[Federal Register Volume 86, Number 211 (Thursday, November 4, 2021)]
[Notices]
[Pages 60926-60930]
[FR Doc No: 2021-24018]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93472; File No. SR-NYSEArca-2021-91]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change to Amend Rule 6.87-O

October 29, 2021.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 20, 2021, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b 4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.87-O to improve the operation
of the Rule. The proposed change is available on the Exchange's website
at www.nyse.com, at the principal office of the Exchange, 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 self-regulatory organization
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule change is to amend Rule 6.87-O
``Nullification and Adjustment of Options Transactions including
Obvious Errors'' to improve the operation of the Rule. Following
discussions with other exchanges and a cross-section of industry
participants and in coordination with the Listed Options Market
Structure Working Group (``LOMSWG'') (collectively, the ``Industry
Working Group''), the Exchange proposes: (1) To amend section (b)(3) of
the Rule to permit the Exchange to determine the Theoretical Price of a
Customer option transaction in a wide market so long as a narrow market
exists at any point during the 10-second period after an opening or re-
opening; and (2) to amend section (c)(4)(B) of the Rule to adjust,
rather than nullify, Customer transactions in Obvious Error situations,
provided the adjustment does not violate the limit price. The Exchange
understands that upon approval of this proposal, other options
exchanges will also submit substantively identical proposals to the
Commission.
Proposed Change to Section (b)(3)
    Rule 6.87-O has been part of various harmonization efforts by the
Industry Working Group.\4\ These efforts have often centered around the
Theoretical Price for which an options transaction should be compared
to determine whether an Obvious Error has occurred. For instance, all
options exchanges have adopted language comparable to Commentary
.06,\5\ which explains how an exchange is to determine Theoretical
Price at the open, when there are no valid quotes, and when there is a
wide quote. This includes at times the use of a singular third-party
vendor, known as a TP Provider (currently CBOE Livevol, LLC).
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    \4\ See, e.g., Securities Exchange Act Release Nos. 74921 (May
8, 2015), 80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41); 80496
(April 20, 2017), 82 FR 19282 (April 26, 2017) (SR-NYSEArca-2017-
42).
    \5\ See, e.g., Securities Exchange Act Release No. 81580
(September 12, 2017), 82 FR 43578 (September 18, 2017) (SR-NYSEArca-
2017-101).
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    Similarly, section (b)(3) of Rule 6.87-O was previously harmonized
across all options exchanges to handle situations where executions
occur in markets that are wide (as set forth in the rule).\6\ Under
that section, the Exchange

determines the Theoretical Price if the NBBO for the subject series is
wide immediately before execution and a narrow market (as set forth in
the rule) existed ``during the 10 seconds prior to the transaction.''
The rule goes on to clarify that, should there be no narrow quotes
``during the 10 seconds prior to the transaction,'' the Theoretical
Price for the affected series is the NBBO that existed at the time of
execution (regardless of its width).
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    \6\ See, e.g., Securities Exchange Act Release No. 74921 (May 8,
2015), 80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41).
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    In recent discussions, the Industry Working Group has identified
proposed changes to section (b)(3) of Rule 6.87-O that would improve
the Rule's functioning. Currently, section (b)(3) does not permit the
Exchange to determine the Theoretical Price unless there is a narrow
quote 10 seconds prior to the transaction. However, in the first
seconds of trading, there is no 10-second period ``prior to the
transaction.'' Further, the Industry Working Group has observed that
prices in certain series can be disjointed at the start of trading.
Accordingly, the Exchange proposes to provide additional protections to
trading in certain circumstances immediately after the opening before
liquidity has had a chance to enter the market. The Exchange proposes
to amend section (b)(3) to allow the Exchange to determine the
Theoretical Price in a wide market so long as a narrow market exists at
any point during the 10-second period after an opening or re-opening.
    Specifically, the Exchange proposes that the existing text of
section (b)(3) would become sub-section ``A.'' The Exchange proposes to
add the following heading and text as sub-section ``B.'':

