Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Compression Forums, 21866-21871 [2017-09424]
Download as PDF
<![CDATA[
21866
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
Section 17A of the Act 37 and the rules
and regulations thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that
proposed rule change SR–NSCC–2017–
001 be, and hereby is, Approved.38
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–09425 Filed 5–9–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80595; File No. SR–CBOE–
2017–035]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating to Compression
Forums
May 4, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 21,
2017, Chicago Board Options Exchange,
Incorporated (the ‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The 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.
jstallworth on DSK7TPTVN1PROD with NOTICES
37 15
U.S.C. 78q–1.
approving the proposed rule change, the
Commission considered the proposals’ impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
39 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
38 In
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
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 changes to
Rule 6.56 (Compression Forums) to: (1)
Make all existing positions in series of
S&P 500® Index (‘‘SPX’’) options 5
eligible to be identified as compressionlist positions (and therefore eligible for
a fee rebate if closed in open outcry in
a compression forum); (2) change the
way in which the Exchange will publish
its compression-list positions file; (3)
amend the rules with respect to
requirements for solicited transactions
executed through a compression forum;
and (4) clarify additional portions of the
rule text. The Exchange’s proposal is
intended to make it easier for TPHs to
efficiently close 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.
Background
SEC Rule 15c3–1 (Net Capital
Requirements for Brokers or Dealers)
(‘‘Net Capital Rules’’) requires registered
broker-dealers, unless otherwise
excepted, to maintain certain specified
minimum levels of capital.6 The Net
Capital Rules are designed to protect
securities customers, counterparties,
and creditors by requiring that brokerdealers 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.7
5 Including groups of series with both ticker
symbols SPX and SPXW.
6 17 CFR 240.15c3–1.
7 In addition, the Net Capital Rules permit various
offsets under which a percentage of an option
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
Subject to certain exceptions, CBOE
Clearing Trading Permit Holders
(‘‘CTPHs’’) 8 are subject to the Net
Capital Rules. However, a subset of
CTPHs 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.9 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
have approved a regulatory capital
framework for subsidiaries of U.S. bank
holding company clearing firms.10
Generally, these rules impose higher
minimum capital requirements, more
restrictive capital eligibility standards,
and higher asset risk weights than were
previously mandated for CTPHs 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.11 Rather,
capital charges under these standards
are, in large part, based on the aggregate
notional value of short positions
regardless of offsets. As a result, in
general, CTPHs 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
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).
8 All CBOE CTPHs must also be clearing members
of The Options Clearing Corporation (‘‘OCC’’).
9 H.R. 4173 (amending section 3(a) of the
Securities Exchange Act of 1934 (the ‘‘Act’’) (15
U.S.C. 78c(a))).
10 12 CFR 50; 79 FR 61440 (Liquidity Coverage
Ratio: Liquidity Risk Measurement Standards).
11 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 securities),
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 higher regulatory capital
requirements. Various factors, including
administration costs; transaction fees; and limited
market demand or counterparty interest, however,
may 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.
E:\FR\FM\10MYN1.SGM
10MYN1
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
jstallworth on DSK7TPTVN1PROD with NOTICES
in the SPX options market due to the
large notional value of SPX contracts.
The Exchange believes that these
higher regulatory capital requirements
have the potential to impact liquidity in
the SPX options market by limiting the
amount of capital CTPHs can allocate to
their clients’ transactions. Specifically,
the rules may cause CTPHs to impose
stricter position limits on their client
clearing members, which include CBOE
Market-Makers. Such 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.12 The
Exchange believes that permitting
Market-Makers and Floor Brokers (for
their own proprietary accounts or for
the account of another on an agency
basis) to efficiently close existing SPX
options positions through modified
open outcry trading procedures on the
Exchange floor may assist CTPHs and
TPHs to address bank regulatory capital
requirements and would likely have a
beneficial effect on continued liquidity
in the SPX options market without
adversely affecting market quality.
In order to mitigate the potential
negative effects of these additional bank
regulatory capital requirements and
foster continued liquidity in the SPX
options market in a manner consistent
with the requirements, the Exchange
recently adopted Rule 6.56 pursuant to
which TPHs can reduce (or ‘‘compress’’)
existing positions in SPX at the end of
each calendar month more efficiently
through trading in an open outcry
compression forum.13 The Exchange
believes that making available these
periodic trading forums, which allow
for closing transactions in SPX options
series to occur at reduced transaction
fees likely contributes to additional
liquidity and continued competitiveness
in the SPX market and promotes more
efficient capital deployment in light of
bank regulatory capital requirements.
Under current Rule 6.56, on the final
three business days of each calendar
month, the Exchange holds compression
forums in the SPX trading crowd.
Beforehand, in order to facilitate TPHs
finding counterparty offsets against
which they can trade closing positions,
12 Several TPHs have indicated to the Exchange
that the heightened bank regulatory requirements
could impact their ability to provide consistent
liquidity in the SPX options market unless they are
able to efficiently close their positions in SPX.
13 See Securities Exchange Act Release No. 79610
(December 20, 2016), 81 FR 95219 (December 27,
2016) (Notice of Filing and Immediate Effectiveness
of a Proposed Rule Change Relating to Compression
of S&P 500(R) Index Options Positions) (SR–CBOE–
2016–090).
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
currently, TPHs may submit lists of
existing SPX positions (with either a
required capital charge equal to the
minimum capital charge under the riskbased haircut calculator provided by the
OCC or comprised of option series with
a delta of ten (10) or less) to the
Exchange that they wish to close during
a compression forum. The Exchange
then aggregates these positions into a
single list containing the series in which
opposite (long/short) interest was
submitted to the Exchange. Prior to the
open of trading on the third-to-last
business day of each calendar month
(i.e. the first day of the month on which
a compression forum is held), the
Exchange makes available to all TPHs
on its Web site the aggregate two-sided
list of compression-list positions for
those series (‘‘compression-list positions
file’’). In addition, TPHs that submit
compression positions list to the
Exchange receive a compression-list
positions file containing the names of
the TPHs that contributed to the file,
including contact information for each
TPH’s designated point of contact. This
list does not identify the specific
positions that any TPH has submitted to
the Exchange.
The Exchange then holds open outcry
‘‘compression forums’’ in which all
TPHs may participate whether or not
they submitted positions for inclusion
in the compression-list position file.
