Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change To Eliminate Position Limits for Options on the SPDR® S&P 500® Exchange-Traded Fund,1, 60491-60496 [2012-24287]
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Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site 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;
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
Number SR–CBOE–2012–091 and
should be submitted on or before
October 24, 2012.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Kevin M. O’Neill,
Deputy Secretary.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2012–091 on the
subject line.
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options exchanges and immediately
benefit market participants who are
CBOE TPHs and members of other
exchanges, such as NYSE Amex, by
ensuring consistency and uniformity
across options exchanges with respect to
the multiply listed SPY options class.
The Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission designates the proposal
operative as of September 27, 2012.22
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2012–091. 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 Web site (https://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
22 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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[FR Doc. 2012–24288 Filed 10–2–12; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–67936; File No. SR–BOX–
2012–013]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing of Proposed Rule Change To
Eliminate Position Limits for Options
on the SPDR® S&P 500® ExchangeTraded Fund,1 Which List and Trade
Under the Symbol SPY
September 27, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),2 and Rule 19b–4 thereunder,3
notice is hereby given that on
September 17, 2012, BOX Options
Exchange LLC (the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
23 17
CFR 200.30–3(a)(12).
‘‘Standard & Poor’s®,’’ ‘‘S&P®,’’ ‘‘S&P
500®,’’ and ‘‘Standard & Poor’s 500’’ are registered
trademarks of Standard & Poor’s Financial Services
LLC. The SPY ETF represents ownership in the
SPDR S&P 500 Trust, a unit investment trust that
generally corresponds to the price and yield
performance of the SPDR S&P 500 Index.
2 15 U.S.C. 78s(b)(1).
3 17 CFR 240.19b–4.
1 ‘‘SPDR®,’’
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60491
comments on the proposed rule from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend IM–
3120–2 to Rule 3120 (Position Limits) to
eliminate position limits for options on
the SPDR® S&P 500® exchange-traded
fund (‘‘SPY ETF’’),4 which list and trade
under the symbol SPY. The text of the
proposed rule change is available from
the principal office of the Exchange, on
the Exchange’s Internet Web site at
https://boxexchange.com, 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 these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Interpretive Material IM–3120–2 to Rule
3120 (Position Limits) to eliminate
position limits for SPY options.
Background
Position limits serve as a regulatory
tool designed to address potential
manipulative schemes and adverse
market impact surrounding the use of
options. The Exchange understands that
the Commission, when considering the
appropriate level at which to set option
position and exercise limits, has
considered the concern that the limits
be sufficient to prevent investors from
disrupting the market in the security
underlying the option.5 This
consideration has been balanced by the
concern that the limits ‘‘not be
established at levels that are so low as
to discourage participation in the
options market by institutions and other
4 See
supra note 1.
Securities Exchange Act Release No. 40969
(January 22, 1999), 64 FR 4911, 4912–4913
(February 1, 1999) (SR–CBOE–98–23) (citing H.R.
No. IFC–3, 96th Cong., 1st Sess. at 189–91 (Comm.
Print 1978)).
5 See
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investors with substantial hedging
needs or to prevent specialists and
market-makers from adequately meeting
their obligations to maintain a fair and
orderly market.’’ 6
SPY options are currently the most
actively traded option class in terms of
average daily volume (‘‘ADV’’).7 The
Exchange believes that, despite the
popularity of SPY options as evidenced
by their significant volume, the current
position limits on SPY options could be
a deterrent to the optimal use of this
product as a hedging tool. The Exchange
further believes that position limits on
SPY options may inhibit the ability of
certain large market participants, such
as mutual funds and other institutional
investors with substantial hedging
needs, to utilize SPY options and gain
meaningful exposure to the hedging
function they provide.
The Exchange believes that current
experience with the trading of SPY
options, as well as the Exchange’s
surveillance capabilities, has made it
appropriate to consider other, less
prophylactic alternatives to regulating
SPY options, while still seeking to
ensure that large positions in SPY
options will not unduly disrupt the
options or underlying cash markets.
Accordingly, the Exchange proposes to
eliminate the position limits on SPY
options—currently 900,000 contracts on
the same side of the market.8 In
proposing the elimination of position
limits on SPY options, the Exchange has
considered several factors, including (1)
the availability of economically
equivalent products and their respective
position limits, (2) the liquidity of the
option and the underlying security, (3)
the market capitalization of the
underlying security and the related
index, (4) the reporting of large
positions and requirements surrounding
margin, and (5) the potential for market
on close volatility.
Economically Equivalent Products
The Exchange has considered the
existence of economically equivalent or
similar products, and their respective
position limits, if any, in assessing the
appropriateness of proposing an
elimination of position limits for SPY
options. For example, AM-settled
options on the S&P 500 Index, which
6 Id.
at 4913.
ADV was 2,156,482 contracts in April 2012.
ADV for the same period for the next four most
actively traded options was: Apple Inc. (option
symbol AAPL)—1,074,351; S&P 500 Index (option
symbol SPX)—656,250; PowerShares QQQ TrustSM,
Series 1 (option symbol QQQ)—573,790; and
iShares® Russell 2000® Index Fund (option symbol
IWM)—550,316.
8 See IM–3120–2 to Rule 3120.
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7 SPY
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list and trade exclusively on the Chicago
Board Options Exchange (‘‘CBOE’’)
under the symbol SPX, are currently not
subject to position limits.9 Moreover,
SPX options are 10 times the size of SPY
options, so that a position of only
90,000 SPX options is the equivalent of
a position of 900,000 SPY options,
which is the current position limit for
SPY options.10
Similarly, the C2 Options Exchange
(‘‘C2’’) has recently introduced a PMsettled S&P 500 cash settled contract
(‘‘SPXPM’’), which also is not subject to
position limits.11 This contract, unlike
the existing SPX contract, is cash-settled
based on the closing value of the S&P
500 Index. In this respect, SPXPM is
very much like SPY options in that it is
settled at the close, albeit into cash as
opposed to shares of the underlying like
SPY options.
The Exchange believes that, because
SPX, SPXPM, and SPY options are
ultimately derivative of the same
benchmark—the S&P 500 Index—they
should be treated equally from a
position limit perspective. As a practical
matter, investors utilize SPX, SPXPM,
and SPY options and their respective
underlying instruments and futures to
gain exposure to the same benchmark
index: The S&P 500. Further, because
the creation and redemption process for
the underlying SPY ETF allows large
investors to transfer positions from a
basket of stocks comprising the S&P 500
index to an equivalent number of ETF
shares (and the reverse) with relative
ease, there is no reason to disadvantage
options overlying the one versus the
other. The Exchange believes that this
view is supported by the recent
expansion of various exemptions from
position limits, such as the Delta-Based
Equity Hedge Exemption 12 for positions
of a BOX Options Participant
(‘‘Participant’’) or non-Participant
affiliate that are delta neutral, which
allows SPY option positions to be deltahedged by positions in SPX options.
