[Federal Register Volume 85, Number 111 (Tuesday, June 9, 2020)]
[Notices]
[Pages 35344-35347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89000; File No. SR-CboeEDGX-2020-023]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Allow Members and Clearing Members To Establish or Adjust the Risk
Settings Set Forth in Interpretation and Policy .03 of Exchange Rule
11.10 on a Risk Group Identifier Basis
June 3, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 28, 2020, Cboe EDGX Exchange, Inc. (the ``Exchange'') 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 Exchange. The Exchange filed the proposal as
a ``non-controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to allow Members and Clearing Members to establish
or adjust the risk settings set forth in Interpretation and Policy .03
of Exchange Rule 11.10 on a risk group identifier basis. The text of
the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, 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
[[Page 35345]]
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 change is to offer Members \5\ and
Clearing Members \6\ a more granular option to manage their credit risk
in equity securities. Specifically, the Exchange proposes to allow
Members and Clearing Members to establish a risk profile(s) on a risk
group identifier basis that would apply the risk settings offered in
Interpretation and Policy .03 of Exchange Rule 11.10 to a subset of
orders.
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\5\ See Exchange Rule 1.5(n).
\6\ A ``Clearing Member'' refers to a Member that is also a
member of a Qualified Clearing Agency and clears transactions on
behalf of another Member. See Exchange Rule 11.13(a).
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Recently, the Exchange adopted Interpretation and Policy .03 to
Exchange Rule 11.10 which provides Members certain optional risk
settings.\7\ As set forth in paragraph (a), the Exchange currently
offers the Gross Credit Risk Limit \8\ and Net Credit Risk Limit \9\
that are applicable to a Member's activities on the Exchange and are
available to either the Member or its Clearing Member. Specifically,
pursuant to paragraph (c), a Member that does not self-clear may
allocate the responsibility of establishing and adjusting the
applicable risk settings to its Clearing Member. Further, paragraph
(b)(1) provides that the risk limits may only be set at the market
participant identifier (``MPID'') level. Now, the Exchange is proposing
to amend paragraph (b)(1) to provide that the Gross Credit Risk Limit
and Net Credit Risk Limit may be set at the MPID level or at a more
granular risk profile level. The Exchange believes the proposed
functionality will provide an effective tool for Members and Clearing
Members to manage their credit risk associated with equities trading.
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\7\ See Securities Exchange Act No. 88783 (April 30, 2020) 85 FR
26991 (May 6, 2020) (the ``Original Filing'').
\8\ The ``Gross Credit Risk Limit'' refers to a pre-established
maximum daily dollar amount for purchases and sales across all
symbols, where both purchases and sales are counted as positive
values. For purposes of calculating the Gross Credit Risk Limit,
only executed orders are included. See Interpretation and Policy
.03(a)(1) of Exchange Rule 11.10.
\9\ The ``Net Credit Risk Limit'' refers to a pre-established
maximum daily dollar amount for purchases and sales across all
symbols, where purchases are counted as positive values and sales
are counted as negative values. For purposes of calculating the Net
Credit Risk Limit, only executed orders are included. See
Interpretation and Policy .03(a)(2) of Exchange Rule 11.10.
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As provided in the Original Filing, a Member can allocate
responsibility for establishing and adjusting the applicable risk
settings to its Clearing Member on an MPID basis via the Exchange's web
portal. The proposal would allow a Member or its Clearing Member, if
allocated such responsibility, to utilize ``Purge Ports'' to apply
Gross Credit Risk Limits and/or Net Credit Risk Limits to more granular
subsets of orders associated with the relevant MPID.\10\ The Exchange
believes the proposal will allow for proactive and reactive risk
management and may be useful to firms operating multiple strategies at
a given time, those operating multiple groups under a single MPID with
disparate risk profiles, or Sponsoring Members \11\ managing risk on
behalf of a Sponsored Participant.\12\ Specifically, Members or
Clearing Members may assign a risk group identifier to a specific
strategy, group, or Sponsored Participant and then set up a risk
profile applicable to that risk group identifier. Without such
functionality, the Member or its Clearing Member would only be able to
manage risk at the MPID level.
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\10\ The risk group identifier is a subset level of an MPID.
Members can use MPID and risk group identifier risk settings in
conjunction.
\11\ See Exchange Rule 1.5(aa).
\12\ See Exchange Rule 1.5(z). As noted in the Original Filing,
the Exchange does not guarantee that the proposed risk settings
described in proposed Interpretation and Policy .03, are
sufficiently comprehensive to meet all of a Member's risk management
needs. Pursuant to Rule 15c3-5 under the Act, a broker-dealer with
market access must perform appropriate due diligence to assure that
controls are reasonably designed to be effective, and otherwise
consistent with the rule. Use of the Exchange's risk settings
included in proposed Interpretation and Policy .03 will not
automatically constitute compliance with Exchange or federal rules
and responsibility for compliance with all Exchange and SEC rules
remains with the Member. See supra note 7.
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A ``Purge Port'' is a dedicated port that permits a User to
simultaneously cancel all or a subset of its orders in one or more
symbols across multiple logical ports \13\ by requesting the Exchange
to effect such cancellation.\14\ Currently, in order to effect a purge
request on a specific subset of orders, a Member must identify which
orders should be purged by applying a risk group identifier to such
orders. As proposed, the risk group identifiers available for purge
requests through Purge Ports would also be utilized to define risk
profiles which constitute risk limits at the more granular order subset
level. Specifically, through the Exchange's proposed functionality, a
Member or its Clearing Member would be able to set risk profiles for up
to 10 risk group identifiers per Purge Port that specify different
Gross Credit Risk Limits and/or Net Credit Risk Limits to orders
bearing the applicable risk group identifier. The Gross Credit Risk
Limit and Net Credit Risk Limit would only be applied to the specified
subset of orders with the applicable risk group identifier.\15\ As
such, only open orders or new orders bearing the applicable risk group
identifier would be canceled or automatically blocked, respectively, in
the event of a risk limit breach as set forth in paragraph (e) of
Interpretation and Policy .03.