Currently, trades executed during
compression forums are 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 each series is
$0.01 during a compression forum.
TPHs that trade positions previously
submitted to the Exchange on a
compression list may then take
advantage of the compression-list
position fee rebate on portions of a
transaction that involve their
compression-list positions, which are
executed through a compression forum.
The Exchange proposes to amend
Rule 6.56 to enhance the effectiveness
and utility of its compression forums
process for market participants. Based
on research, past compression forum
results, and anecdotal evidence, the
Exchange believes that the number of
SPX contracts closed in past
compression forums is only a small
fraction of the number of SPX contracts
that TPHs would like to close out
because of bank regulatory capitalrelated restraints. This is due, at least in
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
21867
part, to TPHs submitting compressionlist positions that include fewer than the
total SPX contracts they would like to
close. These limited TPH compressionlist positions yield fewer series in which
the Exchange has received two-sided
interest (for publication in the
compression-list positions file), and
only a fraction of that two-sided interest
has been closed out during previous
compression forums.14 The Exchange
believes that TPHs are not taking
advantage of the compression forum
process, in part, because the process is
too limited in terms of which positions
have been determined to be eligible
compression-list positions (and
therefore eligible for the related fee
rebate). Accordingly, the Exchange
proposes certain amendments to Rule
6.56 to increase the efficiency and
effectiveness of the compression forums
process.
Proposal
The Exchange proposes to amend
Rule 6.56 to remove the requirement
that compression-list positions must be
positions with either: (1) A required
capital charge equal to the minimum
capital charge under the risk-based
haircut calculator provided by the OCC
or (2) comprised of option series with a
delta of ten (10) or less. In addition, the
Exchange proposes to change the
manner in which it publishes the
compression-list positions file and
amend the rules with respect to
requirements for solicited transactions
executed through a compression forum.
Finally, the Exchange proposes to make
certain non-substantive changes to
clarify the text of Rule 6.56. The
Exchange believes that these proposed
amendments to Rule 6.56 would
enhance the effectiveness and utility of
its compression forums process.
Under current Rule 6.56(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 may
provide the Exchange with a list of open
SPX options positions with either a
required capital charge equal to the
minimum capital charge under the riskbased haircut calculator provided by the
OCC or comprised of option series with
a delta of ten (10) or less that it would
like to close during the compression
forum for that calendar month
(‘‘compression-list positions’’).
Compression-list positions may consist
14 In the months since the adoption of Rule 6.56,
of the compression-list positions submitted to the
Exchange, less than 16% had offsetting interest, and
of those positions, less than 10% were actually
closed in transactions through a compression
forum.
E:\FR\FM\10MYN1.SGM
10MYN1
21868
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
of multi-legged positions in series of
SPX options, which satisfy these
conditions. In turn, the Exchange
rebates transaction fees for trading these
positions against other closing SPX
options positions in a compression
forum so long as a rebate request form
is submitted by the TPH in compliance
with the parameters outlined in the
Exchange’s Fees Schedule.15
The Exchange proposes to amend the
definition of compression-list positions
to include any SPX option position
submitted to the Exchange pursuant to
Rule 6.56(a)(1) that a TPH wishes to
close through a compression forum.
Specifically, the Exchange proposes to
remove the text from paragraph (a)(1) of
Rule 6.56 that requires a compressionlist position to either have a required
capital charge equal to the minimum
capital charge under the risk-based
haircut calculator provided by the OCC
or be comprised of an option series with
a delta of ten (10) or less. Accordingly,
the proposed rule text of the first
sentence of Rule 6.56(a)(1) would
provide that 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 may provide the
Exchange with a list of open SPX
options positions that it would like to
close through the compression forum for
that calendar month (‘‘compression-list
positions’’).
This proposed change would also
obviate the need for the provision that
compression-list positions may consist
of multi-legged positions in series of
SPX options, which satisfy the
conditions set forth in paragraph (a)(1)
of Rule 6.56. Under the current rule,
TPHs may use offsetting positions to
create a multi-leg position with a
required capital charge equal to the
minimum capital charge under the riskbased haircut calculator provided by the
OCC. If the requirement that the
position have a required capital charge
equal to the minimum capital charge
under the risk-based haircut calculator
provided by the OCC were eliminated,
then there would be no need to submit
a multi-leg position to make it qualify as
a compression-list position under Rule
6.56(a)(1); any leg of any SPX position
on its own would qualify without
exception. Thus, under the proposed
rule, TPHs may simply submit a list of
single-leg positions to the Exchange in
order to qualify for a rebate of the fees
for any associated transactions.
The Exchange believes that the
proposed change would encourage more
market participants to close out SPX
positions through compression forums
and help ensure continued depth of
liquidity in the SPX options market.
Based on the Exchange’s understanding
of the number of SPX contracts that
TPHs would like to close out each
month for bank regulatory capitalrelated purposes, the comparatively
small numbers of contracts submitted to
the Exchange on average per month as
compression-list positions, and the even
smaller number of SPX contracts closed
during compression forums, the
Exchange believes that the definition of
compression-list positions ought be
expanded to include any open SPX
options positions that a TPH wishes to
close during a compression forum (and
thus be eligible for a fee rebate).
Although the parameters in current Rule
6.56(a)(1) were put in place as a
mechanism for market participants to
close out-of-the-money (‘‘OTM’’)
positions that might be held until
expiration because of the cost of trading
out of them and despite the large capital
charges associated with such positions,
the Exchange believes that market
participants and, in particular, MarketMakers have a need for a mechanism
that allows them to easily close other
less deep OTM SPX positions and even
in-the-money (‘‘ITM’’) positions at
month’s end in order to free up capital
that could then be deployed to provide
additional liquidity in the SPX options
market.
The Exchange also proposes to make
changes to paragraph (a)(2) of Rule 6.56
regarding the dissemination of the
compression-list positions file. Under
current Rule 6.56, prior to the open of
Regular Trading Hours on the third to
last business day of each calendar
month, the Exchange makes available to
all TPHs an aggregate two-sided (long/
short) list including each series for
jstallworth on DSK7TPTVN1PROD with NOTICES
Market participant
XYZ
XYZ
XYZ
XYZ
XYZ
XYZ
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
Symbol
.....................................................................