Given that SPX options are not subject
to position limits, a Participant (or nonParticipant affiliate thereof) could
9 See Securities Exchange Act Release No. 44994
(October 26, 2001), 66 FR 55722 (November 2, 2001)
(SR–CBOE–2001–22). Position limits were also
eliminated for options on the S&P 100 Index (option
symbol OEX) and the Dow Jones Industrial Average
(option symbol DJX).
10 The Exchange notes that the reduced-value
option on the S&P 500 Index (option symbol XSP)
is the equivalent size of SPY options and, similar
to SPX options, is not subject to position limits. See
Securities Exchange Act Release No. 56350
(September 4, 2007), 72 FR 51878 (September 11,
2007) (SR–CBOE–2007–79).
11 See Securities Exchange Act Release No. 65256
(September 2, 2011), 76 FR 55969 (September 9,
2011) (SR–C2–2011–008) (‘‘SPXPM Approval’’).
12 See Rule 3130(c).
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theoretically establish a position in SPY
options far in excess of the current
900,000 contract limit, provided that the
position is hedged with SPX options.
The Exchange believes that this
situation accurately reflects the
economic equivalence of SPX and SPY
options, supporting the Exchange’s
proposal to further acknowledge this
equivalence by eliminating position
limits in SPY options.
The Exchange also believes that
Commission findings in approving the
SPXPM options further support treating
SPY options in the same manner as SPX
and SPXPM options for purposes of
position limits. In particular, the
Commission noted in approving SPXPM
options that ‘‘C2’s proposal will offer
investors another investment option
through which they could obtain and
hedge exposure to the S&P 500 stocks,’’
and that ‘‘C2’s proposal will provide
investors with the ability to trade an
option on the S&P 500 index in an allelectronic market, which may better
meet the needs of investors who may
prefer to trade electronically.’’ 13 The
Commission also noted that ‘‘C2’s
proposal will provide investors with
added flexibility through an additional
product that may be better tailored to
meet their particular investment,
hedging, and trading needs.’’ 14 The
Exchange believes that these
Commission findings apply equally to
SPY options. In this respect, SPY
options with no position limit will (1)
offer investors another investment
option through which they could obtain
and hedge significant levels of exposure
to the S&P 500 stocks, (2) be available
to trade on the Exchange (and
presumably all other U.S. options
exchanges) electronically, and (3)
provide investors with added flexibility
through an additional product that may
be better tailored to meet their particular
investment, hedging, and trading needs,
because, among other things, they are
PM-settled.
The Exchange notes that, with respect
to competition amongst economically
equivalent products, a 2005 paper by
Hans Dutt and Lawrence Harris that set
forth a model to determine appropriate
position limits for cash-settled index
derivatives observed that ‘‘markets and
their regulators should take a closer look
at the underlying economic rationale for
the levels at which they currently set
their position limits to ensure that the
limits adequately protect markets from
manipulation and that inconsistent
position limits do not produce
competitive advantages and
13 See
SPXPM Approval at 55975.
14 Id.
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disadvantages among contracts.’’ 15 On
this point, the Exchange believes that if
no position limits have been found to be
warranted on both SPX and SPXPM
options, then such treatment should be
extended to SPY options so that
inconsistent position limits do not
produce competitive advantages and
disadvantages among contracts.
In addition, the Exchange notes that
the Dutt-Harris Paper focuses its
attention on the concerns relating to
manipulation of cash-settled
derivatives, stating that ‘‘[a]lthough
several scholars have argued that cash
settlement may increase the risk of
market manipulation, until recently, the
theoretical problems arising from
potential cash settlement manipulation
has been considered minor, as
evidenced by the lack of academic
interest in this area.’’ 16 The paper
further noted that ‘‘[t]he reason for this
may arise from the fact that most
exchange-traded derivative index
contracts that are cash settled are broadbased, and each of the underlying
components typically possesses ample
liquidity,’’ and that ‘‘manipulation of
the underlying components would
likely be extremely costly to the wouldbe manipulator.’’ 17 This suggests that
whatever manipulation risk does exist
in a cash-settled, broad-based product
such as SPXPM, the corresponding
manipulation risk in a physicallysettled, but equally broad-based product
such as SPY, is likely to be equally low,
if not lower.
Similarly, the Exchange notes that in
the Dutt-Harris Paper the authors
observed that the lack of scholarly
interest in the cash-settlement
manipulation problem may have been
‘‘due to the fact that, until recently,
most U.S. exchange-traded cash-settled
derivative contracts were based on
broad indices of very liquid stocks,’’ and
that ‘‘[m]anipulation of such
instruments require very large trades
that are costly to make and easy to
detect through conventional
surveillance.’’ 18 This observation
applies equally to SPY options, which
are based on a broad index of very
liquid stocks and can easily be created
by submitting a position in the
underlying securities. Moreover, it
provides additional support for the
Exchange’s view that the enhanced
reporting and surveillance for SPY
options discussed below adequately
address concerns about manipulation.19
Liquidity in the Option and the
Underlying Security
The Exchange has also considered the
liquidity of SPY options and the
underlying SPY ETF in assessing the
appropriateness of proposing an
Date range
Trade days
Jan. 1, 2011 to Dec. 31, 2011 .............................................
Jan. 1, 2012 to Apr. 19, 2012 ..............................................
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The Exchange believes that certain
factors may result in SPX options—
adjusted for their larger notional size—
currently trading with greater volume
than SPY options.23 In this regard, the
Exchange believes that, based on input
from various market participants, the
existence of position limits in SPY
options is reason in itself to instead
utilize SPX options. Anecdotally,
market participants perceive value in
avoiding the regulatory risk of
15 The Journal of Futures Markets, Vol. 25, no. 10,
945–965, 949 (2005) (‘‘Position Limits for CashSettled Derivative Contracts,’’ by Hans R. Dutt and
Lawrence E. Harris) (‘‘Dutt-Harris Paper’’). In the
paper, the authors examined existing position limits
to determine whether they were consistent with the
model the authors developed, and found that the
results indicated that existing limits were not
correlated with the limits suggested by their model.
16 Id. at 946.
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SPX option
ADV
252
75
1,567,535
1,343,735
exceeding the SPY option position limit
by instead using SPX options for their
hedging needs. The Exchange also
believes that, while exemptions are
available with respect to position limits
for SPY options, such exemptions, and
the regulatory burden attendant
therewith, may dissuade investors from
using SPY options when they can
instead use an SPX option without the
need for such an exemption. Because
SPY and SPX options are economically
17 Id.
at 948.
19 The authors of the Dutt-Harris Paper further
posited that ‘‘position limits need only apply
during the period when cash settlement takes
place.’’ Id. at 964. The Exchange notes that no such
period exists with respect to SPY options, which
are physically settled.
20 See supra note 5 at 4913.
Frm 00121
elimination of position limits for SPY
options.