    B. Customer Transactions Occurring Within 10 Seconds or less
After an Opening or Re-Opening:
    (i) The Exchange will determine the Theoretical Price if the
bid/ask differential of the NBB and NBO for the affected series just
prior to the Customer's erroneous transaction was equal to or
greater than the Minimum Amount set forth in paragraph A above and
there was a bid/ask differential less than the Minimum Amount during
the 10 seconds prior to the transaction.
    (ii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds prior to the transaction, then the
Exchange will determine the Theoretical Price if the bid/ask
differential of the NBB and NBO for the affected series just prior
to the Customer's erroneous transaction was equal to or greater than
the Minimum Amount set forth in paragraph A above and there was a
bid/ask differential less than the Minimum Amount anytime during the
10 seconds after an opening or re-opening.
    (iii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds following an Opening or Re-Opening,
then the Theoretical Price of an option series is the last NBB or
NBO just prior to the Customer transaction in question, as set forth
in paragraph (b) above.
    (iv) Customer transactions occurring more than 10 seconds after
an opening or re-opening are subject to paragraph A above.

    The following examples illustrate the functioning of the proposed
rule change. Consider that the NBBO of a series opens as $0.01 at
$4.00. A marketable limit order to buy one contract arrives one second
later and is executed at $4.00. In the third second of trading, the
NBBO narrows from $0.01 at $4.00 to $2.00 at $2.10. While the execution
occurred in a market with wide widths, there was no tight market within
the 10 seconds prior to execution. Accordingly, under the current rule,
the trade would not qualify for obvious error review, in part due to
the fact that there was only a single second of trading before the
execution. Under the proposal, since a tight market existed at some
point in the first 10 seconds of trading (i.e., in the third second),
the Exchange would be able to determine the Theoretical Price as
provided in Commentary .06.
    As another example, the NBBO for a series opens as $0.01 at $4.00.
In the seventh second of trading, a marketable limit order is received
to buy one contract and is executed at $4.00. Five seconds later (i.e.,
in the twelfth second of trading), the NBBO narrows from $0.01 at $4.00
to $2.00 at $2.10. While the execution occurred in a market with wide
widths, there was no tight market within 10 seconds prior to execution.
Accordingly, under the current rule, the trade would not qualify for
obvious error review. Under the proposal, since no tight market existed
at any point during the first 10 seconds of trading (i.e., the narrow
market occurred in the twelfth second), the trade would not qualify for
obvious error review.
    The proposed rule change would also better harmonize section (b)(3)
with section (b)(1) of the Rule. Under section (b)(1), the Exchange is
permitted to determine the Theoretical Price for transactions occurring
as part of the opening auction process (as defined in Rule 6.64-O) if
there is no NBB or NBO for the affected series just prior to the
erroneous transaction. However, under the current version of section
(b)(3), a core trading transaction could occur in the same wide market
but the Exchange would not be permitted to determine the Theoretical
Price. Consider an example where one second after the Exchange opens a
selected series, the NBBO is $1.00 at $5.00. At 9:30:03, a customer
submits a marketable buy order to the Exchange and pays $5.00. At
9:30:03, a different exchange runs an opening auction that results in a
customer paying $5.00 for the same selected series. At 9:30:06, the
NBBO changes from $1.00 at $5.00 to $1.35 at $1.45. Under the current
version of section (b)(3), the Exchange would not be able to determine
the Theoretical Price for the trade occurring during core trading.
However, the trade on the other exchange could be submitted for review
under (b)(1) and that exchange would be able to determine the
Theoretical Price. If the proposed change to section (b)(3) were
approved, both of the trades occurring at 9:30:03 (on the Exchange
during core trading and on another exchange via auction) would also be
entitled to the same review regarding the same Theoretical Price based
upon the same time.
    The proposal would not change any obvious error review beyond the
first 10 seconds of an opening or re-opening.
Proposed Change to Section (c)(4)(B)
    The Exchange proposes to amend section (c)(4)(B)--the ``Adjust or
Bust'' rule for Customer transactions in Obvious Error situations--to
adjust rather than nullify such orders, provided the adjustment does
not violate the Customer's limit price.
    Currently, the Rule provides that in Obvious Error situations,
transactions involving non-Customers should be adjusted, while
transactions involving Customers are nullified, unless a certain
condition applies.\7\ The Industry Working Group has concluded that the
treatment of these transactions should be harmonized under the Rule,
such that transactions involving Customers may benefit from adjustment,
just as non-Customer transactions currently do, except where such
adjustment would violate the Customer's limit price; in that instance,
the trade would be nullified.
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    \7\ Specifically, the current Rule provides at section (c)(4)(C)
that if an OTP Holder has 200 or more Customer transactions under
review concurrently and the orders resulting in such transactions
were submitted during the course of 2 minutes or less, where at
least one party to the Obvious Error is a non-Customer, then the
Exchange will apply the non-Customer adjustment criteria found in
section (c)(4)(A).
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    Specifically, the Exchange proposes to amend the text of section
(c)(4)(B) to add that where at least one party to the Obvious Error is
a Customer, ``the execution price of the transaction will be adjusted
by the Official pursuant to the table immediately above. Any Customer
Obvious Error exceeding 50 contracts will be subject to the Size
Adjustment Modifier defined in sub-paragraph (a)(4) above. However, if
such adjustment(s) would result in an execution price higher (for buy

