Document ID: SEC-2014-0146-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2014-01-27T05:00Z

[Federal Register Volume 79, Number 17 (Monday, January 27, 2014)]
[Notices]
[Pages 4366-4371]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01424]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71360; File No. SR-NYSE-2014-02]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Supplementary 
Material .20 to Rule 103 Which Sets Forth Net Liquid Assets 
Requirements for Member Organizations That Operate as Designated Market 
Maker Units

January 21, 2014.
    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 January 6, 2014, the New York Stock Exchange LLC (the 
``Exchange'' or ``NYSE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III 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.
---------------------------------------------------------------------------

    \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 Supplementary Material .20 to Rule 
103 (``Rule 103.20''), which sets forth net liquid assets requirements 
for member organizations that operate as Designated Market Maker 
(``DMM'') units (``DMM units''). The text of the proposed rule change 
is available on the Exchange's Web site at www.nyse.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 Exchange proposes to amend Rule 103.20, which sets forth net 
liquid assets requirements for member organizations that operate as DMM 
units.\3\ Specifically, the Exchange proposes to change the types of 
financial assets and resources that would count toward meeting the net 
liquid assets requirement without reducing the level of the overall 
requirement and reorganize and add detail to the rule so that it is 
easier to understand.
---------------------------------------------------------------------------

    \3\ Pursuant to Rule 2(j), a DMM unit is defined as a member 
organization or unit within a member organization that has been 
approved to act as a DMM unit under Rule 98. Pursuant to Rule 2(i), 
a DMM is defined as an individual member, officer, partner, employee 
or associated person of a DMM unit who is approved by the Exchange 
to act in the capacity of a DMM. All references to rules herein are 
to NYSE rules, unless otherwise noted.
---------------------------------------------------------------------------

Current Rule
    Under Rule 103.20, the Exchange imposes a net liquid assets 
requirement on each DMM unit subject to Rule 104 that typically far 
exceeds the minimum net capital requirement applicable to a broker-
dealer under Commission Rule 15c3-1 (``SEC Net Capital Rule'').\4\ The 
purpose of the Exchange's requirement is to reasonably assure that each 
DMM unit maintains sufficient liquidity to carry out its obligation to 
maintain an orderly market in its assigned securities in times of 
market stress. The Exchange established the formula for the current net 
liquid assets requirement in July 2011, which results in the aggregate 
net

[[Page 4367]]

liquid assets of all DMM units equaling at least $125 million.\5\
---------------------------------------------------------------------------

    \4\ 17 CFR 240.15c3-1.
    \5\ See Securities Exchange Act Release No. 64918 (July 19, 
2011), 76 FR 44390 (July 25, 2011) (SR-NYSE-2011-35).
---------------------------------------------------------------------------

    Under current Rule 103.20, each DMM unit must maintain or have 
allocated to it net liquid assets that are the greater of (1) $1 
million or (2) $125,000 for each one-tenth of one percent (0.1%) of 
Exchange transaction dollar volume \6\ in its registered securities 
exclusive of Exchange Traded Funds (``ETFs''), plus $500,000 for each 
ETF, plus a market risk add-on of the average of the prior 20 business 
days' securities haircuts on its DMM dealer's positions computed 
pursuant to paragraph (c)(2)(vi), exclusive of paragraph (N), under the 
SEC Net Capital Rule. If the DMM unit is registered in ETFs, then it 
must maintain the greater of $500,000 for each ETF or $1 million. A DMM 
unit must inform NYSE Regulation immediately whenever the DMM unit is 
unable to comply with these requirements.
---------------------------------------------------------------------------

    \6\ The term ``Exchange transaction dollar volume'' means the 
most recent Statistical Data, calculated and provided by the NYSE on 
a monthly basis.
---------------------------------------------------------------------------

