Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Compression of S&P 500(R) Index Options Positions, 95219-95225 [2016-31102]

Download as PDF Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices to determine whether the proposed rule should be approved or 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ISEGemini–2016–24 on the subject line. Paper Comments asabaliauskas on DSK3SPTVN1PROD with NOTICES • 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–ISEGemini–2016–24. 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– ISEGemini–2016–24 and should be submitted on or before January 17, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016–31117 Filed 12–23–16; 8:45 am] CFR 200.30–3(a)(12). VerDate Sep<11>2014 20:45 Dec 23, 2016 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79610; File No. SR–CBOE– 2016–090] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Compression of S&P 500(R) Index Options Positions December 20, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 15, 2016, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or 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 Exchange. 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 proposes to adopt Rule 6.56 regarding ‘‘compression forums.’’ The text of the proposed rule change is available on the Exchange’s Web site (https://www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, 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 Exchange 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of 2 17 Jkt 241001 the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change BILLING CODE 8011–01–P 1 15 20 17 95219 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00122 Fmt 4703 Sfmt 4703 1. Purpose The Exchange proposes to adopt Rule 6.56 (Compression Forums) to describe the Exchange’s ‘‘compression forum’’ process. Under proposed Rule 6.56, the Exchange would facilitate closing-only transactions in series of S&P 500(R) Index (‘‘SPX’’) options on the final three trading days of each calendar month as described below. Background The Exchange’s proposal is intended to provide a procedure for Trading Permit Holders (‘‘TPHs’’) to efficiently reduce open positions in series of SPX options at the end of each calendar month in order to mitigate the effects of capital constraints on market participants and help ensure continued depth of liquidity in the SPX options market. SEC Rule 15c3–1 (Net Capital Requirements for Brokers or Dealers) (‘‘Net Capital Rules’’) requires that every registered broker-dealer maintain certain specified minimum levels of capital.3 The Net Capital Rules are designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand, at all times, to meet their financial obligations. Notably, hedged positions, including offsetting futures and options contract positions, result in certain net capital requirement reductions under the Net Capital Rules.4 All Options Clearing Corporation (‘‘OCC’’) clearing members are subject to the Net Capital Rules. However, a subset of clearing members are subsidiaries of U.S. bank holding companies, which, due to their affiliations with their parent U.S. bank holding companies, must comply with additional bank regulatory capital requirements pursuant to rulemaking required under the Dodd– Frank Wall Street Reform and Consumer Protection Act.5 Pursuant to this mandate, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation 3 17 CFR 240.15c3–1. addition, the Net Capital Rules permit various offsets under which a percentage of an option position’s gain at any one valuation point is allowed to offset another position’s loss at the same valuation point (e.g. vertical spreads). 5 H.R. 4173 (amending section 3(a) of the Act) (15 U.S.C. 78c(a))). 4 In E:\FR\FM\27DEN1.SGM 27DEN1 95220 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES have approved a comprehensive regulatory capital framework for subsidiaries of U.S. bank holding company clearing firms.6 Generally, these rules impose higher minimum capital requirements, more restrictive capital eligibility standards, and higher asset risk weights than were previously mandated for clearing members that are subsidiaries of U.S. bank holding companies under the Net Capital Rules. Furthermore, the new rules do not permit deductions for hedged securities or offsetting options positions.7 Rather, capital charges under these standards are based on the aggregate notional value of short positions regardless of offsets. As a result, Clearing Trading Permit Holders (‘‘CTPHs’’) generally must hold substantially more bank regulatory capital than would otherwise be required under the Net Capital Rules. The impact of these regulatory capital rules are compounded in the SPX options market due to the large notional value of SPX contracts. The Exchange believes that these regulatory capital requirements could impede efficient use of capital and undermine the critical liquidity role that Market-Makers play in the SPX options market by limiting the amount of capital CTPHs can allocate to clearing member transactions. Specifically, the rules may cause CTPHs to impose stricter position limits on their clearing members. These stricter position limits may impact the liquidity Market-Makers might supply in the SPX market, and this impact may be compounded when a CTPH has multiple Market-Maker client accounts, each having largely risk-neutral portfolio holdings.8 6 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity Risk Measurement Standards). 7 Many options strategies, including relatively simple strategies often used by retail customers and more sophisticated strategies used by marketmakers and institutions, are risk-limited strategies or options spread strategies that employ offsets or hedges to achieve certain investment outcomes. Such strategies typically involve the purchase and sale of multiple options (and may be coupled with purchases or sales of the underlying assets), executed simultaneously as part of the same strategy. In many cases, the potential market exposure of these strategies is limited and defined. Whereas regulatory capital requirements have historically reflected the risk-limited nature of carrying offsetting positions, these positions may now be subject to large regulatory capital requirements. Various factors, including administration costs; transaction fees; and limited market demand or counterparty interest, however, discourage market participants from closing these positions even though many market participants likely would prefer to close the positions rather than carry them to expiration. 8 Several TPHs have indicated to the Exchange that these rules could hamper their ability to provide consistent liquidity in the SPX options market unless they reduce their positions in SPX by the end of the year. VerDate Sep<11>2014 20:45 Dec 23, 2016 Jkt 241001 The Exchange believes that permitting TPHs to reduce open interest in offsetting SPX options positions would have a beneficial effect on the bank regulatory capital requirements of CTPHs’ parent companies without adversely affecting the quality of the SPX options market. Accordingly, the Exchange seeks to codify a process in the rules to encourage the compression of open interest in SPX at the end of each calendar month. The Exchange believes that periodic reductions in open interest would likely contribute additional liquidity and continued competitiveness to the SPX market. In addition, the Exchange believes that the proposed rule change will promote more efficient capital deployment in light of the regulatory capital requirements rules and help ensure depth of liquidity in the SPX options market. Proposal Currently, TPHs seeking to reduce open interest in SPX options for regulatory capital purposes could simply trade out of positions at the end of each month as they would trade any open positions. However, the Exchange believes that wide-scale reduction of open interest in SPX options in such a manner is burdensome. First, the range of positions held by different TPHs in SPX varies greatly. In some cases, a TPH may hold positions in thousands of series of SPX. With no way of efficiently determining whether opposite (long/ short) open interest is present in the trading crowd or whether there is counterparty interest for a particular closing transaction across multiple series, in order to close a position, a TPH would need to represent an order and wait for a response, if any. Second, given that there are more than 10,000 series of SPX held by numerous TPHs, attempting to close positions during normal trading is inefficient and sometimes ineffective. Accordingly, the Exchange proposes to adopt a procedure to facilitate these types of transactions on the Exchange in proposed Rule 6.56. The Exchange believes that its proposal would allow TPHs seeking to close positions in SPX options to more easily identify counterparty interest and efficiently conduct closing transactions in SPX options on the Exchange without interfering with normal SPX trading. In general, the process described in proposed Rule 6.56 would permit TPHs to submit lists of open positions to the Exchange that they wish to close against opposing (long/short) positions of other TPHs, which the Exchange would then aggregate into a single list that would allow TPHs to more easily identify those PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 positions with counterparty interest on the Exchange. The Exchange would then provide a forum in the SPX trading crowd during which TPHs could conduct closing-only transactions in series of SPX options. The procedure for conducting a compression forum would be set forth in paragraph (a) to proposed Rule 6.56. Under paragraph (a)(1), prior to the close of Regular Trading Hours on the fourth to last business day of each calendar month, in a manner and format determined by the Exchange, a TPH could provide the Exchange with a list of open SPX options positions with either a required capital charge equal to the minimum capital charge pursuant to the risk-based haircut (‘‘RBH’’) calculator in OCC’s rules 9 or comprised of option series with a delta of ten 10 (i.e. 9 Under OCC rules, the required capital charge is equal to either the minimum capital charge or an amount equal to the largest potential loss pursuant to OCC’s RBH calculator. The RBH methodology may be used to calculate theoretically based capital charges as set forth within the SEC net capital rule https://apps.theocc.com/pmc/pmc.do. For example, a Market-Maker has the following eight-leg position: Long 1000 Jan 1000 SPX calls, short 1000 Jan 2000 SPX calls, short 842 Jan 2500 SPX calls, short 89 Jan 2600 SPX calls, long 200 Jan 700 puts, short 200 Jan 750 SPX puts, short 1000 Jan 1000 SPX puts, and long 1000 Jan 2000 SPX puts. Under OCC rules, the minimum capital charge for this position is $128,435. Using the RBH calculator, there is no potential loss that is greater than this amount; in fact, under each of the 10 equidistant theoretical valuation points of the underlying index, this strategy would net a profit. Therefore, the clearing firm incurs a charge of $128,435. However, as the RBH calculator values demonstrate, this is essentially a riskless position for which there is a minimal chance that a theoretical loss of $128,435 could ever occur. Therefore, this position is eligible for submission to the Exchange as a compressionlist position, because the OCC theoretical minimum capital charge is larger than any potential loss that may result within the range of an 8% decrease to a 6% increase in the underlying index value. Alternatively, a Market-Maker has the following five-leg strategy position: Short 892 Jan 1400 SPX calls, short 80 Jan 1500 SPX calls, long 200 Jan 1950 SPX puts, short 200 Jan 2000 SPX puts, and long 165 Jan 2100 SPX puts. Under OCC rules, the minimum capital charge for this position is $38,425. Using the RBH calculator, an increase in the underlying index value of 6% could cause this position to lose $12,801,718 (which is the highest potential loss under each of the 10 equidistant theoretical valuation points of the underlying index). Because this potential loss is larger than the theoretical minimum charge, the actual capital requirement is this amount of $12,801,718. This position is therefore not eligible for submission to the Exchange as a compression-list position, as there is a risk of a potential large loss on this position. 10 Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1, the option will rise by $0.65, all else equal. Delta values can be positive or negative depending on the type of option. For example, the delta for a call option always ranges from 0 to 1, because as the underlying asset increases in price, call options increase in price. Put option deltas always range E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES 0.1 or ¥0.1) or less that it would like to close during the compression forum for that calendar month (‘‘compressionlist positions’’). Compression-list positions may consist of multi-legged positions in series of SPX options, which satisfy the conditions set forth in this paragraph of the proposed rule. The Exchange proposes to limit compression-list positions to those positions, the closing of which the Exchange believes would have the greatest impact on bank regulatory capital requirements and which also have little economic risk associated with them.11 The Exchange believes compression of these positions would improve market liquidity by freeing capital currently tied up in positions for which there is a minimal chance that a significant loss would occur.12 Under paragraph (a)(1) to proposed Rule 6.56, TPHs may also permit their CTPHs or the Clearing Corporation to submit a list of these positions to the Exchange on their behalf.13 The Exchange recognizes that a CTPH or OCC may more easily identify all of the positions that are held across a TPH firm as well as those that will have the largest impact with respect to regulatory capital reductions. The Exchange believes that such assistance would help to facilitate the compression forum process further. Under paragraph (a)(2) of proposed Rule 6.56, prior to the open of Regular Trading Hours on the third to last business day of each calendar month, the Exchange would make available 14 to all TPHs an aggregate two-sided (long/ short) list of compression-list positions for which open interest has been submitted to the Exchange on both sides pursuant to paragraph (a)(1), including from ¥1 to 0 because as the underlying security increases, the value of put options decrease. For example, if a put option has a delta of ¥0.33, if the price of the underlying asset increases by $1, the price of the put option will decrease by $0.33. Generally speaking, an at-the-money option usually has a delta of approximately 0.5 or ¥0.5. 