In approving the elimination of
position and exercise limits on SPX
options, the Commission noted that the
deep, liquid markets for the securities
underlying the S&P 500 Index reduced
concerns regarding market manipulation
or disruption in the underlying
markets.20 The Commission further
noted that removing position limits for
SPX options could also bring additional
depth and liquidity, in terms of both
volume and open interest, without
increasing concerns regarding
intermarket manipulations or
disruptions of the options or the
underlying securities.21 The Exchange
similarly believes that this would be the
case if position limits for SPY options
were eliminated.
In this regard, both the SPY ETF and
SPY options similarly exhibit deep,
liquid markets. However, SPY options
are not as active as SPX options when
adjusted for the difference in their
notional size.22 As described below, the
Exchange believes that this is partly due
to the existence of position limits for
SPY options. The table below compares
the ADV in both SPX and SPY options,
and includes an ‘‘implied SPY volume’’
figure that reflects theoretical SPY ADV
without the constraint of position limits:
SPY option
ADV
5,789,511
4,525,709
Implied SPY
option ADV
15,675,353
13,437,353
Implied SPY
option ADV
shortfall
9,885,842
8,911,644
equivalent products, an investor
deciding between the two would
generally trade the product with the
least barriers or requirements to engage
in such activity. In this respect, SPX
options are currently the easier product
to trade.
As a further comparison, the
following table sets forth certain data for
both the SPY ETF and the combined
volume for the component securities
upon which the S&P 500 Index is based:
21 Id.
18 Id.
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22 SPX options have a notional value 10 times
greater than SPY options (i.e., one SPX contract
equals 10 SPY contracts).
23 The Exchange notes that the ‘‘Implied SPY
Option ADV Shortfall’’ has narrowed over time and
at an accelerated rate, which the Exchange believes
is a direct result of the implementation of the DeltaBased Equity Hedge Exemption that allows SPY
options to be hedged via SPX options.
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S&P 500 Index underlying component ADV 24
Date range
Jan.1, 2011 to Dec. 31, 2011 ..........
Jan. 1, 2012 to Apr. 19, 2012 .........
3,289,595,675
2,851,457,600
This data shows that there is
tremendous liquidity in both SPY ETF
shares and the component securities
upon which the S&P 500 Index is based.
While the ADV for the components
underlying the S&P 500 Index is greater
than the ADV for the SPY ETF, the
Exchange believes that SPY ETF volume
has been, is currently and will likely
continue to be within a range that the
S&P 500 Index underlying component average daily value traded
SPY ETF ADV
$4,149,726,217,456
3,860,704,307,080
218,227,747
145,164,527
Commission has previously determined
to be a deep, liquid market.25
Market Capitalization of the Underlying
Security and the Related Index
The Exchange has also considered the
market capitalization of the SPY ETF
and the S&P 500 Index in assessing the
appropriateness of proposing an
elimination of position limits for SPY
options.
The Exchange understands that the
Commission similarly considered the
Jan.1, 2011 to Dec. 31, 2011 ..................................................................................................
Jan. 1, 2012 to Apr. 19, 2012 .................................................................................................
This data shows the enormous
capitalization of both the SPY ETF and
the component securities upon which
the S&P 500 Index is based. While the
capitalization for the components
underlying the S&P 500 Index is greater
than that for the SPY ETF, the Exchange
believes that the SPY ETF capitalization
has nonetheless been, is currently and
will likely continue to be at a level
consistent with that which the
Commission has previously determined
to be enormously capitalized.26
The Exchange notes that the
theoretical limit on one’s ability to
hedge both SPX and SPY options is the
full market capitalization of the S&P 500
Index itself. This similarly contributes
to the Exchange’s determination that it
is appropriate for position limits on SPY
options to be eliminated.
Large Position Reporting and Margin
Requirements
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The Exchange has also considered the
reporting of large option positions and
related margin requirements in
assessing the appropriateness of
proposing an elimination of position
limits for SPY options.
The Exchange notes that the Large
Option Position Reporting (‘‘LOPR’’)
requirement in Exchange Rule 3150
24 The data considers the aggregate volume for all
component stocks of the S&P 500 Index.
25 See supra note 5 at n. 13. The ADV for the
components of the indexes underlying the options
for which position limits were eliminated were
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$27,297,097,993
19,684,577,239
market capitalization of the underlying
index when it approved the elimination
of position limits in SPX options.
Accordingly, the Exchange believes that
the capitalization of and the deep,
liquid markets for the underlying SPY
ETF reduces concerns regarding market
manipulation or disruption in the
underlying market. The table below
shows the market capitalization of the
SPY ETF and the S&P 500 Index:
Average S&P 500 Index
market cap
Date range
SPY ETF average daily
value traded
$11,818,270,341,270
12,547,946,920,000
Average SPY ETF
market cap
$89,533,777,897
99,752,986,022
would continue to apply to positions in
SPY options. Rule 3150 requires
Participants to file a report with the
Exchange with respect to each account
in which any general or special partner
of the Participant, any officer or director
of the Participant, or any Participant, as
such, in any joint, group or syndicate
account with the Participant or with any
partner, officer or director thereof of
such Participant; and each customer
account, that has established an
aggregate position (whether long or
short) that meets certain determined
thresholds (e.g., 200 or more option
contracts of any single class of options).
Additionally, Rule 3150(b) requires that,
‘‘Options Participants that maintain an
end of day position in excess of 10,000
non-FLEX equity options contracts on
the same side of the market on behalf of
its own account or for the account of a
Customer, shall report whether such
position is hedged and provide
documentation as to how such position
is hedged.’’ Further, Rule 3120 also
permits the Exchange to impose a higher
margin requirement upon the account of
a Participant when it determines that
the account maintains an under-hedged
position pursuant to its authority under
Exchange Rule 10130(b). Additionally,
it should be noted that the clearing firm
carrying the account will be subject to
capital charges under Securities
Exchange Act Rule 15c3–1 to the extent
of any margin deficiency resulting from
the higher margin requirements.
Monitoring accounts maintaining
large positions provides the Exchange
with the information necessary to
determine whether to impose additional
margin and/or whether to assess capital
charges upon a Participant carrying the
account. In addition, the Commission’s
net capital rule, Rule 15c3–1 under the
Securities Exchange Act of 1934 (the
‘‘Act’’),27 imposes a capital charge on
Participants to the extent of any margin
deficiency resulting from the higher
margin requirement, which should serve
as an additional form of protection.
In approving SPXPM, the Commission
addressed concerns about the lack of a
position limit by noting that CBOE will
rely on its enhanced surveillance
requirements and procedures for SPX
options to monitor trading activity in
SPXPM options.28 Similarly, the
Exchange notes that certain option
products are currently traded on the
Exchange without position limits (e.g.,
the NASDAQ® 100 Index option (option
symbol NDX)), and believes that the
reporting, surveillance and monitoring
mechanisms in place for these products
94.77 million shares (DJX), 244.3 million shares
(OEX), and 757.5 million shares (SPX).
