controls and 
kill switch functionality are optional functionalities. The Commission 
reminds members electing to use these proposed functionalities to be 
mindful of their obligations to, among other things, seek best 
execution of orders they handle on an agency basis. A broker-dealer has 
a legal duty to seek to obtain best execution of customer orders, and 
the decision to utilize the proposed functionalities, including the 
parameters set forth by the member for the risk setting, must be 
consistent with this duty.\19\ For instance, under the proposal, 
members, and their respective clearing members on their behalf, have 
discretion to set the Single Order Maximum Notional Value Risk Limit, 
Single Order Maximum Quantity Risk Limit, or Gross Credit Risk Limit. 
While the Exchange did not affirmatively establish minimum and maximum 
permissible settings for these limits in its proposed rule change, the 
Commission expects the Exchange to periodically assess whether the risk 
limits are operating in a manner that is consistent with the promotion 
of fair and orderly markets. In addition, the Commission expects that 
members will consider their best execution obligations when 
establishing the parameters for the risk limits.\20\ For example, to 
the extent that a member's risk settings are set to overly-sensitive 
parameters, particularly if a member's order flow to the Exchange 
contains agency orders, a member should consider the effect of its 
chosen settings on its ability to receive a timely execution on 
marketable agency orders that it sends to the Exchange in various 
market conditions.\21\ The Commission cautions that brokers considering 
their best execution obligations should be aware that agency orders 
they represent may be blocked or canceled on account of the Single 
Order Maximum Notional Value Risk Limit, Single Order Maximum Quantity 
Risk Limit, or Gross Credit Risk Limit.
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    \19\ See Securities Exchange Act Release Nos. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996) (``Order Handling Rules 
Release''); 51808 (June 9, 2005), 70 FR 37496, 37537-38 (June 29, 
2005).
    \20\ The Commission reminds broker-dealers that they must 
examine their procedures for seeking to obtain best execution in 
light of market and technology changes and modify those practices if 
necessary to enable their customers to obtain the best reasonably 
available prices. See Order Handling Rules Release, supra note 19, 
at 48323.
    \21\ For example, a marketable agency order that would have 
otherwise executed on the Exchange might be prevented from reaching 
the Exchange on account of other interest from the member that 
causes it to exceed the pre-established risk limit and thereby 
results in the Exchange blocking new orders from the member.
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    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NYSE-2020-17) be, and hereby 
is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09528 Filed 5-4-20; 8:45 am]
 BILLING CODE 8011-01-P