[Federal Register Volume 79, Number 50 (Friday, March 14, 2014)]
[Notices]
[Pages 14558-14561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05594]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71671; File No. SR-NYSE-2014-08]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change To Adopt the Bond Trading
License and the Bond Liquidity Provider Programs Pursuant to NYSE Rules
87 and 88
March 10, 2014.
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 February 27, 2014, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 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 amend [sic] proposes to make permanent its
pilot program (``Pilot Program'') regarding its bond trading license
(``BTL'') and the Bond Liquidity Provider (``BLP'') programs pursuant
to Rules 87 and 88. 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 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
On January 19, 2011, the Exchange established a 12-month pilot
program to (1) adopt new Rule 87 to create a BTL for member
organizations that desire to trade only debt securities on the
Exchange,\3\ and (2) adopt new Rule 88 to establish BLPs, a new class
of debt market participants.\4\ The Pilot Program was extended through
January 19, 2014 \5\ and the Exchange provided the Commission with
written notice of its intent to extend the Pilot Program beyond such
date.\6\ The Exchange has since determined that it is more appropriate
at this time to seek the Commission's approval to make the Pilot
Program permanent. Accordingly, the Exchange is proposing to make
permanent the Pilot Program and adopt Rules 87 and 88 on a permanent
basis.
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\3\ Debt securities are traded on the Exchange pursuant to Rules
86, 1400, and 1401. Bonds eligible to trade on the NYSE Bonds
platform include any debt instrument that is listed on the NYSE and
any corporate debt of a listed company of the Exchange.
\4\ See Securities Exchange Act Release No. 63736 (January 19,
2011), 76 FR 4959 (January 27, 2011) (order approving SR-NYSE-2010-
74). See also Securities Exchange Act Release No. 63444 (December 6,
2010), 75 FR 77024 (December 10, 2010) (notice of filing of SR-NYSE-
2010-74).
\5\ See Securities Exchange Act Release No. 68533 (December 21,
2012), 77 FR 77166 (December 31, 2012) (SR-NYSE-2012-74).
\6\ On January 10, 2014, pursuant to Rule 19b-4(f)(6)(iii), the
Exchange submitted NYSE-2014-1P through the Commission's Electronic
Form 19b-4 Filing System (``EFFS''), which provided the Commission
with written notice of the Exchange's intent to file a rule change
to extend the Pilot Period. See 17 CFR 240.19b-4(f)(6)(iii). On
January 16, 2014, NYSE-2014-1P was marked acceptable in the EFFS.
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The purpose of Pilot Program is to encourage market participants to
bring additional liquidity to the Exchange's bond marketplace by
providing incentives for quoting and adding liquidity to the market and
to offer investors an alternative to over-the-counter trading for debt
securities. Under Rule 87, a member organization that chooses to trade
only bonds, or a new member organization that desires to trade only
bonds, may apply for a BTL, which is available to any approved member
organization. A BTL license is not transferable and may not, in whole
or in part, be transferred, assigned, sublicensed or leased. However,
the holder of the BTL could, with the prior written consent of the
Exchange, transfer a BTL to a qualified and approved member
organization (i) that is an affiliate or (ii) that continues
[[Page 14559]]
substantially the same business of such BTL holder without regard to
the form of the transaction used to achieve such continuation, e.g.,
merger, sale of substantially all assets, reincorporation,
reorganization or the like. The Exchange currently has one member
organization operating under a BTL, but has been notified that
additional market participants are interested in applying for a BTL.
Under Rule 88, the Exchange provides incentives for quoting and
adding liquidity to the bond market in the form of rebates to BLPs that
provide liquidity to the Exchange's bond market. The Exchange believes
that the rebates encourage the additional utilization of, and
interaction with, the Exchange, improve price discovery and liquidity,
and encourage competitive quotes and price improvement opportunities.
These incentives encourage BLPs to make more liquid and competitive
markets. In return, BLPs must meet certain qualification and quoting
obligations under the Rule.
Specifically, pursuant to Rule 88(a), a BLP is required to
maintain: (1) A bid at least seventy percent (70%) of the trading day
for a bond; (2) an offer at least seventy percent (70%) of the trading
day for a bond; and (3) a bid or offer at the Exchange's Best Bid
(``BB'') or Exchange's Best Offer (``BO'') at least five percent (5%)
of the trading day in each of its bonds in the aggregate. To create a
financial incentive to serve as a BLP, Rule 88(b) provides that a BLP
that meets the quoting requirement for a bond as described in paragraph
(a) would receive the liquidity provider rebate set forth in the
Exchange's Price List.
