
[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Notices]
[Pages 4959-4961]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1709]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63736; File No. SR-NYSE-2010-74]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change To Create a Bond Trading License for 
Member Organizations and Establish Bonds Liquidity Providers as a New 
Market Class on NYSE Under a Pilot Program

January 19, 2011.

I. Introduction

    On November 23, 2010, New York Stock Exchange LLC (``NYSE'' or the 
``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 to establish a twelve-month pilot program to 
create a bond trading license (``BTL'') for member organizations that 
desire to trade only debt securities on the Exchange and establish a 
new class of NYSE market participants, Bonds Liquidity Providers 
(``BLPs''). The proposal was published for comment in the Federal 
Register on December 10, 2010.\3\ The Commission received no comments 
on the proposal. This order approves the proposed rule change.
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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. 63444 (December 6, 
2010), 75 FR 77024 (SR-NYSE-2010-74) (``Notice'').
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II. Description of the Proposal

A. Bonds Trading License

    The Exchange proposes to establish a new bonds-only trading 
license.\4\ Currently, an approved member organization may obtain a 
trading license pursuant to Rule 300, which permits trading of all debt 
and equity securities listed on the Exchange. Under proposed Rule 87, 
any member organization that chooses to trade only bonds, or any new 
member organization who desires to trade only bonds, could apply for a 
BTL. A BTL would be available to any approved NYSE member organization. 
A BTL could not be transferred, assigned, sublicensed or leased, in 
whole or in part.\5\
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    \4\ NYSE intends to submit a separate filing to address the fees 
associated with the proposed bond trading license.
    \5\ The holder of the BTL could, however, with 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 
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.
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B. Bond Liquidity Providers

    The Exchange also proposes to create a new class of market 
participant, BLPs, which would function similarly to Supplemental 
Liquidity Providers (``SLPs'') trading equity securities in the 
Exchange's New Market Model.\6\ Currently, bond platform participants 
are charged a graduated fee for liquidity-taking transactions, with 
larger-size transactions charged at a lower rate.\7\ Pursuant to 
proposed Rule 88, the Exchange would provide an additional incentive in 
the form of a rebate to BLPs for quoting and adding liquidity to the 
bond market via the BLP program.
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    \6\ See Securities Exchange Act Release Nos. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) 
(establishing SLP Pilot); 58845 (October 24, 2008), 73 FR 64379 
(October 29, 2008) (SR-NYSE-2008-46) (establishing New Market Model 
Pilot); and 62814 (September 1, 2010), 75 FR 54671 (September 8, 
2010) (SR-NYSE-2010-61) (extending the Pilots until January 31, 
2011).
    \7\ See Securities Exchange Act Release Nos. 63593 (December 21, 
2010), 75 FR 81701 (December 28, 2010) (SR-NYSE-2010-83) and 57176 
(January 18, 2008), 73 FR 4929 (January 28, 2008) (SR-NYSE-2008-04). 
See also Notice, supra note 3.
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Responsibilities of BLPs \8\
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    \8\ The following provides an overview of the Exchange's BLP 
proposal. For additional information, see Notice, supra note 3.
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(1) Quoting Requirements
    Under proposed Rule 88(a), a BLP would be required to maintain: (1) 
A bid at least seventy percent of the trading day for a bond; (2) an 
offer at least seventy percent 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 of the trading day in each of its 
bonds in the aggregate. Proposed Rule 88(b) provides that a BLP that 
meets these quoting requirements would receive a liquidity provider 
rebate, to be set forth in the Exchange's Price List.\9\ The Exchange 
has represented that it would monitor the balance between the quoting 
requirements and the liquidity provider rebate during the course of the 
pilot and may consider revising the incentive and quoting structure if, 
for example, more liquidity is brought to the NYSE bond marketplace.
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    \9\ NYSE has represented that it intends to submit a separate 
filing that would set the liquidity provider rebate at $0.05 per 
bond, with a $50 rebate cap per transaction.
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(2) Qualifications
    To qualify as a BLP under proposed Rule 88(c), a member 
organization would be 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; and (3) have 
adequate trading infrastructure and technology to support electronic 
trading.\10\
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    \10\ 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 electronic trading and 
reporting systems of the Exchange for BLP trading activity, it would 
not qualify as a BLP. The BLP must establish connectivity with 
relevant Exchange systems before being permitted to trade as a BLP.
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(3) Application Process
    Under proposed Rule 88(d), to become a BLP, a member organization 
would be required to submit a BLP application form with supporting 
documentation to the Exchange. The Exchange would review the 
application and documentation and notify the applicant of its decision. 
In the event an applicant is disapproved or disqualified under proposed 
Rule 88(d)(4) or (i)(2) by the Exchange, the applicant may request an 
appeal as provided in proposed Rule 88(j), and/or reapply for BLP 
status three months after the month in which the applicant received 
disapproval or disqualification notice from the Exchange.
(4) Voluntary Withdrawal of BLP Status
    A BLP may withdraw its status by giving notice to the Exchange. 
After the Exchange receives the notice of withdrawal from the BLP, the 
Exchange would reassign such bonds 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 are reassigned to another BLP. If the reassignment of 
bonds takes 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.
(5) Calculation of Quoting Requirements
    Beginning with its first month of operation as a BLP, the BLP must 
satisfy the 70% quoting requirement for each of its assigned BLP bonds. 
The Exchange would calculate 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 
on a daily and monthly

