Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Amend Interpretation and Policy .07 of Exchange Rule 4.11, Position Limits, To Increase the Position Limits for Options on Certain Exchange Traded Products, 8907-8912 [2018-04128]
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Federal Register / Vol. 83, No. 41 / Thursday, March 1, 2018 / Notices
proximity to a facility or site. With
respect to copyrighted works, except for
limited excerpts that serve the purpose
of the adjudicatory filings and would
constitute a Fair Use application,
participants are requested not to include
copyrighted materials in their
submission.
For further details with respect to this
action, see the application for license
amendment dated February 8, 2018.
Attorney for licensee: Jeffrie J. Keenan,
PSEG Nuclear LLC–N21, P.O. Box 236,
Hancocks Bridge, NJ 08038.
NRC Branch Chief: James G. Danna.
Dated at Rockville, Maryland, on February
26, 2018.
For the Nuclear Regulatory Commission.
James G. Danna,
Chief, Plant Licensing Branch I, Division of
Operating Reactor Licensing, Office of
Nuclear Reactor Regulation.
[FR Doc. 2018–04182 Filed 2–28–18; 8:45 am]
BILLING CODE 7590–01–P
POSTAL REGULATORY COMMISSION
[Docket Nos. CP2018–171; MC2018–126 and
CP2018–172]
New Postal Products
Postal Regulatory Commission.
Notice.
AGENCY:
ACTION:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
negotiated service agreements. This
notice informs the public of the filing,
invites public comment, and takes other
administrative steps.
DATES: Comments are due: March 5,
2018.
SUMMARY:
Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
amozie on DSK30RV082PROD with NOTICES
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
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request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3007.40.
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3010, and 39
CFR part 3020, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: CP2018–171; Filing
Title: Notice of United States Postal
Service of Filing a Functionally
Equivalent Global Expedited Package
Services 9 Negotiated Service
Agreement and Application for NonPublic Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
February 23, 2018; Filing Authority: 39
CFR 3015.5; Public Representative:
Timothy J. Schwuchow; Comments Due:
March 5, 2018.
2. Docket No(s).: MC2018–126 and
CP2018–172; Filing Title: USPS Request
to Add Priority Mail Contract 422 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: February 23, 2018;
Filing Authority: 39 U.S.C. 3642 and 39
CFR 3020.30 et seq.; Public
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8907
Representative: Timothy J. Schwuchow;
Comments Due: March 5, 2018.
This Notice will be published in the
Federal Register.
Stacy L. Ruble,
Secretary.
[FR Doc. 2018–04168 Filed 2–28–18; 8:45 am]
BILLING CODE 7710–FW–P
POSTAL SERVICE
Product Change—Priority Mail
Negotiated Service Agreement
Postal ServiceTM.
Notice.
AGENCY:
ACTION:
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
DATES: Date of required notice: March 1,
2018.
FOR FURTHER INFORMATION CONTACT:
Elizabeth A. Reed, 202–268–3179.
SUPPLEMENTARY INFORMATION: The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on February 23,
2018, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Contract 422 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2018–126, CP2018–172.
SUMMARY:
Elizabeth A. Reed,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2018–04120 Filed 2–28–18; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82770; File No. SR–CBOE–
2017–057]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment Nos. 1 and 2, To Amend
Interpretation and Policy .07 of
Exchange Rule 4.11, Position Limits,
To Increase the Position Limits for
Options on Certain Exchange Traded
Products
February 23, 2018.
I. Introduction
On August 15, 2017, Cboe Exchange,
Inc. (‘‘Exchange’’ or ‘‘Cboe’’) filed with
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the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend Interpretation and
Policy .07 of Exchange Rule 4.11,
Position Limits, to increase the position
limits for options on the following
exchange traded funds (‘‘ETFs’’) and
exchange traded note (‘‘ETN’’): iShares
China Large-Cap ETF (‘‘FXI’’), iShares
MSCI EAFE ETF (‘‘EFA’’), iShares MSCI
Emerging Markets ETF (‘‘EEM’’), iShares
Russell 2000 ETF (‘‘IWM’’), iShares
MSCI Brazil Capped ETF (‘‘EWZ’’),
iShares 20+ Year Treasury Bond Fund
ETF (‘‘TLT’’), iPath S&P 500 VIX ShortTerm Futures ETN (‘‘VXX’’),3
PowerShares QQQ Trust (‘‘QQQQ’’),
and iShares MSCI Japan ETF (‘‘EWJ’’).
