[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Notices]
[Pages 41650-41653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14870]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89225; File No. SR-NASDAQ-2020-034]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rules 6130 and IM-6200-1

July 6, 2020.
    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 June 25, 2020, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6130 (Nasdaq Kill Switch) and 
IM-6200-1 (Risk Settings) to provide Participants with additional 
optional settings.
    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
    The purpose of the proposed rule changes under Nasdaq Rule 6130 
(Nasdaq Kill Switch) and IM-6200-1 (Risk Settings) are to provide 
Participants with additional optional settings in order to assist them 
in their efforts to manage their risk levels. Once the optional risk 
controls are set, the Exchange is authorized to take automated action 
if a designated risk level for a Participant is exceeded. Such risk 
settings would provide Participants with enhanced abilities to manage 
their risk with respect to orders on the Exchange.

[[Page 41651]]

    The proposed pre-trade risk controls described below are meant to 
supplement, and not replace, the Participant's own internal systems, 
monitoring and procedures related to risk management. For 
clarification, the Exchange does not guarantee that these controls will 
be sufficiently comprehensive to meet all of a Participant's needs, nor 
are the controls designed to be the sole means of risk management, and 
using these controls will not necessarily meet a Participant's 
obligations required by Exchange or federal rules (including, without 
limitation, the Rule 15c3-5 under the Act \3\ (``Rule 15c3-5'')). Use 
of the Exchange's Kill Switch or proposed risk setting in IM-6200-1(h) 
will not automatically constitute compliance with Exchange or federal 
rules and responsibility for compliance with all Exchange and SEC rules 
remains with the Participant.\4\
---------------------------------------------------------------------------

    \3\ 17 CFR 240.15c3-5.
    \4\ See Division of Trading and Markets, Responses to Frequently 
Asked Questions Concerning Risk Management Controls for Brokers or 
Dealers with Market Access, available at https://www.sec.gov/divisions/marketreg/faq-15c-5-risk-management-controls-bd.htm.
---------------------------------------------------------------------------

    Rule 6130(a) provides the definition of the Nasdaq Kill Switch, 
which is an optional tool offered at no charge that enables 
Participants to establish a pre-determined level of Net Notional Risk 
Exposure (``NNRE''), to receive notifications as the value of executed 
orders approaches the NNRE level, and to have order entry ports 
disabled and open orders administratively cancelled when the value of 
executed orders exceeds the NNRE level. Most order entry ports are 
assigned to one MPID. In the event that multiple MPIDs are assigned to 
one port, only the affected MPID is disabled from the port. The NNRE, 
although not explicitly defined,\5\ accounts for the daily dollar 
amount for buy and sell orders across all symbols, where both buy and 
sell orders are counted as positive values. For purpose of calculating 
NNRE, only executed orders are included.
---------------------------------------------------------------------------

    \5\ The Exchange is not changing the NNRE functionality under 
the proposed amendment. Rather, it is being renamed as the Gross 
Executed Risk Exposure.
---------------------------------------------------------------------------

    The Exchange is renaming the NNRE by proposing to remove references 
to ``Net Notional Risk Exposure'' and to replace them with ``Gross 
Executed Risk Exposure''. This risk level refers to a pre-established 
maximum daily dollar amount for buy and sell orders across all symbols, 
where both buy and sell orders are counted as positive values. For 
purposes of calculating Gross Executed Risk Exposure, only executed 
orders are included. The Exchange is not changing the NNRE calculation 
under the proposed amendment. Rather, it will be renamed as the Gross 
Executed Risk Exposure. This risk setting is similar to Cboe BZX 
Exchange, Inc.'s (``BZX'') Interpretations and Policies .03(a)(1) of 
BZX Rule 11.13.
    The Exchange is also proposing to add an additional risk setting 
titled ``Gross Notional Risk Exposure,'' which refers to a pre-
established maximum daily dollar amount for buy and sell orders across 
all symbols, where both buy and sell orders are counted as positive 
values. For purposes of calculating Gross Notional Risk Exposure, 
unexecuted orders on the Exchange book and executed orders are 
included. This setting is similar to Interpretations and Policies 
.03(a)(2) of BZX Rule 11.13, except BZX excludes unexecuted orders and 
counts purchases as positive values and sales are counted negative 
values. Additionally, the Exchange's rule is similar to New York Stock 
Exchange LLC (``NYSE'') Rule 7.19(a)(5), except NYSE includes orders 
routed on arrival. While the current functionality would continue to be 
available, this additional proposed risk setting would allow a 
Participant to manage its risk more comprehensively, instead of relying 
solely on the NNRE functionality offered today. For purposes of Rule 
6130, the Exchange proposes to use the term ``Participant'' as defined 
in Rule 4701(c).\6\
---------------------------------------------------------------------------