To qualify as a BLP pursuant to Rule 88(c), a member organization
is required to: (1) Demonstrate an ability to meet the quoting
requirements of a BLP; (2) have mnemonics that identify to the Exchange
BLP trading activity in assigned BLP bonds; (3) have adequate trading
infrastructure and technology to support electronic trading.
Because a BLP is only permitted to trade electronically from off
the Floor of the Exchange, a member organization's off-Floor technology
must be fully automated to accommodate the Exchange's trading and
reporting systems that are relevant to operating as a BLP. If a member
organization were unable to support the relevant electronic trading and
reporting systems of the Exchange for BLP trading activity, it would
not qualify as a BLP.
Pursuant to Rule 88(d), to become a BLP, a member organization is
required to submit a BLP application form with all supporting
documentation to the Exchange. The Exchange determines whether an
applicant is qualified to become a BLP as set forth above. After an
applicant submits a BLP application to the Exchange, with supporting
documentation, the Exchange notifies the applicant member organization
of its decision. If an applicant is approved by the Exchange to act as
a BLP, the applicant is required to establish connectivity with
relevant Exchange systems before the applicant is permitted to trade as
a BLP on the Exchange. In the event an applicant is disapproved or
disqualified under proposed Rule 88(d)(4) or (i)(2) by the Exchange,
such applicant may request an appeal of such disapproval or
disqualification by the Exchange as provided in Rule 88(j), and/or
reapply for BLP status three (3) months after the month in which the
applicant received disapproval or disqualification notice from the
Exchange.
Pursuant to Rule 88(e), a BLP is permitted to withdraw from the
status of a BLP by providing notice to the Exchange. Such withdrawal is
effective when those bonds assigned to the withdrawing BLP are
reassigned to another BLP. After the Exchange receives the notice of
withdrawal from the withdrawing BLP, the Exchange reassigns such bonds
as soon as practicable, but no later than 30 days of the date the
notice was received by the Exchange. If the reassignment of bonds takes
longer than the 30-day period, the withdrawing BLP has no further
obligations and is not held responsible for any matters concerning its
previously assigned BLP bonds.
Rule 88(f) sets forth how the Exchange calculates a BLP's quoting
requirements. Beginning with the first month of operation as a BLP, the
BLP must satisfy the 70% quoting requirement for each of its assigned
BLP bonds. The Exchange determines whether a BLP met its 70% quoting
requirement by determining the average percentage of time a BLP was at
a bid (offer) in each of its BLP bonds during the regular trading day
\7\ on a daily and monthly basis. The Exchange determines whether a BLP
has met this requirement by calculating the following:
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\7\ ``Trading day'' means any day on which the Exchange is
scheduled to be open for business. Days on which the Exchange closes
prior to 4 p.m. (Eastern Time) for any reason, which may include any
regulatory halt or trading halt, are considered a trading day.
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A ``Daily Bid Quoting Percentage'' is calculated by
determining the percentage of time a BLP had at least 10 displayed BLP
bonds at a single price level in an Exchange bid during each trading
day for a calendar month;
A ``Daily Offer Quoting Percentage'' is calculated by
determining the percentage of time a BLP had at least 10 displayed BLP
bonds at a single price level in an Exchange offer during each trading
day for a calendar month;
A ``Monthly Average Bid Quoting Percentage'' is calculated
for each BLP bond by summing the bond's ``Daily Bid Quoting
Percentages'' for each trading day in a calendar month then dividing
the resulting sum by the total number of trading days in such calendar
month; and
A ``Monthly Average Offer Quoting Percentage'' is
calculated for each BLP bond by summing the bond's ``Daily Offer
Quoting Percentage'' for each trading day in a calendar month then
dividing the resulting sum by the total number of trading days in such
calendar month.
Only displayed orders entered throughout the trading day are used
when calculating whether a BLP is in compliance with its 70% average
quoting requirements.
The BLP's 5% quoting requirements is not in effect during the first
two months of operation as a BLP in order to allow the BLP time to
achieve this quoting metric. The 5% quoting requirement takes effect in
the third month of a BLP's operation. At that time, a BLP is required
to satisfy the 5% quoting requirement for each assigned BLP bond. The
Exchange determines whether a BLP had met its 5% quoting requirement by
determining the average percentage of time a BLP was at the BB or BO in
each of its assigned BLP bonds during the regular trading day on a
daily and monthly basis, as follows:
A ``Daily BB Quoting Percentage'' is calculated by
determining the percentage of time a BLP had at least one displayed BLP
bond in an Exchange bid at the BB during each trading day for a
calendar month;
A ``Daily BO Quoting Percentage'' is calculated by
determining the percentage of time a BLP had at least one displayed BLP
bond in an Exchange offer at the BO during each trading day for a
calendar month;
A ``Daily BBO Quoting Percentage'' is calculated for each
trading day by summing the ``Daily BB Quoting Percentage'' and the
``Daily BO Quoting Percentage'' in each BLP bond; and
A ``Monthly Average BBO Quoting Percentage'' would be
calculated for each BLP bond by summing the bond's ``Daily BBO Quoting
Percentages'' for each trading day in a calendar month then dividing
the resulting sum by the total number of trading days in such calendar
month.
