[Federal Register Volume 85, Number 72 (Tuesday, April 14, 2020)]
[Notices]
[Pages 20793-20794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07776]



[[Page 20793]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88599; File No. SR-CboeBZX-2020-006]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Approving a Proposed Rule Change To Provide Members Certain Optional 
Risk Settings Under Proposed Interpretation and Policy .03 of Rule 
11.13

April 8, 2020.

I. Introduction

    On February 12, 2020, Cboe BZX Exchange, Inc. (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 
provide members certain optional risk settings under proposed 
Interpretation and Policy .03 of Rule 11.13. The proposed rule change 
was published for comment in the Federal Register on February 27, 
2020.\3\ The Commission received no comment letters on the proposed 
rule change. 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. 88263 (February 21, 
2020), 85 FR 11421 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to offer two optional credit risk settings 
that would authorize the Exchange to take automated action if a 
designated limit for a member is breached. Specifically, the Exchange 
proposes to offer: (i) The ``Gross Credit Risk Limit,'' a pre-
established maximum daily dollar amount for purchases and sales across 
all symbols, where both purchases and sales are counted as positive 
values, and (ii) the ``Net Credit Risk Limit,'' a pre-established 
maximum daily dollar amount for purchases and sales across all symbols, 
where purchases are counted as positive values and sales are counted as 
negative values.\4\
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    \4\ See proposed Interpretation and Policy .03(a) of Rule 11.13. 
For purposes of calculating both the Gross Credit Risk Limit and the 
Net Credit Risk Limit, only executed orders would be included. See 
id.
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    The Exchange also proposes to provide that if a member does not 
self-clear, the member may allocate the responsibility for establishing 
and adjusting the Gross Credit and Net Credit risk settings to a 
clearing member that clears transactions on behalf of the member, if 
designated in a manner prescribed by the Exchange.\5\ A member that 
allocates this responsibility to its clearing member would be able to 
view any risk setting established by the clearing member and would be 
notified of any action taken by the Exchange with respect to the 
member's trading activity.\6\ However, the member would cede all 
control and ability to establish and adjust the risk settings to its 
clearing member,\7\ but the member would retain the ability to revoke 
the responsibility allocated to its clearing member at any time, if 
designated in a manner prescribed by the Exchange.\8\
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    \5\ See proposed Interpretation and Policy .03(c) of Rule 11.13. 
The Exchange notes that all members are required to either clear 
their own transactions or to have in place a relationship with a 
clearing member that has agreed to clear transactions on their 
behalf in order to conduct business on the Exchange. See Notice, 
supra note 3, at 11422.
    \6\ See proposed Interpretation and Policy .03(c) of Rule 11.13.
    \7\ See Notice, supra note 3, at 11422.
    \8\ See proposed Interpretation and Policy .03(c) of Rule 11.13.
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    Pursuant to the proposal, any specified limits for the risk 
settings applicable to the Gross Credit or Net Credit Risk Limits may 
only be set at the MPID level and may be established or adjusted before 
the beginning of a trading day or during the trading day.\9\ Both the 
member and the clearing member may enable alerts to signal when the 
member is approaching the designated limits.\10\ These alerts would 
generate when a member breaches certain percentage thresholds of its 
designated risk limit, which would send an email message to the 
recipients designated by the member or clearing member.\11\ According 
to the Exchange, it anticipates initially setting the thresholds at 
fifty, seventy, or ninety percent of the designated risk limit.\12\
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    \9\ See proposed Interpretation and Policy .03(b) of Rule 11.13.
    \10\ See proposed Interpretation and Policy .03(d) of Rule 
11.13. The Exchange notes that a clearing member would have the 
ability to enable alerts regardless of whether it was allocated 
responsibilities pursuant to proposed Interpretation and Policy 
.03(c) of Rule 11.13. See Notice, supra note 3, at 11423 n.11.
    \11\ See Notice, supra note 3, at at 11423.
    \12\ See id.
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    The proposed rule change would also specify that if a risk setting 
is breached, the Exchange would automatically block new orders 
submitted and cancel open orders until the applicable risk control is 
adjusted to a higher limit by the member or clearing member with the 
responsibility of establishing and adjusting the risk settings.\13\ 
Finally, the Exchange proposes to amend Rule 11.15(f) to specify that 
the Exchange may share any of a member's risk settings specified in 
Interpretation and Policy .03 of Rule 11.13 with the clearing member 
that clears transactions on behalf of the member.
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    \13\ See proposed Interpretation and Policy .03(e) of Rule 
11.13. The Exchange notes, however, that orders entered for 
participation in the opening or closing auction cannot be canceled 
or modified after the applicable ``cut-off'' time, but will be 
marked for cancellation. See Notice, supra note 3, at 11423 n.13. 
Similarly, the Exchange notes that orders entered for participation 
in the Cboe Market Close (``CMC'') will be matched for execution at 
the applicable cut-off time, and cannot be canceled or modified 
after such time. See id. According to the Exchange, therefore, if a 
risk setting breach occurs after the applicable cut-off time for an 
opening or closing auction, or the CMC, the auction orders or CMC 
auction orders would not be canceled or modified. See id. See also 
Rule 11.23(b)(1)(B) and (c)(1)(B) and Rule 11.28(a) and (b).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\15\ 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, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating 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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    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change is reasonably 
designed to provide members with an optional tool to manage their 
credit risk. The Commission notes that other exchanges have established 
risk protection controls that are similar in many respects to the 
Exchange's proposal.\16\ The Commission also notes that the Exchange 
currently provides credit controls that measure gross and net exposure, 
similar to the proposed risk limits.\17\ Unlike the proposed risk 
limits, however, the Exchange's existing credit controls apply at the 
logical port level, rather than by MPID, and are applied based on a 
combination of

