[Federal Register Volume 85, Number 115 (Monday, June 15, 2020)]
[Notices]
[Pages 36246-36249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12790]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89032; File No. SR-CboeBZX-2020-044]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Allow 
Members and Clearing Members To Establish or Adjust the Risk Settings 
Set Forth in Interpretation and Policy .03 of Exchange Rule 11.13 on a 
Risk Group Identifier Basis

June 9, 2020.
    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 May 28, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to allow Members and Clearing Members to establish 
or adjust the risk settings set forth in Interpretation and Policy .03 
of Exchange Rule 11.13 on a risk group identifier basis. The text of 
the proposed rule change is provided in Exhibit 5.

[[Page 36247]]

    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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 Exchange 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
    The purpose of the proposed rule change is to offer Members \5\ and 
Clearing Members \6\ a more granular option to manage their credit risk 
in equity securities. Specifically, the Exchange proposes to allow 
Members and Clearing Members to establish a risk profile(s) on a risk 
group identifier basis that would apply the risk settings offered in 
Interpretation and Policy .03 of Exchange Rule 11.13 to a subset of 
orders.
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    \5\ See Exchange Rule 1.5(n).
    \6\ A ``Clearing Member'' refers to a Member that is also a 
member of a Qualified Clearing Agency and clears transactions on 
behalf of another Member. See Exchange Rule 11.15(a).
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    Recently, the Exchange adopted Interpretation and Policy .03 to 
Exchange Rule 11.13 which provides Members certain optional risk 
settings.\7\ As set forth in paragraph (a), the Exchange currently 
offers the Gross Credit Risk Limit \8\ and Net Credit Risk Limit \9\ 
that are applicable to a Member's activities on the Exchange and are 
available to either the Member or its Clearing Member. Specifically, 
pursuant to paragraph (c), a Member that does not self-clear may 
allocate the responsibility of establishing and adjusting the 
applicable risk settings to its Clearing Member. Further, paragraph 
(b)(1) provides that the risk limits may only be set at the market 
participant identifier (``MPID'') level. Now, the Exchange is proposing 
to amend paragraph (b)(1) to provide that the Gross Credit Risk Limit 
and Net Credit Risk Limit may be set at the MPID level or at a more 
granular risk profile level. The Exchange believes the proposed 
functionality will provide an effective tool for Members and Clearing 
Members to manage their credit risk associated with equities trading.
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    \7\ See Securities Exchange Act No. 88599 (April 8, 2020) 85 FR 
20793 (April 14, 2020) (the ``Approval Order''); Securities Exchange 
Act No. 88263 (February 21, 2020) 85 FR 11421 (February 27, 2020) 
(the ``Original Filing'').
    \8\ The ``Gross Credit Risk Limit'' refers to a pre-established 
maximum daily dollar amount for purchases and sales across all 
symbols, where both purchases and sales are counted as positive 
values. For purposes of calculating the Gross Credit Risk Limit, 
only executed orders are included. See Interpretation and Policy 
.03(a)(1) of Exchange Rule 11.13.
    \9\ The ``Net Credit Risk Limit'' refers to 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. For purposes of calculating the Net 
Credit Risk Limit, only executed orders are included. See 
Interpretation and Policy .03(a)(2) of Exchange Rule 11.13.
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    As provided in the Original Filing, a Member can allocate 
responsibility for establishing and adjusting the applicable risk 
settings to its Clearing Member on an MPID basis via the Exchange's web 
portal. The proposal would allow a Member or its Clearing Member, if 
allocated such responsibility, to utilize ``Purge Ports'' to apply 
Gross Credit Risk Limits and/or Net Credit Risk Limits to more granular 
subsets of orders associated with the relevant MPID.\10\ The Exchange 
believes the proposal will allow for proactive and reactive risk 
management and may be useful to firms operating multiple strategies at 
a given time, those operating multiple groups under a single MPID with 