The proposed rule change was
published for comment in the Federal
Register on August 31, 2017.4 On
October 11, 2017, pursuant to Section
19(b)(2) of the Act,5 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule change.6 The Commission
received no comments on the original
proposal.
On November 22, 2017, the Exchange
submitted Amendment No. 1 to the
proposed rule change.7 On November
29, 2017, the Commission published
notice of Amendment No. 1 and
instituted proceedings under Section
19(b)(2)(B) of the Act 8 to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 1.9 The Commission
received one comment letter on the
proposed rule change in response to the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 As noted below, the Exchange subsequently
amended its proposal to remove the proposed
increase in position limits for options on the VXX
ETN. See infra note 11.
4 See Securities Exchange Act Release No. 81483
(August 25, 2017), 82 FR 41457 (‘‘Notice’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 81853,
82 FR 48300 (October 17, 2017). The Commission
designated November 29, 2017 as the deadline for
the Commission to approve or disapprove, or
institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
7 In Amendment No. 1, the Exchange provided
additional justification and analysis in support of
the proposal, which is summarized below. The full
text of Amendment No. 1 has been placed in the
public comment file for SR–CBOE–2017–57 and is
available at: https://www.sec.gov/comments/srcboe-2017-057/cboe2017057-2715774-161526.pdf.
8 15 U.S.C. 78s(b)(2)(B).
9 See Securities Exchange Act Release No. 82168,
82 FR 57501 (December 5, 2017) (‘‘Order Instituting
Proceedings’’).
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2 17
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Order Instituting Proceedings.10 On
February 21, 2018, the Exchange filed
Amendment No. 2 to the proposed rule
change.11 The Commission is
publishing this notice to solicit
comment on Amendment No. 2, and is
approving the proposed rule change, as
modified by Amendment Nos. 1 and 2,
on an accelerated basis.
II. Description of the Proposal, as
Modified by Amendment Nos. 1 and 2
Currently, position limits for options
on ETFs such as those subject to the
proposal, as amended,12 are determined
pursuant to Exchange Rule 4.11, and,
with certain exceptions, vary by tier
according to the number of outstanding
shares and past six-month trading
volume of the underlying security.13
Options in the highest tier—i.e., options
that overlie securities with the largest
numbers of outstanding shares and
trading volume—have a standard option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.14
In addition, Interpretation and Policy
.07 of Exchange Rule 4.11 currently sets
forth separate position limits for options
on certain ETFs, including 500,000
contracts for options on EEM and IWM,
and 900,000 contracts for options on
QQQQ.
In the proposal, as amended, the
Exchange proposes to revise
Interpretation and Policy .07 to
Exchange Rule 4.11 to increase the
position limits for options on certain
ETFs, as described more fully below.
The Exchange states its belief that
increasing the position limits for these
options will lead to a more liquid and
10 See Letter to Brent J. Fields, Secretary,
Commission, from Ellen Greene, Managing Director,
Securities Industry and Financial Markets
Association, dated December 19, 2017 (‘‘SIFMA
Letter’’).
11 In Amendment No. 2, the Exchange revised its
proposal to eliminate the proposed increase to
position limits for options on VXX. The full text of
Amendment No. 2 has been placed in the comment
file for SR–CBOE–2017–57 and is available at:
https://www.sec.gov/comments/sr-cboe-2017-057/
cboe2017057-3120566-161917.pdf.
12 See Notice, supra note 4, at 41458, for
descriptions provided by the Exchange regarding
the composition and design of the underlying
securities of each of the options subject to this
proposal.