11 As further discussed below, positions on this list as well as other open SPX positions may be closed during a compression forum. 12 This definition of compression-list positions is similar to the transaction fee rebate described in SR–CBOE–2015–117, which was adopted for reasons similar to those underlying this proposal. See Securities Exchange Act Release No. 76842 (January 6, 2016), 81 FR 1455 (January 12, 2016) (Notice of Filing and Immediate Effectiveness of a Proposed Rule To Amend the Fees Schedule) (SR– CBOE–2015–117). 13 The Exchange notes that while CTPHs may request that their clients holding the out-of-themoney and riskless positions permit the CTPHs to attempt to close these positions out, firms are not required to do so (i.e., these transactions are voluntary and within the discretion of the CTPHs’ clients). 14 The Exchange expects to publish this list on its Web site. VerDate Sep<11>2014 20:45 Dec 23, 2016 Jkt 241001 the aggregate size of open interest on each side of each series (‘‘compressionlist positions file’’).15 This aggregate two-sided list may also include multilegged positions of SPX options with opposite open interest submitted to the Exchange according to the parameters described in paragraph (a)(1) to proposed Rule 6.56. This would allow the Exchange to identify multi-leg strategy orders with opposing interest of particular TPHs in the various series of the strategy (e.g. vertical spreads, calendar spreads, butterflies, iron condors). The Exchange believes that a list containing such multi-leg or complex positions may help facilitate a more efficient forum by facilitating closing transactions in multiple series at a time. Under paragraph (a)(3) to proposed Rule 6.56, in addition to making the compression-list positions file available to all TPHs, the Exchange would electronically send the compression-list positions file to the TPHs that submitted compression-list positions to the Exchange pursuant to paragraph (a)(1), including a list of those TPHs that contributed to the compression-list positions file. The list will not include the name of any TPH that requests its name be excluded from this list. Pursuant to paragraph (a)(3), TPHs would be identified as having contributed to the list only and would not be identified as holding any specific position. The Exchange believes this process to identify TPHs that seek to close compression-list positions in advance of a compression forum will increase opportunities for TPHs to ultimately close compression-list positions during a compression forum while, at the same time, providing the opportunity for anonymity. TPHs that do not want to be listed as having contributed compression-list positions may inform the Exchange and will not be included in the listed TPHs. Under paragraph (a)(4) of proposed Rule 6.56, the Exchange would conduct an open outcry ‘‘compression forum’’ in which all TPHs may participate 16 on each of the last three business days of every calendar month at a location on the trading floor determined by the Exchange. Compression forums would be held for four (4) hours during Regular Trading Hours on each of the last three business days of every calendar month, or three (3) hours if any of those days is an abbreviated trading day (such as 15 This list would not identify which TPH holds these positions. 16 As compression forums will be conducted in open outcry, TPHs that may participate include Floor Brokers and Market-Makers with SPX appointments. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 95221 the day before a holiday), at times determined by the Exchange. All such notices would be provided to TPHs reasonably in advance of any forum as announced via Regulatory Circular in accordance with paragraph (d) to proposed Rule 6.56 discussed below. The Exchange believes that multiple hours across multiple trading days will allow TPHs to close as many positions as possible during this process without interfering with normal SPX trading. In some cases, an appropriate counterparty may not be present in the crowd at [sic] particular time on a particular day when a TPH with an opposite position represents the position in the crowd. In other cases, a TPH may wish to break up a complex order into single legs after trying unsuccessfully to close the multileg positions or may have residual positions that could not be closed in full. Additionally, news may be reported causing a high amount of activity preventing TPHs for [sic] participating in the forum at certain times. The Exchange believes that the three-day format will provide TPHs sufficient time to close these positions in a forum without interfering with normal trading. Under paragraph (b) of proposed Rule 6.56, trades executed during compression forums would be subject to trading rules applicable to trading in SPX during Regular Trading Hours, including manner of bids and offers and allocation and priority rules, except: (1) Only closing transactions in SPX options (including compression-list positions) may be executed during a compression forum; and (2) the minimum increment for all series will be $0.01 during a compression forum. In other words, although trades executed during a compression forum may only be closing transactions and may be in penny increments within a specified timeframe and at a specific location on the trading floor, trades executing during a compression forum will occur in the same manner as all other open outcry SPX trades, including in accordance with systemization requirements under Rule 6.24, and order allocation and priority rules under Rule 6.45B(b). The purpose of the compression forum would simply be to facilitate closing transactions in series of SPX options so that TPHs would have the opportunity to free up capital and eliminate riskless and low delta positions that they may otherwise hold until expiration. Notably, TPHs would not be required to submit a list of positions to the Exchange pursuant to paragraph (a)(1) in order to participate in a compression forum, and positions SPX series other E:\FR\FM\27DEN1.SGM 27DEN1 95222 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices than compression-list positions may be closed during a compression forum, as long as it involves only closing transactions. The compression forums will be limited to closing only transactions, because if opening transactions were permitted during a compression forum, it would defeat the purpose of the proposed rule, which is to encourage the closing of positions that are creating high bank regulatory capital requirements, often with positions that are of low economic benefit and risk and could otherwise be offset. Similarly, the minimum increment for series traded during a compression forum will be $0.01 to further encourage closing of these positions. Because many series the Exchange expects to trade during the compression forum will be out-of-themoney, and essentially worthless, TPHs may not otherwise close positions in these series if a higher minimum increment causes the price to be too much higher than the option’s value. Under paragraph (c) to proposed Rule 6.56, and as noted above in the example, TPHs would be permitted to communicate with other TPHs to determine: A TPH’s open single-legged or multi-legged SPX positions and/or (2) whether a TPH anticipates participating in a compression forum at a particular date and time. During these communications, TPHs may not discuss the price of a potential transaction involving these positions during a compression forum. Trades executed during a compression forum pursuant to proposed Rule 6.56 and otherwise in compliance with the Rules would not be deemed prearranged trades in violation of the Rules.17 The purpose of the compression forum process is to facilitate closing transactions in series of SPX options between counterparties holding opposite open positions. The proposed rule is intended to help counterparties find one another so they can more efficiently trade out of open positions at the end of each calendar month. Communications between one another as to what positions they hold and when they will be available to potentially trade out of such positions will provide this efficiency and increase opportunities for TPHs to close these positions. Without communications regarding these logistics, it would be left to chance whether TPH with opposite positions would be present to close those positions during a compression forum, making it more difficult to close these positions. As long as communications are limited to which positions are held and timing of participation in a compression forum and do not include discussions of other elements of a potential trade, such as the price, the Exchange would not deem such communications to form the basis of a prearranged trade. The Exchange notes again all orders placed during a compression forum must be represented in the crowd and executed against the best responsive bid or offer, as they would during normal trading. Additionally, as noted above, all TPHs that are able to trade SPX on the trading floor may participate in a compression forum in accordance with the proposed procedure. TPHs participating in a compression forum must continue to comply with all other trading rules. Finally, paragraph (d) to proposed Rule 6.56 states the Exchange will announce to TPHs determinations it Market participant asabaliauskas on DSK3SPTVN1PROD with NOTICES XYZ XYZ XYZ XYZ XYZ XYZ XYZ XYZ XYZ TRADING TRADING TRADING TRADING TRADING TRADING TRADING TRADING TRADING Symbol ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... 17 Under Section 9(a)(1) of the Act, it shall be unlawful for any member of a national securities exchange, for the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange or a false or misleading appearance with respect to the market for any such security, (A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders VerDate Sep<11>2014 20:45 Dec 23, 2016 Jkt 241001 SPXW SPXW SPX SPX SPXW SPXW SPXW SPXW SPXW Expiration date Frm 00125 Fmt 4703 Sfmt 4703 Strike 12/30/2016 12/30/2016 1/20/2017 1/20/2017 1/8/2016 1/8/2016 1/8/2016 12/30/2016 12/30/2016 of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties. Prearranged trading could result in also result in [sic] a violation of CBOE Rule 4.1, which prohibits conduct inconsistent with just and equitable principles of trade, Rule 6.45A or 6.45B which addresses the priority of bids and offers, and/or Rule 10b–5 of the Act, which prohibits any act, practice or course of business which operates or PO 00000 makes pursuant to the proposed rule via Regulatory Circular with reasonable notice. The following is an example of how the compression forum process would work under paragraph (a) of proposed Rule 6.56. On December 20, 2016, the Exchange issues a regulatory circular stating a compression forum will be held on December 28 and 29 between 10:00 a.m. and 2:00 p.m. each day, and on December 30 between 9:00 a.m. and 12:00 p.m. The circular and [sic] invites all TPHs to submit a password protected .CSV file containing SPX positions with either a required capital charge equal to the minimum capital charge under Clearing Corporation rules risk-based haircut calculator and/or positions in series of SPX options with a delta of ten (10) or less via email with appropriate security measures containing the following fields: MARKET PARTICIPANT; SYMBOL, EXPIRATION DATE, STRIKE, CALL/ PUT (either call or put), and SIZE (negative size denoting short size). The circular notes that all submissions must be received by the Exchange no later than December 27, 2016 at 3:15 p.m. Additionally, the circular notes a TPH should state in its email to CBOE if it does not want its name with the other submitting TPHs. Additionally, each submitting TPH must designate a point person. Prior to 3:15 p.m. on December 27, 2016, the Exchange receives the following .CSV files: XYZ closing postions.csv; ABC closing trades.csv; and 123 compression.csv.18 1500 1505 1610 1700 1800 1850 1900 2350 2460 Call/ put C P P P C C C C C Size ¥125 25 ¥75 ¥166 250 500 250 ¥652 ¥1425 would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security, respectively. See Regulatory Circular RG16–190 (Prearranged Trades) (December 6, 2016). 18 For purposes of this example, it is assumed that all the positions submitted to the Exchange by XYZ Trading, ABC Trading, and 123 Trading are either positions with a delta of ten or less or positions with a required capital charge equal to the minimum capital charge under the risk-based haircut calculator in the Clearing Corporation rules. E:\FR\FM\27DEN1.SGM 27DEN1 95223 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices Market participant ABC ABC ABC ABC ABC ABC TRADING TRADING TRADING TRADING TRADING TRADING Symbol ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... ................................................................................... SPXW SPXW SPX SPXW SPXW SPX Market participant 123 123 123 123 123 123 123 123 123 TRADING TRADING TRADING TRADING TRADING TRADING TRADING TRADING TRADING Symbol .................................................................................... .................................................................................... .................................................................................... .................................................................................... .................................................................................... .................................................................................... .................................................................................... .................................................................................... .................................................................................... The email identify the following point people: XYZ Trading Firm—John Smith; ABC Trading Firm—Jane Doe; and 123 Trading Company—Sam Jones. No TPH requests to remain anonymous. Expiration date ...................................................... ...................................................... ...................................................... ...................................................... ...................................................... ...................................................... ...................................................... Market participants asabaliauskas on DSK3SPTVN1PROD with NOTICES 1500 1610 1800 1850 1850 1900 2350 2460 2500 C P C P C C P C P Size 50 ¥105 ¥200 ¥400 ¥107 ¥200 ¥62 25 ¥300 the Exchange. Additionally, it distributes the list, as well as the TPHs that submitted individual position lists, to those TPHs: Call/ put Strike 1500 1505 1800 1850 1900 2350 2460 Long size C P C P C P C 50 25 250 500 250 0 347 Short size ¥201 ¥105 ¥200 ¥400 ¥200 ¥62 ¥1425 John Smith Jane Doe Sam Jones Following the dissemination of the .CSV file, TPHs discuss the positions included in the disseminated .CSV file with the designated leads in order to determine when each intended to participate in an upcoming compression forum. Each TPH coordinates with another TPH that holds an opposite position when they will be present at one of the upcoming compression forums. During the compression forums held on December 28 through 30, these three TPHs conducted the following trades: 19 19 This example assumes: (1) No customer orders are on the book at the same or better price of the compression forum transaction; (2) if two TPHs respond to an order represented in the compression forum, they do so at the same price and time and, thus, the order is allocated equally among them; and (3) no other TPHs enter the compression forum to attempt to participate in the trades. 