.....................................................................
.....................................................................
.....................................................................
.....................................................................
.....................................................................
15 See Securities Exchange Act Release No. 79745
(January 5, 2017), 82 FR 3379 (January 11, 2017)
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
Expiration date
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
Frm 00080
Fmt 4703
Sfmt 4703
Strike
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
(Notice of Filing and Immediate Effectiveness of a
PO 00000
which both long and short positions
have been submitted to the Exchange
pursuant to paragraph (a)(1) and the size
on each side in each of those series
(‘‘compression-list positions file’’).
Based on anecdotal evidence, the
Exchange believes that TPHs are
submitting fractions of positions that
they would like to compress to the
Exchange as compression-list positions
because of the format in which the
Exchange publishes the compressionlist positions file. Specifically, the
Exchange believes TPHs are concerned
about revealing large position
imbalances and thus are hesitant to
submit their full eligible compressionlist positions to the Exchange. This
results in an overall lowering of the
compression forum efficiency, fewer
SPX positions closed, and less reduced
capital that could be used to create and
maintain greater liquidity in the SPX
options market.
If the Exchange were to only publish
the offsetting size of long and short
positions in each series, however, these
concerns would be alleviated.
Accordingly, the Exchange proposes to
amend paragraph (a)(2) to provide that
it will publish only up to the size of the
offsetting compression-list positions in
each series for which both long and
short positions have been submitted to
the Exchange. Specifically, the
Exchange proposed to amend paragraph
(a)(2) of Rule 6.56 to provide that prior
to the open of Regular Trading Hours on
the third to last business day of each
calendar month, the Exchange will
make available to all TPHs a list
including each series for which both
long and short compression-list
positions have been submitted to the
Exchange and the size of the offsetting
compression-list positions in those
series. The difference between the
current and proposed compression-list
positions file publication methodologies
can be demonstrated through the
following example, which assumes that
prior to the close of trading on the
fourth to last business day of a
particular calendar month, the Exchange
receives the following compression-list
positions from TPHs XYZ, ABC, and
123:
Call/put
2000
2005
2110
2200
2210
2220
Size
C
P
P
P
C
C
Proposed Rule Change To Amend the Fees
Schedule) (SR–CBOE–2016–094).
E:\FR\FM\10MYN1.SGM
10MYN1
¥125
2500
¥75
¥166
250
2000
21869
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
Market participant
Symbol
XYZ TRADING .....................................................................
XYZ TRADING .....................................................................
XYZ TRADING .....................................................................
SPXW
SPXW
SPXW
Market participant
ABC
ABC
ABC
ABC
ABC
ABC
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
Symbol
....................................................................
....................................................................
....................................................................
....................................................................
....................................................................
....................................................................
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
......................................................................
......................................................................
......................................................................
......................................................................
......................................................................
......................................................................
......................................................................
......................................................................
......................................................................
Assuming that each of the positions
listed above qualify as compression-list
positions under Rule 6.56(a)(1), under
Expiration date
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
...................................................................................
Under the Exchanges’ proposal to
show only up to the offsetting size in
each series for which both long and
jstallworth on DSK7TPTVN1PROD with NOTICES
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
Strike
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
Expiration date
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
As demonstrated in the examples
above, using the current method for
compiling the compression-list
positions file, several large position
imbalances would be shown to market
participants, whereas under the
proposed method for compiling the
compression-list positions file, only the
net size would be shown.
The Exchange also proposes to amend
Rule 6.56(c) to provide that TPHs may
solicit a TPH or a non-TPH customer or
broker-dealer to transact through a
compression forum in accordance with
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
the provisions of this Rule and the
solicited transaction requirements
contained in Rule 6.9 and that trades
executed through a compression forum
pursuant to Rule 6.56 and otherwise in
compliance with the Rules, including,
but not limited to Rule 6.9 will not be
deemed prearranged trades. Currently,
Rule 6.56(c) provides that TPHs may
communicate with other TPHs to
determine: (1) A TPH’s open singlelegged or multi-legged SPX position,
including side and size, and/or (2)
whether a TPH anticipates participating
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
Size
C
C
C
Call/put
2000
2005
2050
2250
2360
2500
Strike
C
P
P
C
C
P
2000
2110
2220
2250
2250
2300
2350
2360
2500
2500
¥652
¥1425
Size
Call/put
¥76
¥105
¥166
¥4000
1322
¥50
Size
C
P
C
P
C
C
P
C
P
50
¥105
¥200
¥400
107
¥200
¥62
¥5000
¥300
positions in each series for which both
long and short positions had been
submitted to the Exchange as follows:
Call/put
2000
2005
2220
2250
2300
2360
short positions have been submitted to
the Exchange, assuming the same
compression-list positions above were
Symbol
Strike
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
Expiration date
Call/put
2300
2350
2360
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
6/2/2017
the current rule, the Exchange would
compile the compression-list positions
file by aggregating the long and short
Symbol
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
Expiration date
Symbol
Strike
6/2/2017
6/2/2017
6/2/2017
SPXW
SPXW
SPXW
SPXW
SPXW
SPXW
Market participant
123
123
123
123
123
123
123
123
123
Expiration date
Long size
C
P
C
C
C
C
Short size
50
2500
2000
107
2500
1322
¥201
¥105
¥200
¥4000
¥200
¥6425
submitted to the Exchange, the
Exchange would publish the following
compression-list positions filing:
Strike
2000
2005
2200
2250
2300
2360
............
............
[sic] .....
............
............
............
Call/put
Size
C
P
C
C
C
C
50
105
200
107
200
1322
in a compression forum at a particular
date and time, but that during these
communications, TPHs may not discuss
the price of a potential transaction
involving these positions during a
compression forum. This restriction is
stricter than the Exchange’s normal
trading rules, which, under Rule 6.9
(Solicited Transactions), permit price
discovery. The Exchange believes
permitting solicited transactions that
include discussion of price in
accordance with Rule 6.9 may enhance
the compression forum process. The
E:\FR\FM\10MYN1.SGM
10MYN1
21870
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
jstallworth on DSK7TPTVN1PROD with NOTICES
proposed rule change also harmonizes
the compression forum rules with
requirements for solicited transactions
under Rule 6.9 and the provision of
Rule 6.56(b), which provides that trades
executed through compression forums
are subject to normal SPX trading rules,
apart from the specifically enumerated
exceptions as provided in Rule
6.56(b)(1) and (2). The Exchange
believes that this amendment would
further align the compression forum
trading rules with normal SPX trading
rules, which would clarify the Rules
and eliminate both potential confusion
and regulatory discrepancy.
