[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Notices]
[Pages 24773-24775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09922]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72026; File No. SR-NYSE-2014-08]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving a Proposed Rule Change To Adopt the Bond Trading License and
the Bond Liquidity Provider Programs Pursuant to NYSE Rules 87 and 88
April 25, 2014.
I. Introduction
On February 27, 2014, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change that would provide for a bond trading license
(``BTL'') for member organizations that desire to trade only debt
securities on the Exchange and that would establish a new class of
market participants called bond liquidity providers (``BLPs''). The
proposal was published for comment in the Federal Register on March 14,
2014.\3\ The Commission received no comments on the proposal. This
order approves the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4
\3\ See Securities Exchange Act Release No. 71671 (March 10,
2014), 79 FR 14558 (March 14, 2014).
\4\ The Commission notes that it previously approved the
proposed BTL and BLP program on a pilot basis. See Securities
Exchange Act Release No. 63736 (January 9, 2011), 76 FR 4959
(January 28, 2011) (SR-NYSE-2010-74). The pilot program was
originally scheduled to expire on January 19, 2012, but the
Commission approved two one-year extensions. See Securities Exchange
Act Release No. 65995 (December 16, 2011), 76 FR 79726 (December 22,
2011) (SR-NYSE-2011-63); Securities Exchange Act Release No. 68533
(December 21, 2012), 77 FR 77166 (December 31, 2012) (SR-NYSE-2011-
63). The pilot program terminated on January 19, 2014.
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II. Description of the Proposal
A. Bond Trading License
The Exchange proposes to establish a trading license for its member
organizations to trade only debt securities on the Exchange. Generally,
to effect any transaction on the Exchange, a member organization must
obtain a trading license pursuant to NYSE Rule 300. Under proposed NYSE
Rule 87, the Exchange may issue a BTL to any approved member
organization to effectuate bond transactions on the Exchange. The BTL
would not be transferrable and could not be assigned, sublicensed, or
leased.\5\
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\5\ The holder of the BTL may, with the Exchange's prior written
consent, transfer the BTL to a qualified and approved member
organization that is an affiliate or that continues substantially
the same business of the BTL holder. See proposed NYSE Rule 87.
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B. Bonds Liquidity Providers
Proposed NYSE Rule 88 would provide for a class of market
participants called BLPs. The Exchange would provide BLPs with
incentives, in the form of rebates, for quoting and for providing
liquidity with respect to bonds to which they have been assigned.
1. Qualifications
To qualify as a BLP, an Exchange member organization would have to
demonstrate an ability to meet the quoting requirement described below.
In addition, an Exchange member organization would need to have
mnemonics that identify to the Exchange BLP trading activity in
assigned BLP bonds. Finally, an Exchange member organization would need
to have adequate trading infrastructure and technology to support
electronic trading.
2. Application Process
To become a BLP, an Exchange member organization would be required
to submit an application form with supporting documentation to the
Exchange. The Exchange would review the application and determine
whether the applicant was qualified to be a BLP. In the event an
applicant were disapproved or disqualified as a BLP, the applicant
could request an appeal or reapply three months after the month in
which the applicant received the disapproval or disqualification notice
from the Exchange.
3. Matching of BLPs and Issuers
Only one BLP would be assigned with respect to the bonds of a
single issuer. Prior to the commencement of the program, the Exchange
would match issuers with approved BLPs. For issuers that have at least
one debt issue with current outstanding principal of at least $500
million, each BLP would select the issuers it will represent in the
program, with the order of selection among BLPs determined by lottery.
For issuers that do not have any debt issue with current outstanding
principal of at least $500 million, each BLP would submit a list of
issuers and bonds it would be willing to represent. The BLP that is
willing to represent the most bonds for a given issuer would be matched
to that issuer. In the event of a tie, the BLP with the highest lottery
number from the first round of matching would be matched with the
issuer.
After the commencement of the program, on a monthly basis, BLPs
would be able to apply for unrepresented issuers. The BLP willing to
represent the most debt issuances of any given unrepresented issuer
would be awarded status as a BLP for that issuer, with ties resolved by
lottery.
A BLP would be required, with respect to an assigned issuer, to
represent each debt issuance of that issuer that has an outstanding
principal of $500 million or more. A BLP could, but would not be
required to, represent any debt issuance with a smaller outstanding
principal amount. If a BLP were representing a debt issuance that was
above $500 million but fell below that level, or if a BLP had been
voluntarily representing an issuance below the $500 million level where
the outstanding principal amount had since been reduced, the BLP would
be
[[Page 24774]]
permitted to cease representing that debt issuance by notifying the
Exchange in writing by the 15th day of the month, in which case the BLP
could cease representing the issuance on the first day of the following
month.
4. Appeal of Disapproval or Disqualification
An Exchange member organization would be able to dispute the
Exchange's decision to disapprove an application or to disqualify a
member from BLP status by requesting, within five business days of
receiving notice of the decision, review by the Bond Liquidity Provider
Panel (``BLP Panel''). The BLP Panel would be composed of the
Exchange's Chief Regulatory Officer (or a designee) and two officers of
the Exchange designated by the Co-Head of U.S. Listings and Cash
Execution. In the event an Exchange member organization were
disqualified from its status as a BLP, the Exchange would not reassign
the appellant's bonds to a different BLP until the BLP Panel had
informed the appellant of its ruling. The BLP Panel would review the
facts and render a decision within the time frame prescribed by the
Exchange, and all determinations by the BLP Panel would constitute
final action by the Exchange.