transactions) or lower (for sell transactions) than the Customer's
limit price,'' the trade will be nullified. The ``table immediately
above'' referenced in the proposed text refers to the table at current
Section (c)(4)(A), which provides for the adjustment of prices a
specified amount away from the Theoretical Price, rather than adjusting
the Theoretical Price.
    The Exchange proposes no other changes at this time.
Implementation Date
    The Exchange will announce the effective date of the proposed
changes in a Trader Update distributed to all OTP Holders and OTP
Firms. The effective date will be no sooner than six months from the
approval of this proposal.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\8\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\9\ in particular, because it is 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 and because it is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change to section (b)(3) of
the Rule would remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors and the public interest because it provides a method
for addressing Obvious Error Customer transactions that occur in a wide
market at the opening of trading. Generally, a wide market is an
indication of a lack of liquidity in the market such that the market is
unreliable. Current section (b)(3) recognizes that a persistently wide
quote (i.e., more than 10 seconds) should be considered the reliable
market regardless of its width, but does not address transactions that
occur in a wide market in the first seconds of trading, where there is
no preceding 10-second period to reference. Accordingly, in the first
10 seconds of trading, there is no opportunity for a wide quote to have
persisted for a sufficiently lengthy period such that the market should
consider it a reliable market for the purposes of determining an
Obvious Error transaction.
    The proposed change would rectify this disparity and permit the
Exchange to consider whether a narrow quote is present at any time
during the 10-second period after an opening or re-opening. The
presence of such a narrow quote would indicate that the market has
gained sufficient liquidity and that the previous wide market was
unreliable, such that it would be appropriate for the Exchange to
determine the Theoretical Price of an Obvious Error transaction. In
this way, the proposed rule harmonizes the treatment of Customer
transactions that execute in an unreliable market at any point of the
trading day, by making them uniformly subject to Exchange determination
of the Theoretical Price.
    The Exchange believes that the proposed change to section (c)(4)(B)
of the Rule would remove impediments to and perfect the mechanism of a
free and open market and a national market system and enhance the
protection of investors by harmonizing the treatment of non-Customer
transactions and Customer transactions under the Rule. Under the
current Rule, Obvious Error situations involving non-Customer
transactions are adjusted, while those involving Customer transactions
are generally nullified, unless they meet the additional requirements
of section (c)(4)(C) (i.e., where an OTP Holder has 200 or more
Customer transactions under review concurrently and the orders
resulting in such transactions were submitted during the course of 2
minutes or less). The proposal would harmonize the treatment of non-
Customer and Customer transactions by providing for the adjustment of
all such transactions, except where such adjustment would violate the
Customer's limit price.
    When it proposed the current rule in 2015, the Exchange believed
there were sound reasons for treating non-Customer transactions and
Customer transactions differently. At the time, the Exchange stated its
belief that ``Customers are not necessarily immersed in the day-to-day
trading of the markets, are less likely to be watching trading activity
in a particular option throughout the day, and may have limited funds
in their trading accounts,'' and that nullifying Obvious Error
transactions involving Customers would give Customers ``greater
protections'' than adjusting such transactions by eliminating the
possibility that a Customer's order will be adjusted to a significantly
different price. The Exchange also noted its belief that ``Customers
are . . . less likely to have engaged in significant hedging or other
trading activity based on earlier transactions, and thus, are less in
need of maintaining a position at an adjusted price than non-
Customers.'' \10\
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    \10\ Securities Exchange Act Release No. 74921 (May 9, 2015), 80
FR 27747, 27761 (May 14, 2015) (SR-NYSEArca-2015-41).
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    Those assumptions about Customer trading and hedging activity no
longer hold. The Exchange and the Industry Working Group believe that
over the course of the last five years, Customers that use options have
become more sophisticated, as retail broker-dealers have enhanced the
trading tools available. Pursuant to OCC data, volumes clearing in the
Customer range have expanded from 12,022,163 ADV in 2015 to 35,081,130
ADV in 2021. This increase in trading activity underscores the greater
understanding of options by Customers as a trading tool and its use in
the markets. Customers who trade options today largely are more
educated, have better trading tools, and have better access to
financial news than any time prior.\11\ The proposed rule would extend
the hedging protections currently enjoyed by non-Customers to
Customers, by allowing them to maintain an option position at an
adjusted price, which would in turn prevent a cascading effect by
maintaining the hedge relationship between the option transaction and
any other transactions in a related security.
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    \11\ See ``Retail Traders Adopt Options En Masse'' by Dan Raju,
available at https://www.nasdaq.com/articles/retail-traders-adopt-options-en-masse-2020-12-08.
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    The Exchange believes that extending such hedging protections to
Customer transactions would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
enhance the protection of investors by providing greater certainty of
execution for all participants to options transactions. Under the
current Rule, a Customer that believes its transaction was executed
pursuant to an Obvious Error may be disincentivized from submitting the
transaction for review, since during the review process, the Customer
would be uncertain whether the trade would be nullified, and if so,
whether market conditions would still permit the opportunity to execute
a related order at a better price after the nullification ruling is
finalized. In contrast, under the proposed rule, the Customer would
know that the only likely outcomes of submitting a trade to Obvious
Error review would be that the

