NYSE proposes pre-trade risk controls for entering and clearing firms

Maria Nikolova

The Exchange will be allowed to take action if credit limits or other pre-trade risk controls are exceeded.

New York Stock Exchange LLC (NYSE) has filed with the Securities and Exchange Commission (SEC) a proposal to amend its rules to add new Rule 7.19 (Pre-Trade Risk Controls).

The new Rule 7.19 (Pre-Trade Risk Controls) will establish a range of pre-trade risk controls by which Entering Firms and their designated Clearing Firms may set credit limits and other pre-trade risk controls for an Entering Firm’s trading on the Exchange and authorize NYSE to take action if those credit limits or other pre-trade risk controls are exceeded.

These pre-trade risk controls would provide Entering Firms and their Clearing Firms with enhanced abilities to manage their risk with respect to orders on the Exchange.

These controls would allow Entering Firms and their Clearing Firms to each define different pre-set risk thresholds and to choose the automated action the Exchange would take if those thresholds are breached, which would range from notifying the Entering Firm and Clearing Firm that a limit has been breached, blocking new orders, or canceling orders until the Entering Firm has been reinstated to trade on the Exchange.

Under proposed Rule 7.19(b)(1), an Entering Firm may select one or more of the following optional pre-trade risk controls with respect to its trading activity on the Exchange: (i) one or more Gross Credit Risk Limits; (ii) Single Order Maximum Notional Value Risk Limits; and (iii) Single Order Maximum Quantity Risk Limits, which would collectively be referred to as the “Pre-Trade Risk Controls.”

In addition, under proposed Rule 7.19(b)(2)(A), an Entering Firm that does not self-clear may designate its Clearing Firm to (i) view any Pre-Trade Risk Controls set by the Entering Firm, or (ii) set one or more Pre-Trade Risk Controls on the Entering Firm’s behalf, or both.

Because the Entering Firm is the member organization that is entering orders on the Exchange, NYSE will not take action based on a Clearing Firm’s instructions about the Entering Firm’s trading activities on the Exchange without first receiving consent from the Entering Firm. NYSE would consider an Entering Firm to provide such consent by authorizing a Clearing Firm to enter Pre-Trade Risk Controls via the risk management tool that will be provided to Entering Firms in connection with this proposed rule change. Once such authorization is provided by the Entering Firm, the Clearing Firm would have access to the Pre-Trade Risk Controls on behalf of that Entering Firm.

The Securities and Exchange Commission (SEC) is inviting comments on the proposed changes. More information on how to submit feedback may be found in this document.

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