    The term ``net liquid assets'' is defined as excess net capital 
computed in accordance with the SEC Net Capital Rule and Rule 325, with 
the following adjustments:
    (1) Additions for haircuts and undue concentration charges taken 
pursuant to Section (c)(2)(vi)(M) of the SEC Net Capital Rule on 
registered securities in dealer accounts;
    (2) Deductions for clearing organization deposits; and
    (3) Deductions for any cash surrender value of life insurance 
policies allowable under the SEC Net Capital Rule.
    If two or more DMM units are associated with each other and deal 
for the same DMM unit account, then the capital requirement of Rule 
103.20 applies to such DMM units as one unit, rather than to each DMM 
unit individually. Any joint account must be approved by NYSE 
Regulation.
    Notwithstanding Rule 98, the DMM unit's net liquid assets needed to 
meet the requirements of Rule 103.20 must be dedicated exclusively to 
DMM dealer activities and must not be used for any other purpose 
without the express written consent of NYSE Regulation.
    Solely for the purpose of maintaining a fair and orderly market, 
NYSE Regulation may, for a period not to exceed five business days, 
allow a DMM unit to continue to operate despite such DMM unit's 
noncompliance with the provisions of the minimum requirements of Rule 
103.20.
Developments Since July 2011 Rule Implementation
    A determination of whether Rule 103.20 is appropriately calibrated 
such that it is consistent with the overall level of DMM unit risk 
involves consideration and assessment of many factors, including legal 
and regulatory developments, market fragmentation, DMM unit end-of-day 
inventory positions and position duration, and the use of technology to 
manage market volatility. Since July 2011, the Exchange has continued 
to regularly assess these factors.
    With respect to legal and regulatory developments, the Exchange 
states that the allocation of capital by market participants has become 
much more disciplined and stringent following passage of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act \7\ and in light of the 
impending U.S. implementation of the Basel III regulatory capital 
reforms from the Basel Committee on Banking Supervision.\8\ DMMs 
frequently are established in segregated units where capital cannot be 
leveraged across other business activities, as it can in other 
traditional market making businesses. The Exchange notes that overall 
DMM unit risk levels have continued to decline due to, among other 
things, implementation of marketwide volatility controls (e.g., Limit 
Up/Limit Down price controls),\9\ enhanced technology resulting in 
reduced trading latency levels, clearing organization risk control 
enhancements, tighter percentage triggers on marketwide circuit 
breakers,\10\ pre-trade risk controls (i.e., SEC Rule 15c3-5,\11\ the 
``Market Access Rule''), and clearly defined Clearly Erroneous 
Execution parameters and processes.\12\ These initiatives have 
contributed to reducing the potential for significant and/or rapid 
movements in the market and help DMM units in satisfying their 
obligation to maintain an orderly market in assigned securities in 
times of market stress. The Exchange also recently filed to adopt 
optional ``kill switch'' mechanisms to reduce systemic risk for member 
organizations, which is a market-wide initiative that has been 
discussed among several U.S. equity exchanges.\13\
---------------------------------------------------------------------------

    \7\ Public Law 111-203, 124 Stat. 1376 (2010).
    \8\ See 78 FR 62018 (October 11, 2013) (Adoption of Regulatory 
Capital Rules by the Office of the Comptroller of the Currency and 
the Federal Reserve Board: Regulatory Capital, Implementation of 
Basel III, Capital Adequacy, Transition Provisions, Prompt 
Corrective Action, Standardized Approach for Risk-weighted Assets, 
Market Discipline and Disclosure Requirements, Advanced Approaches 
Risk-Based Capital Rule, and Market Risk Capital Rule).
    \9\ See, e.g., Securities Exchange Act Release No. 70530 
(September 26, 2013), 78 FR 60937 (October 2, 2013) (File No. 4-
631).
    \10\ See Rule 80B.
    \11\ 17 CFR 240.15c3-5.
    \12\ See Rule 128.
    \13\ See Securities Exchange Act Release No. 71164 (December 20, 
2013), 78 FR 79044 (December 27, 2013) (SR-NYSE-2013-80).
---------------------------------------------------------------------------

    With respect to market fragmentation, the Exchange notes that both 
the overall consolidated Tape A volume as well as the Exchange's 
average daily volume of shares traded have declined approximately 30% 
since 2010, therefore resulting in less trading both market-wide and at 
the Exchange in the securities assigned to DMMs.
    As a result of this decline in marketplace volume and other 
factors, the regular need for capital to fund end-of-day position 
inventories has also declined. For example, the average value of DMM 
units' end-of-day position inventories decreased by over 50% since the 
last time the Exchange filed to amend the DMM net capital requirements. 
As a result, the need to keep dedicated capital in the DMM unit is 
inefficient and this proposal, as described below, would provide for 
the ability to utilize capital in a more efficient manner. This 
decrease in inventories also indicates that DMM units are carrying 
significantly less overnight risk. Moreover, the duration of a position 
is also much shorter than it was in years past, which has further 
contributed to reducing overall DMM risk. Speed is a key tool for 
managing risk, and the Exchange's focus on reducing round-trip order 
execution times has helped DMM units reduce exposure time and better 
manage their risks, while allowing them to offer better, more 
competitively-priced quotes. The Exchange's round trip for marketable 
order executions has declined from several hundred milliseconds in Q4 
2010 to less than 1 millisecond in Q4 2013, based on an average of the 
medians.
    Finally, as the Exchange's marketplace has become more electronic, 
DMM units have also increased their utilization of technology to reduce 
risk exposure, in particular by using algorithms to adjust prices 
quickly in response to market dynamics. In this regard, rapidly 
incorporating market information into quotes provides better pricing 
for investors, better risk control mechanisms for DMM units and 
therefore a marketplace with greater stability and resilience, all of 
which the Exchange believes contributes to reducing DMM unit risk.

