83 FR 23506 - Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the ICE Clear Europe CDS Clearing Stress Testing Policy
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 98 (May 21, 2018)
Federal Register Volume 83, Issue 98 (May 21, 2018)
| Page Range | 23506-23509 | |
| FR Document | 2018-10710 |
[Federal Register Volume 83, Number 98 (Monday, May 21, 2018)] [Notices] [Pages 23506-23509] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-10710] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83243; File No. SR-ICEEU-2018-001] Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the ICE Clear Europe CDS Clearing Stress Testing Policy May 15, 2018. I. Introduction On February 6, 2018, ICE Clear Europe Limited (``ICE Clear Europe'') 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 (SR-ICEEU-2018-001) to revise its CDS Clearing Stress-Testing Policy (``Stress Testing Policy'') to, among other things: (i) Re-categorize its CDS stress testing scenarios; (ii) add provisions addressing specific wrong way risk; (iii) implement new forward-looking credit event scenarios; and (iv) make certain clarifications and enhancements. The proposed rule change was published for comment in the Federal Register on February 16, 2018.\3\ The Commission did not receive comments on the proposed rule change. On April 2, 2018, the Commission designated a longer period for Commission action on the proposed rule change.\4\ For the reasons discussed below, the Commission is approving the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ Securities Exchange Act Release No. 34-82692 (February 12, 2018), 83 FR 7096 (February 16, 2018) (SR-ICEEU-2018-001) (``Notice''). \4\ Securities Exchange Act Release No. 34-82978 (April 2, 2018), 83 FR 14901 (April 6, 2018) (SR-ICEEU-2018-001). --------------------------------------------------------------------------- II. Description of the Proposed Rule Change As currently constructed, ICE Clear Europe's Stress Testing Policy contains a number of stress testing scenarios. These stress testing scenarios are applied to portfolios of positions as part of ICE Clear Europe's risk management processes for its credit default swap (``CDS'') product class.\5\ Under the [[Page 23507]] proposed amendments, ICE Clear Europe would re-categorize the current stress testing scenarios included in its Stress Testing Policy from the three standard categories currently used into two broad categories: (i) Extreme but plausible market scenarios; and (ii) extreme market scenarios.\6\ Included in the extreme but plausible market scenarios category would be both historical scenarios (for example, scenarios based on the 2008/2009 credit crisis, and the Lehman Brothers default, among others) and certain hypothetical scenarios (for example, hypothetical inversion or steepening of credit spread curves, or the opposite of a historical scenario).\7\ Included in the extreme market scenarios category would be extreme but plausible scenarios, but with higher magnitudes of spread widening or tightening incorporated into the scenario.\8\ In addition, the Stress Testing Policy would be amended to clarify the approach used for scaling the spread widening or tightening with respect to the extreme market scenarios category.\9\ --------------------------------------------------------------------------- \5\ Notice, 83 FR at 7096. \6\ Id. \7\ Id. at 7096-97. \8\ Notice, 83 FR at 7097. \9\ Id. --------------------------------------------------------------------------- In addition to re-categorizing existing stress scenarios, ICE Clear Europe also proposes to add a new set of stress testing scenarios, which would be included in the extreme but plausible category of market scenarios. These new scenarios would be forward-looking and based on historical extreme but plausible stress scenarios, but would incorporate the occurrence of specified adverse credit events involving both Clearing Member and non-Clearing Member reference entities. ICE Clear Europe also proposes to incorporate a new ``Opposite Lehman Brothers'' scenario into its Stress Testing Policy.\10\ This new scenario would be included in the extreme market scenarios category and derived from a Lehman Brothers scenario that is part of the current Stress Testing Framework. --------------------------------------------------------------------------- \10\ Notice, 83 FR at 7097. --------------------------------------------------------------------------- The current ICE Clear Europe Stress Testing Policy does not address specific wrong way risk.\11\ Under the proposed amendments, ICE Clear Europe would amend the Stress Testing Policy to provide that, where a portfolio that is subject to stress testing presents specific wrong way risk, the calculation of hypothetical losses will take into account the full uncollateralized loss given default.