The Exchange proposes to further
amend the text of Rule 6.56(c) to
provide that trades executed through a
compression forum pursuant to Rule
6.56 and otherwise in compliance with
the Rules, including but not limited to
Rule 6.9 (including a discussion of price
as permitted by that rule), will not be
deemed prearranged trades.16 The
Exchange proposes to make
corresponding changes to Rule 6.56(b)
to make clear that all normal SPX
trading rules apply to transactions
executed through compression forums,
including but not limited to the
solicited transaction rules in Rule 6.9.
The Exchange also proposes to make
several clarifying changes to the rule
text of Rule 6.56. In paragraphs (a)(1),
16 Under the Exchange’s policy concerning
prearranged trading, TPHs are cautioned that any
purchase or sale, transaction or series of
transactions, coupled with an agreement,
arrangement or understanding, directly or indirectly
to reverse such transaction which is not done for
a legitimate economic purpose or without
subjecting the transactions to market risk, violates
Exchange Rules and may be inconsistent with
various provisions of the Act and rules thereunder.
All transactions must be effected in accordance
with applicable trading rules, must be subject to
risk of the market, and must be reported for
dissemination. In addition, under the Exchange’s
policy, TPHs are reminded that Section 9(a)(1) of
the Act provides in relevant part that 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
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. See
CBOE Regulatory Circular RG16–190 (Prearranged
Trades). In this regard, Rule 6.56(c) is not intended
as an absolute safe harbor from prearranged trading
prohibitions, but is instead intended to provide
that, the act of soliciting another party to transact
through a compression forum will not be deemed
to be prearranged trading provided that the
transaction is otherwise executed in accordance
with the Rules, including, but not limited to, the
Exchange’s solicitation rules and open outcry
trading procedures, as modified by Rule 6.56(b).
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
(b), (b)(1), and (c), the Exchange
proposes to change the word ‘‘during’’
to ‘‘through’’ to make clear that the rules
apply to transactions executed through
the compression forum process, rather
than transactions in series of SPX
options that may be executed during the
hours in which a compression forum is
taking place, but outside of the
compression forum process.
The Exchange proposes to amend
Rule 6.56(a)(4) to delete the word
‘‘conduct’’ and replace it with the words
‘‘make available.’’ Currently, Rule
6.56(a)(4) provides that the Exchange
will conduct an open outcry
‘‘compression forum’’ in which all TPHs
may participate on each of the last three
business days of every calendar month
at a location on the trading floor
determined by the Exchange. The
Exchange, however, does not conduct or
participate in the compression forum
process. Rather, the Exchange provides
a locale for the compression forums or
‘‘makes available’’ compression forums
to TPHs. Accordingly, the Exchange
proposes changes to Rule 6.56(a)(4) to
make this point clear.
Finally, the Exchange proposes
changes to paragraph (b)(2) of Rule 6.56
to make clear that the minimum
increment for bids and offers
represented in open outcry in a
compression forum is $0.01, both for
single series positions and with respect
to complex orders
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.17 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 18 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
the Section 6(b)(5) 19 requirement that
the rules of an exchange not be designed
17 15
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
19 Id.
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
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
submit compression-list positions (that
would be eligible for a fee rebate) in
accordance with the proposed rule
change. In fact, the proposed rule
change would encourage participation
by additional participants as any market
participant holding an SPX position
could now submit positions eligible
compression-list positions (that would
therefore qualify for a fee rebate), rather
than only those with positions meeting
certain limiting criteria. Any market
participant with an open SPX positions
could participate in a compression
forum (including customers through
CBOE Floor Brokers), as they would for
any other SPX trade. Participation in
compression forums, as well as
advanced submission of compressionlist positions, is optional, and TPHs may
also continue to trade open SPX
positions during normal trading.
Furthermore, the Exchange believes
that its proposal is consistent with the
Act in that it seeks to foster liquidity in
the SPX options market in light of the
bank regulatory capital requirements. As
described above, the Exchange believes
that the new bank regulatory capital
requirements could potentially limit the
amount of capital CTPHs can allocate to
their clients’ transactions, which in
turn, may impact liquidity, particularly
in the SPX market. Specifically, the
rules may cause CTPHs to impose
stricter position limits on their clients,
including Market-Makers. The Exchange
believes that permitting TPHs to reduce
open interest in offsetting SPX options
positions in the manner set out in Rule
6.56 would likely contribute to the
availability of liquidity in the SPX
options. 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 through compression
forums be conducted in accordance
with normal SPX trading rules and thus,
in the same manner as transactions
during normal SPX trading, except that
they must be closing only and may be
in penny increments. In particular, the
proposed changes to Rule 6.56(b) and (c)
would eliminate discrepancies in the
E:\FR\FM\10MYN1.SGM
10MYN1
Federal Register / Vol. 82, No. 89 / Wednesday, May 10, 2017 / Notices
trading rules that apply to trading
through compression forums and
normal SPX trading rules by
harmonizing the solicited transactions
rules and making trading through
compression forums subject to the rules
set forth in Rule 6.9. Accordingly, the
Exchange believes that the proposed
rule changes to Rule 6.56 would
eliminate potential confusion caused by
regulatory discrepancies in the Rules
and provide additional clarity,
specifically with respect to the
application of the solicited transaction
rules. The Exchange believes that the
adoption of clear, transparent, and
consistent rules is in the best interests
of both investors and the general public.
jstallworth on DSK7TPTVN1PROD with NOTICES
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 with positions
that meet the eligible criteria in the
same manner. The proposed change
would encourage the closing of
positions, which, once closed, may
serve to alleviate the capital
requirement constraints on TPHs and
improve overall market liquidity by
freeing capital currently tied up in
certain 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 eligible to participant
through CBOE TPHs. 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 through a compression forum.
Lists of positions will be made available
to all TPHs simply alert TPHs to certain
SPX positions that other TPHs are
interested in closing at the end of each
calendar month.
