
[Federal Register Volume 79, Number 43 (Wednesday, March 5, 2014)]
[Notices]
[Pages 12554-12556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04789]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71620; File No. SR-NYSE-2014-02]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval of Proposed Rule Change Amending Supplementary 
Material .20 to NYSE Rule 103 Setting Forth Net Liquid Assets 
Requirements for Member Organizations That Operate as Designated Market 
Maker Units

February 27, 2014.

I. Introduction

    On January 6, 2014, the New York Stock Exchange LLC (the 
``Exchange'' or ``NYSE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Supplementary Material 
.20 to NYSE Rule 103 (``NYSE Rule 103.20'' or the ``Rule''), which sets 
forth net liquid asset requirements for NYSE member organizations that 
operate as Designated Market Maker (``DMM'') units. The proposed rule 
change was published for comment in the Federal Register on January 27, 
2014.\3\ The Commission received no comments in response to 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. 71360 (January 21, 
2014), 79 FR 4366 (``Exchange's Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend NYSE Rule 103.20, which sets forth 
net liquid assets requirements for member organizations that operate as 
DMM units.\4\ Specifically, the Exchange proposes to change the types 
of financial assets and resources that would be allowed to fulfill the 
net liquid assets requirement of NYSE Rule 103.20 and to reorganize and 
add detail to the rule so that it is easier to understand.
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    \4\ Pursuant to NYSE 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 NYSE Rule 98. Pursuant to 
NYSE 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.
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Current Rule

    Under NYSE Rule 103.20, the Exchange imposes a net liquid assets 
requirement on each DMM unit that typically exceeds minimum net capital 
requirement applicable to a broker-dealer pursuant to Rule 15c3-1 under 
the Act.\5\ The Exchange indicates that the purpose of the rule 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.\6\ 
Under current NYSE 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 volum \7\ in its registered securities that 
are not exchange-traded funds (``ETFs''), 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 certain parts of Rule 15c3-
1 under the Act (the ``Market Risk Add-on Charge'').\8\ DMM units 
registered in ETFs must maintain the greater of $1 million or $500,000 
for each ETF.\9\ A DMM unit must inform NYSE Regulation immediately 
whenever the DMM unit is unable to comply with the requirements under 
the Rule.
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    \5\ 17 CFR 240.15c3-1.
    \6\ See Securities Exchange Act Release No. 64918 (July 19, 
2011), 76 FR 44390 (July 25, 2011) (SR-NYSE-2011-35).
    \7\ The term ``Exchange transaction dollar volume'' means the 
most recent statistical data, calculated and provided by the NYSE on 
a monthly basis. See NYSE Rule 103.20(b)(iii).
    \8\ The Market Risk Add-on Charge is computed using the average 
of the prior twenty business days' securities haircuts on its DMM 
dealer's positions computed pursuant to Rule 15c3-1(c)(2)(vi), 
exclusive of paragraphs (N), under the Act. See NYSE Rule 
103.20(b)(i)(B).
    \9\ See NYSE Rule 103.20(b)(i)(A).
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    The term ``net liquid assets'' is currently defined as excess net 
capital computed in accordance with the Rule 15c3-1 under the Act and 
NYSE Rule

[[Page 12555]]

325,\10\ with the certain adjustments.\11\ 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 NYSE Rule 103.20.
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    \10\ The Commission notes that NYSE Rule 325 was deleted and 
replaced by FINRA Rule 4110. See Exchange Act Release No. 61557 
(February 22, 2010), 75 FR 9472 (March 2, 2010) (SR-NYSE-2010-10).
    \11\ The adjustments are as follows: (A) Additions for haircuts 
and undue concentration charges taken pursuant to paragraph 
(c)(2)(vi)(M) of Rule 15c3-1 under the Act on registered securities 
in dealer accounts; (B) Deductions for clearing organization 
deposits; and (C) Deductions for any cash surrender value of life 
insurance policies allowable under Rule 15c3-1 under the Act. See 
NYSE Rule 103.20(a)(iv).
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Developments Since July 2011 Rule Implementation