20:45 Dec 23, 2016 12/30/2016 1/20/2017 1/8/2016 1/8/2016 2/17/2017 1/8/2016 12/30/2016 12/30/2016 12/30/2017 ¥76 ¥105 ¥166 ¥62 322 ¥50 C P P C C P Call/ put Strike Size Designated lead XYZ TRADING ........................................ ABC TRADING ........................................ 123 TRADING ......................................... VerDate Sep<11>2014 1500 1505 1850 2350 2460 2500 Expiration date 12/30/2016 .............................................. 12/30/2016 .............................................. 1/8/2016 .................................................. 1/8/2016 .................................................. 1/8/2016 .................................................. 12/30/2016 .............................................. 12/30/2016 .............................................. Call/ put Strike 12/30/2016 12/30/2016 2/17/2017 12/30/2016 12/30/2016 2/17/2017 The Exchange then aggregates the closing positions and publishes the aggregated position data on its Web site for series of SPX options with two-sided compression-list positions submitted to Symbol SPXW SPXW SPXW SPXW SPXW SPXW SPXW SPXW SPX SPXW SPXW SPX SPXW SPXW SPXW SPXW Expiration date Jkt 241001 1. 123 Trading sells 25 SPXW 12/30/ 16 1500 C to each of ABC Trading and XYZ Trading. 2. XYZ Trading sells 25 SPXW 12/30/ 16 1505 P to ABC Trading. 3. XYZ Trading sells 200 butterflies consisting of 200 SPXW 1/8/2016 1800 C, 400 SPXW 1/8/2016 1850 C, and 200 SPXW 1/8/16 1900 C to 123 Trading. 4. 123 Trading sells 12 SPXW 12/30/ 2016 2460 C to each of ABC Trading and XYZ Trading (and the parties determine which of ABC Trading and XYZ Trading receive the extra contract). 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 Section 6(b) of the Act.20 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 21 requirements that the rules of an exchange be 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. Additionally, the Exchange believes the proposed rule change is consistent with 20 15 21 15 E:\FR\FM\27DEN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 27DEN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES 95224 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices the Section 6(b)(5) 22 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes the proposed rule change is reasonable, equitable, and does not unfairly discriminate against any market participants. The Exchange notes that all TPHs with open SPX positions may participate in a compression forum in accordance with the proposed procedure. Other market participants with open SPX positions may participate through CBOE floor brokers, as they would for any other SPX trading. Participation in compression forums, as well as advanced submission of compression-list positions, is optional, and TPHs may continue to attempt to trade open SPX positions during normal trading. The Exchange believes it is reasonable, equitable and not unfairly discriminatory to limit compression-list positions to certain riskless and low delta positions and trading in compression forums to closing only transactions because these types of positions and transactions will result in large bank regulatory capital requirements impacts for CTPHs even though there is minimal chance for large losses to occur. The Exchange notes that if opening transactions were permitted during a compression forum, it would defeat the purpose of the proposed rule, which is to encourage the closing of positions that are creating high bank regulatory capital requirements, often with positions that are of low economic benefit and risk and could otherwise be offset. The Exchange notes that there are other circumstances involving liquidity concerns in which the Exchange limits transactions in particular securities to closing only transactions. For example, the Exchange [sic] transactions in restricted option classes to [sic] closing only (subject to certain exceptions).23 Additionally, cabinet trades are limited to closing only (subject to certain exceptions).24 Similarly, the minimum increment for series traded during a compression forum will be $0.01 to further encourage closing of these positions. Because many series the Exchange expects to trade during the compression forum will be out-of-themoney, and essentially worthless, TPHs may not otherwise close positions in these series if a higher minimum increment causes the price to be too much higher than the option’s value. 22 Id. 23 See 24 See Rule 5.4. Rule 6.54. VerDate Sep<11>2014 20:45 Dec 23, 2016 Jkt 241001 In addition, the Exchange believes it’s reasonable, equitable and not unfairly discriminatory to limit the compression forum process to SPX options (including SPXW and SPXPM) because SPX has a substantially higher notional value than other options classes. As such, open interest in SPX has a much greater effect on a bank’s regulatory capital requirements. Compressing out-of-themoney and riskless SPX option positions therefore has a greater impact on reducing a bank regulatory capital requirement. Furthermore, the Exchange believes that its proposal is consistent with the Act in that it seeks to mitigate the potentially negative effects of the bank capital requirements on liquidity in the SPX options market. As described above, the Exchange believes that the new regulatory capital requirements could potentially impede efficient use of capital and undermine the critical liquidity role that Market-Makers play in the SPX options market by limiting the amount of capital CTPHs an [sic] allocate to clearing member transactions. Specifically, the rules may cause CTPHs to impose stricter position limits on their clearing members. In turn, this could force Market-Makers to reduce the size of their quotes in SPX and result in reduced liquidity in the market. The Exchange believes that permitting TPHs to reduce open interest in offsetting SPX options positions would likely contribute to the availability of liquidity in the SPX options market and help ensure that the SPX options market retains its competitive balance. The Exchange believes that the proposed rule would serve to protect investors by helping to ensure consistent continued depth of liquidity in the SPX options market. The Exchange also believes the proposed rule change is consistent with the Act, because the proposed procedure is consistent with its current rules. The proposed rule would direct that all trading during compression forums be conducted in accordance with normal SPX trading rules and thus, all transactions that would occur during compression forums would occur in the same manner as transactions during normal SPX trading, except transactions must be closing only and may be in penny increments. This process is narrowly tailored for a for [sic] the specific purpose of facilitating the closing of positions in the SPX options market, which the Exchange believes will serve to protect investors by helping to ensure continued depth of liquidity in the SPX options market. The Exchange also notes the proposed provisions regarding the position lists PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 are optional procedures to help facilitate compression transactions. Submission of lists of positions for compression is completely voluntary, open to all TPHs, and non-binding, in that submission of a list does not require a TPH to trade any position or even represent any position in a trading crowd. Furthermore, the list of positions will be made available to all market participants and contain very limited information regarding open interest in positions in SPX. The list will not advantage or disadvantage any TPH, but rather simply alert TPHs to certain SPX positions that other TPHs are interested in closing at the end of each calendar month. 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 intramarket competition that is not necessary or appropriate in furtherance of the Act because it applies to all market participants in the same manner with positions that meet the eligible criteria. The proposed change would encourage the closing of positions that needlessly result in burdensome capital requirements, which, once closed, would alleviate the capital requirement constraints on TPHs and improve overall market liquidity by freeing capital currently tied up in certain unwanted SPX positions. The Exchange does not believe that the proposed rule changes will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed rule change applies only to the trading of SPX options, which are exclusively-listed on CBOE. To the extent that the proposed changes make the Exchange a more attractive marketplace for market participants at other exchanges, such market participants are welcome to become CBOE market participants. Furthermore, as stated in Item 3(b) above, submission of lists of positions for compression is completely voluntary, open to all TPHs, and nonbinding, in that submission of a list does not require a TPH to trade any position or even represent any position in a trading crowd. Lists of positions will be made available to all TPHs and contain very limited information regarding open interest in positions in SPX. The list will simply alert TPHs to certain SPX positions that other TPHs are interested in closing at the end of each calendar month. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received written comments on the proposed rule change. asabaliauskas on DSK3SPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 25 and Rule 19b–4(f)(6) thereunder.26 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, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder. The Exchange has asked the Commission to waive the 30-day operative delay to allow the compression forum process to begin in December 2016 and trading to take place on the final three days of trading in 2016. The Exchange stated that it is requesting this waiver because it believes that bank capital requirements will have substantial adverse consequences on some CTPHs if TPHs are not able to sufficiently reduce their open interest in SPX by the end of the year. The Exchange understands that bank-imposed capital limits for TPHs, measured at the end of the year and based on the aggregate notional value of short positions regardless of offsets, may impact CTPHs and the firms for which they clear depending on the open interest they hold. CBOE believes, as it explained above, that the impact of these rules uniquely affects the SPX options market due to the large notional value of SPX contracts. In response, CTPHs may impose stricter position limits on the firms for which they clear and, to the extent they do so, it may effectively limit the amount of liquidity that some TPHs, notably Market-Makers, 25 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of 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. 26 17 VerDate Sep<11>2014 20:45 Dec 23, 2016 Jkt 241001 will be able to provide in SPX options. The Exchange believes that it is in the best interest of investors to use this new compression forum process to help foster continued liquidity in the SPX options market by allowing firms to free up capital by finding opportunities to trade out of relatively worthless positions. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because this waiver will enable the Exchange to hold compression forums for SPX options prior to the end of the year, thereby helping to facilitate transactions and remove impediments to year-end trading in SPX options, through a limited process designed to protect investors and the public interest. The Commission notes that CBOE’s compression forum rule is limited in its application, involves no material changes to how trading is conducted on the Exchange, creates a process in which participation is voluntary and open to all, and is provided as a means to help Market Makers and other market participants, as well as their clearing brokers, avoid the need to limit their activities as a result of out-of-the-money positions on SPX options that such firms wish to exit. For this reason, the Commission hereby waives the 30-day operative delay requirement and designates the proposed rule change as operative upon filing.27 At any time within 60 days of the filing of such 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. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 28 of the Act to determine whether the proposed rule change should be approved or 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2016–090 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2016–090. 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 such 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– 2016–090, and should be submitted on or before January 17, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016–31102 Filed 12–23–16; 8:45 am] BILLING CODE 8011–01–P 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). 28 15 U.S.C. 78s(b)(2)(B). 27 For PO 00000 Frm 00128 Fmt 4703 Sfmt 9990 95225 29 17 E:\FR\FM\27DEN1.SGM CFR 200.30–3(a)(12). 27DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Notices]
[Pages 95219-95225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31102]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79610; File No. SR-CBOE-2016-090]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Compression of S&P 500(R) Index
Options Positions

