[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