5. Voluntary Withdrawal of BLP Status
A BLP would be able to withdraw its status as a BLP by giving
notice to the Exchange. After the Exchange received the notice of
withdrawal, the Exchange would reassign bonds assigned to the
withdrawing BLP as soon as practicable, but no later than 30 days from
the date the notice was received by the Exchange. Withdrawal would
become effective when bonds assigned to the withdrawing BLP were
reassigned to another BLP. If the reassignment of bonds took longer
than the 30-day period, the withdrawing BLP would have no further
obligations and would not be responsible for any matters concerning its
previously assigned BLP bonds.
6. Quoting Requirement
A BLP would be required to maintain: (1) A bid at least 70% of the
trading day for each assigned bond; (2) an offer at least 70% of the
trading day for each assigned bond; and (3) a bid or offer at the
Exchange's Best Bid (``BB'') or Exchange's Best Offer (``BO'') at least
5% of the trading day in each of its bonds in the aggregate. A BLP that
met these quoting requirements would receive a liquidity provider
rebate, to be set forth in the Exchange's Price List.
7. Calculation of Quoting Requirement
On a daily and monthly basis, the Exchange would calculate whether
a BLP met its 70% quoting requirement by determining the average
percentage of time a BLP posted bids and offers in each of its BLP
bonds during the regular trading day.\6\ The 5% quoting requirement
would take effect starting the third month of a BLP's participation. On
a daily and monthly basis, the Exchange would determine 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.\7\
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\6\ See proposed NYSE Rule 88(f)(1).
\7\ See proposed NYSE Rule 88(f)(2).
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8. Failure To Meet Quoting Requirements
After an initial two-month grace period, if, in any given calendar
month, a BLP failed to meet any of the quoting requirements for an
assigned bond, the BLP would not receive the rebate for transactions in
that bond for that month. If a BLP's failure to meet the quoting
requirements continued 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 the BLP; or (iii) disqualify a member
organization from its status as a BLP.
The Exchange would determine if and when a member organization
would be disqualified from its status as a BLP. One calendar month
prior to any such determination, the Exchange would notify a BLP of its
impending disqualification in writing. When disqualification
determinations were made, the Exchange would provide a disqualification
notice to the member organization.
If a member organization were denied approval or disqualified from
its status as a BLP, that member organization could re-apply for BLP
status three calendar months after the month in which the member
organization received its disapproval or disqualification notice.
III. Discussion and Findings
After carefully reviewing the proposal, the Commission finds that
the proposed rule change to create a BTL for member organizations and
to establish BLPs as a class of NYSE market participants is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\8\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\9\ which, among other
things, requires that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating
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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\8\ In approving the proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the proposed BTL would allow a member
organization that wishes to trade only debt securities to become
authorized to trade on the Exchange pursuant to a license more
specifically tailored to that member organization's trading. The
Commission believes that this aspect of the proposal could increase
efficiency, without compromising regulatory oversight, for member
organization applicants and the Exchange. The Commission also notes
that the proposed BLPs would be required to have adequate trading
infrastructure and technology to support trading in the debt securities
and to meet quoting requirements. Furthermore, BLPs would have to be
approved by the Exchange and, upon meeting quoting requirements and
providing liquidity to NYSE's bond market, would receive a rebate based
on an incentive and quoting structure.\10\ BLPs that fail to meet the
quoting requirements set forth in the proposed rule would no longer be
eligible for the rebate and could, in the Exchange's discretion, be
disqualified as a BLP or have one or more issues revoked. The
Commission believes that it is consistent with the requirements of the
Act for the Exchange to provide an incentive to member organizations to
provide liquidity to the bond marketplace and to remove the incentive
if a BLP does not meet its obligations.
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\10\ The Exchange has not submitted a filing to set forth the
rebate with respect to the proposed program.
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As proposed, only one BLP could represent the bonds of a given
issuer. With respect to issuers having at least one issue with an
outstanding principal of at least $500 million, BLPs would, in an order
determined by lottery, select the issuers they would represent. Issuers
[[Page 24775]]
not having at least one issue with an outstanding principal of at least
$500 million would be matched to BLPs willing to represent the most
bonds for that given issuer, and any tie with respect to BLPs wishing
to represent these issuers would be resolved by allowing BLPs to choose
in the order determined by lottery. The Commission believes that the
proposed allocation of issuers to BLPs is an objective way to initiate
the BLP.
NYSE would allow BLPs and BLP applicants the opportunity to appeal
disapproval or disqualification decisions, as applicable, to a BLP
panel, and NYSE would provide a disqualified BLP with a month's prior
written notice of the disqualification. The Commission believes that
this should provide transparency to the process and an additional
opportunity for BLPs and BLP applicants to be heard by the Exchange.
The Commission notes that debt securities typically trade in a
decentralized over-the-counter dealer market that is less liquid and
transparent than the equities markets. The proposal to reward market
participants for actively quoting and providing liquidity could enhance
market quality for bonds traded on the Exchange.
For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with the requirements of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-NYSE-2014-08), be, and it
hereby is, approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09922 Filed 4-30-14; 8:45 am]
BILLING CODE 8011-01-P