trade would stand or be re-executed at a better price; the trade would
only be nullified if the adjustment would violate the order's limit.
Similarly, under the current Rule, during the review period, a market
maker who traded contra to the Customer would be uncertain if it should
retain any position executed to hedge the original trade, or attempt to
unwind it, possibly at a significant loss. Under the proposed rule
change, this uncertainty is largely eliminated, and the question would
be whether the already-executed and hedged trade would be adjusted to a
better price for the Customer, or if it would stand as originally
executed. In this way, the proposed rule enhances the protection of
investors and removes impediments to and perfects the mechanism of a
free and open market and a national market system.
    The proposed rule also addresses the concern the Exchange cited in
its 2015 filing that adjusting, rather than nullifying, Customer
transactions could lead to a Customer's order being adjusted to a
significantly different price. To address that concern, the proposed
rule would prevent Customer transactions from being adjusted to a price
that violates the order's limit; if the adjustment would violate a
Customer's limit, the trade would instead be nullified. The Exchange
believes it is in the best interest of investors to expand the
availability of adjustments to Customer transactions in all Obvious
Error situations except where the adjustment would violate the
Customer's limit price.
    Further, the Exchange believes that, with respect to such proposed
adjustments to Customer transactions, it is appropriate to use the same
form of adjustment as is currently in place with respect to non-
Customer transactions as laid out in the table in section (c)(4)(A).
That is, the Exchange believes that it is appropriate to adjust to
prices a specified amount away from the Theoretical Price rather than
to adjust the Theoretical Price, even though the Exchange has
determined a given trade to be erroneous in nature, because the parties
in question should have had some expectation of execution at the price
or prices submitted. Also, it is common that by the time it is
determined that an Obvious Error has occurred, additional hedging and
trading activity has already occurred based on the executions that
previously happened. The Exchange believes that providing an adjustment
to the Theoretical Price in all cases would not appropriately
incentivize market participants to maintain appropriate controls to
avoid potential errors, while adjusting to prices a specified amount
away from the Theoretical Price would incentivize such behavior.
    The Exchange believes that the proposal is not designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
The proposed change to section (b)(3) would apply to all instances of a
wide market occurring within the first 10 seconds of trading followed
by a narrow market at any point in the subsequent 10-second period,
regardless of the types of market participants involved in such
transactions. The proposed change to section (c)(4)(B) would harmonize
the treatment of Obvious Error transactions involving Customers and
non-Customers, no matter what type of market participants those parties
may be.
    For these reasons, the Exchange believes that the proposal is
consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal will not impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of Section 6(b)(8) of the Act.\12\ The Exchange
anticipates that the other options exchanges will adopt substantively
similar proposals, such that there would be no burden on intermarket
competition from the Exchange's proposal. Accordingly, the proposed
change is not meant to affect competition among the options exchanges.
For these reasons, the Exchange believes that the proposed rule change
reflects this competitive environment and does not impose any undue
burden on intermarket competition.
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    \12\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days.
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be 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 [email protected]. Please include
File Number SR-NYSEArca-2021-91 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-NYSEArca-2021-91. 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 the 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-NYSEArca-2021-91 and should be submitted
on or before November 26, 2021.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-24018 Filed 11-3-21; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: April 24, 2006 (Volume 71, Number 78)]
[Notices]
[Page 21060-21062]
[DOCID:fr24ap06-106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53671; File Nos. SR-FICC-2006-03 and SR-NSCC-2006-03]