\12\ --------------------------------------------------------------------------- \11\ ICE Clear Europe defines specific wrong way risk as the risk arising where a Clearing Member has provided credit protection on itself or an affiliate. See Notice, 83 FR at 7097. \12\ Id. --------------------------------------------------------------------------- In addition to addressing specific wrong way risk, ICE Clear Europe also proposes to amend its Stress Testing Policy to add a section that discusses the overall Board risk appetite framework to align the Stress Testing Policy with other policy documents that also contain discussion of the Board risk appetite framework.\13\ Currently, the Stress Testing Policy does not contain a discussion of ICE Clear Europe's Board risk appetite framework. --------------------------------------------------------------------------- \13\ Notice, 83 FR at 7097. --------------------------------------------------------------------------- The section of the Stress Testing Policy dealing with guaranty fund adequacy currently provides for an analysis of positions constituting Clearing Member sold protection. Under the proposed amendments, ICE Clear Europe would amend this section of the Stress Testing Policy to provide that stress testing will be performed on both Clearing Member sold and bought credit protection positions to test the primary risk drivers of Clearing Member Portfolios that would result in the guaranty fund being depleted. In addition, the proposed changes to this section would provide that the maximum level for hypothetical spread realizations used in the guaranty fund adequacy analysis will be set such that the stress test loss will result in full depletion of the guaranty fund.\14\ Currently, the Stress Testing Policy does not explicitly provide a set maximum that the hypothetical spread realizations will reach, but instead provides that certain ICE Clear Europe personnel are to determine the extent to which hypothetical spread realizations widen. --------------------------------------------------------------------------- \14\ Id. --------------------------------------------------------------------------- ICE Clear Europe also proposes to revise the Stress Testing Policy by adding a new section that addresses the validation of the models underlying the Stress Testing Policy, as well providing for review of the Stress Testing Policy by ICE Clear Europe personnel, the CDS Risk Committee, and the Board Risk Committee. Currently, the Stress Testing Policy does not contain provisions explicitly addressing validation of the models set forth in the Stress Testing Policy. Similarly, while the Stress Testing Policy contains provisions regarding review of the result of the stress tests, it does not currently contain provisions regarding review of the policy itself. The new section of the Stress Testing Policy would provide for certain routine review, notification, and escalation processes on the part of designated ICE Clear Europe personnel, the CDS Risk Committee, and the Board Risk Committee in the event relevant thresholds are breached.\15\ Specifically, these review requirements would require that the Stress Testing Policy be kept up- to-date, as well as provide for an annual review by ICE Clear Europe's CDS Risk Committee and the Board Risk Committee. Additionally, the proposed rule change would implement a notification and escalation process in the event that certain established thresholds are breached. Depending on the extent of the breach, the notification and escalation process may require a particular response and review of the response by the Executive Risk Committee or the Board Risk Committee --------------------------------------------------------------------------- \15\ Notice, 83 FR at 7097. --------------------------------------------------------------------------- Finally, ICE Clear Europe proposes certain clarifying edits including providing for updated references to ICE Clear Europe personnel titles, management structures, and governance policies, and to also provide greater detail surrounding the scaling approach used for spread tightening or widening in connection with the extreme market scenarios. ICE Clear Europe also proposes to remove from the Stress Testing Policy certain tables that describe specific scenarios because such tables are unnecessary in light of the revised organizational structure described above.\16\ --------------------------------------------------------------------------- \16\ Id. --------------------------------------------------------------------------- III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act directs the Commission to approve a proposed rule changes of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization.\17\ For the reasons given below, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act,\18\ and Rules 17Ad-22(e)(4)(vi)(A) through (D) and 17Ad- 22(e)(4)(vii) thereunder.\19\ --------------------------------------------------------------------------- \17\ 15 U.S.C. 78s(b)(2)(C). \18\ 15 U.S.C. 78q-1(b)(3)(F). \19\ 17 CFR 240.17Ad-22(e)(4)(vi)(A)-(D), (e)(4)(vii). --------------------------------------------------------------------------- A. Consistency With Section 17A(b)(3)(F) Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a registered clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, and to assure the safeguarding of securities and funds which are in the custody or [[Page 23508]] control of the clearing agency or for which it is responsible.