VerDate Sep<11>2014
15:21 May 09, 2017
Jkt 241001
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
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 20 and Rule 19b–4(f)(6) 21
thereunder. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
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:
21871
All submissions should refer to File
Number SR–CBOE–2017–035. 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–CBOE–
2017–035, and should be submitted on
or before May 31, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–09424 Filed 5–9–17; 8:45 am]
BILLING CODE 8011–01–P
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–2017–035 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
20 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
21 17
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
Notice of Intent To Rule on Request To
Release Airport Property at Walnut
Ridge Regional Airport, Walnut Ridge,
Arkansas
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of request to release
airport property.
AGENCY:
The FAA proposes to rule and
invites public comment on the release of
land at Walnut Ridge Regional Airport
under the provisions of Section 125 of
the Wendell H. Ford Aviation
SUMMARY:
22 17
E:\FR\FM\10MYN1.SGM
CFR 200.30–3(a)(12).
10MYN1
]]>Agencies
[Federal Register Volume 82, Number 89 (Wednesday, May 10, 2017)]
[Notices]
[Pages 21866-21871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09424]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80595; File No. SR-CBOE-2017-035]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Compression Forums
May 4, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 21, 2017, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the
Exchange. The Exchange filed the proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
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 changes to Rule 6.56 (Compression Forums) to:
(1) Make all existing positions in series of S&P 500[supreg] Index
(``SPX'') options \5\ eligible to be identified as compression-list
positions (and therefore eligible for a fee rebate if closed in open
outcry in a compression forum); (2) change the way in which the
Exchange will publish its compression-list positions file; (3) amend
the rules with respect to requirements for solicited transactions
executed through a compression forum; and (4) clarify additional
portions of the rule text. The Exchange's proposal is intended to make
it easier for TPHs to efficiently close 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.
---------------------------------------------------------------------------
\5\ Including groups of series with both ticker symbols SPX and
SPXW.
---------------------------------------------------------------------------
Background
SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers)
(``Net Capital Rules'') requires registered broker-dealers, unless
otherwise excepted, to maintain certain specified minimum levels of
capital.\6\ 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.\7\
---------------------------------------------------------------------------
\6\ 17 CFR 240.15c3-1.
\7\ 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).
---------------------------------------------------------------------------
Subject to certain exceptions, CBOE Clearing Trading Permit Holders
(``CTPHs'') \8\ are subject to the Net Capital Rules. However, a subset
of CTPHs 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.\9\ 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 have
approved a regulatory capital framework for subsidiaries of U.S. bank
holding company clearing firms.\10\ Generally, these rules impose
higher minimum capital requirements, more restrictive capital
eligibility standards, and higher asset risk weights than were
previously mandated for CTPHs 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.\11\ Rather, capital charges under these standards
are, in large part, based on the aggregate notional value of short
positions regardless of offsets. As a result, in general, CTPHs 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
[[Page 21867]]
in the SPX options market due to the large notional value of SPX
contracts.
---------------------------------------------------------------------------
\8\ All CBOE CTPHs must also be clearing members of The Options
Clearing Corporation (``OCC'').
\9\ H.R. 4173 (amending section 3(a) of the Securities Exchange
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
\10\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards).
\11\ 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 securities),
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 higher regulatory capital
requirements. Various factors, including administration costs;
transaction fees; and limited market demand or counterparty
interest, however, may 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.
---------------------------------------------------------------------------
The Exchange believes that these higher regulatory capital
requirements have the potential to impact liquidity in the SPX options
market by limiting the amount of capital CTPHs can allocate to their
clients' transactions. Specifically, the rules may cause CTPHs to
impose stricter position limits on their client clearing members, which
include CBOE Market-Makers. Such 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.\12\ The
Exchange believes that permitting Market-Makers and Floor Brokers (for
their own proprietary accounts or for the account of another on an
agency basis) to efficiently close existing SPX options positions
through modified open outcry trading procedures on the Exchange floor
may assist CTPHs and TPHs to address bank regulatory capital
requirements and would likely have a beneficial effect on continued
liquidity in the SPX options market without adversely affecting market
quality.
---------------------------------------------------------------------------
\12\ Several TPHs have indicated to the Exchange that the
heightened bank regulatory requirements could impact their ability
to provide consistent liquidity in the SPX options market unless
they are able to efficiently close their positions in SPX.
---------------------------------------------------------------------------
In order to mitigate the potential negative effects of these
additional bank regulatory capital requirements and foster continued
liquidity in the SPX options market in a manner consistent with the
requirements, the Exchange recently adopted Rule 6.56 pursuant to which
TPHs can reduce (or ``compress'') existing positions in SPX at the end
of each calendar month more efficiently through trading in an open
outcry compression forum.\13\ The Exchange believes that making
available these periodic trading forums, which allow for closing
transactions in SPX options series to occur at reduced transaction fees
likely contributes to additional liquidity and continued
competitiveness in the SPX market and promotes more efficient capital
deployment in light of bank regulatory capital requirements.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 79610 (December 20,
2016), 81 FR 95219 (December 27, 2016) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change Relating to
Compression of S&P 500(R) Index Options Positions) (SR-CBOE-2016-
090).
---------------------------------------------------------------------------
Under current Rule 6.56, on the final three business days of each
calendar month, the Exchange holds compression forums in the SPX
trading crowd. Beforehand, in order to facilitate TPHs finding
counterparty offsets against which they can trade closing positions,
currently, TPHs may submit lists of existing SPX positions (with either
a required capital charge equal to the minimum capital charge under the
risk-based haircut calculator provided by the OCC or comprised of
option series with a delta of ten (10) or less) to the Exchange that
they wish to close during a compression forum. The Exchange then
aggregates these positions into a single list containing the series in
which opposite (long/short) interest was submitted to the Exchange.
Prior to the open of trading on the third-to-last business day of each
calendar month (i.e. the first day of the month on which a compression
forum is held), the Exchange makes available to all TPHs on its Web
site the aggregate two-sided list of compression-list positions for
those series (``compression-list positions file''). In addition, TPHs
that submit compression positions list to the Exchange receive a
compression-list positions file containing the names of the TPHs that
contributed to the file, including contact information for each TPH's
designated point of contact. This list does not identify the specific
positions that any TPH has submitted to the Exchange.