    In the Exchange's filing, it noted many factors that have arisen 
since July 2011, when the Exchange originally established the formula 
for the net liquid asset requirements for DMM units that would support 
modifying the DMM units' capital requirements. These factors, which 
included 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 are described in more detail 
in the Exchange's Notice.\12\
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    \12\ See supra note 3.
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Proposed Rule Change

    The Exchange proposed to amend the NYSE Rule 103.20 to expand the 
types of financial assets and resources permitted to be used by a DMM 
unit to meet the minimum ``Net Liquid Assets'' requirement without 
changing the aggregate level of Net Liquid Assets required for all DMM 
units. Specifically, the proposal would permit some of DMM unit's Net 
Liquid Assets \13\ to be comprised of ``Liquidity,'' which would be 
defined to include certain undrawn committed lines of credit and actual 
borrowings that are used to purchase DMM unit securities, U.S. 
Treasuries, or reverse repurchase agreements or that are held as 
cash.\14\ A DMM unit would be limited in the percentage of Net Liquid 
Assets that could be comprised of Liquidity. Specifically, a DMM unit 
would be required to derive at least 40% of its total required Net 
Liquid Assets with ``Excess Net Capital'' (defined as excess net 
capital computed in accordance with Rule 15c3-1 under the Act) that is 
dedicated exclusively to the DMM unit's activities.\15\ In effect, this 
requirement would limit the percentage of a DMM unit's Net Liquid 
Assets to be comprised of no more than 60% in Liquidity.
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    \13\ See proposed NYSE Rule 103.20(a)(1).
    \14\ See proposed NYSE Rule 103.20(a)(3).
    \15\ See proposed NYSE Rule 103.20(b)(2).
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    The Liquidity that would be eligible to be included in a Net Liquid 
Assets would also be subject to additional requirements. For example, 
all Liquidity would be required to be subject to a minimum level of 
commitment period (of not less than 30 calendar days), and a minimum 
initial repayment term of not less than 30 calendar days.\16\ Moreover, 
the Liquidity would be required to be included in a comprehensive 
liquidity plan that provides for stress testing of the Liquidity that 
must show, among other things, that there would be excess Liquidity 
available to the DMM unit for 30 calendar days beyond the date of the 
Net Liquid Assets computation.\17\
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    \16\ See proposed NYSE Rule 103.20(a)(4).
    \17\ See proposed NYSE Rule 103.20(a)(5).
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    The Exchange also proposes to eliminate the separate, additional 
financial requirement for ETFs.\18\ In justifying the elimination of 
these additional requirements for ETFs, the Exchange indicated that it 
believes that DMM units should be subject to the same Net Liquid Assets 
Requirements for ETFs as for other securities and notes that if a DMM 
unit were assigned a significant number of ETFs, the Net Liquid Assets 
Requirement for those ETFs would significantly exceed the Net Liquid 
Assets Requirement applicable to an equal number of other 
securities.\19\
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    \18\ See NYSE Rule 103.20(a)(ii).
    \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).
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    The proposed rule change would also eliminate the Market Risk Add-
on Charge,\20\ as well as the adjustments to the Net Liquid Assets 
described above.\21\ In addition, the proposal would require written 
approval by NYSE Regulation for any joint account involving two or more 
DMM units.\22\
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    \20\ See note 8 supra.
    \21\ See note 11 supra.
    \22\ See proposed NYSE Rule 103.20(b)(3).
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    The proposed rule change would delineate the circumstances where a 
DMM unit must notify NYSE Regulation, or its designee, immediately.\23\ 
The proposal also would maintain the Exchange's flexibility to allow a 
DMM unit to continue to operate as a DMM for a limited period of time 
(of no more than five business days) when the DMM unit fails to meet 
the requirements of NYSE Rule 103.20, and clarifies that a DMM unit 
that is granted permission by NYSE Regulation to continue to operate 
for up to five business days may continue to operate as such thereafter 
if the DMM unit resolves the condition within the period of time 
granted by NYSE Regulation.
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    \23\ Specifically, a DMM unit would be required to notify NYSE 
Regulation 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.
    See proposed NYSE Rule 103.20(c)(1).
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    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.\24\ The Exchange would notify DMM units of the implementation 
date of this rule change via a Member Education Bulletin.
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    \24\ See NYSE 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.
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III. Discussion of Commission Findings