[[Page 4368]]

Proposed Rule Change
    In light of these developments, the Exchange believes that it is 
now appropriate to amend the rule to expand the types of financial 
assets and resources permitted to be used to meet the net liquid assets 
requirement without changing the aggregate level of net liquid assets 
maintained by all DMM units. The Exchange notes that the proposed rule 
change is designed to promote a more efficient use of capital. The 
Exchange believes that the current structure may act as a barrier to 
entry for potential new DMM units because market makers and traders on 
other U.S. equity exchanges are not subject to any additional net 
capital requirements beyond the minimum net capital required by the SEC 
Net Capital Rule. Providing a broader range of alternatives for meeting 
the net liquid assets requirement would reduce that barrier to entry 
and reduce the inefficient use of capital. The Exchange also believes 
that Rule 103.20 should be revised and reorganized in a manner that 
would make it clearer and easier to understand.
    Proposed Rule 103.20(a) would contain new text setting forth 
definitions. The term ``Net Liquid Assets'' would be redefined to mean 
the sum of (A) ``Excess Net Capital'' and (B) ``Liquidity'' dedicated 
to the DMM unit.\14\ The term ``Excess Net Capital'' would have the 
same meaning as the term excess net capital as computed in accordance 
with the SEC Net Capital Rule. This would mean the amount identified as 
item number 3770 of SEC Form X-17A-5 (``FOCUS Report''), except for DMM 
units that compute net capital under the alternative standard, for 
which it would mean item number 3910 of the FOCUS Report. The additions 
to and deletions from net liquid assets under current Rule 
103.20(a)(iv)(A)-(C) as described above would no longer apply.
---------------------------------------------------------------------------

    \14\ The capitalized, defined terms used in the proposed rule 
change would have the specific meanings proposed herein. Non-
capitalized forms of the terms (e.g., liquidity instead of 
Liquidity) would have the general industry meaning. The Exchange 
proposes to amend the title of Rule 103.20 to be ``DMM Financial 
Requirements,'' instead of the current ``DMM Capital Requirements'' 
title, to reflect the proposed alternatives to capital when 
determining Net Liquid Assets.
---------------------------------------------------------------------------

    Liquidity would be defined to mean undrawn or actual borrowings 
that are dedicated to the DMM unit's business, including:
    (A) Undrawn committed lines of credit from a bank, as defined in 
Section 3(a)(6) of the Act; \15\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78c(a)(6).
---------------------------------------------------------------------------

    (B) undrawn committed lines of credit from an affiliate of the DMM 
unit or from the member organization of which the DMM unit is a part; 
and
    (C) actual borrowings after the effective date of the rule that (i) 
have been used to purchase DMM unit securities, U.S. Treasury 
securities, or reverse repurchase agreements collateralized by U.S. 
Treasury securities, or (ii) are held as cash.\16\
---------------------------------------------------------------------------

    \16\ If a DMM utilizes an undrawn committed line of credit after 
the effective date of the rule to make such purchases, the amount of 
the credit line would continue to count toward Liquidity. Any 
reduction in the value of purchased securities would be reflected in 
Excess Net Capital.
---------------------------------------------------------------------------

    Proposed Rule 103.20(b)(1) would set forth the minimum Net Liquid 
Assets requirement. The proposed rule change draws from the text of 
current Rules 103.20(a) and (b), but reorders the text using the new 
definitions proposed above to make it easier to understand. As noted 
above, the aggregate level of Net Liquid Assets of $125 million would 
not change, but the permitted components of Net Liquid Assets and 
proportions thereof would change. Thus, proposed Rule 103.20(b)(1) 
would provide that each DMM unit must at all times maintain or have 
allocated to it minimum Net Liquid Assets equal to the greater of (i) 
$1 million or (ii) $125,000 for every 0.1% of Exchange Transaction 
Dollar Volume \17\ in each of the DMM unit's registered securities. The 
market risk add-on requirement under current Rule 103.20(b)(i)(B) as 
described above would no longer apply.
---------------------------------------------------------------------------