\20\ The proposed rule change would re-categorize ICE Clear Europe's existing stress testing scenarios while adding a new set of forward-looking stress testing scenarios that incorporate adverse credit events involving Clearing Member and non-Clearing Member reference entities, as well as the Opposite Lehman Brothers stress testing scenario. The proposed rule change also would address specific wrong way risk, and would test the guaranty fund for full depletion. --------------------------------------------------------------------------- \20\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- By (i) adopting the new forward-looking stress testing scenarios, as well as the Opposite Lehman Brothers scenario, (ii) incorporating the uncollateralized loss given default for portfolios exhibiting specific wrong way risk, and (iii) testing the guaranty fund for full depletion, the Commission believes that ICE Clear Europe will be able to obtain additional information from the results of the new stress testing scenarios that it would not otherwise have, and this additional information will be relevant to determining the appropriate level of risk management resources that ICE Clear Europe should maintain. As a result, the Commission believes that ICE Clear Europe will be better able to calculate and collect such resources, which in turn will improve ICE Clear Europe`s ability to promote the prompt and accurate clearance and settlement of derivatives agreements, contracts, and transactions, and to assure the safeguarding of securities and funds which are in the custody or control of ICE Clear Europe or for which it is responsible. Therefore, the Commission finds that the proposed rule change is consistent with the requirements of Section 17A(b)(3)(F) of the Act.\21\ --------------------------------------------------------------------------- \21\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- B. Consistency With Rule 17Ad-22(e)(4)(vi)(A) Rule 17Ad-22(e)(4)(vi)(A) requires, in relevant part, that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to test the sufficiency of its total financial resources available to meet the minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) through (iii) by conducting stress testing of its total financial resources once each day using standard predetermined parameters and assumptions.\22\ As noted above, the proposed rule change would add a set of new standardized stress testing scenarios (forward-looking scenarios based on historical stress testing scenarios and the Opposite Lehman Brothers scenario), and also would implement a hypothetical spread widening level that would result in depletion of the guaranty fund. These standardized stress testing scenarios and related assumptions would be incorporated into ICE Clear Europe's existing Stress Testing Policy, which it uses to conduct daily stress testing of its risk management financial resources. --------------------------------------------------------------------------- \22\ 17 CFR 240.17Ad-22(e)(4)(vi)(A). --------------------------------------------------------------------------- Based on a review and analysis of the Notice and the Stress Testing Policy, the Commission finds that the proposed rule change will add standardized stress scenarios that are relevant to the products that ICE Clear Europe clears, including security-based swaps, and that these additions will allow ICE Clear Europe to obtain from the results of the new stress testing scenarios additional information that will be relevant to determining the sufficiency of its total financial resources on a daily basis. Therefore, the Commission finds that the proposed rule change is consistent with the requirements of Rule 17Ad- 22(e)(4)(vi)(A).\23\ --------------------------------------------------------------------------- \23\ 17 CFR 240.17Ad-22(e)(4)(vi)(A). --------------------------------------------------------------------------- C. Consistency With Rule 17Ad-22(e)(4)(vi)(B) Through (D) Rules 17Ad-22(e)(4)(vi)(B) through (D) require, in relevant part, that a covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to: (i) Conduct a comprehensive analysis on at least a monthly basis of the existing stress testing scenarios, models, and underlying parameters and assumptions, and consider modifications to ensure they are appropriate for determining the covered clearing agency's required level of default protection in light of current and evolving market conditions; (ii) conduct a comprehensive analysis of stress testing scenarios, models, and underlying parameters and assumptions more frequently than monthly when the products cleared or markets served display high volatility or become less liquid, or when the size or concentration of positions held by the covered clearing agency's participants increases significantly; and (iii) report the results of the analyses described above to appropriate decision makers at the covered clearing agency, including but not limited to, its risk management committee or board of directors.