    \6\ Pursuant to Nasdaq Rule 4701 (c), a ``Participant'' is 
defined as an entity that fulfills the obligations contained in Rule 
4611 regarding participation in the System, and shall include: (1) 
``Nasdaq ECNs,'' members that meet all of the requirements of Rule 
4623, and that participates in the System with respect to one or 
more System Securities; (2) ``Nasdaq Market Makers'' or ``Market 
Makers'', members that are registered as Nasdaq Market Makers for 
purposes of participation in the System on a fully automated basis 
with respect to one or more System securities; and (3) ``Order Entry 
Firms,'' members that are registered as Order Entry Firms for 
purposes of entering orders in System Securities into the System. 
This term shall also include any Electronic Communications Network 
or Alternative Trading System (as such terms are defined in 
Regulation NMS) that fails to meet all the requirements of Rule 
4623.
---------------------------------------------------------------------------

    The Exchange also proposes to make a conforming change to Rule 
6130(b) by removing ``Net Notional Risk Exposure'' and replacing it 
with ``Establishing and Adjusting Levels.'' The Exchange is also 
proposing to specify that a Participant's clearing member, as discussed 
below, may set the risk levels for each MPID individually. This action 
is similar to Interpretations and Policies .03(b)(1) of BZX Rule 11.13 
and NYSE Rule 7.19(b)(3)(B), except unlike NYSE, the Exchange does not 
allow for setting risk levels at the sub-ID of an MPID. Additionally, 
the proposal allows for the clearing member, in addition to the 
Participant, to set and adjust the values before the beginning of a 
trading day as well as set and adjust them during the trading day. This 
is similar to Interpretations and Policies .03(b) of BZX Rule 11.13 and 
NYSE Rule 7.19(b)(3)(A).
    The Exchange is proposing under Rule 6130(c) to allow clearing 
members, if designated pursuant to Rule 6130(d), to receive 
notifications when the total value of executed orders, and if 
applicable, unexecuted orders associated with an MPID exceeds 50, 75, 
85, 90, and 95 percent of the applicable risk level values. This rule 
is similar to Interpretations and Policies .03(d) of BZX Rule 11.13 and 
NYSE Rule 7.19(b)(4).
    A clearing member guarantees transactions executed on Nasdaq for 
members with whom it has entered into a clearing arrangement, and 
therefore bears the risk associated with those transactions. Because 
clearing members bear the risk on behalf of their Participant, the 
Exchange believes that it is appropriate for the clearing member to 
have knowledge of what risk settings the Participant may utilize within 
the Exchange's trading system, as well as the option to set and adjust 
the risk levels. Therefore, the Exchange proposes to make the proposed 
optional risk settings in Rule 6130 available to clearing members, if 
so authorized by the Participant.
    Proposed Rule 6130(d) would allow for a Participant that does not 
self-clear to allocate responsibility for establishing and adjusting 
the risk levels to a clearing member that clears transactions on behalf 
of the Participant. A Participant may request to sign up for the Kill 
Switch optional setting by contacting Nasdaq Subscriber Services or by 
completing a Front End Request form.\7\ In order to allocate 
responsibility to a clearing member, a Participant must provide the 
Exchange with authorization, either by providing Nasdaq Subscriber 
Services with written authorization or by requesting the appropriate 
user role and permission for the clearing member via the Front End 
Request form. The Participant may adjust the user role and permissions 
at any time. If a Participant chooses to designate responsibility to 
its clearing member, the Participant may view any risk levels 
established by the clearing member pursuant to proposed Rule 6130(d). 
Additionally, by allocating responsibility to its clearing member,