[[Page 20794]]

outstanding orders on the Exchange's book and notional execution value, 
rather than based simply on a notional execution value.\18\ The 
Commission believes that the proposed rule change would provide an 
additional option for members seeking to further tailor their risk 
management capability while transacting on the Exchange. The Commission 
also believes that the proposed rule change is reasonably designed to 
provide clearing members additional opportunity to monitor and manage 
the potential risks that they assume when clearing for members of the 
Exchange, as well as to provide clearing members with greater control 
over their risk tolerance and exposure on behalf of their correspondent 
members, while also providing an alert system designed to help ensure 
that both members and clearing members are made aware of developing 
issues.
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    \16\ See, e.g., Investors Exchange LLC Rule 11.380.
    \17\ See Interpretation and Policy .01(h) of Rule 11.13.
    \18\ See id. See also Notice, supra note 3, at 11422.
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    The Commission notes that the proposed Gross Credit and Net Credit 
Risk Limits are optional functionalities. The Commission reminds 
members electing to use the proposed risk limits to be mindful of their 
obligations to, among other things, seek best execution of orders they 
handle on an agency basis. A broker-dealer has a legal duty to seek to 
obtain best execution of customer orders, and the decision to utilize 
the proposed risk settings, including the parameters set forth by the 
member for the risk setting, must be consistent with this duty.\19\ For 
instance, under the proposal, members, or their respective clearing 
members on their behalf, have discretion to set the Gross Credit Risk 
Limit or Net Credit Risk Limit. While the Exchange did not 
affirmatively establish minimum and maximum permissible settings for 
these limits in its proposed rule change, the Commission expects the 
Exchange to periodically assess whether the risk limits are operating 
in a manner that is consistent with the promotion of fair and orderly 
markets. In addition, the Commission expects that members will consider 
their best execution obligations when establishing the parameters for 
the risk limits.\20\ For example, to the extent that a member's risk 
settings are set to overly-sensitive parameters, particularly if a 
member's order flow to the Exchange contains agency orders, a member 
should consider the effect of its chosen settings on its ability to 
receive a timely execution on marketable agency orders that it sends to 
the Exchange in various market conditions.\21\ The Commission cautions 
that brokers considering their best execution obligations should be 
aware that agency orders they represent may be blocked or canceled on 
account of the Gross Credit and Net Credit Risk Limits.
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    \19\ See Securities Exchange Act Release Nos. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996) (``Order Handling Rules 
Release''); 51808 (June 9, 2005), 70 FR 37496, 37537-38 (June 29, 
2005).
    \20\ The Commission reminds broker-dealers that they must 
examine their procedures for seeking to obtain best execution in 
light of market and technology changes and modify those practices if 
necessary to enable their customers to obtain the best reasonably 
available prices. See Order Handling Rules Release, supra note 19, 
at 48323.
    \21\ For example, a marketable agency order that would have 
otherwise executed on the Exchange might be prevented from reaching 
the Exchange on account of other interest from the member that 
causes it to exceed the pre-established risk limit and thereby 
results in the Exchange blocking new orders from the member.
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    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-CboeBZX-2020-006) be, and 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07776 Filed 4-13-20; 8:45 am]
 BILLING CODE 8011-01-P