    After careful review and for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act, including Section 6 of the Act,\25\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\26\ In particular, the Commission finds that the proposed 
rule change is consistent

[[Page 12556]]

with Section 6(b)(5) of the Act,\27\ which requires, among other 
things, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest, to facilitate transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \25\ 15 U.S.C. 78f.
    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the expansion of the the types of 
assets that will be available for a DMM unit to include in its Net 
Liquid Assets requirement should facilitate a DMM unit's ability to 
meet the minimum capital requirements imposed by the Exchange, thus 
removing impediments to a free and open market. The proposal's 
requirement that a DMM unit derive at least 40% of its total required 
Net Liquid Assets with Excess Net Capital appears to be reasonably 
designed to protect investors and the public interest because the Rule 
will continue to require that a DMM unit hold a portion of capital that 
is derived from sources recognized by the Commission as allowable for a 
broker-dealer to meet its minimum net capital requirement.\28\ In 
making this finding, the Commission notes that the Exchange represented 
in its filing that it believes that the 40% level exceeds the amount of 
capital that historical DMM unit losses have required. The Commission 
also believes that the proposal's delineation of the circumstances 
under which a DMM unit must immediately notify NYSE Regulation, such as 
when its Net Liquid Assets fall below the minimum threshold of the 
Rule, is reasonably designed to protect investors and the public 
interest and prevent fraudulent and manipulative acts and practices.
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    \28\ See Rule 15c3-1 under the Act.
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    The Commission also believes that the Exchange's removal of the 
Market Risk Add-on Charge and the elimination of the deductions for 
clearing organization deposits and the cash surrender value of certain 
life insurance policies is also reasonably designed to facilitate 
transactions in securities and perfect the mechanism of a free and open 
market. In its filing, the Exchange noted that the overall DMM unit 
risk levels have declined since the original implementation of NYSE 
Rule 103.20, the overall consolidated Tape A volume as well as the 
Exchange's average daily volume of shares traded have declined 
approximately 30% since 2010, the average value of DMM units' end-of-
day position inventories have decreased by over half since the last 
time the Exchange filed to amend the DMM net capital requirements, and 
the duration of a DMM unit's position is much shorter than it was in 
years past. The Commission believes that these factors support the 
Exchange's rationale for changing the Rule.
    The Commission also believes that harmonizing the financial 
requirements applicable to DMM units responsible for ETFs with the 
requirements applicable to DMM units responsible for other securities 
promotes just and equitable principles of trade. The Exchange 
represented that it does not currently list or trade ETFs, and that the 
enhanced financial requirements for DMM units responsible for ETFs 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.
    The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(8) of the Act,\29\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. The Commission believes that the easing of financial 
requirements for DMM units should promote competition in that it will 
permit a greater number of broker-dealers to qualify as DMMs while 
still providing assurances that DMMs have the financial wherewithal to 
undertake the responsibilities that attend to such a role. Finally, the 
conditions under which a DMM unit must notify NYSE Regulation under the 
proposal appear to be narrowly tailored to meet the objective of 
keeping NYSE Regulation informed of financially troubled DMM units.
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    \29\ 15 U.S.C. 78f(b)(8).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-NYSE-2014-02) be, and it is 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04789 Filed 3-4-14; 8:45 am]
BILLING CODE 8011-01-P