December 20, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 15, 2016, Chicago Board Options Exchange, Incorporated
(``CBOE'' or 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 Exchange.
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\ 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 adopt Rule 6.56 regarding ``compression
forums.'' The text of the proposed rule change is available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, 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 Exchange 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 Exchange 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to adopt Rule 6.56 (Compression Forums) to
describe the Exchange's ``compression forum'' process. Under proposed
Rule 6.56, the Exchange would facilitate closing-only transactions in
series of S&P 500(R) Index (``SPX'') options on the final three trading
days of each calendar month as described below.
Background
The Exchange's proposal is intended to provide a procedure for
Trading Permit Holders (``TPHs'') to efficiently reduce open positions
in series of SPX options at the end of each calendar month in order to
mitigate the effects of capital constraints on market participants and
help ensure continued depth of liquidity in the SPX options market.
SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers)
(``Net Capital Rules'') requires that every registered broker-dealer
maintain certain specified minimum levels of capital.\3\ The Net
Capital Rules are designed to protect securities customers,
counterparties, and creditors by requiring that broker-dealers have
sufficient liquid resources on hand, at all times, to meet their
financial obligations. Notably, hedged positions, including offsetting
futures and options contract positions, result in certain net capital
requirement reductions under the Net Capital Rules.\4\
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\3\ 17 CFR 240.15c3-1.
\4\ In addition, the Net Capital Rules permit various offsets
under which a percentage of an option position's gain at any one
valuation point is allowed to offset another position's loss at the
same valuation point (e.g. vertical spreads).
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All Options Clearing Corporation (``OCC'') clearing members are
subject to the Net Capital Rules. However, a subset of clearing members
are subsidiaries of U.S. bank holding companies, which, due to their
affiliations with their parent U.S. bank holding companies, must comply
with additional bank regulatory capital requirements pursuant to
rulemaking required under the Dodd-Frank Wall Street Reform and
Consumer Protection Act.\5\ Pursuant to this mandate, the Board of
Governors of the Federal Reserve System, the Office of the Comptroller
of the Currency, and the Federal Deposit Insurance Corporation