    \17\ The meaning of Exchange Transaction Dollar Volume would not 
change, but it would become a defined term for purposes of Rule 
103.20. See, e.g., current Rule 103.20(b)(iii), proposed Rule 
103.20(a)(4) and supra note 6.
---------------------------------------------------------------------------

    Under the proposed rule change, there would no longer be a separate 
financial requirement for ETFs,\18\ thus harmonizing the financial 
requirements applicable to ETFs with those applicable to other 
securities. Although the Exchange does not currently list or trade any 
ETFs or other exchange traded products (``ETPs''), future business 
developments could result in an expansion of products traded on the 
Exchange to include them. Under the current rule, if a DMM unit were 
assigned a significant number of ETFs, the net liquid assets 
requirements for those ETFs would significantly exceed the net liquid 
assets requirements applicable to an equal number of other securities. 
The Exchange believes that ETFs and ETPs should be subject to the same 
requirements as other securities.\19\
---------------------------------------------------------------------------

    \18\ See current Rules 103.20(a)(ii) and (b)(i)(A).
    \19\ The Exchange further notes that the current ETF financial 
requirements date back to a time when the overall financial 
requirements for specialists (predecessors to DMM units) were 
significantly higher, and have not been modernized to account for a 
changing micro and macro market structure, despite decreases in the 
financial requirements applicable to other securities. See 
Securities Exchange Act Release No. 54205 (July 25, 2006), 71 FR 
43260 (July 31, 2006) (SR-NYSE-2005-38).
---------------------------------------------------------------------------

    Under proposed Rule 103.20(b)(2), the portion of a DMM unit's Net 
Liquid Assets that is derived from Excess Net Capital must at all times 
equal or exceed 40% of a DMM unit's total Net Liquid Assets 
requirement. Excess Net Capital that is allocated to the DMM unit must 
be dedicated exclusively to the DMM unit's activities and may not be 
used by other business units within, or for any other purpose of, the 
member organization. This is designed to reasonably assure that DMM 
units maintain sufficient levels of Excess Net Capital and that their 
Net Liquid Assets are not overly weighted with borrowings or credit 
lines.
    Proposed Rule 103.20(b)(3) would be substantially the same as 
current Rule 103.20(a)(v). The proposed rule would provide that if two 
or more DMM units were associated with each other and deal for the same 
joint DMM unit account, the Net Liquid Assets requirements enumerated 
in proposed Rule 103.20 would apply to such DMM units treated as one 
unit, rather than to each DMM unit individually, and any joint account 
involving two or more DMM units would be required to be approved in 
writing by NYSE Regulation or its designee.
    Under proposed Rule 103.20(b)(4), all Liquidity would be required 
to be subject to a written agreement that provided for a commitment 
period of not less than 30 calendar days and, once borrowed, an initial 
repayment term of not less than 30 calendar days, and an unconditional, 
irrevocable commitment with no material adverse change or other 
limiting clauses, other than provisions to accelerate the commitment 
period to 30 calendar days. Such written agreement must be made 
available to the Exchange upon request.
    Under proposed Rule 103.20(b)(5), all Liquidity provided via a 
commitment to a DMM unit from an affiliate, or to a DMM unit from the 
member organization of which the DMM unit is a part, would be required 
to be included in a comprehensive liquidity plan prepared by the 
affiliate or the member organization, as the case may be, that provided 
for stress testing of the overall Liquidity of all entities that rely 
on such Liquidity, including the DMM unit, and the plan must show 
excess Liquidity for a period of at least 30 calendar days beyond the 
date that the DMM unit is relying on Liquidity for its Net Liquid 
Assets computation. The DMM unit would be required to arrange for the