disparate risk profiles, or Sponsoring Members \11\ managing risk on 
behalf of a Sponsored Participant.\12\ Specifically, Members or 
Clearing Members may assign a risk group identifier to a specific 
strategy, group, or Sponsored Participant and then set up a risk 
profile applicable to that risk group identifier. Without such 
functionality, the Member or its Clearing Member would only be able to 
manage risk at the MPID level.
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    \10\ The risk group identifier is a subset level of an MPID. 
Members can use MPID and risk group identifier risk settings in 
conjunction.
    \11\ See Exchange Rule 1.5(y).
    \12\ See Exchange Rule 1.5(x). As noted in the Original Filing, 
the Exchange does not guarantee that the proposed risk settings 
described in proposed Interpretation and Policy .03, are 
sufficiently comprehensive to meet all of a Member's risk management 
needs. Pursuant to Rule 15c3-5 under the Act, a broker-dealer with 
market access must perform appropriate due diligence to assure that 
controls are reasonably designed to be effective, and otherwise 
consistent with the rule. Use of the Exchange's risk settings 
included in proposed Interpretation and Policy .03 will not 
automatically constitute compliance with Exchange or federal rules 
and responsibility for compliance with all Exchange and SEC rules 
remains with the Member. See supra note 7.
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    A ``Purge Port'' is a dedicated port that permits a User to 
simultaneously cancel all or a subset of its orders in one or more 
symbols across multiple logical ports \13\ by requesting the Exchange 
to effect such cancellation.\14\ Currently, in order to effect a purge 
request on a specific subset of orders, a Member must identify which 
orders should be purged by applying a risk group identifier to such 
orders. As proposed, the risk group identifiers available for purge 
requests through Purge Ports would also be utilized to define risk 
profiles which constitute risk limits at the more granular order subset 
level. Specifically, through the Exchange's proposed functionality, a 
Member or its Clearing Member would be able to set risk profiles for up 
to 10 risk group identifiers per Purge Port that specify different 
Gross Credit Risk Limits and/or Net Credit Risk Limits to orders 
bearing the applicable risk group identifier. The Gross Credit Risk 
Limit and Net Credit Risk Limit would only be applied to the specified 
subset of orders with the applicable risk group identifier.\15\ As 
such, only open orders or new orders bearing the applicable risk group 
identifier would be canceled or automatically blocked, respectively, in 
the event of a risk limit breach as set forth in paragraph (e) of 
Interpretation and Policy .03.
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    \13\ A logical port represents a port established by the 
Exchange within the Exchange's system for trading and billing 
purposes. Each logical port established is specific to a Member or 
non-Member and grants that Member or non-Member the ability to 
accomplish a specific function, such as order entry, order 
cancellation, or data receipt. In addition, logical ports enable 
Users to access information such as execution reports, execution 
report messages, auction notifications, and administrative data 
through a single feed.
    \14\ A User initiating such a request may also request that the 
Exchange block all or a subset of its new inbound orders in one or 
more symbols across multiple logical ports. The block will remain in 
effect until the User requests the Exchange remove the block. See 
Interpretation and Policy .02(b) of Exchange Rule 11.13. Purge Ports 
are available to Users while risk settings are only available to 
Members and its Clearing Member.
    \15\ As proposed, a new optional port level attribute will be 
available to validate that each new order submitted through that 
specific logical port contains a risk group identifier. Once this 
logical port level setting is selected, any orders submitted through 
that session that are not tagged with a risk group identifier will 
be rejected in an effort to ensure intended risk thresholds are 
maintained.
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    As noted above, Purge Ports enable Users to simultaneously cancel 
all open orders, or a subset thereof, across multiple logical ports 
through a single cancel message. Therefore, Purge Ports allow Members 
to manage risk for some subset of their business, such as by