26 See supra note 10 at 51879. Specifically, the
market capitalization of the component securities of
the Russell 2000 Index (‘‘RUT’’) of $1.73 trillion
was determined to be enormously capitalized.
27 17 CFR 240.15c3–1.
28 See SPXPM Approval at 55972.
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are effective and could easily
accommodate SPY options if position
limits thereon are eliminated.
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Market on Close Volatility
The Exchange has also considered the
potential for resulting or increased
market on close volatility in assessing
the appropriateness of proposing an
elimination of position limits for SPY
options.
SPY options are American-style,
physically settled options that can be
exercised at any time and settle into
shares of the underlying SPY ETF. A
key characteristic of the SPY ETF is that
the number of shares outstanding is
limited only by the number of shares
available in the component securities of
the S&P 500 Index, which can be used
to create additional SPY ETF shares as
needed. This in-kind creation and
redemption mechanism has proven to
be quite robust, as evidenced by the SPY
ETF’s close tracking of its benchmark
index and the relatively small premiums
or discounts to Net Asset Value
(‘‘NAV’’) that it has historically
exhibited.29 Additionally, the ability to
hedge with SPX options against the
stocks underlying the S&P 500 is limited
to the shares outstanding for those
stocks—the same limit that applies to
hedging with SPY options. Accordingly,
the Exchange believes that the risk of
distortions to the market resulting from
the elimination of position limits in SPY
options is no greater than the risk
presented by SPX options not being
subject to position limits.
As a physically-settled option, SPY
options can be easily hedged via long or
short positions in SPY ETF shares,
which, as noted above, can be easily
created or redeemed as needed. With a
physically-settled contract such as SPY
options, once a hedge in the form of a
long or short position is obtained, that
hedge can only be lost if the underlying
security becomes hard to borrow and
the short position is bought in.30 The
Exchange believes that this ability to
hedge with shares of the SPY ETF is
very important, and reduces the
likelihood of market on close volatility
in the component securities underlying
29 See SPDR® S&P 500® ETF Trust, Annual
Report (September 30, 2011), available at https://
www.spdrs.com/librarycontent/public/
SPY%20Annual%20Report%2009.30.11.pdf.
30 As noted, the in-kind creation and redemption
process allows for short term imbalances in supply
and demand to be resolved readily, which in turn
reduces the likelihood of getting ‘‘bought in’’ on a
short position in SPY. Since the implementation of
Regulation SHO, SPY has never been on the
threshold security list, which further evidences the
efficacy of the in-kind creation and redemption
process in resolving imbalances in supply and
demand.
VerDate Mar<15>2010
15:03 Oct 02, 2012
Jkt 229001
the S&P 500 Index (i.e., a market
participant can remain fully hedged
through expiration via shares of the SPY
ETF), which should also be the case if
position limits for SPY options are
eliminated. At the same time, the
Exchange believes that the elimination
of position limits for SPY options would
not increase market volatility or
facilitate the ability to manipulate the
market. The Exchange believes that any
potential concern regarding volatility at
the closing that could result from an
elimination in the position limits for
SPY options is further alleviated by the
current trading environment, including
that there are markets for individual
securities on more than one exchange,
via unlisted trading privileges, that
there is wide dispersion of trading
across multiple exchanges, and that
exchange procedures and systems are
designed to facilitate orderly closings,
even when there is volatility.
Pilot Program
The Exchange proposes that this rule
change be adopted pursuant to a pilot
program, set to expire November 27,
2013. The Exchange will perform an
analysis of the initial pilot program to
eliminate position limits in SPY after
the first twelve (12) months of the pilot
program (the ‘‘Pilot Report’’). The Pilot
Report will be submitted within thirty
(30) days of the end of such twelve (12)
month time period. The Pilot Report
will detail the size and different types
of strategies employed with respect to
positions established as a result of the
elimination of position limits in SPY. In
addition, the report will note whether
any problems resulted due to the no
limit approach and any other
information that may be useful in
evaluating the effectiveness of the pilot
program. The Pilot Report will compare
the impact of the pilot program, if any,
on the volumes of SPY options and the
volatility in the price of the underlying
SPY shares, particularly at expiration. In
preparing the report, the Exchange will
utilize various data elements such as
volume and open interest. In addition
the Exchange will make available to
Commission staff data elements relating
to the effectiveness of the pilot program.
Conditional on the findings in the Pilot
Report, the Exchange will file with the
Commission a proposal to either extend
the pilot program, adopt the pilot
program on a permanent basis, or
terminate the pilot program. If the pilot
program is not extended or adopted on
a permanent basis by November 27,
2013, the position limits for SPY would
revert to limits in effect at the
commencement of the pilot program.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
60495
Implementation
In addition to Commission approval,
the implementation of this proposed
rule change will be contingent on other
factors, including the completion of any
changes that may be necessary to the
Exchange’s regulatory and surveillance
program. The Exchange will announce
the implementation of the elimination
of position limits on SPY options
through a notice to Participants after
any Commission notice of effectiveness
regarding this proposed rule change.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,31 in general, and Section 6(b)(5) of
the Act,32 in particular, that the rules of
an exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and to perfect
the mechanism for a free and open
market and a national market system,
and, in general, to protect investors and
the public interest. The Exchange
believes that the proposed rule change
would be beneficial to market
participants, including market makers,
institutional investors and retail
investors, by permitting them to
establish greater positions when
pursuing their investment goals and
needs. The Exchange also believes that
economically equivalent products
should be treated in an equivalent
manner so as to avoid regulatory
arbitrage, especially with respect to
position limits. Treating SPY and SPX
options differently by virtue of imposing
different position limits is inconsistent
with the notion of promoting just and
equitable principles of trade and
removing impediments to perfect the
mechanisms of a free and open market.
At the same time, the Exchange believes
that the elimination of position limits
for SPY options would not increase
market volatility or facilitate the ability
to manipulate the market.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
31 15
32 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
03OCN1
60496
Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not: (i) Significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative prior to 30 days from the date
on which it was filed, or such shorter
time as the Commission may designate,
the proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 33 and Rule 19b–4(f)(6)
thereunder.34
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 35 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6) 36
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay, noting that doing so
will allow the Exchange to remain
competitive with other options
exchanges, avoid potential regulatory
inconsistencies for Participants that are
also members of NYSE Amex and
seamlessly continue to offer traders and
the investing public the ability to use
SPY options as an effective hedging and
trading vehicle. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest. Therefore, the Commission
designates the proposal operative as of
September 27, 2012.37
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
33 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
35 17 CFR 240.19b–4(f)(6).
36 17 CFR 240.19b–4(f)(6).