[[Page 95220]]

have approved a comprehensive regulatory capital framework for
subsidiaries of U.S. bank holding company clearing firms.\6\ Generally,
these rules impose higher minimum capital requirements, more
restrictive capital eligibility standards, and higher asset risk
weights than were previously mandated for clearing members that are
subsidiaries of U.S. bank holding companies under the Net Capital
Rules. Furthermore, the new rules do not permit deductions for hedged
securities or offsetting options positions.\7\ Rather, capital charges
under these standards are based on the aggregate notional value of
short positions regardless of offsets. As a result, Clearing Trading
Permit Holders (``CTPHs'') generally must hold substantially more bank
regulatory capital than would otherwise be required under the Net
Capital Rules. The impact of these regulatory capital rules are
compounded in the SPX options market due to the large notional value of
SPX contracts.
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\5\ H.R. 4173 (amending section 3(a) of the Act) (15 U.S.C.
78c(a))).
\6\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards).
\7\ Many options strategies, including relatively simple
strategies often used by retail customers and more sophisticated
strategies used by market-makers and institutions, are risk-limited
strategies or options spread strategies that employ offsets or
hedges to achieve certain investment outcomes. Such strategies
typically involve the purchase and sale of multiple options (and may
be coupled with purchases or sales of the underlying assets),
executed simultaneously as part of the same strategy. In many cases,
the potential market exposure of these strategies is limited and
defined. Whereas regulatory capital requirements have historically
reflected the risk-limited nature of carrying offsetting positions,
these positions may now be subject to large regulatory capital
requirements. Various factors, including administration costs;
transaction fees; and limited market demand or counterparty
interest, however, discourage market participants from closing these
positions even though many market participants likely would prefer
to close the positions rather than carry them to expiration.
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The Exchange believes that these regulatory capital requirements
could impede efficient use of capital and undermine the critical
liquidity role that Market-Makers play in the SPX options market by
limiting the amount of capital CTPHs can allocate to clearing member
transactions. Specifically, the rules may cause CTPHs to impose
stricter position limits on their clearing members. These stricter
position limits may impact the liquidity Market-Makers might supply in
the SPX market, and this impact may be compounded when a CTPH has
multiple Market-Maker client accounts, each having largely risk-neutral
portfolio holdings.\8\
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\8\ Several TPHs have indicated to the Exchange that these rules
could hamper their ability to provide consistent liquidity in the
SPX options market unless they reduce their positions in SPX by the
end of the year.
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The Exchange believes that permitting TPHs to reduce open interest
in offsetting SPX options positions would have a beneficial effect on
the bank regulatory capital requirements of CTPHs' parent companies
without adversely affecting the quality of the SPX options market.
Accordingly, the Exchange seeks to codify a process in the rules to
encourage the compression of open interest in SPX at the end of each
calendar month. The Exchange believes that periodic reductions in open
interest would likely contribute additional liquidity and continued
competitiveness to the SPX market. In addition, the Exchange believes
that the proposed rule change will promote more efficient capital
deployment in light of the regulatory capital requirements rules and
help ensure depth of liquidity in the SPX options market.
Proposal
Currently, TPHs seeking to reduce open interest in SPX options for
regulatory capital purposes could simply trade out of positions at the
end of each month as they would trade any open positions. However, the
Exchange believes that wide-scale reduction of open interest in SPX
options in such a manner is burdensome. First, the range of positions
held by different TPHs in SPX varies greatly. In some cases, a TPH may
hold positions in thousands of series of SPX. With no way of
efficiently determining whether opposite (long/short) open interest is
present in the trading crowd or whether there is counterparty interest
for a particular closing transaction across multiple series, in order
to close a position, a TPH would need to represent an order and wait
for a response, if any. Second, given that there are more than 10,000
series of SPX held by numerous TPHs, attempting to close positions
during normal trading is inefficient and sometimes ineffective.
Accordingly, the Exchange proposes to adopt a procedure to facilitate
these types of transactions on the Exchange in proposed Rule 6.56. The
Exchange believes that its proposal would allow TPHs seeking to close
positions in SPX options to more easily identify counterparty interest
and efficiently conduct closing transactions in SPX options on the
Exchange without interfering with normal SPX trading.
In general, the process described in proposed Rule 6.56 would
permit TPHs to submit lists of open positions to the Exchange that they
wish to close against opposing (long/short) positions of other TPHs,
which the Exchange would then aggregate into a single list that would
allow TPHs to more easily identify those positions with counterparty
interest on the Exchange. The Exchange would then provide a forum in
the SPX trading crowd during which TPHs could conduct closing-only
transactions in series of SPX options.
The procedure for conducting a compression forum would be set forth
in paragraph (a) to proposed Rule 6.56. Under paragraph (a)(1), prior
to the close of Regular Trading Hours on the fourth to last business
day of each calendar month, in a manner and format determined by the
Exchange, a TPH could provide the Exchange with a list of open SPX
options positions with either a required capital charge equal to the
minimum capital charge pursuant to the risk-based haircut (``RBH'')
calculator in OCC's rules \9\ or comprised of option series with a
delta of ten \10\ (i.e.

[[Page 95221]]

