
[Federal Register Volume 77, Number 127 (Monday, July 2, 2012)]
[Notices]
[Pages 39300-39302]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16136]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67266; File No. SR-EDGX-2012-21]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
New Market Access Risk Management Service, EdgeRisk 
ControlsSM

June 26, 2012.
    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 June 19, 2012, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which items have been prepared by the Exchange. 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

    EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing with 
the Securities and Exchange Commission (the ``Commission'') a proposed 
rule change to establish a new market access risk management service, 
called EdgeRisk ControlsSM (the ``Service'').

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 self-regulatory organization 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
    Background on Market Access Rule
    On November 3, 2010, the Commission adopted Rule 15c3-5 under the 
Act. Rule 15c3-5, known as the ``Market Access Rule'', governs risk 
management controls by broker-dealers with market access. The Market 
Access Rule had an effective date of January 14, 2011, with phased-in 
compliance dates of July 14, 2011, and November 30, 2011.\3\
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    \3\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2011) [sic] (File No. S7-03-10). 
See also Securities Exchange Act Release No. 64798 [sic] (June 27, 
2011), 76 FR 38293 (June 30, 2011) (File No. S7-03-10) (providing 
limited extension of compliance date for certain requirements); 
Securities Exchange Act Release No. 65132 (August 15, 2011), 76 FR 
51457 (August 18, 2011) (exempting floor broker operations of 
certain broker-dealers with market access from automated controls 
requirement of Rule 15c3-5).
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    Among other things, the Market Access Rule requires that any 
broker-dealer with market access,\4\ or that provides a customer or any 
other person with market access, must establish, document and maintain 
a system of risk management controls and supervisory procedures that 
are reasonably designed to manage the financial, regulatory and other 
risks of this business activity. These controls include financial risk 
management controls reasonably designed to prevent the entry of orders 
that exceed appropriate pre-set credit or capital thresholds in the 
aggregate for each customer and the broker-dealer itself, and to 
prevent the entry of erroneous orders. In addition, the Market Access 
Rule requires certain regulatory risk management controls that, among 
other things, prevent the entry of orders unless compliance with 
applicable regulatory requirements has been satisfied on a pre-order 
entry basis, and restrict access to trading systems and technology that 
provide market access to persons and accounts that have been pre-
approved and authorized by the broker-dealer. These regulatory risk 
management controls also include measures designed to prevent the entry 
of orders for a broker-dealer, customer or other person if such person 
is restricted from trading those securities, and to assure that 
appropriate surveillance personnel receive immediate, post-trade 
execution reports that result from market access.
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    \4\ The term ``market access'' is defined in Rule 15c3-5(a)(1) 
to include, inter alia, access to trading in securities on an 
exchange or alternative trading system (``ATS'') as a result of 
being a member or subscriber of the exchange or ATS, respectively.
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    These risk management controls and associated supervisory 
procedures must be under the direct and exclusive control of the 
broker-dealer that is subject to the Market Access Rule. While a 
broker-dealer can use third-party providers to satisfy some or all of 
these requirements, the broker-dealer is nonetheless required to ensure 
that whatever technology or other services

[[Page 39301]]

