[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Notices]
[Pages 4959-4961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1709]
[[Page 4959]]
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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
[[Page 4960]]
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