0.1 or -0.1) or less that it would like to close during the compression
forum for that calendar month (``compression-list positions'').
Compression-list positions may consist of multi-legged positions in
series of SPX options, which satisfy the conditions set forth in this
paragraph of the proposed rule. The Exchange proposes to limit
compression-list positions to those positions, the closing of which the
Exchange believes would have the greatest impact on bank regulatory
capital requirements and which also have little economic risk
associated with them.\11\ The Exchange believes compression of these
positions would improve market liquidity by freeing capital currently
tied up in positions for which there is a minimal chance that a
significant loss would occur.\12\
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\9\ Under OCC rules, the required capital charge is equal to
either the minimum capital charge or an amount equal to the largest
potential loss pursuant to OCC's RBH calculator. The RBH methodology
may be used to calculate theoretically based capital charges as set
forth within the SEC net capital rule https://apps.theocc.com/pmc/pmc.do. For example, a Market-Maker has the following eight-leg
position: Long 1000 Jan 1000 SPX calls, short 1000 Jan 2000 SPX
calls, short 842 Jan 2500 SPX calls, short 89 Jan 2600 SPX calls,
long 200 Jan 700 puts, short 200 Jan 750 SPX puts, short 1000 Jan
1000 SPX puts, and long 1000 Jan 2000 SPX puts. Under OCC rules, the
minimum capital charge for this position is $128,435. Using the RBH
calculator, there is no potential loss that is greater than this
amount; in fact, under each of the 10 equidistant theoretical
valuation points of the underlying index, this strategy would net a
profit. Therefore, the clearing firm incurs a charge of $128,435.
However, as the RBH calculator values demonstrate, this is
essentially a riskless position for which there is a minimal chance
that a theoretical loss of $128,435 could ever occur. Therefore,
this position is eligible for submission to the Exchange as a
compression-list position, because the OCC theoretical minimum
capital charge is larger than any potential loss that may result
within the range of an 8% decrease to a 6% increase in the
underlying index value. Alternatively, a Market-Maker has the
following five-leg strategy position: Short 892 Jan 1400 SPX calls,
short 80 Jan 1500 SPX calls, long 200 Jan 1950 SPX puts, short 200
Jan 2000 SPX puts, and long 165 Jan 2100 SPX puts. Under OCC rules,
the minimum capital charge for this position is $38,425. Using the
RBH calculator, an increase in the underlying index value of 6%
could cause this position to lose $12,801,718 (which is the highest
potential loss under each of the 10 equidistant theoretical
valuation points of the underlying index). Because this potential
loss is larger than the theoretical minimum charge, the actual
capital requirement is this amount of $12,801,718. This position is
therefore not eligible for submission to the Exchange as a
compression-list position, as there is a risk of a potential large
loss on this position.
\10\ Delta is the ratio comparing the change in the price of the
underlying asset to the corresponding change in the price of a
derivative. For example, if a stock option has a delta value of
0.65, this means that if the underlying stock increases in price by
$1, the option will rise by $0.65, all else equal. Delta values can
be positive or negative depending on the type of option. For
example, the delta for a call option always ranges from 0 to 1,
because as the underlying asset increases in price, call options
increase in price. Put option deltas always range from -1 to 0
because as the underlying security increases, the value of put
options decrease. For example, if a put option has a delta of -0.33,
if the price of the underlying asset increases by $1, the price of
the put option will decrease by $0.33. Generally speaking, an at-
the-money option usually has a delta of approximately 0.5 or -0.5.
\11\ As further discussed below, positions on this list as well
as other open SPX positions may be closed during a compression
forum.
\12\ This definition of compression-list positions is similar to
the transaction fee rebate described in SR-CBOE-2015-117, which was
adopted for reasons similar to those underlying this proposal. See
Securities Exchange Act Release No. 76842 (January 6, 2016), 81 FR
1455 (January 12, 2016) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule To Amend the Fees Schedule) (SR-
CBOE-2015-117).
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Under paragraph (a)(1) to proposed Rule 6.56, TPHs may also permit
their CTPHs or the Clearing Corporation to submit a list of these
positions to the Exchange on their behalf.\13\ The Exchange recognizes
that a CTPH or OCC may more easily identify all of the positions that
are held across a TPH firm as well as those that will have the largest
impact with respect to regulatory capital reductions. The Exchange
believes that such assistance would help to facilitate the compression
forum process further.
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\13\ The Exchange notes that while CTPHs may request that their
clients holding the out-of-the-money and riskless positions permit
the CTPHs to attempt to close these positions out, firms are not
required to do so (i.e., these transactions are voluntary and within
the discretion of the CTPHs' clients).
---------------------------------------------------------------------------

Under paragraph (a)(2) of proposed Rule 6.56, prior to the open of
Regular Trading Hours on the third to last business day of each
calendar month, the Exchange would make available \14\ to all TPHs an
aggregate two-sided (long/short) list of compression-list positions for
which open interest has been submitted to the Exchange on both sides
pursuant to paragraph (a)(1), including the aggregate size of open
interest on each side of each series (``compression-list positions
file'').\15\ This aggregate two-sided list may also include multi-
legged positions of SPX options with opposite open interest submitted
to the Exchange according to the parameters described in paragraph
(a)(1) to proposed Rule 6.56. This would allow the Exchange to identify
multi-leg strategy orders with opposing interest of particular TPHs in
the various series of the strategy (e.g. vertical spreads, calendar
spreads, butterflies, iron condors). The Exchange believes that a list
containing such multi-leg or complex positions may help facilitate a
more efficient forum by facilitating closing transactions in multiple
series at a time.
---------------------------------------------------------------------------

\14\ The Exchange expects to publish this list on its Web site.
\15\ This list would not identify which TPH holds these
positions.
---------------------------------------------------------------------------

Under paragraph (a)(3) to proposed Rule 6.56, in addition to making
the compression-list positions file available to all TPHs, the Exchange
would electronically send the compression-list positions file to the
TPHs that submitted compression-list positions to the Exchange pursuant
to paragraph (a)(1), including a list of those TPHs that contributed to
the compression-list positions file. The list will not include the name
of any TPH that requests its name be excluded from this list. Pursuant
to paragraph (a)(3), TPHs would be identified as having contributed to
the list only and would not be identified as holding any specific
position. The Exchange believes this process to identify TPHs that seek
to close compression-list positions in advance of a compression forum
will increase opportunities for TPHs to ultimately close compression-
list positions during a compression forum while, at the same time,
providing the opportunity for anonymity. TPHs that do not want to be
listed as having contributed compression-list positions may inform the
Exchange and will not be included in the listed TPHs.
Under paragraph (a)(4) of proposed Rule 6.56, the Exchange would
conduct an open outcry ``compression forum'' in which all TPHs may
participate \16\ on each of the last three business days of every
calendar month at a location on the trading floor determined by the
Exchange. Compression forums would be held for four (4) hours during
Regular Trading Hours on each of the last three business days of every
calendar month, or three (3) hours if any of those days is an
abbreviated trading day (such as the day before a holiday), at times
determined by the Exchange. All such notices would be provided to TPHs
reasonably in advance of any forum as announced via Regulatory Circular
in accordance with paragraph (d) to proposed Rule 6.56 discussed below.
The Exchange believes that multiple hours across multiple trading days
will allow TPHs to close as many positions as possible during this
process without interfering with normal SPX trading. In some cases, an
appropriate counterparty may not be present in the crowd at [sic]
particular time on a particular day when a TPH with an opposite
position represents the position in the crowd. In other cases, a TPH
may wish to break up a complex order into single legs after trying
unsuccessfully to close the multi-leg positions or may have residual
positions that could not be closed in full. Additionally, news may be
reported causing a high amount of activity preventing TPHs for [sic]
participating in the forum at certain times. The Exchange believes that
the three-day format will provide TPHs sufficient time to close these
positions in a forum without interfering with normal trading.
---------------------------------------------------------------------------

\16\ As compression forums will be conducted in open outcry,
TPHs that may participate include Floor Brokers and Market-Makers
with SPX appointments.
---------------------------------------------------------------------------

Under paragraph (b) of proposed Rule 6.56, trades executed during
compression forums would be subject to trading rules applicable to
trading in SPX during Regular Trading Hours, including manner of bids
and offers and allocation and priority rules, except: (1) Only closing
transactions in SPX options (including compression-list positions) may
be executed during a compression forum; and (2) the minimum increment
for all series will be $0.01 during a compression forum. In other
words, although trades executed during a compression forum may only be
closing transactions and may be in penny increments within a specified
timeframe and at a specific location on the trading floor, trades
executing during a compression forum will occur in the same manner as
all other open outcry SPX trades, including in accordance with
systemization requirements under Rule 6.24, and order allocation and
priority rules under Rule 6.45B(b). The purpose of the compression
forum would simply be to facilitate closing transactions in series of
SPX options so that TPHs would have the opportunity to free up capital
and eliminate riskless and low delta positions that they may otherwise
hold until expiration.
Notably, TPHs would not be required to submit a list of positions
to the Exchange pursuant to paragraph (a)(1) in order to participate in
a compression forum, and positions SPX series other

