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 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 (http://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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for 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 (http://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 (http://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.
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    \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).
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    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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    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.
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    \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 (http://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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for 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.
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    \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