are provided by such third-party are under their direct and exclusive 
control. Thus, the broker-dealer must retain the ability to make 
adjustments to and monitor the operation of the controls.
    Description of EdgeRisk ControlsSM
    To assist Members \5\ in satisfying their compliance obligations 
under the Market Access Rule, the Exchange is proposing to offer the 
Service.\6\ This optional Service would act as a risk filter by causing 
the orders of Members, and/or their Sponsored Participants \7\ if 
applicable, to be evaluated by the Service against an array of 
manageable threshold limits pre-selected and controlled by the Member 
prior to entering the Exchange's System.\8\ Based on parameters 
provided to the Service by the Member, the order would be immediately 
passed on to the matching engine or rejected back to the Member (and 
its Sponsored Participant, if applicable). The Service is designed so 
that Members would have the ability to select from a menu of financial 
and regulatory controls, as well as supervisory and monitoring tools, 
and to manage the parameter settings of those features in real time.\9\ 
To that end, the Service would enable Members to receive FIX Drop Order 
Copy \10\ sessions, which include complete XPRS \11\/FIX conversations, 
as well as web-based management services to configure certain controls.
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    \5\ As defined in EDGX Rule 1.5(n).
    \6\ The Exchange is not proposing to charge a fee for the 
Service at this time, although it is possible that the Exchange 
might submit a fee filing in respect of the Service at some later 
point in time. The Service would be made available to Members upon 
request.
    \7\ A ``Sponsored Participant'' is a person who has entered into 
a sponsorship arrangement with a Sponsoring Member. EDGX Rule 
1.5(z). A ``Sponsoring Member'', in turn, is a Member that is a 
registered broker-dealer and that has been designated by a Sponsored 
Participant to execute, clear and settle transactions executed on or 
through the Exchange. EDGX Rule 1.5(aa).
    \8\ As defined in EDGX Rule 1.5(cc).
    \9\ These features are dynamic are likely to evolve over time.
    \10\ The Financial Information eXchange (``FIX'') Protocol is a 
series of messaging specifications for the electronic communication 
of trade-related messages. A Drop Copy is a trade execution report 
or message that is sent back to a trading participant's system using 
the FIX protocol.
    \11\ Edge XPRS is a high-performance order entry protocol.
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    The Exchange does not guarantee that the Service offers or will 
offer tools sufficiently comprehensive to be the exclusive means by 
which Members could satisfy their compliance obligations under the 
Market Access Rule. The Exchange would not require Members to use the 
Service, nor would use of the Service by a member automatically 
constitute compliance with the Market Access Rule. The Service is but 
one option that Members may elect to use in the efficient risk 
management of the Members' and/or Sponsored Participants' access to the 
Exchange. Members are free to use any appropriate risk management tool 
or service, or combination thereof, which could but is not required to 
include the Service. Ultimately, it is the Member's responsibility, and 
not the Exchange's, to demonstrate its compliance with the Market 
Access Rule and the Exchange's Rule 11.3.\12\ The Exchange will not 
provide preferential treatment to Members electing to use the Service, 
nor will the Exchange discriminate against Members who choose not to 
utilize the Service.
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    \12\ EDGX Rule 11.3 addresses access by Members and Sponsored 
Participants to the facilities of the Exchange.
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    Finally, the Service does not supersede other controls that the 
Exchange and its affiliated routing broker dealer (``DE Route'') have 
established to manage the potential financial, regulatory and other 
risks associated with providing Members access to the Exchange and to 
external market centers, respectively.\13\ Thus, even if an order were 
to satisfy the risk controls established by a Member via the Service, 
it is still possible that the Exchange's own risk controls could either 
reject the order from entry to the Exchange or cancel the order back to 
the Member and/or Sponsored Participant if the order could not be 
routed as a result of the separate risk controls that DE Route has 
established to satisfy its own compliance obligations under the Market 
Access Rule.
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    \13\ See Direct Edge Regulatory Notice 11-01 (November 30, 
2011).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \14\ and furthers the objectives of 
Section 6(b)(5) of the Act,\15\ in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. Moreover, the proposed rule change 
is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    In its release adopting the Market Access Rule, the Commission 
stated that the rule ``is designed to ensure that broker-dealers 
appropriately control the risks associated with market access, so as 
not to jeopardize their own financial condition, that of other market 
participants, the integrity of trading on the securities markets, and 
the stability of the financial system.'' \16\ As noted above, the 
obligation to comply with the Market Access Rule falls squarely on 
broker-dealers that have and provide market access. The Service is 
designed to provide certain functionality to assist broker-dealers that 
are Members of the Exchange to satisfy their compliance obligations 
under the Market Access Rule (although not necessarily to the exclusion 
of other appropriate tools and services that are also available to 
Members). In this regard, the Exchange believes that the Service is 
consistent with the objectives in the Act of protecting investors and 
the public interest, promoting just and equitable principles of trade, 
and preventing fraudulent and manipulative acts and practices, as it 
would contribute to helping Members further the objectives of the 
Market Access Rule.
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    \16\ See Securities Exchange Act Release No. 69792 [sic] at 
69792.
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    The proposed rule change is also consistent with the Exchange's 
responsibilities under the Act as a self-regulatory organization, as 
the Exchange is not purporting to offer a tool that would necessarily 
be the exclusive means by which Members could satisfy their obligations 
under the Market Access Rule, nor is the Exchange requiring its Members 
to use the Service. Indeed, the Exchange represents that it will not 
discriminate against any Member that elects not to use the Service. In 
that regard, the Service is not designed to permit unfair 
discrimination between Members.
    Finally, the Exchange believes that the proposed rule change would 
foster competition by providing another option in the efficient risk 
management of trading on the Exchange, in a manner similar to those 
which are currently being provided by competitors of the Exchange.\17\
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    \17\ See Securities Exchange Act Release No. 60236 (July 2, 
2009), 74 FR 34068 (July 14, 2009) (SR-BATS-2009-19) (Notice of 
Filing and Immediate Effectiveness of BATS Exchange, Inc.'s 
Sponsored Access Risk Management Tool). See also Securities Exchange 
Act Release No. 59354 (February 3, 2009), 74 FR 6683 (February 10, 
2009) (SR-NYSE-2008-101) (Approval of New York Stock Exchange LLC's 
Risk Management Gateway).

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[[Page 39302]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-4(f)(6) 
\19\ thereunder.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has asked the Commission to accelerate the 30-day 
operative delay.\20\ The Commission finds that accelerating the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because it will allow the Exchange to begin offering 
the Service immediately to its Members. The Commission notes that other 
exchanges currently provide services similar to the Service proposed by 
EDGX.\21\ Accordingly, the Commission designates the proposal operative 
upon filing.\22\
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    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ See supra note 17 and accompanying text.
    \22\ For purposes only of accelerating the 30-day operative 
delay, the Commission has considered the proposed rule change's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-EDGX-2012-21 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-EDGX-2012-21. 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 
a.m. and 3 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. All 
submissions should refer to File Number SR-EDGX-2012-21 and should be 
submitted on or before July 23, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16136 Filed 6-29-12; 8:45 am]
BILLING CODE 8011-01-P