[[Page 14560]]
Only displayed orders at the BB and BO throughout the trading day
are used when calculating whether a BLP is in compliance with its 5%
average quoting requirement.
Rule 88(g) sets forth how BLPs are matched to issuers. The Exchange
matches BLPs to issuers with one or more debt issues, each of which has
a current outstanding principal of less than $500 million. Each BLP
would submit a list of the issuers and the issuer's bonds it would be
willing to represent. The BLP willing to represent the most bonds for a
given issuer would be matched to that issuer. In the event of a tie
(i.e., two or more BLPs seeking to represent the same issuer and the
same number of that issuer's bonds), the BLP with the highest lottery
number from the first round would be matched with the issuer. On a
monthly basis, BLPs are permitted to apply for unrepresented issuers.
The BLP willing to represent the most debt issuances of an issuer is
awarded status as a BLP for such issuer, with ties resolved by lottery.
A BLP must represent each debt issuance of an issuer that has an
outstanding principal of $500 million or more. A BLP also may represent
any debt issuance below such level, but would not be required to do so.
If a BLP is representing a debt issuance that was above $500 million
but falls below such level, or has voluntarily been representing an
issuance below the $500 million level where the outstanding principal
amount has since been reduced, the BLP may cease representing such
issue by notifying the Exchange in writing by the 15th day of the
month, in which case the BLP may cease acting as such on the 1st day of
the following month.
The Exchange believes that this matching process is fair to
approved BLPs and beneficial to issuers. In light of the unique nature
of the debt market, the matching process gives BLPs the opportunity to
select the issuers they want to represent and thereby take into account
the BLP's expertise in particular issuers and sectors. The matching
process for the largest issuers is determined on a random basis, while
the matching process for smaller issuers is determined in favor of
those BLPs willing to offer the broadest coverage to such issuers.
Rule 88(i) sets forth what happens if a BLP fails to meet its
quoting requirements. If, in any given calendar month after the first
two months a BLP acted as a BLP, a BLP fails to meet any of the quoting
requirements set forth in Rule 88(a), the BLP would no longer be
eligible for the rebate for the affected bond. If a BLP's failure to
meet the quoting requirements continues for three consecutive calendar
months in any assigned BLP bond, the Exchange could, in its discretion,
take one or more of the following actions: (i) Revoke the assignment of
all of the affected issuer's bonds from the BLP; (ii) revoke the
assignment of an additional unaffected issuer from a BLP; or (iii)
disqualify a member organization from its status as a BLP.
The Exchange, in its sole discretion, would determine if and when a
member organization is disqualified from its status as a BLP. One
calendar month prior to any such determination, the Exchange would
notify a BLP of such impending disqualification in writing. When
disqualification determinations are made, the Exchange would provide a
disqualification notice to the member organization.
If a member organization were disapproved pursuant to Rule 88(d)(2)
or disqualified from its status as a BLP pursuant to Rule 88(i)(1)(C),
such member organization could re-apply for BLP status three calendar
months after the month in which the member organization received its
disqualification notice.
Pursuant to Rule 88(j), in the event a member organization disputes
the Exchange's decision to disapprove or disqualify it under Rule
88(d)(4) or (i)(2), such member organization (``appellant'') may
request, within five (5) business days of receiving notice of the
decision, the Bond Liquidity Provider Panel (``BLP Panel'') to review
all such decisions to determine if such decisions were correct. In the
event a member organization is disqualified from its status as a BLP
pursuant to Rule 88(i)(2), the Exchange will not reassign the
appellant's bonds to a different BLP until the BLP Panel has informed
the appellant of its ruling.
The BLP Panel consists of the NYSE's Chief Regulatory Officer
(``CRO''), or a designee of the CRO, and two (2) officers of the
Exchange designated by the Co-Head of U.S. Listings and Cash Execution.
The BLP Panel will review the facts and render a decision within the
time frame prescribed by the Exchange. The BLP Panel may overturn or
modify an action taken by the Exchange and all determinations by the
BLP Panel will constitute final action by the Exchange on the matter at
issue.