[[Page 41652]]

the Participant consents to the Exchange taking action as provided for 
in proposed Rule 6130(e). Even if a clearing member is designated, a 
Participant will continue to be notified by the Exchange of any action 
taken regarding its trading activity. By allowing Participants to 
allocate the responsibility for establishing and adjusting such risk 
settings to its clearing member, the Exchange believes clearing members 
may reduce potential risks that they assume when clearing for 
Participants of the Exchange. A Participant may revoke responsibility 
allocated to its clearing member at any time by following the same 
process described above that is used to grant the clearing member 
authorization.
---------------------------------------------------------------------------

    \7\ The Front End Request form is available at https://www.nasdaqtrader.com/EASP/TraderEASP.aspx?id=FrontEndForm.
---------------------------------------------------------------------------

    BZX and NYSE also provide similar designations to its clearing 
members pursuant to Interpretations and Policies .03(c) of BZX Rule 
11.13 and NYSE Rule 7.19(b)(2). However, unlike NYSE, the Exchange does 
not allow for multiple risk level values to be in place at one time.
    The Exchange also proposes to renumber current Rule 6130(d) as Rule 
6130(e) and retitle it to more accurately describe the provision by 
removing ``Operation'' and replacing it with ``Breach Action and 
Reinstatement.'' Additionally, the Exchange is proposing to clarify 
that when a pre-established risk level is breached, the Kill Switch 
will be triggered. With the limited exceptions noted below the Kill 
Switch will operate at all times and on all orders when the Nasdaq 
System is open. When a risk level is breached, order entry for the 
breached MPID is disabled and all unexecuted orders are cancelled, with 
the exception of cancellations prohibited by Nasdaq Rules 4752, 4753 
and 4754. The Kill Switch function will not cancel orders directed to a 
Nasdaq Cross during the period leading up to the Cross when order 
cancellation is prohibited (i.e. between 9:28 a.m. ET to the time of 
the Nasdaq Opening Cross; between 3:50 p.m. ET to the time of the 
Nasdaq Closing Cross). Either the Participant or the clearing member 
may contact the Exchange to request reactivation of the MPID before 
trading will be reauthorized.
    As a reminder, pursuant to current Rule 6200, the Exchange will 
continue to share any Participant risk settings in the trading system 
that are specified in Rule 6130 and IM-6200-1 with the clearing member 
that clears transactions on behalf of the Participant even if the 
clearing member is not designated. Under current IM-6200-1, the 
Exchange offers certain risk settings applicable to a Participant on 
the Exchange. Proposed Rule IM-6200-1(h) would allow for a Participant 
to limit the maximum dollar amount that the Participant may associate 
with an order placed on the Exchange. This risk setting is similar to 
the risk control provided by NYSE pursuant to Rule 7.19(a)(3). When the 
Maximum Single Order Notional Check is enabled, if a Participant 
breaches this risk setting, the single order will be rejected by the 
system. The action taken is similar to NYSE Rule 7.19(c)(2).
    The Exchange is also proposing to make the following non-
substantive conforming changes:
     Capitalize the term ``Participant'' when referenced 
throughout the rule.
     Remove the term ``open orders'' and replace with 
``unexecuted orders''.
     Remove all references to the acronym ``NNRE'' throughout 
the rule in conjunction with the removal of the reference to ``Net 
Notional Risk Exposure.''
     Renumber IM-6200-1 to conform to the addition of proposed 
Rule IM-6200-1(h).

