Document ID: SEC-2018-1512-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2018-10-01T04:00Z

[Federal Register Volume 83, Number 190 (Monday, October 1, 2018)]
[Notices]
[Pages 49434-49437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21231]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84284; File No. SR-NYSEArca-2018-68]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Modify Rule 6.15-O Regarding the Give Up of 
a Clearing Member by OTP Holders and OTP Firms and Conforming Changes 
to Rule 6.46-O

September 25, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on September 11, 2018, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Rule 6.15-O regarding the Give Up 
of a Clearing Member by OTP Holders and OTP Firms and proposes 
conforming changes to Rule 6.46-O. The proposed change is available on 
the Exchange's website at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

[[Page 49435]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to modify Rule 6.15-O regarding the 
Give Up of a Clearing Member \4\ by OTP Holders and OTP Firms (each an 
``OTP,'' collectively, ``OTPs'') and to make conforming changes to Rule 
6.46-O.
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    \4\ Rule 6.1-O(2) defines ``Clearing Member'' as an Exchange OTP 
which has been admitted to membership in the Options Clearing 
Corporation pursuant to the provisions of the Rules of the Options 
Clearing Corporation.
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Rule 6.15-O: Current Process to Give Up a Clearing Member
    In 2015 the Exchange adopted its current ``give up'' procedure for 
OTPs executing transactions on the Exchange.\5\ Per Rule 6.15-O, an OTP 
may give up a ``Designated Give Up'' or its ``Guarantor,'' as defined 
in the Rule and described below.
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    \5\ See Securities and Exchange Act Release No. 75641 (August 7, 
2015), 80 FR 48577 (August 13, 2015) (SR-NYSEArca-2015-65).
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    The Rule defines ``Designated Give Up'' as any Clearing Member that 
an OTP Holder (other than a Market Maker \6\) identifies to the 
Exchange, in writing, as a Clearing Member the OTP requests the ability 
to give up. To designate a ``Designated Give Up,'' an OTP must submit 
written notification to the Exchange. Specifically, the Exchange uses a 
standardized form (``Notification Form''). An OTP may currently 
designate any Clearing Member as a Designated Give Up. Additionally, 
there is no minimum or maximum number of Designated Give Ups that an 
OTP must identify. Similarly, should an OTP no longer want the ability 
to give up a particular Designated Give Up, the OTP informs the 
Exchange in writing.
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    \6\ For purposes of this rule, references to ``Market Maker'' 
refer to OTPs acting in the capacity of a Market Maker and include 
all Exchange Market Maker capacities e.g., Lead Market Makers. As 
explained below, Market Makers give up Guarantors that have executed 
a Letter of Guarantee on behalf of the Marker Maker, pursuant to 
Rule 6.36-O; Market Makers need not give up Designated Give Ups.
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    Rule 6.15-O also requires that the Exchange notify a Clearing 
Member, in writing and as soon as practicable, of each OTP that has 
identified it as a Designated Give Up. However, the Exchange will not 
accept any instructions from a Clearing Member to prohibit an OTP from 
designating the Clearing Member as a Designated Give Up. Additionally, 
there is no subjective evaluation of an OTP's list of Designated Give 
Ups by the Exchange. The Rule does, however, provide that a Designated 
Give Up may determine to not accept a trade on which its name was given 
up so long as it believes in good faith that it has a valid reason not 
to accept the trade.\7\
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    \7\ See Rule 6.15-O(f)(1) (setting forth procedures for 
rejecting a trade). An example of a valid reason to reject a trade 
may be that the Designated Give Up does not have a customer for that 
particular trade.
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    The Rule defines ``Guarantor'' as a Clearing Member that has issued 
a Letter of Guarantee or Letter of Authorization for the executing OTP, 
pursuant to Rules of the Exchange \8\ that is in effect at the time of 
the execution of the applicable trade. An executing OTP may give up its 
Guarantor without such Guarantor being a ``Designated Give Up.'' 
Additionally, Rule 6.36 provides that a Letter of Guarantee is required 
to be issued and filed by each Clearing Member through which a Market 
Maker clears transactions. Accordingly, a Market Maker is enabled to 
give up only a Guarantor that had executed a Letter of Guarantee on its 
behalf pursuant to Rule 6.36-O; a Market Maker does not need to 
identify any Designated Give Ups. Like Designated Give Ups, Guarantors 
likewise have the ability to reject a trade.\9\
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    \8\ See Rule 6.36-O (Letters of Guarantee); Rule 6.45-O (Letters 
of Authorization).
    \9\ See Rule 6.15-O(f)(2) (providing that a Guarantor may 
``change the give up to another Clearing Member that has agreed to 
be the give up on the subject trade, provided such Clearing Member 
has notified the Exchange and the executing OTP Holder or OTP Firm 
in writing of its intent to accept the trade'').
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    Beginning in early 2018, certain Clearing Firms (in conjunction 
with the Securities Industry and Financial Markets Association 
(``SIFMA'')) expressed concerns related to the process by which 
executing brokers on U.S. options exchanges (the ``Exchanges'') are 
allowed to designate or `give up' a clearing firm for purposes of 
clearing particular transactions. The SIFMA-affiliated Clearing Members 
indicated that the Federal Reserve has recently identified the current 
give-up process as a significant source of risk for clearing firms. 
SIFMA-affiliated Clearing Members subsequently requested that the 
Exchanges alleviate this risk by amending Exchange rules governing the 
give up process.\10\
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    \10\ Cboe Exchange, Inc. (``CBOE'') recently filed to amend its 
give up procedure to require CBOE Trading Permit Holders (each a 
``TPH'') to receive written authorization from a Clearing TPH 
(``CTPH'') before it may give up that CTPH. See Securities and 
Exchange Act Release No. 83872 (August 17, 2018), 83 FR 42751 
(August 23, 2018) (SR-CBOE-2018-55). The Exchange's proposal leads 
to the same result of providing Clearing Members the ability to 
control risk, but it differs in process.
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Proposed Amendment to Rules 6.15-O and 6.46-O
    The Exchange proposes to amend Rule 6.15-O to provide a means for a 
Designated Give Up to opt out of acting as the give up for certain 
OTPs. As proposed, Rule 6.15-O b)(4) would be revised to provide that 
the Exchange would ``accept instruction from a Clearing Member not to 
permit an OTP to designate the Clearing Member as the Designated Give 
Up.'' The Exchange further proposes to add language to Rule 6.15-
O(b)(7) to provide that ``[i]f a Clearing Member no longer wants to be 
a Designated Give Up of a particular [OTP], the Clearing Member must 
notify the Exchange, in a form and manner prescribed by the Exchange.'' 
In practice, a Clearing Member that has been designated as the 
Designated Give Up need only tell the Exchange that it refuses this 
designation.
    Consistent with this proposed change, the Exchange also proposes to 
amend Rule 6.46-O(g) regarding the responsibilities of Floor Brokers to 
maintain error accounts ``for the purposes of correcting bona fide 
errors, as provided in Rule 6.14-O.'' As proposed, the Exchange would 
specify that ``it will not be a violation of this provision if a trade 
is transferred away from an error account through the CMTA process at 
OCC.'' \11\ This additional language would enable an executing OTP that 
has executed an order to CMTA that order through its own clearing 
relationship. For example, assume a Floor Broker executes a trade 
giving up Firm A (a Clearing Member that is one of its Designated Give 
Ups) and, after the execution, the Floor Broker is informed that a 
portion of the trade needs to be changed to give-up Firm B (a Clearing 
Member that is not