[[Page 95222]]

than compression-list positions may be closed during a compression
forum, as long as it involves only closing transactions. The
compression forums will be limited to closing only transactions,
because if opening transactions were permitted during a compression
forum, it would defeat the purpose of the proposed rule, which is to
encourage the closing of positions that are creating high bank
regulatory capital requirements, often with positions that are of low
economic benefit and risk and could otherwise be offset. Similarly, the
minimum increment for series traded during a compression forum will be
$0.01 to further encourage closing of these positions. Because many
series the Exchange expects to trade during the compression forum will
be out-of-the-money, and essentially worthless, TPHs may not otherwise
close positions in these series if a higher minimum increment causes
the price to be too much higher than the option's value.
Under paragraph (c) to proposed Rule 6.56, and as noted above in
the example, TPHs would be permitted to communicate with other TPHs to
determine: A TPH's open single-legged or multi-legged SPX positions
and/or (2) whether a TPH anticipates participating in a compression
forum at a particular date and time. During these communications, TPHs
may not discuss the price of a potential transaction involving these
positions during a compression forum. Trades executed during a
compression forum pursuant to proposed Rule 6.56 and otherwise in
compliance with the Rules would not be deemed prearranged trades in
violation of the Rules.\17\ The purpose of the compression forum
process is to facilitate closing transactions in series of SPX options
between counterparties holding opposite open positions. The proposed
rule is intended to help counterparties find one another so they can
more efficiently trade out of open positions at the end of each
calendar month. Communications between one another as to what positions
they hold and when they will be available to potentially trade out of
such positions will provide this efficiency and increase opportunities
for TPHs to close these positions. Without communications regarding
these logistics, it would be left to chance whether TPH with opposite
positions would be present to close those positions during a
compression forum, making it more difficult to close these positions.
As long as communications are limited to which positions are held and
timing of participation in a compression forum and do not include
discussions of other elements of a potential trade, such as the price,
the Exchange would not deem such communications to form the basis of a
prearranged trade. The Exchange notes again all orders placed during a
compression forum must be represented in the crowd and executed against
the best responsive bid or offer, as they would during normal trading.
Additionally, as noted above, all TPHs that are able to trade SPX on
the trading floor may participate in a compression forum in accordance
with the proposed procedure. TPHs participating in a compression forum
must continue to comply with all other trading rules.
---------------------------------------------------------------------------

\17\ Under Section 9(a)(1) of the Act, it shall be unlawful for
any member of a national securities exchange, for the purpose of
creating a false or misleading appearance of active trading in any
security registered on a national securities exchange or a false or
misleading appearance with respect to the market for any such
security, (A) to effect any transaction in such security which
involves no change in the beneficial ownership thereof, or (B) to
enter an order or orders for the purchase of such security with the
knowledge that an order or orders of substantially the same size, at
substantially the same time, and at substantially the same price,
for the sale of any such security, has been or will be entered by or
for the same or different parties. Prearranged trading could result
in also result in [sic] a violation of CBOE Rule 4.1, which
prohibits conduct inconsistent with just and equitable principles of
trade, Rule 6.45A or 6.45B which addresses the priority of bids and
offers, and/or Rule 10b-5 of the Act, which prohibits any act,
practice or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or
sale of any security, respectively. See Regulatory Circular RG16-190
(Prearranged Trades) (December 6, 2016).
---------------------------------------------------------------------------

Finally, paragraph (d) to proposed Rule 6.56 states the Exchange
will announce to TPHs determinations it makes pursuant to the proposed
rule via Regulatory Circular with reasonable notice.
The following is an example of how the compression forum process
would work under paragraph (a) of proposed Rule 6.56. On December 20,
2016, the Exchange issues a regulatory circular stating a compression
forum will be held on December 28 and 29 between 10:00 a.m. and 2:00
p.m. each day, and on December 30 between 9:00 a.m. and 12:00 p.m. The
circular and [sic] invites all TPHs to submit a password protected .CSV
file containing SPX positions with either a required capital charge
equal to the minimum capital charge under Clearing Corporation rules
risk-based haircut calculator and/or positions in series of SPX options
with a delta of ten (10) or less via email with appropriate security
measures containing the following fields: MARKET PARTICIPANT; SYMBOL,
EXPIRATION DATE, STRIKE, CALL/PUT (either call or put), and SIZE
(negative size denoting short size). The circular notes that all
submissions must be received by the Exchange no later than December 27,
2016 at 3:15 p.m. Additionally, the circular notes a TPH should state
in its email to CBOE if it does not want its name with the other
submitting TPHs. Additionally, each submitting TPH must designate a
point person.
Prior to 3:15 p.m. on December 27, 2016, the Exchange receives the
following .CSV files: XYZ closing postions.csv; ABC closing trades.csv;
and 123 compression.csv.\18\
---------------------------------------------------------------------------

\18\ For purposes of this example, it is assumed that all the
positions submitted to the Exchange by XYZ Trading, ABC Trading, and
123 Trading are either positions with a delta of ten or less or
positions with a required capital charge equal to the minimum
capital charge under the risk-based haircut calculator in the
Clearing Corporation rules.

----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
XYZ TRADING.................... SPXW 12/30/2016 1500 C -125
XYZ TRADING.................... SPXW 12/30/2016 1505 P 25
XYZ TRADING.................... SPX 1/20/2017 1610 P -75
XYZ TRADING.................... SPX 1/20/2017 1700 P -166
XYZ TRADING.................... SPXW 1/8/2016 1800 C 250
XYZ TRADING.................... SPXW 1/8/2016 1850 C 500
XYZ TRADING.................... SPXW 1/8/2016 1900 C 250
XYZ TRADING.................... SPXW 12/30/2016 2350 C -652
XYZ TRADING.................... SPXW 12/30/2016 2460 C -1425
----------------------------------------------------------------------------------------------------------------

[[Page 95223]]

----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
ABC TRADING.................... SPXW 12/30/2016 1500 C -76
ABC TRADING.................... SPXW 12/30/2016 1505 P -105
ABC TRADING.................... SPX 2/17/2017 1850 P -166
ABC TRADING.................... SPXW 12/30/2016 2350 C -62
ABC TRADING.................... SPXW 12/30/2016 2460 C 322
ABC TRADING.................... SPX 2/17/2017 2500 P -50
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
123 TRADING.................... SPXW 12/30/2016 1500 C 50
123 TRADING.................... SPX 1/20/2017 1610 P -105
123 TRADING.................... SPXW 1/8/2016 1800 C -200
123 TRADING.................... SPXW 1/8/2016 1850 P -400
123 TRADING.................... SPX 2/17/2017 1850 C -107
123 TRADING.................... SPXW 1/8/2016 1900 C -200
123 TRADING.................... SPXW 12/30/2016 2350 P -62
123 TRADING.................... SPXW 12/30/2016 2460 C 25
123 TRADING.................... SPXW 12/30/2017 2500 P -300
----------------------------------------------------------------------------------------------------------------

The email identify the following point people: XYZ Trading Firm--
John Smith; ABC Trading Firm--Jane Doe; and 123 Trading Company--Sam
Jones. No TPH requests to remain anonymous.
The Exchange then aggregates the closing positions and publishes
the aggregated position data on its Web site for series of SPX options
with two-sided compression-list positions submitted to the Exchange.
Additionally, it distributes the list, as well as the TPHs that
submitted individual position lists, to those TPHs:

----------------------------------------------------------------------------------------------------------------
Symbol Expiration date Strike Call/put Long size Short size
----------------------------------------------------------------------------------------------------------------
SPXW........................... 12/30/2016........ 1500 C 50 -201
SPXW........................... 12/30/2016........ 1505 P 25 -105
SPXW........................... 1/8/2016.......... 1800 C 250 -200
SPXW........................... 1/8/2016.......... 1850 P 500 -400
SPXW........................... 1/8/2016.......... 1900 C 250 -200
SPXW........................... 12/30/2016........ 2350 P 0 -62
SPXW........................... 12/30/2016........ 2460 C 347 -1425
----------------------------------------------------

Market participants Designated lead
----------------------------------------------------
XYZ TRADING.................... John Smith
ABC TRADING.................... Jane Doe
123 TRADING.................... Sam Jones
----------------------------------------------------------------------------------------------------------------

Following the dissemination of the .CSV file, TPHs discuss the
positions included in the disseminated .CSV file with the designated
leads in order to determine when each intended to participate in an
upcoming compression forum. Each TPH coordinates with another TPH that
holds an opposite position when they will be present at one of the
upcoming compression forums. During the compression forums held on
December 28 through 30, these three TPHs conducted the following
trades: \19\
---------------------------------------------------------------------------

\19\ This example assumes: (1) No customer orders are on the
book at the same or better price of the compression forum
transaction; (2) if two TPHs respond to an order represented in the
compression forum, they do so at the same price and time and, thus,
the order is allocated equally among them; and (3) no other TPHs
enter the compression forum to attempt to participate in the trades.
---------------------------------------------------------------------------