The Exchange then holds open outcry ``compression forums'' in which
all TPHs may participate whether or not they submitted positions for
inclusion in the compression-list position file. Currently, trades
executed during compression forums are 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 each series is $0.01 during a compression forum.
TPHs that trade positions previously submitted to the Exchange on a
compression list may then take advantage of the compression-list
position fee rebate on portions of a transaction that involve their
compression-list positions, which are executed through a compression
forum.
The Exchange proposes to amend Rule 6.56 to enhance the
effectiveness and utility of its compression forums process for market
participants. Based on research, past compression forum results, and
anecdotal evidence, the Exchange believes that the number of SPX
contracts closed in past compression forums is only a small fraction of
the number of SPX contracts that TPHs would like to close out because
of bank regulatory capital-related restraints. This is due, at least in
part, to TPHs submitting compression-list positions that include fewer
than the total SPX contracts they would like to close. These limited
TPH compression-list positions yield fewer series in which the Exchange
has received two-sided interest (for publication in the compression-
list positions file), and only a fraction of that two-sided interest
has been closed out during previous compression forums.\14\ The
Exchange believes that TPHs are not taking advantage of the compression
forum process, in part, because the process is too limited in terms of
which positions have been determined to be eligible compression-list
positions (and therefore eligible for the related fee rebate).
Accordingly, the Exchange proposes certain amendments to Rule 6.56 to
increase the efficiency and effectiveness of the compression forums
process.
---------------------------------------------------------------------------
\14\ In the months since the adoption of Rule 6.56, of the
compression-list positions submitted to the Exchange, less than 16%
had offsetting interest, and of those positions, less than 10% were
actually closed in transactions through a compression forum.
---------------------------------------------------------------------------
Proposal
The Exchange proposes to amend Rule 6.56 to remove the requirement
that compression-list positions must be positions with either: (1) A
required capital charge equal to the minimum capital charge under the
risk-based haircut calculator provided by the OCC or (2) comprised of
option series with a delta of ten (10) or less. In addition, the
Exchange proposes to change the manner in which it publishes the
compression-list positions file and amend the rules with respect to
requirements for solicited transactions executed through a compression
forum. Finally, the Exchange proposes to make certain non-substantive
changes to clarify the text of Rule 6.56. The Exchange believes that
these proposed amendments to Rule 6.56 would enhance the effectiveness
and utility of its compression forums process.
Under current Rule 6.56(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 may
provide the Exchange with a list of open SPX options positions with
either a required capital charge equal to the minimum capital charge
under the risk-based haircut calculator provided by the OCC or
comprised of option series with a delta of ten (10) or less that it
would like to close during the compression forum for that calendar
month (``compression-list positions''). Compression-list positions may
consist
[[Page 21868]]
of multi-legged positions in series of SPX options, which satisfy these
conditions. In turn, the Exchange rebates transaction fees for trading
these positions against other closing SPX options positions in a
compression forum so long as a rebate request form is submitted by the
TPH in compliance with the parameters outlined in the Exchange's Fees
Schedule.\15\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 79745 (January 5,
2017), 82 FR 3379 (January 11, 2017) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend the Fees Schedule)
(SR-CBOE-2016-094).
---------------------------------------------------------------------------
The Exchange proposes to amend the definition of compression-list
positions to include any SPX option position submitted to the Exchange
pursuant to Rule 6.56(a)(1) that a TPH wishes to close through a
compression forum. Specifically, the Exchange proposes to remove the
text from paragraph (a)(1) of Rule 6.56 that requires a compression-
list position to either have a required capital charge equal to the
minimum capital charge under the risk-based haircut calculator provided
by the OCC or be comprised of an option series with a delta of ten (10)
or less. Accordingly, the proposed rule text of the first sentence of
Rule 6.56(a)(1) would provide that 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 may
provide the Exchange with a list of open SPX options positions that it
would like to close through the compression forum for that calendar
month (``compression-list positions'').
This proposed change would also obviate the need for the provision
that compression-list positions may consist of multi-legged positions
in series of SPX options, which satisfy the conditions set forth in
paragraph (a)(1) of Rule 6.56. Under the current rule, TPHs may use
offsetting positions to create a multi-leg position with a required
capital charge equal to the minimum capital charge under the risk-based
haircut calculator provided by the OCC. If the requirement that the
position have a required capital charge equal to the minimum capital
charge under the risk-based haircut calculator provided by the OCC were
eliminated, then there would be no need to submit a multi-leg position
to make it qualify as a compression-list position under Rule
6.56(a)(1); any leg of any SPX position on its own would qualify
without exception. Thus, under the proposed rule, TPHs may simply
submit a list of single-leg positions to the Exchange in order to
qualify for a rebate of the fees for any associated transactions.
The Exchange believes that the proposed change would encourage more
market participants to close out SPX positions through compression
forums and help ensure continued depth of liquidity in the SPX options
market. Based on the Exchange's understanding of the number of SPX
contracts that TPHs would like to close out each month for bank
regulatory capital-related purposes, the comparatively small numbers of
contracts submitted to the Exchange on average per month as
compression-list positions, and the even smaller number of SPX
contracts closed during compression forums, the Exchange believes that
the definition of compression-list positions ought be expanded to
include any open SPX options positions that a TPH wishes to close
during a compression forum (and thus be eligible for a fee rebate).
Although the parameters in current Rule 6.56(a)(1) were put in place as
a mechanism for market participants to close out-of-the-money (``OTM'')
positions that might be held until expiration because of the cost of
trading out of them and despite the large capital charges associated
with such positions, the Exchange believes that market participants
and, in particular, Market-Makers have a need for a mechanism that
allows them to easily close other less deep OTM SPX positions and even
in-the-money (``ITM'') positions at month's end in order to free up
capital that could then be deployed to provide additional liquidity in
the SPX options market.