2. Statutory Basis

    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ in particular, 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes the proposed amendment will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because it provides functionality 
for a Participant to manage its risk exposure under Rule 6130 and IM-
6200-1, while also providing a notification system under Rule 6130(c) 
that would help to ensure the Participant and its clearing member are 
aware of developing issues. In addition, the proposed amendments to 
Rule 6130 would provide clearing members, who have assumed certain 
risks of Participants, greater control over risk tolerance and exposure 
on behalf of their correspondent Participant, while helping to ensure 
that both Participant and its clearing member are aware of developing 
issues.
    A clearing member guarantees transactions executed on Nasdaq for 
members with whom it has entered into a clearing arrangement, and 
therefore bears the risk associated with those transactions. The 
Exchange therefore believes that it is appropriate for the clearing 
member to have knowledge of what risk settings the Participant may 
utilize within the Exchange's trading system, as well as the option to 
set and adjust the risk levels. The proposal will permit clearing 
members who have a financial interest in the risk settings of 
Participants with whom the Participants have entered into clearing 
arrangements to better monitor and manage the potential risks assumed 
by clearing members, thereby providing clearing members with greater 
control and flexibility over setting their own risk tolerance and 
exposure and aiding clearing members in complying with the Act.
    In addition, the Exchange believes that the proposed amendments 
under Rule 6130 and IM-6200-1 are designed to protect investors and the 
public interest because the proposed functionalities are a form of risk 
mitigation that will aid Participants and clearing members in 
minimizing their financial exposure and reduce the potential for 
disruptive, market-wide events. The proposed Gross Executed Risk 
Exposure and Gross Notional Risk Exposure settings are appropriate 
measures to serve as an additional tool for Participants and clearing 
members to assist them in identifying risk exposure by identifying when 
the Participant is reaching its maximum dollar amount for purchases and 
sales across all symbols. The Exchange also believes the proposed 
amendments will assist Participants and clearing members in managing 
their financial exposure which, in turn, could enhance the integrity of 
trading on the securities markets and help to assure the stability of 
the financial system. Moreover, a Participant may revoke responsibility 
allocated to its clearing member at any time.
    Further, the Exchange believes that the proposed amendments under 
Rule 6130 and IM-6200-1 will foster cooperation and coordination with 
persons facilitating transactions in securities because under Rule 
6130(c), the Exchange will provide alerts when a Participant's trading 
activity reaches certain thresholds and under IM-6200-1, the Exchange 
will limit the Participant's maximum dollar amount placed on an order. 
As such, the Exchange may help clearing members monitor the risk levels 
of corresponding Participants.
    Finally, the Exchange believes that the proposed rule changes do 
not unfairly discriminate among the Exchange's Participants because use 
of the risk settings under Rule 6130 and IM-6200-1(h) are optional and 
available

[[Page 41653]]

to all Participants, and not a prerequisite for participation on the 
Exchange. In addition, because all orders on the Exchange would pass 
through the risk checks, there would be no difference in the latency 
experienced by Participants who have opted to use the risk settings 
versus those who have not opted to use them.\10\
---------------------------------------------------------------------------

    \10\ All Exchange orders pass through a basic risk checks 
regardless of whether a Participant opts into a risk setting.
---------------------------------------------------------------------------

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. In fact, the Exchange believes 
that the proposal will have a positive effect on competition because, 
it would allow the Exchange to offer risk management functionality that 
is comparable to functionality being offered by other national 
securities exchanges.\11\ Moreover, by providing Participants and their 
clearing members additional means to monitor and control risk, the 
proposed rule may increase confidence in the proper functioning of the 
markets and contribute to additional competition among trading venues 
and broker-dealers. Rather than impede competition, the proposal is 
designed to facilitate more robust risk management by Participants and 
clearing members, which, in turn, could enhance the integrity of 
trading on the securities markets and help to assure the stability of 
the financial system.
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release Nos. 88904(May 19, 
2020) 85 FR 31560 (May 26, 2020) (SR-NYSEArca-2020-43); 88776 (April 
29, 2020) 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17) (Approval 
Order); 88599 (April 8, 2020) 85 FR 20793 (April 14, 2020) (SR-
CboeBZX-2020-006) (Approval Order).
---------------------------------------------------------------------------

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
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-2020-034 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-2020-034. 
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-2020-034 and should 
be submitted on or before July 31, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14870 Filed 7-9-20; 8:45 am]
BILLING CODE 8011-01-P