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basis,\11\ using the calculation methodology set forth proposed Rule 
88(f)(1).\12\
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    \11\ Only displayed orders entered throughout the trading day 
would be used when calculating whether a BLP is in compliance with 
its 70% average quoting requirement. In addition, for purposes of 
the 70% quoting requirement, a BLP would be considered to be quoting 
an assigned bond if it had a displayed bid (offer) for at least 10 
displayed bonds at a single price level.
    \12\ See Notice, supra note 3, 75 FR at 77025-26.
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    The 5% quoting requirement would take effect starting the third 
month of a BLP's operation.\13\ 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 on a daily and monthly basis, 
using the calculation methodology set forth proposed Rule 88(f)(2).\14\
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    \13\ Only displayed orders at the BB and BO throughout the 
trading day would be used when calculating whether a BLP is in 
compliance with its 5% average quoting requirement.
    \14\ See Notice, supra note 3, 75 FR at 77026.
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(6) Matching of BLPs and Issuers
    During the proposed pilot program, an issuer may be represented by 
only one BLP. Prior to the commencement of the pilot, the Exchange 
would match issuers with approved BLPs. The matching process for the 
largest issuers would be determined on a random basis, while the 
matching process for smaller issuers would be determined in favor of 
those BLPs willing to offer the broadest coverage to such issuers.
    In the first round of matching, the Exchange would match BLPs to 
issuers that have at least one debt issue with a current outstanding 
principal of $500 million or greater. BLPs would be permitted to select 
the issuers that they want to represent from this group in an order 
determined by lottery. Each BLP would make one selection, and the 
process would continue until all BLPs exhausted their selections for 
this group of issuers.
    In the second round of matching, the Exchange would match BLPs to 
issuers with one or more debt issues that each has a current 
outstanding principal of less than $500 million. Each BLP would submit 
a list of the issuers and bonds that 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 event of a tie (i.e., two or more 
issuers 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.
    After the commencement of the program, matching would continue in a 
manner similar to the second round of matching prior to commencement of 
the program. On a monthly basis, BLPs would be permitted to apply for 
unrepresented issuers. The BLP willing to represent the most debt 
issuances of an issuer would be 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 may represent any 
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 first day of the 
following month.
    The Exchange believes that the matching process would give BLPs the 
opportunity to select the issuers that they want to represent and 
thereby take into account the BLP's expertise in particular issuers and 
sectors. In addition, NYSE believes this matching process would be fair 
to approved BLPs and beneficial to issuers and would result in the 
broadest coverage of issuers and sectors upon commencement of the 
pilot.
(7) Failure To Meet Quoting Requirements
    After the initial two-month grace period, if, in any given calendar 
month, a BLP fails to meet any of the quoting requirements set forth in 
proposed Rule 88(a), the BLP would not receive the liquidity provider 
rebate for the affected bond for that month. 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 the 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 its 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 denied approval pursuant to paragraph 
(d)(2) of the proposed rule or disqualified from its status as a BLP 
pursuant to paragraph (i)(1)(C) of the proposed rule, such 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.
(8) Appeal of Disapproval or Disqualification
    A member organization may dispute the Exchange's decision to 
disapprove or disqualify it by requesting, within five business days of 
receiving notice of the decision, review by the Bond Liquidity Provider 
Panel (``BLP Panel'') \15\ (the disputing member organization, an 
``appellant'').\16\ In the event a member organization is disqualified 
from its status as a BLP pursuant to proposed 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 will review the facts and render a decision within the time frame 
prescribed by the Exchange, and all determinations by the BLP Panel 
will constitute final action by the Exchange.
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    \15\ The BLP Panel will consist of the NYSE's Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and two officers of the 
Exchange designated by the Co-Head of U.S. Listings and Cash 
Execution.
    \16\ See proposed Rule 88(j).
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III. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the Commission 
finds that the proposed rule change to establish a pilot program, 
expiring twelve months from the date of this approval order, to create 
a BTL for member organizations that desire to trade only debt 
securities on the Exchange and to establish BLPs as a new 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.\17\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\18\ 
which, among other things, requires that the rules of a national 
securities exchange be