1. 123 Trading sells 25 SPXW 12/30/16 1500 C to each of ABC Trading
and XYZ Trading.
2. XYZ Trading sells 25 SPXW 12/30/16 1505 P to ABC Trading.
3. XYZ Trading sells 200 butterflies consisting of 200 SPXW 1/8/
2016 1800 C, 400 SPXW 1/8/2016 1850 C, and 200 SPXW 1/8/16 1900 C to
123 Trading.
4. 123 Trading sells 12 SPXW 12/30/2016 2460 C to each of ABC
Trading and XYZ Trading (and the parties determine which of ABC Trading
and XYZ Trading receive the extra contract).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\20\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \21\ requirements that the rules
of an exchange be 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.
Additionally, the Exchange believes the proposed rule change is
consistent with

[[Page 95224]]

the Section 6(b)(5) \22\ requirement that the rules of an exchange not
be designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ Id.
---------------------------------------------------------------------------

In particular, the Exchange believes the proposed rule change is
reasonable, equitable, and does not unfairly discriminate against any
market participants. The Exchange notes that all TPHs with open SPX
positions may participate in a compression forum in accordance with the
proposed procedure. Other market participants with open SPX positions
may participate through CBOE floor brokers, as they would for any other
SPX trading. Participation in compression forums, as well as advanced
submission of compression-list positions, is optional, and TPHs may
continue to attempt to trade open SPX positions during normal trading.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to limit compression-list positions to certain riskless
and low delta positions and trading in compression forums to closing
only transactions because these types of positions and transactions
will result in large bank regulatory capital requirements impacts for
CTPHs even though there is minimal chance for large losses to occur.
The Exchange notes that if opening transactions were permitted during a
compression forum, it would defeat the purpose of the proposed rule,
which is to encourage the closing of positions that are creating high
bank regulatory capital requirements, often with positions that are of
low economic benefit and risk and could otherwise be offset. The
Exchange notes that there are other circumstances involving liquidity
concerns in which the Exchange limits transactions in particular
securities to closing only transactions. For example, the Exchange
[sic] transactions in restricted option classes to [sic] closing only
(subject to certain exceptions).\23\ Additionally, cabinet trades are
limited to closing only (subject to certain exceptions).\24\ Similarly,
the minimum increment for series traded during a compression forum will
be $0.01 to further encourage closing of these positions. Because many
series the Exchange expects to trade during the compression forum will
be out-of-the-money, and essentially worthless, TPHs may not otherwise
close positions in these series if a higher minimum increment causes
the price to be too much higher than the option's value.
---------------------------------------------------------------------------

\23\ See Rule 5.4.
\24\ See Rule 6.54.
---------------------------------------------------------------------------

In addition, the Exchange believes it's reasonable, equitable and
not unfairly discriminatory to limit the compression forum process to
SPX options (including SPXW and SPXPM) because SPX has a substantially
higher notional value than other options classes. As such, open
interest in SPX has a much greater effect on a bank's regulatory
capital requirements. Compressing out-of-the-money and riskless SPX
option positions therefore has a greater impact on reducing a bank
regulatory capital requirement.
Furthermore, the Exchange believes that its proposal is consistent
with the Act in that it seeks to mitigate the potentially negative
effects of the bank capital requirements on liquidity in the SPX
options market. As described above, the Exchange believes that the new
regulatory capital requirements could potentially impede efficient use
of capital and undermine the critical liquidity role that Market-Makers
play in the SPX options market by limiting the amount of capital CTPHs
an [sic] allocate to clearing member transactions. Specifically, the
rules may cause CTPHs to impose stricter position limits on their
clearing members. In turn, this could force Market-Makers to reduce the
size of their quotes in SPX and result in reduced liquidity in the
market. The Exchange believes that permitting TPHs to reduce open
interest in offsetting SPX options positions would likely contribute to
the availability of liquidity in the SPX options market and help ensure
that the SPX options market retains its competitive balance. The
Exchange believes that the proposed rule would serve to protect
investors by helping to ensure consistent continued depth of liquidity
in the SPX options market.
The Exchange also believes the proposed rule change is consistent
with the Act, because the proposed procedure is consistent with its
current rules. The proposed rule would direct that all trading during
compression forums be conducted in accordance with normal SPX trading
rules and thus, all transactions that would occur during compression
forums would occur in the same manner as transactions during normal SPX
trading, except transactions must be closing only and may be in penny
increments. This process is narrowly tailored for a for [sic] the
specific purpose of facilitating the closing of positions in the SPX
options market, which the Exchange believes will serve to protect
investors by helping to ensure continued depth of liquidity in the SPX
options market. The Exchange also notes the proposed provisions
regarding the position lists are optional procedures to help facilitate
compression transactions. Submission of lists of positions for
compression is completely voluntary, open to all TPHs, and non-binding,
in that submission of a list does not require a TPH to trade any
position or even represent any position in a trading crowd.
Furthermore, the list of positions will be made available to all market
participants and contain very limited information regarding open
interest in positions in SPX. The list will not advantage or
disadvantage any TPH, but rather simply alert TPHs to certain SPX
positions that other TPHs are interested in closing at the end of each
calendar month.

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 intramarket competition that is not necessary or
appropriate in furtherance of the Act because it applies to all market
participants in the same manner with positions that meet the eligible
criteria. The proposed change would encourage the closing of positions
that needlessly result in burdensome capital requirements, which, once
closed, would alleviate the capital requirement constraints on TPHs and
improve overall market liquidity by freeing capital currently tied up
in certain unwanted SPX positions. The Exchange does not believe that
the proposed rule changes will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the proposed rule change applies only to
the trading of SPX options, which are exclusively-listed on CBOE. To
the extent that the proposed changes make the Exchange a more
attractive marketplace for market participants at other exchanges, such
market participants are welcome to become CBOE market participants.
Furthermore, as stated in Item 3(b) above, submission of lists of
positions for compression is completely voluntary, open to all TPHs,
and non-binding, in that submission of a list does not require a TPH to
trade any position or even represent any position in a trading crowd.
Lists of positions will be made available to all TPHs and contain very
limited information regarding open interest in positions in SPX. The
list will simply alert TPHs to certain SPX positions that other TPHs
are interested in closing at the end of each calendar month.

[[Page 95225]]

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

The Exchange neither solicited nor received written comments on the
proposed rule change.

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

The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\
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, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

\25\ 15 U.S.C. 78s(b)(3)(A)(iii).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of 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.
---------------------------------------------------------------------------

The Exchange has asked the Commission to waive the 30-day operative
delay to allow the compression forum process to begin in December 2016
and trading to take place on the final three days of trading in 2016.
The Exchange stated that it is requesting this waiver because it
believes that bank capital requirements will have substantial adverse
consequences on some CTPHs if TPHs are not able to sufficiently reduce
their open interest in SPX by the end of the year. The Exchange
understands that bank-imposed capital limits for TPHs, measured at the
end of the year and based on the aggregate notional value of short
positions regardless of offsets, may impact CTPHs and the firms for
which they clear depending on the open interest they hold. CBOE
believes, as it explained above, that the impact of these rules
uniquely affects the SPX options market due to the large notional value
of SPX contracts. In response, CTPHs may impose stricter position
limits on the firms for which they clear and, to the extent they do so,
it may effectively limit the amount of liquidity that some TPHs,
notably Market-Makers, will be able to provide in SPX options. The
Exchange believes that it is in the best interest of investors to use
this new compression forum process to help foster continued liquidity
in the SPX options market by allowing firms to free up capital by
finding opportunities to trade out of relatively worthless positions.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest
because this waiver will enable the Exchange to hold compression forums
for SPX options prior to the end of the year, thereby helping to
facilitate transactions and remove impediments to year-end trading in
SPX options, through a limited process designed to protect investors
and the public interest. The Commission notes that CBOE's compression
forum rule is limited in its application, involves no material changes
to how trading is conducted on the Exchange, creates a process in which
participation is voluntary and open to all, and is provided as a means
to help Market Makers and other market participants, as well as their
clearing brokers, avoid the need to limit their activities as a result
of out-of-the-money positions on SPX options that such firms wish to
exit. For this reason, the Commission hereby waives the 30-day
operative delay requirement and designates the proposed rule change as
operative upon filing.\27\
---------------------------------------------------------------------------

\27\ 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).
---------------------------------------------------------------------------

At any time within 60 days of the filing of such 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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \28\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------

\28\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-CBOE-2016-090 on the subject line.

Paper Comments

Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2016-090. 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 such 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-2016-090, and should be
submitted on or before January 17, 2017.
---------------------------------------------------------------------------

\29\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31102 Filed 12-23-16; 8:45 am]
BILLING CODE 8011-01-P

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