\24\ --------------------------------------------------------------------------- \24\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D). --------------------------------------------------------------------------- The proposed rule change would implement certain requirements regarding the routine review of the Stress Testing Policy, including, as described above, a requirement that the Stress Testing Policy be kept up-to-date, an annual review by ICE Clear Europe's CDS Risk Committee and the Board Risk Committee, and implementation of a notification and escalation process in the event that certain established thresholds are breached that could, depending on the extent of the breach, require a particular response and review of the response by the Executive Risk Committee or the Board Risk Committee. The Commission believes that these proposed changes, in combination with existing provisions in the Stress Testing Policy requiring detailed analysis of stress testing results on a monthly basis, or more frequent analysis in stressed market conditions, will enhance ICE Clear Europe's processes for review of its Stress Testing Policy and stress testing results, and will also result in improved oversight by ICE Clear Europe's Executive Risk Committee and Board Risk Committee. As a result, the Commission finds that the proposed rule changes are consistent with the requirements of Rules 17Ad-22(e)(4)(vi)(B) through (D).\25\ --------------------------------------------------------------------------- \25\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D). --------------------------------------------------------------------------- D. Consistency With Rule 17Ad-22(e)(4)(vii) Rule 17Ad-22(e)(4)(vii) requires, in relevant part, a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to perform a model validation for its credit risk models not less than annually.\26\ The Commission finds that, because the proposed rule change would amend the Stress Testing Policy to provide for an annual independent model validation, it is consistent with the requirements of Rule 17Ad- 22(e)(4)(vii).\27\ --------------------------------------------------------------------------- \26\ 17 CFR 240.17Ad-22(e)(4)(vii). \27\ Id. --------------------------------------------------------------------------- IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act,\28\ and Rules 17Ad-22(e)(4)(vi)(A) through (D),\29\ and 17Ad-22(e)(4)(vii) \30\ thereunder. --------------------------------------------------------------------------- \28\ 15 U.S.C. 78q-1. \29\ 17 CFR 240.17Ad-22(e)(4)(vi)(A)-(D). \30\ 17 CFR 240.17Ad-22(e)(4)(vii). --------------------------------------------------------------------------- It is therefore ordered pursuant to Section 19(b)(2) of the Act \31\ that the [[Page 23509]] proposed rule change (ICEEU-2018-001) be, and hereby is, approved.\32\ --------------------------------------------------------------------------- \31\ 15. U.S.C. 78s(b)(2). \32\ In approving the proposed rule change, the Commission considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\33\ --------------------------------------------------------------------------- \33\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-10710 Filed 5-18-18; 8:45 am] BILLING CODE 8011-01-P
![23506 Federal Register / Vol. 83, No. 98 / Monday, May 21, 2018 / Notices
19(b)(3)(A) of the Act 19 and Rule 19b– IV. Solicitation of Comments For the Commission, by the Division of
4(f)(6) thereunder.20 Trading and Markets, pursuant to delegated
Interested persons are invited to authority.24
A proposed rule change filed submit written data, views, and Eduardo A. Aleman,
pursuant to Rule 19b–4(f)(6) under the arguments concerning the foregoing, Assistant Secretary.
Act 21 normally does not become including whether the proposed rule [FR Doc. 2018–10708 Filed 5–18–18; 8:45 am]
operative for 30 days after the date of its change is consistent with the Act. BILLING CODE 8011–01–P
filing. However, Rule 19b–4(f)(6)(iii) 22 Comments may be submitted by any of
permits the Commission to designate a the following methods:
shorter time if such action is consistent SECURITIES AND EXCHANGE
with the protection of investors and the Electronic Comments COMMISSION
public interest. The Exchange has asked
• Use the Commission’s internet [Release No. 34–83243; File No. SR–ICEEU–
the Commission to waive the 30-day
comment form (http://www.sec.gov/ 2018–001]
operative delay so that the proposal may
rules/sro.shtml); or
become operative immediately upon Self-Regulatory Organizations; ICE
filing. According to the Exchange, • Send an email to rule-comments@ Clear Europe Limited; Order Approving
waiver of the operative delay will allow sec.gov. Please include File Number SR– Proposed Rule Change Relating to
the immediate implementation of the CBOE–2018–039 on the subject line. Amendments to the ICE Clear Europe
SPX SMM program and updated Paper Comments CDS Clearing Stress Testing Policy
references relating to ‘‘Hybrid 3.0’’. The
Exchange also states that delaying the • Send paper comments in triplicate May 15, 2018.