37 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
erowe on DSK2VPTVN1PROD with
34 17
VerDate Mar<15>2010
15:03 Oct 02, 2012
Jkt 229001
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–24287 Filed 10–2–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–67938; File No. SR–CBOE–
2012–093]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BOX–2012–013 on the
subject line.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Related to AIM, SAM,
FLEX AIM, FLEX SAM and FLEX
Electronic RFQs
Paper Comments
September 27, 2012.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–BOX–2012–013. 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 Web site (https://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 Web site 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;
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
Number SR–BOX–2012–013 and should
be submitted on or before October 24,
2012.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 21, 2012, Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) 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 Exchange. The Exchange has
designated the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6) thereunder.4
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to make
certain amendments to its rules for
trading FLEX Options 5 and Non-FLEX
38 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 FLEX Options provide investors with the ability
to customize basic option features including size,
expiration date, exercise style, and certain exercise
prices. FLEX Options can be FLEX Index Options
or FLEX Equity Options. In addition, other products
are permitted to be traded pursuant to the FLEX
trading procedures. For example, credit options are
eligible for trading as FLEX Options pursuant to the
FLEX rules in Chapters XXIVA and XXIVB. See
CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1),
24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.17.
The rules governing the trading of FLEX Options on
the FLEX Request for Quote (‘‘RFQ’’) System
platform (which is limited to open outcry trading
only) are contained in Chapter XXIVA. The rules
governing the trading of FLEX Options on the FLEX
1 15
E:\FR\FM\03OCN1.SGM
03OCN1
]]>Agencies
[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Notices]
[Pages 60491-60496]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24287]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67936; File No. SR-BOX-2012-013]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Proposed Rule Change To Eliminate Position Limits for
Options on the SPDR[supreg] S&P 500[supreg] Exchange-Traded Fund,\1\
Which List and Trade Under the Symbol SPY
---------------------------------------------------------------------------
\1\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],''
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500''
are registered trademarks of Standard & Poor's Financial Services
LLC. The SPY ETF represents ownership in the SPDR S&P 500 Trust, a
unit investment trust that generally corresponds to the price and
yield performance of the SPDR S&P 500 Index.
---------------------------------------------------------------------------
September 27, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that
on September 17, 2012, BOX Options Exchange LLC (the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule from
interested persons.
---------------------------------------------------------------------------
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend IM-3120-2 to Rule 3120 (Position
Limits) to eliminate position limits for options on the SPDR[supreg]
S&P 500[supreg] exchange-traded fund (``SPY ETF''),\4\ which list and
trade under the symbol SPY. The text of the proposed rule change is
available from the principal office of the Exchange, on the Exchange's
Internet Web site at https://boxexchange.com, and at the Commission's
Public Reference Room.
---------------------------------------------------------------------------
\4\ See supra note 1.
---------------------------------------------------------------------------
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Interpretive Material IM-3120-2 to
Rule 3120 (Position Limits) to eliminate position limits for SPY
options.
Background
Position limits serve as a regulatory tool designed to address
potential manipulative schemes and adverse market impact surrounding
the use of options. The Exchange understands that the Commission, when
considering the appropriate level at which to set option position and
exercise limits, has considered the concern that the limits be
sufficient to prevent investors from disrupting the market in the
security underlying the option.\5\ This consideration has been balanced
by the concern that the limits ``not be established at levels that are
so low as to discourage participation in the options market by
institutions and other
[[Page 60492]]
investors with substantial hedging needs or to prevent specialists and
market-makers from adequately meeting their obligations to maintain a
fair and orderly market.'' \6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (SR-CBOE-98-23)
(citing H.R. No. IFC-3, 96th Cong., 1st Sess. at 189-91 (Comm. Print
1978)).
\6\ Id. at 4913.
---------------------------------------------------------------------------
SPY options are currently the most actively traded option class in
terms of average daily volume (``ADV'').\7\ The Exchange believes that,
despite the popularity of SPY options as evidenced by their significant
volume, the current position limits on SPY options could be a deterrent
to the optimal use of this product as a hedging tool. The Exchange
further believes that position limits on SPY options may inhibit the
ability of certain large market participants, such as mutual funds and
other institutional investors with substantial hedging needs, to
utilize SPY options and gain meaningful exposure to the hedging
function they provide.
---------------------------------------------------------------------------
\7\ SPY ADV was 2,156,482 contracts in April 2012. ADV for the
same period for the next four most actively traded options was:
Apple Inc. (option symbol AAPL)--1,074,351; S&P 500 Index (option
symbol SPX)--656,250; PowerShares QQQ TrustSM, Series 1
(option symbol QQQ)--573,790; and iShares[supreg] Russell
2000[supreg] Index Fund (option symbol IWM)--550,316.
---------------------------------------------------------------------------
The Exchange believes that current experience with the trading of
SPY options, as well as the Exchange's surveillance capabilities, has
made it appropriate to consider other, less prophylactic alternatives
to regulating SPY options, while still seeking to ensure that large
positions in SPY options will not unduly disrupt the options or
underlying cash markets. Accordingly, the Exchange proposes to
eliminate the position limits on SPY options--currently 900,000
contracts on the same side of the market.\8\ In proposing the
elimination of position limits on SPY options, the Exchange has
considered several factors, including (1) the availability of
economically equivalent products and their respective position limits,
(2) the liquidity of the option and the underlying security, (3) the
market capitalization of the underlying security and the related index,
(4) the reporting of large positions and requirements surrounding
margin, and (5) the potential for market on close volatility.
---------------------------------------------------------------------------
\8\ See IM-3120-2 to Rule 3120.
---------------------------------------------------------------------------
Economically Equivalent Products
The Exchange has considered the existence of economically
equivalent or similar products, and their respective position limits,
if any, in assessing the appropriateness of proposing an elimination of
position limits for SPY options. For example, AM-settled options on the
S&P 500 Index, which list and trade exclusively on the Chicago Board
Options Exchange (``CBOE'') under the symbol SPX, are currently not
subject to position limits.\9\ Moreover, SPX options are 10 times the
size of SPY options, so that a position of only 90,000 SPX options is
the equivalent of a position of 900,000 SPY options, which is the
current position limit for SPY options.\10\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22). Position
limits were also eliminated for options on the S&P 100 Index (option
symbol OEX) and the Dow Jones Industrial Average (option symbol
DJX).
\10\ The Exchange notes that the reduced-value option on the S&P
500 Index (option symbol XSP) is the equivalent size of SPY options
and, similar to SPX options, is not subject to position limits. See
Securities Exchange Act Release No. 56350 (September 4, 2007), 72 FR
51878 (September 11, 2007) (SR-CBOE-2007-79).
---------------------------------------------------------------------------
Similarly, the C2 Options Exchange (``C2'') has recently introduced
a PM-settled S&P 500 cash settled contract (``SPXPM''), which also is
not subject to position limits.\11\ This contract, unlike the existing
SPX contract, is cash-settled based on the closing value of the S&P 500
Index. In this respect, SPXPM is very much like SPY options in that it
is settled at the close, albeit into cash as opposed to shares of the
underlying like SPY options.
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 65256 (September 2,
2011), 76 FR 55969 (September 9, 2011) (SR-C2-2011-008) (``SPXPM
Approval'').