[[Page 49436]]

one of the Floor Broker's Designated Give Ups). The proposed language 
would enable the Floor Broker to CMTA the trade to Firm B through its 
own clearing arrangement (i.e., error account/Letter of Authorization) 
rather than nullifying or busting the trade.
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    \11\ See proposed Rule 6.46-O(g). The Exchange also proposes to 
delete as obsolete reference to Rule 4.21-O, which is currently 
``Reserved,'' and therefore an outdated cross-reference. See id.
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Implementation
    The Exchange proposes to announce the implementation date of the 
proposed rule change via Trader Notice, to be published no later than 
thirty (30) days following Commission approval. The implementation date 
will be no later than sixty (60) days following Commission approval. 
This additional time would afford the Exchange and OTP the time to make 
any changes current give up designations.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \12\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\13\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Particularly, as discussed above, several Clearing Firms affiliated 
with SIFMA have recently expressed concerns relating to the current 
give up process that permits OTPs to identify any Clearing Members as a 
Designated Give Up for purposes of clearing particular transactions. 
Also as noted above, the Clearing Members have relayed that the Federal 
Reserve has recently identified the current give-up process (i.e., a 
process that lacks authorization) as a significant source of risk for 
clearing firms. The Exchange believes the proposed changes to Rule 
6.15-O would help alleviate this risk by enabling Clearing Members to 
refuse to act as a Designated Give Up for certain OTPs, which would 
afford Clearing Members a measure of control. The Exchange believes its 
proposal addresses concerns raised by Clearing Members, while 
maintaining the basic give up process. The Exchange does not anticipate 
Clearing Members to routinely refuse the role of Designated Give Up, 
but rather to utilize this option only when there is a valid reason and 
good faith basis to do so. The Exchange notes that Clearing Member 
would still have the ability to reject trades on an ad hoc basis for 
OTPs for which it has not refused to be a Designated Give Up. 
Accordingly, the Exchange believes the proposed rule change is 
reasonable and continues to provide certainty that a Clearing Member 
would be responsible for a trade, which protects investors and the 
public interest.
    The Exchange also believes that the proposed change to Rule 6.46-O 
would protect investors because it would permit an executing OTP to 
utilize its error account to CMTA an order through its own clearing 
relationship. This would preserve executions while accommodating the 
proposed rule change that could result in an executing OTP not being 
permissioned to for a particular give-up.
    Thus, this proposal would foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that this proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
that the proposed rule change would impose an unnecessary burden on 
intramarket competition because it would apply equally to all similarly 
situated OTPs. The Exchange also notes that, should the proposed 
changes make the Exchange more attractive for trading, market 
participants trading on other exchanges can always elect to become OTPs 
on the Exchange to take advantage of the trading opportunities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2018-68 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2018-68. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2018-68, and

[[Page 49437]]

should be submitted on or before October 22, 2018.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21231 Filed 9-28-18; 8:45 am]
 BILLING CODE 8011-01-P