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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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    \17\ In approving this 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).
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission notes that the new BTL, pursuant to a 
pilot program, may allow member organizations to become authorized to 
trade on the Exchange pursuant to a license more specifically tailored 
to a member organization's trading. Therefore, this aspect of the 
proposal may increase efficiency, without compromising regulatory 
oversight, both for member applicants as well as the Exchange. In 
addition, the Commission notes that NYSE has represented it will submit 
a separate fee filing to address the BTL, and the Commission expects 
that the costs for the BTL would be less than the general trading 
license on the Exchange. Thus, the BTL may also decrease costs for 
organizations choosing to trade just bonds on NYSE.
    The Commission also notes that BLPs would be required to have 
adequate trading infrastructure and technology to support trading in 
the bonds and meet quoting requirements and be approved by NYSE, and 
upon bringing liquidity to NYSE's bond market, BLPs would receive a 
rebate based on an incentive and quoting structure. BLPs that fail to 
meet the quoting requirements set forth in the proposed rule would no 
longer be eligible for the rebate and may, in the Exchange's 
discretion, have one or more issues revoked or be disqualified as a 
BLP. The Commission believes it is consistent with the Act for the 
Exchange to provide an incentive to member organizations bringing 
liquidity to the bond marketplace, and to remove the incentive when the 
BLP does not meet its obligations. Importantly, the Commission notes 
that the proposed rules relating to BLPs would be on a pilot basis. The 
Commission believes that, while the framework proposed by the Exchange 
as part of this proposed rule change may be suitable for the Exchange's 
current level of trading activity on its bond platform, this framework 
may not be suitable in the future should the characteristics of the 
bond platform, including but not limited to trading activity, change. 
Thus, the Commission believes that it is appropriate that the proposed 
rules be approved on a pilot basis, such that the Exchange and 
Commission may review the suitability of these rules again. The 
Commission notes that the Exchange has represented that it would 
monitor the quoting and rebate structure and may consider 
modifications.
    The Commission understands that one BLP would be matched to each 
issuer. BLPs would be able to choose issuers having at least one issue 
with an outstanding principal of $500 million or greater in an order 
determined by lottery. Issuers not having at least one issue with an 
outstanding principal of $500 million or greater 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 this is an objective way to commence the 
pilot program for all parties, as it is intended by the Exchange to 
result in broad coverage of issuers; however, the Commission believes 
the results of the issuer selection and assignment process should be 
evaluated by the Exchange, and the findings shared with the Commission, 
prior to any proposal to modify or permanently establish the rules 
relating to the BLP selection process.
    Finally, the Commission understands that NYSE would allow BLPs and 
BLP applicants the opportunity to appeal disapproval or 
disqualification decisions, as applicable, to a BLP panel, and that 
NYSE would provide a disqualified BLP with a month's prior written 
notice of the disqualification. This should provide transparency to the 
process and an additional opportunity for BLPs and BLP applicants to be 
heard.
    For the reasons discussed above, the Commission finds that the rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NYSE-2010-74), be, and it 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1709 Filed 1-26-11; 8:45 am]
BILLING CODE 8011-01-P