implementation of the SPX SMM to Secretary, Securities and Exchange I. Introduction
program could result in lower levels of Commission, 100 F Street NE, On February 6, 2018, ICE Clear
liquidity, as without the program there Washington, DC 20549–1090. Europe Limited (‘‘ICE Clear Europe’’)
may not be sufficient incentive for filed with the Securities and Exchange
Trading Permit Holders to undertake an All submissions should refer to File
Number SR–CBOE-2018–039. This file Commission (‘‘Commission’’), pursuant
obligation to quote at heightened levels. to Section 19(b)(1) of the Securities
In addition, the Exchange states that the number should be included on the
subject line if email is used. To help the Exchange Act of 1934 (‘‘Act’’),1 and rule
SPX SMM program does not present any 19b–4 thereunder,2 a proposed rule
new or novel issues. The Commission Commission process and review your
comments more efficiently, please use change (SR–ICEEU–2018–001) to revise
believes the waiver of the operative its CDS Clearing Stress-Testing Policy
delay is consistent with the protection only one method. The Commission will
post all comments on the Commission’s (‘‘Stress Testing Policy’’) to, among
of investors and the public interest. As other things: (i) Re-categorize its CDS
discussed above by the Exchange, there internet website (http://www.sec.gov/
stress testing scenarios; (ii) add
are no new or novel issues raised by the rules/sro.shtml). Copies of the
provisions addressing specific wrong
proposed rule change. Therefore, the submission, all subsequent
way risk; (iii) implement new forward-
Commission hereby waives the amendments, all written statements
looking credit event scenarios; and (iv)
operative delay and designates the with respect to the proposed rule make certain clarifications and
proposal operative upon filing.23 change that are filed with the enhancements. The proposed rule
Commission, and all written change was published for comment in
At any time within 60 days of the communications relating to the
filing of the proposed rule change, the the Federal Register on February 16,
proposed rule change between the 2018.3 The Commission did not receive
Commission summarily may Commission and any person, other than comments on the proposed rule change.
temporarily suspend such rule change if those that may be withheld from the On April 2, 2018, the Commission
it appears to the Commission that such public in accordance with the designated a longer period for
action is necessary or appropriate in the provisions of 5 U.S.C. 552, will be Commission action on the proposed rule
public interest, for the protection of available for website viewing and change.4 For the reasons discussed
investors, or otherwise in furtherance of printing in the Commission’s Public below, the Commission is approving the
the purposes of the Act. If the Reference Room, 100 F Street NE, proposed rule change.
Commission takes such action, the Washington, DC 20549 on official
Commission shall institute proceedings business days between the hours of II. Description of the Proposed Rule
to determine whether the proposed rule Change
10:00 a.m. and 3:00 p.m. Copies of the
change should be approved or filing also will be available for As currently constructed, ICE Clear
disapproved. inspection and copying at the principal Europe’s Stress Testing Policy contains
office of the Exchange. All comments a number of stress testing scenarios.
19 15 U.S.C. 78s(b)(3)(A). received will be posted without change. These stress testing scenarios are
20 17 CFR 240.19b–4(f)(6). As required under Rule Persons submitting comments are applied to portfolios of positions as part
19b–4(f)(6)(iii), the Exchange provided the of ICE Clear Europe’s risk management
Commission with written notice of its intent to file cautioned that we do not redact or edit
the proposed rule change, along with a brief personal identifying information from processes for its credit default swap
description and the text of the proposed rule comment submissions. You should (‘‘CDS’’) product class.5 Under the
change, at least five business days prior to the date submit only information that you wish
sradovich on DSK3GMQ082PROD with NOTICES
of filing of the proposed rule change, or such 1 15 U.S.C. 78s(b)(1).
shorter time as designated by the Commission. to make available publicly. All 2 17 CFR 240.19b–4.