---------------------------------------------------------------------------
The Exchange believes that, because SPX, SPXPM, and SPY options are
ultimately derivative of the same benchmark--the S&P 500 Index--they
should be treated equally from a position limit perspective. As a
practical matter, investors utilize SPX, SPXPM, and SPY options and
their respective underlying instruments and futures to gain exposure to
the same benchmark index: The S&P 500. Further, because the creation
and redemption process for the underlying SPY ETF allows large
investors to transfer positions from a basket of stocks comprising the
S&P 500 index to an equivalent number of ETF shares (and the reverse)
with relative ease, there is no reason to disadvantage options
overlying the one versus the other. The Exchange believes that this
view is supported by the recent expansion of various exemptions from
position limits, such as the Delta-Based Equity Hedge Exemption \12\
for positions of a BOX Options Participant (``Participant'') or non-
Participant affiliate that are delta neutral, which allows SPY option
positions to be delta-hedged by positions in SPX options. Given that
SPX options are not subject to position limits, a Participant (or non-
Participant affiliate thereof) could theoretically establish a position
in SPY options far in excess of the current 900,000 contract limit,
provided that the position is hedged with SPX options. The Exchange
believes that this situation accurately reflects the economic
equivalence of SPX and SPY options, supporting the Exchange's proposal
to further acknowledge this equivalence by eliminating position limits
in SPY options.
---------------------------------------------------------------------------
\12\ See Rule 3130(c).
---------------------------------------------------------------------------
The Exchange also believes that Commission findings in approving
the SPXPM options further support treating SPY options in the same
manner as SPX and SPXPM options for purposes of position limits. In
particular, the Commission noted in approving SPXPM options that ``C2's
proposal will offer investors another investment option through which
they could obtain and hedge exposure to the S&P 500 stocks,'' and that
``C2's proposal will provide investors with the ability to trade an
option on the S&P 500 index in an all-electronic market, which may
better meet the needs of investors who may prefer to trade
electronically.'' \13\ The Commission also noted that ``C2's proposal
will provide investors with added flexibility through an additional
product that may be better tailored to meet their particular
investment, hedging, and trading needs.'' \14\ The Exchange believes
that these Commission findings apply equally to SPY options. In this
respect, SPY options with no position limit will (1) offer investors
another investment option through which they could obtain and hedge
significant levels of exposure to the S&P 500 stocks, (2) be available
to trade on the Exchange (and presumably all other U.S. options
exchanges) electronically, and (3) provide investors with added
flexibility through an additional product that may be better tailored
to meet their particular investment, hedging, and trading needs,
because, among other things, they are PM-settled.
---------------------------------------------------------------------------
\13\ See SPXPM Approval at 55975.
\14\ Id.
---------------------------------------------------------------------------
The Exchange notes that, with respect to competition amongst
economically equivalent products, a 2005 paper by Hans Dutt and
Lawrence Harris that set forth a model to determine appropriate
position limits for cash-settled index derivatives observed that
``markets and their regulators should take a closer look at the
underlying economic rationale for the levels at which they currently
set their position limits to ensure that the limits adequately protect
markets from manipulation and that inconsistent position limits do not
produce competitive advantages and
[[Page 60493]]
disadvantages among contracts.'' \15\ On this point, the Exchange
believes that if no position limits have been found to be warranted on
both SPX and SPXPM options, then such treatment should be extended to
SPY options so that inconsistent position limits do not produce
competitive advantages and disadvantages among contracts.
---------------------------------------------------------------------------
\15\ The Journal of Futures Markets, Vol. 25, no. 10, 945-965,
949 (2005) (``Position Limits for Cash-Settled Derivative
Contracts,'' by Hans R. Dutt and Lawrence E. Harris) (``Dutt-Harris
Paper''). In the paper, the authors examined existing position
limits to determine whether they were consistent with the model the
authors developed, and found that the results indicated that
existing limits were not correlated with the limits suggested by
their model.
---------------------------------------------------------------------------
In addition, the Exchange notes that the Dutt-Harris Paper focuses
its attention on the concerns relating to manipulation of cash-settled
derivatives, stating that ``[a]lthough several scholars have argued
that cash settlement may increase the risk of market manipulation,
until recently, the theoretical problems arising from potential cash
settlement manipulation has been considered minor, as evidenced by the
lack of academic interest in this area.'' \16\ The paper further noted
that ``[t]he reason for this may arise from the fact that most
exchange-traded derivative index contracts that are cash settled are
broad-based, and each of the underlying components typically possesses
ample liquidity,'' and that ``manipulation of the underlying components
would likely be extremely costly to the would-be manipulator.'' \17\
This suggests that whatever manipulation risk does exist in a cash-
settled, broad-based product such as SPXPM, the corresponding
manipulation risk in a physically-settled, but equally broad-based
product such as SPY, is likely to be equally low, if not lower.
---------------------------------------------------------------------------
\16\ Id. at 946.
\17\ Id.
---------------------------------------------------------------------------
Similarly, the Exchange notes that in the Dutt-Harris Paper the
authors observed that the lack of scholarly interest in the cash-
settlement manipulation problem may have been ``due to the fact that,
until recently, most U.S. exchange-traded cash-settled derivative
contracts were based on broad indices of very liquid stocks,'' and that
``[m]anipulation of such instruments require very large trades that are
costly to make and easy to detect through conventional surveillance.''
\18\ This observation applies equally to SPY options, which are based
on a broad index of very liquid stocks and can easily be created by
submitting a position in the underlying securities. Moreover, it
provides additional support for the Exchange's view that the enhanced
reporting and surveillance for SPY options discussed below adequately
address concerns about manipulation.\19\
---------------------------------------------------------------------------
\18\ Id. at 948.
\19\ The authors of the Dutt-Harris Paper further posited that
``position limits need only apply during the period when cash
settlement takes place.'' Id. at 964. The Exchange notes that no
such period exists with respect to SPY options, which are physically
settled.
---------------------------------------------------------------------------
Liquidity in the Option and the Underlying Security
The Exchange has also considered the liquidity of SPY options and
the underlying SPY ETF in assessing the appropriateness of proposing an
elimination of position limits for SPY options.
In approving the elimination of position and exercise limits on SPX
options, the Commission noted that the deep, liquid markets for the
securities underlying the S&P 500 Index reduced concerns regarding
market manipulation or disruption in the underlying markets.\20\ The
Commission further noted that removing position limits for SPX options
could also bring additional depth and liquidity, in terms of both
volume and open interest, without increasing concerns regarding
intermarket manipulations or disruptions of the options or the
underlying securities.\21\ The Exchange similarly believes that this
would be the case if position limits for SPY options were eliminated.
---------------------------------------------------------------------------
\20\ See supra note 5 at 4913.
\21\ Id.