[[Page 36248]]

trading strategy. The proposal would expand the existing Purge Port 
functionality to allow Members and Clearing Members to use the 
Exchange's automated risk management functionality in a similar manner. 
As a result, Members and Clearing Members would be able to set 
automated gross and net notional risk limits for particular risk group 
identifiers, while retaining the ability to mass cancel and/or block 
orders entered with that risk group identifier using current purge 
functionality, e.g., in response to alerts that the Member is 
approaching designated limits.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirements that the rules of an 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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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market because the proposal 
would enhance Members' and Clearing Members' ability to manage their 
credit risk associated with equities trading, which would, in turn, 
improve their risk controls to the benefit of all market participants. 
Specifically, as discussed above, the proposal would allow a Member or 
its Clearing Member, if allocated such responsibility, to utilize the 
existing Purge Port risk group identifier functionality to set risk 
profiles for up to 10 risk group identifiers per Purge Port. Each risk 
profile would specify the applicable Gross Credit Risk Limits and/or 
Net Credit Risk Limits that would be applied to the subset of orders 
bearing the risk group identifier. Further, the proposal would allow 
the automatic mass cancellation of all open orders and block new orders 
bearing the risk group identifier in the event of a risk limit breach. 
As such, the Exchange believes that the proposal will allow for 
proactive and reactive risk management and may be useful to firms 
operating multiple strategies at a given time, those operating multiple 
groups under a single MPID with disparate risk profiles, or Sponsoring 
Members managing risk on behalf of a Sponsored Participant.\18\
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    \18\ Supra note 12.
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    In addition, the Exchange believes that the proposed rule change is 
designed to protect investors and the public interest because the 
proposed functionality is a form of risk mitigation that will aid 
Members, and Clearing Members for firms who do not self-clear, in 
minimizing their risk associated with operating or clearing multiple 
business lines with disparate risk profiles. In turn, the introduction 
of such risk management functionality could enhance the integrity of 
trading on the securities markets and help to assure the stability of 
the financial system.
    The Exchange also believes that building on the Purge Port 
functionality to provide the proposed changes would foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities because it offers enhanced use of existing functionality. 
This may enable more efficient use of Members' and Clearing Members' 
resources.
    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's Members and Clearing 
Members because use of the risk settings is optional and are not a 
prerequisite for participation on the Exchange, and will be available 
to all Members and Clearing Members as an enhancement to existing Purge 
Port functionality. The proposed risk settings are completely voluntary 
and, as they relate solely to optional risk management functionality, 
no Member or Clearing Member is required or under any regulatory 
obligation to utilize them.

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. In fact, the Exchange 
believes that the proposal may have a positive effect on competition 
because it would allow the Exchange to offer enhanced risk management 
functionality. Further, by providing Members and their Clearing Members 
more granular means to monitor and control risk, the proposed rule may 
increase confidence in the proper functioning of the markets and 
contribute to additional competition among trading venues and broker-
dealers. Rather than impede competition, the proposal is designed as an 
innovative way to facilitate more robust risk management by Members and 
Clearing Members, which, in turn, could enhance the integrity of 
trading on the securities markets and help to assure the stability of 
the financial system. Furthermore, other exchanges are free to propose 
similar functionality as they see fit.\19\
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    \19\ The NYSE has adopted similar provisions that allow for risk 
settings at a ``sub-ID'' level. See Securities Exchange Act No. 
88776 (April 29, 2020) 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received 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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of 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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \22\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the Exchange may implement the proposed rule change on the anticipated 
launch date of May 29, 2020. The Exchange states that waiver of the 
operative delay would

[[Page 36249]]

allow Members and Clearing Members to immediately utilize the proposed 
functionality to manage their risk. For this reason, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Therefore, the 
Commission hereby waives the operative delay and designates the 
proposal as operative upon filing.\24\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 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 change 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-CboeBZX-2020-044 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2020-044. 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 website (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 website 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 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2020-044, and should be 
submitted on or before July 6, 2020.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12790 Filed 6-12-20; 8:45 am]
BILLING CODE 8011-01-P