21 17 CFR 240.19b–4(f)(6). submissions should refer to File 3 Securities Exchange Act Release No. 34–82692
22 17 CFR 240.19b–4(f)(6)(iii). Number SR–CBOE–2018–039 and (February 12, 2018), 83 FR 7096 (February 16, 2018)
23 For purposes only of waiving the 30-day
should be submitted on or before June (SR–ICEEU–2018–001) (‘‘Notice’’).
operative delay, the Commission has also 4 Securities Exchange Act Release No. 34–82978
11, 2018. (April 2, 2018), 83 FR 14901 (April 6, 2018) (SR–
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See ICEEU–2018–001).
15 U.S.C. 78c(f). 24 17 CFR 200.30–3(a)(12). 5 Notice, 83 FR at 7096.
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![Federal Register / Vol. 83, No. 98 / Monday, May 21, 2018 / Notices 23509
proposed rule change (ICEEU–2018– II. Self-Regulatory Organization’s enter into certain agreements with the
001) be, and hereby is, approved.32 Statement of the Purpose of, and Exchange; and (4) make a number of
For the Commission, by the Division of
Statutory Basis for, the Proposed Rule related, non-substantive changes. Each
Trading and Markets, pursuant to delegated
Change change is discussed in detail as follows.
authority.33 In its filing with the Commission, the Defining Sponsored Access
Eduardo A. Aleman, Exchange included statements
A Sponsored Customer is a non-
concerning the purpose of and basis for
Assistant Secretary. member of the Exchange, such as an
the proposed rule change and discussed
[FR Doc. 2018–10710 Filed 5–18–18; 8:45 am] institutional investor, that gains access
any comments it received on the
to the Exchange 6 and trades under a
BILLING CODE 8011–01–P proposed rule change. The text of these
Sponsoring Member’s execution and
statements may be examined at the
clearing identity pursuant to a
places specified in Item IV below. The
SECURITIES AND EXCHANGE sponsorship arrangement between such
Exchange has prepared summaries, set
COMMISSION non-member and Sponsoring Member,
forth in sections A, B, and C below, of
as set forth in Supplementary Material
the most significant aspects of such
to Rule 706. The Exchange is proposing
[Release No. 34–83237; File No. SR–GEMX– statements.
to define the term ‘‘Sponsored Access’’
2018–15]
A. Self-Regulatory Organization’s to clarify the type of market access
Self-Regulatory Organizations; Nasdaq Statement of the Purpose of, and arrangement that is subject to this rule.
Statutory Basis for, the Proposed Rule Accordingly, the Exchange proposes to
GEMX, LLC; Notice of Filing and
Change amend Supplementary Material .01(a) to
Immediate Effectiveness of Proposed
Rule 706 to add the following
Rule Change To Amend 1. Purpose
definition: ‘‘Sponsored Access shall
Supplementary Material to Rule 706 To The purpose of the proposed rule mean an arrangement whereby a
Harmonize Its Sponsored Access change is to amend Supplementary Member permits its customers to enter
Rules With Those of Its Affiliates Material to Rule 706, which contains the orders into the System that bypass the
Exchange’s sponsored access rules, to Member’s trading system and are routed
May 15, 2018.
harmonize these rules with those of the directly to the Exchange, including
Pursuant to Section 19(b)(1) of the Nasdaq Exchanges.3 On March 9, 2016, routing through a service bureau or
Securities Exchange Act of 1934 the Exchange and its affiliates, other third party technology provider.’’