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In this regard, both the SPY ETF and SPY options similarly exhibit
deep, liquid markets. However, SPY options are not as active as SPX
options when adjusted for the difference in their notional size.\22\ As
described below, the Exchange believes that this is partly due to the
existence of position limits for SPY options. The table below compares
the ADV in both SPX and SPY options, and includes an ``implied SPY
volume'' figure that reflects theoretical SPY ADV without the
constraint of position limits:
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\22\ SPX options have a notional value 10 times greater than SPY
options (i.e., one SPX contract equals 10 SPY contracts).
----------------------------------------------------------------------------------------------------------------
Implied SPY
Date range Trade days SPX option ADV SPY option ADV Implied SPY option ADV
option ADV shortfall
----------------------------------------------------------------------------------------------------------------
Jan. 1, 2011 to Dec. 31, 2011... 252 1,567,535 5,789,511 15,675,353 9,885,842
Jan. 1, 2012 to Apr. 19, 2012... 75 1,343,735 4,525,709 13,437,353 8,911,644
----------------------------------------------------------------------------------------------------------------
The Exchange believes that certain factors may result in SPX
options--adjusted for their larger notional size--currently trading
with greater volume than SPY options.\23\ In this regard, the Exchange
believes that, based on input from various market participants, the
existence of position limits in SPY options is reason in itself to
instead utilize SPX options. Anecdotally, market participants perceive
value in avoiding the regulatory risk of exceeding the SPY option
position limit by instead using SPX options for their hedging needs.
The Exchange also believes that, while exemptions are available with
respect to position limits for SPY options, such exemptions, and the
regulatory burden attendant therewith, may dissuade investors from
using SPY options when they can instead use an SPX option without the
need for such an exemption. Because SPY and SPX options are
economically equivalent products, an investor deciding between the two
would generally trade the product with the least barriers or
requirements to engage in such activity. In this respect, SPX options
are currently the easier product to trade.
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\23\ The Exchange notes that the ``Implied SPY Option ADV
Shortfall'' has narrowed over time and at an accelerated rate, which
the Exchange believes is a direct result of the implementation of
the Delta-Based Equity Hedge Exemption that allows SPY options to be
hedged via SPX options.
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As a further comparison, the following table sets forth certain
data for both the SPY ETF and the combined volume for the component
securities upon which the S&P 500 Index is based:
[[Page 60494]]
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S&P 500 Index
S&P 500 Index underlying component SPY ETF average daily
Date range underlying component average daily value SPY ETF ADV value traded
ADV \24\ traded
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan.1, 2011 to Dec. 31, 2011........................ 3,289,595,675 $4,149,726,217,456 218,227,747 $27,297,097,993
Jan. 1, 2012 to Apr. 19, 2012....................... 2,851,457,600 3,860,704,307,080 145,164,527 19,684,577,239
--------------------------------------------------------------------------------------------------------------------------------------------------------
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\24\ The data considers the aggregate volume for all component
stocks of the S&P 500 Index.
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This data shows that there is tremendous liquidity in both SPY ETF
shares and the component securities upon which the S&P 500 Index is
based. While the ADV for the components underlying the S&P 500 Index is
greater than the ADV for the SPY ETF, the Exchange believes that SPY
ETF volume has been, is currently and will likely continue to be within
a range that the Commission has previously determined to be a deep,
liquid market.\25\
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\25\ See supra note 5 at n. 13. The ADV for the components of
the indexes underlying the options for which position limits were
eliminated were 94.77 million shares (DJX), 244.3 million shares
(OEX), and 757.5 million shares (SPX).
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Market Capitalization of the Underlying Security and the Related Index
The Exchange has also considered the market capitalization of the
SPY ETF and the S&P 500 Index in assessing the appropriateness of
proposing an elimination of position limits for SPY options.
The Exchange understands that the Commission similarly considered
the market capitalization of the underlying index when it approved the
elimination of position limits in SPX options. Accordingly, the
Exchange believes that the capitalization of and the deep, liquid
markets for the underlying SPY ETF reduces concerns regarding market
manipulation or disruption in the underlying market. The table below
shows the market capitalization of the SPY ETF and the S&P 500 Index:
----------------------------------------------------------------------------------------------------------------
Average S&P 500 Index Average SPY ETF market
Date range market cap cap
----------------------------------------------------------------------------------------------------------------
Jan.1, 2011 to Dec. 31, 2011.................................. $11,818,270,341,270 $89,533,777,897
Jan. 1, 2012 to Apr. 19, 2012................................. 12,547,946,920,000 99,752,986,022
----------------------------------------------------------------------------------------------------------------
This data shows the enormous capitalization of both the SPY ETF and
the component securities upon which the S&P 500 Index is based. While
the capitalization for the components underlying the S&P 500 Index is
greater than that for the SPY ETF, the Exchange believes that the SPY
ETF capitalization has nonetheless been, is currently and will likely
continue to be at a level consistent with that which the Commission has
previously determined to be enormously capitalized.\26\
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\26\ See supra note 10 at 51879. Specifically, the market
capitalization of the component securities of the Russell 2000 Index
(``RUT'') of $1.73 trillion was determined to be enormously
capitalized.
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The Exchange notes that the theoretical limit on one's ability to
hedge both SPX and SPY options is the full market capitalization of the
S&P 500 Index itself. This similarly contributes to the Exchange's
determination that it is appropriate for position limits on SPY options
to be eliminated.
Large Position Reporting and Margin Requirements
The Exchange has also considered the reporting of large option
positions and related margin requirements in assessing the
appropriateness of proposing an elimination of position limits for SPY
options.
The Exchange notes that the Large Option Position Reporting
(``LOPR'') requirement in Exchange Rule 3150 would continue to apply to
positions in SPY options. Rule 3150 requires Participants to file a
report with the Exchange with respect to each account in which any
general or special partner of the Participant, any officer or director
of the Participant, or any Participant, as such, in any joint, group or
syndicate account with the Participant or with any partner, officer or
director thereof of such Participant; and each customer account, that
has established an aggregate position (whether long or short) that
meets certain determined thresholds (e.g., 200 or more option contracts
of any single class of options). Additionally, Rule 3150(b) requires
that, ``Options Participants that maintain an end of day position in
excess of 10,000 non-FLEX equity options contracts on the same side of
the market on behalf of its own account or for the account of a
Customer, shall report whether such position is hedged and provide
documentation as to how such position is hedged.'' Further, Rule 3120
also permits the Exchange to impose a higher margin requirement upon
the account of a Participant when it determines that the account
maintains an under-hedged position pursuant to its authority under
Exchange Rule 10130(b). Additionally, it should be noted that the
clearing firm carrying the account will be subject to capital charges
under Securities Exchange Act Rule 15c3-1 to the extent of any margin
deficiency resulting from the higher margin requirements.
Monitoring accounts maintaining large positions provides the
Exchange with the information necessary to determine whether to impose
additional margin and/or whether to assess capital charges upon a
Participant carrying the account. In addition, the Commission's net
capital rule, Rule 15c3-1 under the Securities Exchange Act of 1934
(the ``Act''),\27\ imposes a capital charge on Participants to the
extent of any margin deficiency resulting from the higher margin
requirement, which should serve as an additional form of protection.