The Exchange believes that the Pilot Program has provided value to
the bonds marketplace as the Exchange is the only marketplace that
offers pre-trade transparency and real-time reporting of trading in
debt securities. The Exchange believes that making the Pilot Program
permanent will continue to encourage trading of debt securities on a
transparent market and reduce the opportunities for anti-competitive
practices.\8\ The Exchange therefore believes it is appropriate for it
to maintain its BTL and BLP Programs on a permanent basis in order to
continue to compete in the retail bond market, thereby encouraging
market participants to bring additional liquidity to the Exchange's
transparent bond marketplace.
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\8\ Commissioner Michael S. Piwowar recently noted the need to
improve how the fixed-income market operates, including how more
transparency could benefit investors. See ``Advancing and Defending
SEC's Core Mission,'' Remarks by Commissioner Piwowar to the U.S.
Chamber of Commerce, Washington, DC (Jan 27, 2014), http://www.sec.gov/News/Speech/Detail/Speech/1370540671978.
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The proposed change is not otherwise intended to address any other
issues or make any other amendments to Rules 87 and 88 and the Exchange
is not aware of any problems that member organizations 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,\9\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\10\ in particular, because it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, 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.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade because it seeks to make
permanent a Pilot Program that is designed to encourage market
participants to bring additional liquidity to the only transparent bond
market. The Exchange believes the proposed rule change is designed to
facilitate transactions in securities and to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system because making the Pilot Program permanent would expand the
number of member organizations that can trade debt securities on the
Exchange and enable the Exchange to continue to create incentives for
BLPs to provide additional liquidity to the only transparent bond
market. The Exchange believes that making the Pilot Program
[[Page 14561]]
permanent protects investors and the public interest because investors
benefit from the availability of a transparent market for bonds
trading, as well as the increased competition and liquidity in the
bonds marketplace that the Pilot Program has offered. 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, and making the Pilot Program permanent will support the
continued availability of a transparent market in this highly
competitive environment. For these reasons, the Exchange believes that
the proposal to make the Pilot Program permanent is consistent with the
Act.
Finally, recognizing the statements of Commissioners who have
expressed concern about the state of the U.S. corporate and municipal
bond markets as well as recommendations outlined in the Commission's
release of its Report on the Municipal Securities Market (Report), the
Exchange believes that BLPs, by meeting their quoting requirements,
will be an important participant in the democratization of the fixed
income market.\11\ As highlighted in SEC Chair White's statement during
the SEC's 2013 Roundtable on Fixed Income Markets, the Report makes
recommendations that include (1) improving pre- and post-trade
transparency; (2) promoting the use of transparent and open trading
venues, and (3) requiring dealers to seek ``best execution'' for
customers and to provide customers with relevant pricing information in
connection with their transactions.\12\ Achieving these recommendations
and applying them to both the municipal and corporate bond markets
would, in our view, assist in lowering the systemic risk that is
anticipated to increase as interest rates rise and the closed network
of bond trading comes under pressure as retirement and pension managers
seek to adjust their positions.
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\11\ See SEC Report on the Municipal Securities Market, July
2012. http://www.sec.gov/news/studies/2012/munireport073112.pdf;
``SEC's Gallagher Says Retail Bond Investors Fighting `Headwinds'
'', Jesse Hamilton, Bloomberg News. Sep 20, 2012. See http://www.bloomberg.com/news/2012-09-19/sec-s-gallagher-says-retail-bond-investors-fighting-headwinds-.html.
\12\ See Opening remarks of Chairman Mary Jo White at SEC
Roundtable on Fixed Income Markets. http://www.sec.gov/News/Speech/Detail/Speech/1365171515300.
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\13\ 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 Exchange believes that the Pilot Program has
promoted liquidity and competition in the marketplace and is designed
to improve market quality and making the Pilot Program permanent would
continue these benefits.
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\13\ 15 U.S.C. 78f(b)(8).
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The Exchange notes that it operates in a highly competitive market
in which market participants can readily favor competing venues that
are not transparent. 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. bond
trading platforms. For the reasons described above, the Exchange
believes that the proposed rule change reflects this competitive
environment by making permanent a program that promotes transparency,
competition, and liquidity in the bond marketplace.
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 [email protected]. Please include
File Number SR-NYSE-2014-08 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-NYSE-2014-08. 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 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSE-2014-08 and should be
submitted on or before April 4, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05594 Filed 3-13-14; 8:45 am]
BILLING CODE 8011-01-P