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 International Securities Exchange, LLC This definition mirrors the language set
notice is hereby given that on May 9, (now, Nasdaq ISE, LLC) (‘‘ISE’’) and ISE forth in the Nasdaq Sponsored Access
2018, Nasdaq GEMX, LLC (‘‘GEMX’’ or Mercury, LLC (now, Nasdaq MRX, LLC) Rules,7 and is derived from the
‘‘Exchange’’) filed with the Securities (‘‘MRX’’ and together with ISE and Commission’s description of Sponsored
and Exchange Commission GEMX, ‘‘ISE Exchanges’’), were Access used in the release approving the
(‘‘Commission’’) the proposed rule acquired by Nasdaq, Inc. Market Access Rule.8 The Exchange
change as described in Items I and II (‘‘Acquisition’’).4 In the context of the believes that defining Sponsored Access
Acquisition, the ISE Exchanges have in Supplementary Material .01(a) to
below, which Items have been prepared
been working to align certain of its rules Rule 706 will provide market
by the Exchange. The Commission is
and processes with those of the Nasdaq participants with greater clarity
publishing this notice to solicit Exchanges in order to provide regarding Sponsored Access and their
comments on the proposed rule change consistent standards across the six obligations with respect to this type of
from interested persons. exchanges owned and operated by access arrangement.
I. Self-Regulatory Organization’s Nasdaq, Inc. (collectively, ‘‘Affiliated
Exchanges’’). As part of this effort, the Defining Customer Agreement
Statement of the Terms of Substance of
the Proposed Rule Change proposal set forth below harmonizes the The Exchange proposes to amend
Exchange’s sponsored access rules with Supplementary Material .01(b)(1) to
The Exchange proposes to amend the Nasdaq Sponsored Access Rules in Rule 706 to define the agreement that
Supplementary Material to Rule 706 to order to provide uniform standards and Sponsored Customers must enter into
harmonize its sponsored access rules requirements for users of the Affiliated and maintain with one or more
with those of its affiliates, The Nasdaq Exchanges.5 Sponsoring Members to establish proper
Stock Market LLC (‘‘NQX’’), Nasdaq BX, In particular, the Exchange proposes relationship(s) and account(s) through
Inc. (‘‘BX’’) and Nasdaq PHLX LLC to (1) define the term ‘‘Sponsored
(‘‘PHLX,’’ and together with NQX and Access’’ and ‘‘Customer Agreement;’’ (2) 6 For example, a broker-dealer may allow its
specify the requirement to comply with customer—whether an institution such as a hedge
BX, ‘‘Nasdaq Exchanges’’). fund, mutual fund, bank or insurance company, an
Rule 15c3–5 under the Act (‘‘Market individual, or another broker-dealer—to use the
The text of the proposed rule change Access Rule’’); (3) remove the broker-dealer’s MPID, account or other mechanism
is available on the Exchange’s website at requirements that each Sponsored or mnemonic used to identify a market participant
http://nasdaqgemx.cchwallstreet.com/, Customer and each Sponsoring Member for the purposes of electronically accessing the
Exchange.
at the principal office of the Exchange, 7 See NQX Rule 4615(a), BX Rule 4615(a) and
and at the Commission’s Public 3 See NQX Rule 4615, BX Rule 4615 and PHLX
PHLX Rule 1094(a).
Reference Room. Rule 1094 (collectively, ‘‘Nasdaq Sponsored Access
sradovich on DSK3GMQ082PROD with NOTICES
8 The Market Access Rule, among other things,
Rules’’). requires broker-dealers providing others with access
4 See Securities Exchange Act Release No. 78119
32 In approving the proposed rule change, the
to an exchange or alternative trading system to
(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR– establish, document, and maintain a system of risk
Commission considered the proposal’s impact on ISE–2016–11; SR–ISEGemini–2016–05; SR– management controls and supervisory procedures
efficiency, competition, and capital formation. 15 ISEMercury–2016–10). reasonably designed to manage the financial,
U.S.C. 78c(f). 5 ISE and MRX will each file similar rule change regulatory, and other risks of providing such access.
33 17 CFR 200.30–3(a)(12).
proposals with the Commission to harmonize their See Securities Exchange Act Release No. 63241
1 15 U.S.C. 78s(b)(1).
sponsored access rules with the Nasdaq Sponsored (November 3, 2010), 75 FR 69792 (November 15,
2 17 CFR 240.19b–4. Access Rules. 2010).
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Document Created: 2018-11-02 11:07:59
Document Modified: 2018-11-02 11:07:59
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