[[Page 4369]]

affiliate(s), or the member organization of which the DMM unit is a 
part, to submit liquidity plans to the Exchange or its designee upon 
request.
    The requirement that DMM units notify the Exchange if they are 
unable to satisfy the requirements of Rule 103.20 would be moved from 
current Rule 103.20(a)(iii) to proposed Rule 103.20(c), titled 
``Notification Requirements,'' and further revised. Proposed Rule 
103.20(c)(1) would specify that a DMM unit must immediately notify the 
Exchange when (A) the DMM unit's Net Liquid Assets fall below the 
minimum requirements; (B) the percentage of Net Liquid Assets derived 
from the DMM unit's Excess Net Capital falls below 40% of the total Net 
Liquid Assets requirement; (C) Liquidity has a commitment term of less 
than 30 calendar days from the date of the DMM unit's Net Liquid Assets 
computation; (D) the DMM unit is not in compliance with one or more 
terms of its loan or commitment agreements relating to its DMM 
activities; or (E) the repayment date of any actual borrowing is 30 
days or less. The Exchange would also maintain the current provision 
under Rule 103.20(c) that provides the Exchange with the flexibility to 
allow a DMM unit to continue to operate as such for a limited period of 
time despite not meeting certain requirements of Rule 103.20. 
Specifically, proposed Rule 103.20(c)(2) would provide that if the 
Exchange received notice of a condition under proposed Rule 
103.20(c)(1), the Exchange could allow a DMM unit to continue to 
operate as such for a period not to exceed five business days from the 
date of such notice in order to permit the DMM unit to resolve such 
condition. If the DMM unit were granted such a period and timely 
resolved the condition requiring notice under paragraph (c)(1), it 
could continue to operate as a DMM unit thereafter. The Exchange notes 
that regardless of whether a resolution period was granted, the 
Exchange retains the discretion to take enforcement action against any 
member organization for non-compliance with the Exchange's rules in 
appropriate circumstances.
    The Exchange believes that the proposed change would result in DMM 
units maintaining a robust level of capital through a means that is 
less burdensome for DMM units to satisfy. The Exchange notes that it 
would continue to assess DMM unit financial requirements and that the 
Financial Industry Regulatory Authority, Inc. (``FINRA''), on behalf of 
the Exchange, would monitor DMM unit Net Liquid Assets on a daily 
basis.\20\ The Exchange would notify DMM units of the implementation 
date of this rule change via a Member Education Bulletin.
---------------------------------------------------------------------------

    \20\ See Rule 0 (describing the regulatory services agreement 
between NYSE and FINRA). In particular, FINRA would monitor actual 
DMM unit borrowings after the effective date of the proposed rule to 
assess whether proceeds have been used to purchase DMM unit 
securities, U.S. Treasury securities, or reverse repurchase 
agreements collateralized by U.S. Treasury securities, or are held 
as cash. This could be accomplished, for example, by comparing the 
timing of the borrowings to the timing of a DMM unit's purchases of 
the corresponding assets.
---------------------------------------------------------------------------

    The proposed change is not otherwise intended to address any other 
issues and the Exchange is not aware of any problems that DMM units 
would have in complying with the proposed change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\21\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\22\ in particular, because 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 regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed change would remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system by reducing the burden on DMM units to 
maintain inordinate levels of excess net capital. The Exchange believes 
that using Liquidity to satisfy a portion of the DMM unit Net Liquid 
Assets requirements would be more efficient and less burdensome than 
the existing requirements, under which DMM units must generally 
maintain materially more net liquid assets than they have historically 
needed on a day-to-day basis. When maintained as excess net capital, 
these ``excess'' assets cannot be as efficiently utilized. The Exchange 
further anticipates that Liquidity would generally be made available to 
a DMM unit at a lower cost than additional capital.
    The Exchange believes that using a combination of Excess Net 
Capital and Liquidity for purposes of satisfying the DMM unit Net 
Liquid Assets requirement would reasonably assure that DMM units have 
sufficient liquidity to carry out their obligations to maintain an 
orderly market in their assigned securities in times of market stress. 
In this regard, the Exchange notes that overall DMM unit risk levels 
have continued to decline due to, among other things, implementation of 
marketwide volatility controls (e.g., Limit Up/Limit Down price 
controls), enhanced technology resulting in reduced trading latency 
levels, clearing organization risk control enhancements, tighter 
percentage triggers on marketwide circuit breakers, pre-trade risk 
controls (i.e., the Market Access Rule), and clearly defined Clearly 
Erroneous Execution parameters and processes. These initiatives have 
contributed to reducing the potential for significant and/or rapid 
movements in the market and provide support to DMM units in satisfying 
their obligation to maintain an orderly market in assigned securities 
in times of market stress. An initiative to develop a marketwide ``kill 
switch'' to reduce systemic risk has also been discussed among several 
U.S. equity exchanges. The Exchange further believes that continued 
market fragmentation, the decline in the average value of DMM units' 
end-of-day position inventories and the shorter duration of positions, 
and improved technology to manage market risk also support the proposed 
rule change.
    The need for a source of liquid assets could occur during times of 
market stress when DMM units need to acquire more and larger positions 
at times when their capital levels are largely comprised of DMM unit 
positions and their liquidity has been exhausted. While these purchases 
and sales of DMM unit positions are generally ``capital neutral,'' 
absent a significant market movement, to the extent the DMM unit needs 
to engage in additional transactions, it could require additional 
liquidity to settle these transactions. The Exchange believes that 
requiring at least 40% of the Net Liquid Assets requirement to be 
satisfied by Excess Net Capital, rather than Liquidity, would be 
consistent with the Act and protect investors and the public interest 
because it is set at a level that the Exchange believes exceeds the 
amount of capital that historical DMM unit losses have required. 
Additionally, 40% would be the minimum level of Excess Net Capital to 
satisfy the Net Liquid Assets requirement, such that DMM