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\13\ A logical port represents a port established by the
Exchange within the Exchange's system for trading and billing
purposes. Each logical port established is specific to a Member or
non-Member and grants that Member or non-Member the ability to
accomplish a specific function, such as order entry, order
cancellation, or data receipt. In addition, logical ports enable
Users to access information such as execution reports, execution
report messages, auction notifications, and administrative data
through a single feed.
\14\ A User initiating such a request may also request that the
Exchange block all or a subset of its new inbound orders in one or
more symbols across multiple logical ports. The block will remain in
effect until the User requests the Exchange remove the block. See
Interpretation and Policy .02(b) of Exchange Rule 11.10. Purge Ports
are available to Users while risk settings are only available to
Members and its Clearing Member.
\15\ As proposed, a new optional port level attribute will be
available to validate that each new order submitted through that
specific logical port contains a risk group identifier. Once this
logical port level setting is selected, any orders submitted through
that session that are not tagged with a risk group identifier will
be rejected in an effort to ensure intended risk thresholds are
maintained.
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As noted above, Purge Ports enable Users to simultaneously cancel
all open orders, or a subset thereof, across multiple logical ports
through a single cancel message. Therefore, Purge Ports allow Members
to manage risk for some subset of their business, such as by trading
strategy. The proposal would expand the existing Purge Port
functionality to allow Members and Clearing Members to use the
Exchange's automated risk management functionality in a similar manner.
As a result, Members and Clearing Members would be able to set
automated gross and net notional risk limits for particular risk group
identifiers, while retaining the ability to mass cancel and/or block
orders entered with that risk group identifier using current purge
functionality, e.g., in response to alerts that the Member is
approaching designated limits.
[[Page 35346]]
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ requirements that the rules of an 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\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market because the proposal
would enhance Members' and Clearing Members' ability to manage their
credit risk associated with equities trading, which would, in turn,
improve their risk controls to the benefit of all market participants.
Specifically, as discussed above, the proposal would allow a Member or
its Clearing Member, if allocated such responsibility, to utilize the
existing Purge Port risk group identifier functionality to set risk
profiles for up to 10 risk group identifiers per Purge Port. Each risk
profile would specify the applicable Gross Credit Risk Limits and/or
Net Credit Risk Limits that would be applied to the subset of orders
bearing the risk group identifier. Further, the proposal would allow
the automatic mass cancellation of all open orders and block new orders
bearing the risk group identifier in the event of a risk limit breach.
As such, the Exchange believes that the proposal will allow for
proactive and reactive risk management and may be useful to firms
operating multiple strategies at a given time, those operating multiple
groups under a single MPID with disparate risk profiles, or Sponsoring
Members managing risk on behalf of a Sponsored Participant.\18\
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\18\ Supra note 12.
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In addition, the Exchange believes that the proposed rule change is
designed to protect investors and the public interest because the
proposed functionality is a form of risk mitigation that will aid
Members, and Clearing Members for firms who do not self-clear, in
minimizing their risk associated with operating or clearing multiple
business lines with disparate risk profiles. In turn, the introduction
of such risk management functionality could enhance the integrity of
trading on the securities markets and help to assure the stability of
the financial system.
The Exchange also believes that building on the Purge Port
functionality to provide the proposed changes would foster cooperation
and coordination with persons engaged in facilitating transactions in
securities because it offers enhanced use of existing functionality.
This may enable more efficient use of Members' and Clearing Members'
resources.
Finally, the Exchange believes that the proposed rule change does
not unfairly discriminate among the Exchange's Members and Clearing
Members because use of the risk settings is optional and are not a
prerequisite for participation on the Exchange, and will be available
to all Members and Clearing Members as an enhancement to existing Purge
Port functionality. The proposed risk settings are completely voluntary
and, as they relate solely to optional risk management functionality,
no Member or Clearing Member is required or under any regulatory
obligation to utilize them.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. In fact, the Exchange
believes that the proposal may have a positive effect on competition
because it would allow the Exchange to offer enhanced risk management
functionality. Further, by providing Members and their Clearing Members
more granular 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 as an
innovative way to facilitate more robust risk management by Members 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. Furthermore, other exchanges are free to propose
similar functionality as they see fit.\19\
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\19\ The NYSE has adopted similar provisions that allow for risk
settings at a ``sub-ID'' level. See Securities Exchange Act No.
88776 (April 29, 2020) 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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 \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \22\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the Exchange may implement the proposed rule change on the anticipated
launch date of May 29, 2020. The Exchange states that waiver of the
operative delay would allow Members and Clearing Members to immediately
utilize the proposed functionality to manage their risk. For this
reason, the Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Therefore, the Commission hereby waives the operative delay
and designates the proposal as operative upon filing.\24\
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\22\ 17 CFR 240.19b-4(f)(6).
\23\ 17 CFR 240.19b-4(f)(6)(iii).
\24\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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-CboeEDGX-2020-023 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-CboeEDGX-2020-023. 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 such 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-CboeEDGX-2020-023, and should be
submitted on or before June 30, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12385 Filed 6-8-20; 8:45 am]
BILLING CODE 8011-01-P