Self-Regulatory Organizations; Fixed Income Clearing Corporation
and National Securities Clearing Corporation; Notice of Filing of
Proposed Rule Changes To Institute a Clearing Fund Premium Based Upon a
Member's Clearing Fund Requirement To Excess Regulatory Capital Ratio

April 18, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 22, 2006, the
Fixed Income Clearing Corporation (``FICC'') and the National
Securities Clearing Corporation (``NSCC'') filed with the Securities
and Exchange Commission (``Commission'') the proposed rule changes
described in Items I, II, and III below, which items have been
primarily prepared by FICC and NSCC. The Commission is publishing this
notice to solicit comments on the proposed rule changes from interested
parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Changes

    FICC and NSCC are seeking to institute a clearing fund premium on
their members based on a member's clearing fund requirement to excess
regulatory capital ratio.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes

    In its filing with the Commission, FICC and NSCC included
statements concerning the purpose of and basis for the proposed rule
changes and discussed any comments they received on the proposed rule
changes. The text of these statements may be examined at the places
specified in Item IV below. FICC and NSCC have prepared summaries, set
forth in sections (A), (B), and (C) below, of the most significant
aspects of these statements.\2\
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    \2\ The Commission has modified the text of the summaries
prepared by FICC and NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes

1. FICC Clearing Fund Premium
    The degree to which the collateral requirement of a clearing agency
member compares to the member's excess regulatory capital is an
important indicator of the potential risk that the member presents to
the clearing agency. In 2002, the Government Securities Clearing
Corporation (``GSCC''), the predecessor to the Government Securities
Division (``GSD'') of FICC, received Commission approval to impose a
collateral premium on netting members whose clearing fund requirement
exceeds their excess regulatory capital.\3\ Specifically, the GSD
currently imposes a 25 percent collateral premium when a member's ratio
of clearing fund requirement to excess net capital, excess liquid
capital, excess regulatory capital, or excess adjusted capital is
greater than 1.0. The 25 percent premium is applied to the amount by
which the member's clearing fund requirement exceeds the member's
excess regulatory capital.
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    \3\ Securities Exchange Act Release No. 45647 (March 26, 2002),
67 FR 15438 (April 1, 2002) [File No. SR-GSCC-2001-15]. ``Excess
regulatory capital'' for purposes of GSD's collateral premium
included excess net capital, excess liquid capital, or excess
adjusted capital.
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    In order to more effectively manage the risk posed by a GSD member
whose activity causes it to have a clearing fund requirement that is
greater than its excess regulatory capital, FICC now proposes to
strengthen the above-mentioned risk management tool by applying a
clearing fund premium that is equal to the member's ratio of clearing
fund requirement to excess regulatory capital in place of the current
flat premium of 25 percent.\4\ The premium would be determined by
multiplying: (a) The amount by which a member's clearing fund
requirement exceeds its capital by (b) the member's ratio of clearing
fund to excess regulatory capital expressed as a percent. This formula
would allow the premium to increase or decrease in proportion to
changes in the ratio and should allow for risk management that is
measured in proportion to the risk presented. For example, if a member
has a clearing fund requirement of $11.4 million and excess net capital
of $10 million, its ratio is 1.14 (or 114 percent), and the applicable
collateral premium would be 114 percent of $1.4 million (i.e., the
amount by which the member's clearing fund requirement exceeds its
excess net capital) or $1,596,000. If the same member had a clearing
fund requirement of $20 million, its ratio would be 2.0 (or 200
percent), and the applicable collateral premium would be 200 percent of
$10 million or $20 million.
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    \4\ If FICC imposes this premium on a Netting Member, then it
shall be considered included as part of the netting member's
``required fund deposit'' as defined in the GSD's rules.
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    Currently, the collateral premium applies to members whose excess
regulatory capital is measured as excess net capital, excess liquid
capital, or excess adjusted net capital. The proposed rule change seeks
to also include excess equity capital as regulatory excess capital so
that the premium can be applied to bank and trust company netting
members whose capital is measured as equity capital.