The Exchange also proposes to make changes to paragraph (a)(2) of
Rule 6.56 regarding the dissemination of the compression-list positions
file. Under current Rule 6.56, prior to the open of Regular Trading
Hours on the third to last business day of each calendar month, the
Exchange makes available to all TPHs an aggregate two-sided (long/
short) list including each series for which both long and short
positions have been submitted to the Exchange pursuant to paragraph
(a)(1) and the size on each side in each of those series
(``compression-list positions file''). Based on anecdotal evidence, the
Exchange believes that TPHs are submitting fractions of positions that
they would like to compress to the Exchange as compression-list
positions because of the format in which the Exchange publishes the
compression-list positions file. Specifically, the Exchange believes
TPHs are concerned about revealing large position imbalances and thus
are hesitant to submit their full eligible compression-list positions
to the Exchange. This results in an overall lowering of the compression
forum efficiency, fewer SPX positions closed, and less reduced capital
that could be used to create and maintain greater liquidity in the SPX
options market.
If the Exchange were to only publish the offsetting size of long
and short positions in each series, however, these concerns would be
alleviated. Accordingly, the Exchange proposes to amend paragraph
(a)(2) to provide that it will publish only up to the size of the
offsetting compression-list positions in each series for which both
long and short positions have been submitted to the Exchange.
Specifically, the Exchange proposed to amend paragraph (a)(2) of Rule
6.56 to provide that prior to the open of Regular Trading Hours on the
third to last business day of each calendar month, the Exchange will
make available to all TPHs a list including each series for which both
long and short compression-list positions have been submitted to the
Exchange and the size of the offsetting compression-list positions in
those series. The difference between the current and proposed
compression-list positions file publication methodologies can be
demonstrated through the following example, which assumes that prior to
the close of trading on the fourth to last business day of a particular
calendar month, the Exchange receives the following compression-list
positions from TPHs XYZ, ABC, and 123:
----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
XYZ TRADING..................... SPXW 6/2/2017 2000 C -125
XYZ TRADING..................... SPXW 6/2/2017 2005 P 2500
XYZ TRADING..................... SPXW 6/2/2017 2110 P -75
XYZ TRADING..................... SPXW 6/2/2017 2200 P -166
XYZ TRADING..................... SPXW 6/2/2017 2210 C 250
XYZ TRADING..................... SPXW 6/2/2017 2220 C 2000
[[Page 21869]]
XYZ TRADING..................... SPXW 6/2/2017 2300 C 2500
XYZ TRADING..................... SPXW 6/2/2017 2350 C -652
XYZ TRADING..................... SPXW 6/2/2017 2360 C -1425
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
ABC TRADING..................... SPXW 6/2/2017 2000 C -76
ABC TRADING..................... SPXW 6/2/2017 2005 P -105
ABC TRADING..................... SPXW 6/2/2017 2050 P -166
ABC TRADING..................... SPXW 6/2/2017 2250 C -4000
ABC TRADING..................... SPXW 6/2/2017 2360 C 1322
ABC TRADING..................... SPXW 6/2/2017 2500 P -50
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Expiration
Market participant Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
123 TRADING..................... SPXW 6/2/2017 2000 C 50
123 TRADING..................... SPXW 6/2/2017 2110 P -105
123 TRADING..................... SPXW 6/2/2017 2220 C -200
123 TRADING..................... SPXW 6/2/2017 2250 P -400
123 TRADING..................... SPXW 6/2/2017 2250 C 107
123 TRADING..................... SPXW 6/2/2017 2300 C -200
123 TRADING..................... SPXW 6/2/2017 2350 P -62
123 TRADING..................... SPXW 6/2/2017 2360 C -5000
123 TRADING..................... SPXW 6/2/2017 2500 P -300
----------------------------------------------------------------------------------------------------------------
Assuming that each of the positions listed above qualify as
compression-list positions under Rule 6.56(a)(1), under the current
rule, the Exchange would compile the compression-list positions file by
aggregating the long and short positions in each series for which both
long and short positions had been submitted to the Exchange as follows:
----------------------------------------------------------------------------------------------------------------
Expiration
Symbol date Strike Call/put Long size Short size
----------------------------------------------------------------------------------------------------------------
SPXW............................ 6/2/2017 2000 C 50 -201
SPXW............................ 6/2/2017 2005 P 2500 -105
SPXW............................ 6/2/2017 2220 C 2000 -200
SPXW............................ 6/2/2017 2250 C 107 -4000
SPXW............................ 6/2/2017 2300 C 2500 -200
SPXW............................ 6/2/2017 2360 C 1322 -6425
----------------------------------------------------------------------------------------------------------------
Under the Exchanges' proposal to show only up to the offsetting
size in each series for which both long and short positions have been
submitted to the Exchange, assuming the same compression-list positions
above were submitted to the Exchange, the Exchange would publish the
following compression-list positions filing:
----------------------------------------------------------------------------------------------------------------
Expiration
Symbol date Strike Call/put Size
----------------------------------------------------------------------------------------------------------------
SPXW................................. 6/2/2017 2000..................... C 50
SPXW................................. 6/2/2017 2005..................... P 105
SPXW................................. 6/2/2017 2200 [sic]............... C 200
SPXW................................. 6/2/2017 2250..................... C 107
SPXW................................. 6/2/2017 2300..................... C 200
SPXW................................. 6/2/2017 2360..................... C 1322
----------------------------------------------------------------------------------------------------------------
As demonstrated in the examples above, using the current method for
compiling the compression-list positions file, several large position
imbalances would be shown to market participants, whereas under the
proposed method for compiling the compression-list positions file, only
the net size would be shown.
The Exchange also proposes to amend Rule 6.56(c) to provide that
TPHs may solicit a TPH or a non-TPH customer or broker-dealer to
transact through a compression forum in accordance with the provisions
of this Rule and the solicited transaction requirements contained in
Rule 6.9 and that trades executed through a compression forum pursuant
to Rule 6.56 and otherwise in compliance with the Rules, including, but
not limited to Rule 6.9 will not be deemed prearranged trades.
Currently, Rule 6.56(c) provides that TPHs may communicate with other
TPHs to determine: (1) A TPH's open single-legged or multi-legged SPX
position, including side and size, and/or (2) whether a TPH anticipates
participating in a compression forum at a particular date and time, but
that during these communications, TPHs may not discuss the price of a
potential transaction involving these positions during a compression
forum. This restriction is stricter than the Exchange's normal trading
rules, which, under Rule 6.9 (Solicited Transactions), permit price
discovery. The Exchange believes permitting solicited transactions that
include discussion of price in accordance with Rule 6.9 may enhance the
compression forum process. The
[[Page 21870]]
proposed rule change also harmonizes the compression forum rules with
requirements for solicited transactions under Rule 6.9 and the
provision of Rule 6.56(b), which provides that trades executed through
compression forums are subject to normal SPX trading rules, apart from
the specifically enumerated exceptions as provided in Rule 6.56(b)(1)
and (2). The Exchange believes that this amendment would further align
the compression forum trading rules with normal SPX trading rules,
which would clarify the Rules and eliminate both potential confusion
and regulatory discrepancy.