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\27\ 17 CFR 240.15c3-1.
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In approving SPXPM, the Commission addressed concerns about the
lack of a position limit by noting that CBOE will rely on its enhanced
surveillance requirements and procedures for SPX options to monitor
trading activity in SPXPM options.\28\ Similarly, the Exchange notes
that certain option products are currently traded on the Exchange
without position limits (e.g., the NASDAQ[supreg] 100 Index option
(option symbol NDX)), and believes that the reporting, surveillance and
monitoring mechanisms in place for these products
[[Page 60495]]
are effective and could easily accommodate SPY options if position
limits thereon are eliminated.
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\28\ See SPXPM Approval at 55972.
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Market on Close Volatility
The Exchange has also considered the potential for resulting or
increased market on close volatility in assessing the appropriateness
of proposing an elimination of position limits for SPY options.
SPY options are American-style, physically settled options that can
be exercised at any time and settle into shares of the underlying SPY
ETF. A key characteristic of the SPY ETF is that the number of shares
outstanding is limited only by the number of shares available in the
component securities of the S&P 500 Index, which can be used to create
additional SPY ETF shares as needed. This in-kind creation and
redemption mechanism has proven to be quite robust, as evidenced by the
SPY ETF's close tracking of its benchmark index and the relatively
small premiums or discounts to Net Asset Value (``NAV'') that it has
historically exhibited.\29\ Additionally, the ability to hedge with SPX
options against the stocks underlying the S&P 500 is limited to the
shares outstanding for those stocks--the same limit that applies to
hedging with SPY options. Accordingly, the Exchange believes that the
risk of distortions to the market resulting from the elimination of
position limits in SPY options is no greater than the risk presented by
SPX options not being subject to position limits.
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\29\ See SPDR[supreg] S&P 500[supreg] ETF Trust, Annual Report
(September 30, 2011), available at https://www.spdrs.com/librarycontent/public/SPY%20Annual%20Report%2009.30.11.pdf.
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As a physically-settled option, SPY options can be easily hedged
via long or short positions in SPY ETF shares, which, as noted above,
can be easily created or redeemed as needed. With a physically-settled
contract such as SPY options, once a hedge in the form of a long or
short position is obtained, that hedge can only be lost if the
underlying security becomes hard to borrow and the short position is
bought in.\30\ The Exchange believes that this ability to hedge with
shares of the SPY ETF is very important, and reduces the likelihood of
market on close volatility in the component securities underlying the
S&P 500 Index (i.e., a market participant can remain fully hedged
through expiration via shares of the SPY ETF), which should also be the
case if position limits for SPY options are eliminated. At the same
time, the Exchange believes that the elimination of position limits for
SPY options would not increase market volatility or facilitate the
ability to manipulate the market. The Exchange believes that any
potential concern regarding volatility at the closing that could result
from an elimination in the position limits for SPY options is further
alleviated by the current trading environment, including that there are
markets for individual securities on more than one exchange, via
unlisted trading privileges, that there is wide dispersion of trading
across multiple exchanges, and that exchange procedures and systems are
designed to facilitate orderly closings, even when there is volatility.
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\30\ As noted, the in-kind creation and redemption process
allows for short term imbalances in supply and demand to be resolved
readily, which in turn reduces the likelihood of getting ``bought
in'' on a short position in SPY. Since the implementation of
Regulation SHO, SPY has never been on the threshold security list,
which further evidences the efficacy of the in-kind creation and
redemption process in resolving imbalances in supply and demand.
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Pilot Program
The Exchange proposes that this rule change be adopted pursuant to
a pilot program, set to expire November 27, 2013. The Exchange will
perform an analysis of the initial pilot program to eliminate position
limits in SPY after the first twelve (12) months of the pilot program
(the ``Pilot Report''). The Pilot Report will be submitted within
thirty (30) days of the end of such twelve (12) month time period. The
Pilot Report will detail the size and different types of strategies
employed with respect to positions established as a result of the
elimination of position limits in SPY. In addition, the report will
note whether any problems resulted due to the no limit approach and any
other information that may be useful in evaluating the effectiveness of
the pilot program. The Pilot Report will compare the impact of the
pilot program, if any, on the volumes of SPY options and the volatility
in the price of the underlying SPY shares, particularly at expiration.
In preparing the report, the Exchange will utilize various data
elements such as volume and open interest. In addition the Exchange
will make available to Commission staff data elements relating to the
effectiveness of the pilot program. Conditional on the findings in the
Pilot Report, the Exchange will file with the Commission a proposal to
either extend the pilot program, adopt the pilot program on a permanent
basis, or terminate the pilot program. If the pilot program is not
extended or adopted on a permanent basis by November 27, 2013, the
position limits for SPY would revert to limits in effect at the
commencement of the pilot program.
Implementation
In addition to Commission approval, the implementation of this
proposed rule change will be contingent on other factors, including the
completion of any changes that may be necessary to the Exchange's
regulatory and surveillance program. The Exchange will announce the
implementation of the elimination of position limits on SPY options
through a notice to Participants after any Commission notice of
effectiveness regarding this proposed rule change.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\31\ in general, and Section
6(b)(5) of the Act,\32\ in particular, that the rules of an exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and to perfect the mechanism for a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Exchange believes that
the proposed rule change would be beneficial to market participants,
including market makers, institutional investors and retail investors,
by permitting them to establish greater positions when pursuing their
investment goals and needs. The Exchange also believes that
economically equivalent products should be treated in an equivalent
manner so as to avoid regulatory arbitrage, especially with respect to
position limits. Treating SPY and SPX options differently by virtue of
imposing different position limits is inconsistent with the notion of
promoting just and equitable principles of trade and removing
impediments to perfect the mechanisms of a free and open market. At the
same time, the Exchange believes that the elimination of position
limits for SPY options would not increase market volatility or
facilitate the ability to manipulate the market.
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\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
[[Page 60496]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \33\ and Rule 19b-
4(f)(6) thereunder.\34\
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\33\ 15 U.S.C. 78s(b)(3)(A).
\34\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \35\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \36\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay, noting that doing
so will allow the Exchange to remain competitive with other options
exchanges, avoid potential regulatory inconsistencies for Participants
that are also members of NYSE Amex and seamlessly continue to offer
traders and the investing public the ability to use SPY options as an
effective hedging and trading vehicle. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission designates
the proposal operative as of September 27, 2012.\37\
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\35\ 17 CFR 240.19b-4(f)(6).
\36\ 17 CFR 240.19b-4(f)(6).
\37\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BOX-2012-013 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2012-013. 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 Web site (https://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 Web site 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; 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 Number SR-BOX-2012-013 and
should be submitted on or before October 24, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24287 Filed 10-2-12; 8:45 am]
BILLING CODE 8011-01-P