    The proposed rule change also seeks an additional change to Rule 4
(Clearing Fund, Watch List and Loss Allocation), Section 3 (Watch List)
to remove a provision which states that FICC may require a netting
member to adjust its trading activity so that its excess regulatory
capital ratio decreases to a satisfactory level. This provision was
appropriate under the fixed 25 percent premium but no longer would be
appropriate because the proposed rule change would impose a variable
premium based on activity which would require members to adjust their
trading activity or be subject to the higher premium.
 2. NSCC Clearing Fund Premium
    NSCC is proposing to impose a clearing fund premium on Rule 2
(Members) broker/dealer and bank members whose clearing fund
requirement exceeds their regulatory excess capital. NSCC's proposed
excess regulatory capital premium would apply to members whose
regulatory excess capital is measured as excess net capital or excess
equity capital. The excess regulatory capital premium would be
triggered when a member's ratio of clearing fund requirement to excess
regulatory capital is greater than 1.0 and would be determined using
the same formula as that proposed by FICC. The new premium would be
added to NSCC's clearing fund formula in Procedure XV (Clearing Fund
Formula and Other Matters).\5\
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    \5\ This premium would not apply to the Canadian Depository for
Securities Limited (``CDS'') clearing fund requirement that is
computed pursuant to Appendix 1 of NSCC's rules.
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    As a matter of practice, when a FICC or NSCC member's clearing fund
requirement to excess regulatory capital ratio is between .50 and 1.0,
a warning notification will be issued which will put the member on
notice that a collateral premium will be required if the ratio reaches
an amount greater than 1.0. When a member's ratio exceeds 1.0, it will
be notified on that business day that a collateral premium has been
calculated and will be collected.
    FICC and NSCC will reserve the right to: (i) Apply a lesser
collateral premium (including no premium) based on specific
circumstances (such as a member being subject to an unexpected haircut
or capital charge that does not fundamentally change its risk profile)
and (ii) return all or a portion of the premium amount if it believes
that the member's risk profile does not require the maintenance of that
amount.
    FICC and NSCC believe that the proposed rule changes are consistent
with the requirements of Section 17A of the Act \6\ and the rules and
regulations thereunder applicable to FICC and NSCC because they should
help FICC and NSCC assure the safeguarding of securities and funds
which are in their custody or control or for which they are responsible
by allowing FICC and NSCC to more effectively manage risk presented by
certain members.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC and NSCC do not believe that the proposed rule changes would
impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Changes Received From Members, Participants or Others

    Written comments were not and are not intended to be solicited with
respect to the proposed rule changes, and none have been received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action

    Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the self-regulatory organization consents,
the Commission will:
    (A) By order approve such proposed rule changes or
    (B) institute proceedings to determine whether the proposed rule
changes should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
changes are 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 e-mail to<EMAIL_ADDRESS>Please include

File Numbers SR-FICC-2006-03 and SR-NSCC-2006-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Numbers SR-FICC-2006-03 and
SR-NSCC-2006-03. These file numbers should be included on the subject
line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent

amendments, all written statements with respect to the proposed rule
changes that are filed with the Commission, and all written
communications relating to the proposed rule changes 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 inspection and copying in the Commission's Public
Reference Section, 100 F Street, NE., Washington, DC 20549. Copies of
such filings also will be available for inspection and copying at the
principal offices of FICC and NSCC and on FICC's Web site at http://www.ficc.com/gov/gov.docs.jsp?NS-query
 and on NSCC's Web site at http:/

/http://www.nscc.com/legal/ All comments received will be posted without

change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Numbers
SR-FICC-2006-03 and SR-NSCC-2006-03 and should be submitted on or
before May 15, 2006.
    For the Commission by the Division of Market Regulation, pursuant
to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).

Nancy M. Morris,
Secretary.
 [FR Doc. E6-6066 Filed 4-21-06; 8:45 am]

BILLING CODE 8010-01-P