The Exchange proposes to further amend the text of Rule 6.56(c) to
provide that trades executed through a compression forum pursuant to
Rule 6.56 and otherwise in compliance with the Rules, including but not
limited to Rule 6.9 (including a discussion of price as permitted by
that rule), will not be deemed prearranged trades.\16\ The Exchange
proposes to make corresponding changes to Rule 6.56(b) to make clear
that all normal SPX trading rules apply to transactions executed
through compression forums, including but not limited to the solicited
transaction rules in Rule 6.9.
---------------------------------------------------------------------------
\16\ Under the Exchange's policy concerning prearranged trading,
TPHs are cautioned that any purchase or sale, transaction or series
of transactions, coupled with an agreement, arrangement or
understanding, directly or indirectly to reverse such transaction
which is not done for a legitimate economic purpose or without
subjecting the transactions to market risk, violates Exchange Rules
and may be inconsistent with various provisions of the Act and rules
thereunder. All transactions must be effected in accordance with
applicable trading rules, must be subject to risk of the market, and
must be reported for dissemination. In addition, under the
Exchange's policy, TPHs are reminded that Section 9(a)(1) of the Act
provides in relevant part that 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 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. See CBOE Regulatory Circular
RG16-190 (Prearranged Trades). In this regard, Rule 6.56(c) is not
intended as an absolute safe harbor from prearranged trading
prohibitions, but is instead intended to provide that, the act of
soliciting another party to transact through a compression forum
will not be deemed to be prearranged trading provided that the
transaction is otherwise executed in accordance with the Rules,
including, but not limited to, the Exchange's solicitation rules and
open outcry trading procedures, as modified by Rule 6.56(b).
---------------------------------------------------------------------------
The Exchange also proposes to make several clarifying changes to
the rule text of Rule 6.56. In paragraphs (a)(1), (b), (b)(1), and (c),
the Exchange proposes to change the word ``during'' to ``through'' to
make clear that the rules apply to transactions executed through the
compression forum process, rather than transactions in series of SPX
options that may be executed during the hours in which a compression
forum is taking place, but outside of the compression forum process.
The Exchange proposes to amend Rule 6.56(a)(4) to delete the word
``conduct'' and replace it with the words ``make available.''
Currently, Rule 6.56(a)(4) provides that the Exchange will conduct an
open outcry ``compression forum'' in which all TPHs may participate on
each of the last three business days of every calendar month at a
location on the trading floor determined by the Exchange. The Exchange,
however, does not conduct or participate in the compression forum
process. Rather, the Exchange provides a locale for the compression
forums or ``makes available'' compression forums to TPHs. Accordingly,
the Exchange proposes changes to Rule 6.56(a)(4) to make this point
clear.
Finally, the Exchange proposes changes to paragraph (b)(2) of Rule
6.56 to make clear that the minimum increment for bids and offers
represented in open outcry in a compression forum is $0.01, both for
single series positions and with respect to complex orders
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.\17\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \18\ 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 the Section 6(b)(5) \19\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ 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 submit compression-list positions (that would be eligible for
a fee rebate) in accordance with the proposed rule change. In fact, the
proposed rule change would encourage participation by additional
participants as any market participant holding an SPX position could
now submit positions eligible compression-list positions (that would
therefore qualify for a fee rebate), rather than only those with
positions meeting certain limiting criteria. Any market participant
with an open SPX positions could participate in a compression forum
(including customers through CBOE Floor Brokers), as they would for any
other SPX trade. Participation in compression forums, as well as
advanced submission of compression-list positions, is optional, and
TPHs may also continue to trade open SPX positions during normal
trading.
Furthermore, the Exchange believes that its proposal is consistent
with the Act in that it seeks to foster liquidity in the SPX options
market in light of the bank regulatory capital requirements. As
described above, the Exchange believes that the new bank regulatory
capital requirements could potentially limit the amount of capital
CTPHs can allocate to their clients' transactions, which in turn, may
impact liquidity, particularly in the SPX market. Specifically, the
rules may cause CTPHs to impose stricter position limits on their
clients, including Market-Makers. The Exchange believes that permitting
TPHs to reduce open interest in offsetting SPX options positions in the
manner set out in Rule 6.56 would likely contribute to the availability
of liquidity in the SPX options. 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 through
compression forums be conducted in accordance with normal SPX trading
rules and thus, in the same manner as transactions during normal SPX
trading, except that they must be closing only and may be in penny
increments. In particular, the proposed changes to Rule 6.56(b) and (c)
would eliminate discrepancies in the
[[Page 21871]]
trading rules that apply to trading through compression forums and
normal SPX trading rules by harmonizing the solicited transactions
rules and making trading through compression forums subject to the
rules set forth in Rule 6.9. Accordingly, the Exchange believes that
the proposed rule changes to Rule 6.56 would eliminate potential
confusion caused by regulatory discrepancies in the Rules and provide
additional clarity, specifically with respect to the application of the
solicited transaction rules. The Exchange believes that the adoption of
clear, transparent, and consistent rules is in the best interests of
both investors and the general public.
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 with positions that meet the eligible criteria in the same
manner. The proposed change would encourage the closing of positions,
which, once closed, may serve to alleviate the capital requirement
constraints on TPHs and improve overall market liquidity by freeing
capital currently tied up in certain 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 eligible to participant through
CBOE TPHs. 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 through a
compression forum. Lists of positions will be made available to all
TPHs simply alert TPHs to certain SPX positions that other TPHs are
interested in closing at the end of each calendar month.
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
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \20\ and
Rule 19b-4(f)(6) \21\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
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-2017-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2017-035. 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-CBOE-2017-035, and should be
submitted on or before May 31, 2017.
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09424 Filed 5-9-17; 8:45 am]
BILLING CODE 8011-01-P