[[Page 4370]]

units would remain able to maintain higher levels of Excess Net Capital 
and therefore be less weighted with Liquidity. Also, while the market 
risk add-on under current Rule 103.20(b)(i)(B) would no longer apply to 
the amount of Excess Net Capital that the DMM unit must maintain, 
neither would the additions to net liquid assets allowed for haircuts 
and undue concentration charges under current Rule 103.20(a)(iv), 
therefore effectively cancelling each other out.
    The Exchange further believes that the proposed change would 
protect investors and the public interest by reducing existing barriers 
to entry for new DMM units and mitigating the potential loss of 
existing DMM units. Stabilizing and increasing the pool of DMM units 
with a more efficient financial structure would be beneficial to the 
Exchange and would also enhance market quality and thereby support 
investor protection and public interest goals.
    The Exchange believes that harmonizing the financial requirements 
applicable to ETFs with those applicable to other securities would 
remove impediments to, and perfect the mechanisms of, a free and open 
market and a national market system by eliminating a potential 
disincentive to seeking appointment as a DMM unit in ETFs. Investors 
would continue to be protected and the public interest would continue 
to be served because DMM units appointed to ETFs would be subject to 
the same Net Liquid Assets requirements as DMM units appointed to other 
securities, which would reasonably assure maintenance of sufficient 
liquidity to carry out DMM unit obligations to maintain an orderly 
market in such assigned ETFs in times of market stress. The Exchange 
does not believe that there is a basis to conclude that ETFs subject 
DMM units to greater risk than other securities. The Exchange therefore 
does not believe that there is a need for DMM units to maintain capital 
for ETFs or ETPs at levels that are greater than the levels required 
for other securities.
    Finally, the Exchange believes that it is subject to significant 
competitive forces, as described below in the Exchange's statement 
regarding the burden on competition.
    For these reasons, the Exchange believes that the proposal is 
consistent with the Act.

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

    In accordance with Section 6(b)(8) of the Act,\23\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed change is designed to amend the 
structure of DMM unit financial requirements, but not the overall level 
thereof. This proposed change in the structure of required DMM unit 
capital would eliminate a potential barrier to entry for new DMM units 
and thereby promote intramarket competition.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Exchange notes that market makers and traders on other U.S. 
equity exchanges are not subject to financial requirements beyond those 
required by the SEC Net Capital Rule. Nonetheless, DMM units have 
unique affirmative obligations and the Exchange continues to believe 
that it is appropriate that their financial requirements be higher than 
other market participants. The proposal would support intermarket 
competition by structuring DMM unit financial requirements in a way 
that is more manageable for member organizations, including both 
existing and potential future DMM units, and would thereby promote 
greater interest in seeking DMM unit appointments on the Exchange 
rather than as comparable market participants on other markets.
    Finally, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues. In such an environment, the Exchange must continually 
review, and consider adjusting the services it offers and the 
requirements it imposes to remain competitive with other U.S. equity 
exchanges. For the reasons described above, the Exchange believes that 
the proposed rule change reflects this competitive environment.

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 (i) as the Commission may 
designate up to 90 days of such date 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 rule-comments@sec.gov. Please include 
File Number SR-NYSE-2014-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2014-02. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

[[Page 4371]]

    All submissions should refer to File Number SR-NYSE-2014-02 and 
should be submitted on or before February 18, 2014.
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01424 Filed 1-24-14; 8:45 am]
BILLING CODE 8011-01-P