13 Pursuant to Exchange Rule 4.12, Interpretation
and Policy .02, which provides that the exercise
limits for ETF options are equivalent to their
position limits, the exercise limits for each of these
options would be increased to the level of the new
position limits.
14 To be eligible for this tier, the recent six-month
trading volume of the underlying security must
have totaled at least 100,000,000 shares; or the most
recent six-month trading volume of the underlying
security must have totaled at least 75,000,000
shares and the underlying security must have at
least 300,000,000 shares currently outstanding.
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competitive market environment for
these options that will benefit customers
interested in these products.15
First, the Exchange proposes to
increase the position limits for options
on FXI, EFA, EWZ, TLT, and EWJ, each
of which fall into the highest standard
tier set forth in Rule 4.11. The Exchange
proposes to increase the current
position limit of 250,000 contracts for
options on these securities to 500,000
contracts.16 In support of this change,
the Exchange compares certain trading
characteristics of FXI, EFA, EWZ, TLT,
and EWJ (the average daily trading
volume of the security and of the
overlying option), as well as the number
of outstanding shares and market
capitalization of each of these securities,
to the same figures for EEM and IWM,
both of which currently have a position
limit of 500,000 contracts.17 Referencing
this data, the Exchange maintains that
the trading characteristics of FXI, EFA,
EWZ, TLT, and EWJ are either similar
to that of EEM and IWM or reflect
trading activity sufficient to assure that
the proposed position limit would
continue to address potential
manipulation.18
In addition, the Exchange proposes to
increase the position limits for options
on EEM and IWM from 500,000
contracts to 1,000,000 contracts.19 In
support of this change, the Exchange
compares the trading characteristics of
15 See
Notice, supra note 4, at 41459.
connection with this change, the exercise
limits for these options would rise to 500,000
contracts. See supra note 13.
17 See Notice, supra note 4, at 41459. With respect
to trading characteristics, specifically, the Exchange
states that the average daily trading volumes of FXI,
EFA, EWZ, TLT, and EWJ for the periods analyzed
were 15.08 million shares, 19.42 million shares,
17.08 million shares, 8.53 million shares, and 6.06
million shares, respectively. The figures for EEM
and IWM were 52.12 million shares and 27.46
million shares. With regard to the overlying
options, trading volumes for the first group were
71,944 contracts, 98,844 contracts, 95,152 contracts,
80,476 contracts, and 4,715 contracts, while trading
volumes for EEM options and IWM options were
287,357 and 490,070, respectively. The Exchange
further states that the total shares outstanding for
FXI was 78.6 million, EFA was 1178.4 million,
EWZ was 159.4 million, TLT was 60 million, and
EWJ was 303.6 million compared to 797.4 million
for EEM and 253.1 million for IWM. Finally, the
Exchange states that the fund market cap for FXI
was $3,343.6 million, EFA was $78,870.3 million,
EWZ was $6,023.4 million, TLT was $7,442.4
million, and EWJ was $16,625.1 million compared
to $34,926.1 million for EEM and $35,809.1 million
for IWM.
18 See id. With respect to FXI, EWZ, and TLT, the
Exchange acknowledges that these securities are not
as actively traded as EEM and IWM, but notes that
each is based on a broad basket of underlying
securities and maintains that trading of each is
sufficiently active so as to alleviate concerns about
potential manipulative activity. Id.
19 In connection with this change, the exercise
limits for these options would rise to 1,000,000
contracts. See supra note 13.
16 In
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EEM and IWM to that of QQQQ, which
currently has a position limit of 900,000
contracts, and states its belief that, given
the respective trading behaviors of EEM
and IWM, the proposed position limits
would continue to address potential
manipulative schemes and adverse
market impact on trading in the options
and their underlying shares.20
Finally, the Exchange proposes to
increase the position limits for options
on QQQQ from 900,000 contracts to
1,800,000 contracts.21 In support of this
change, the Exchange compares the
trading and other characteristics of
QQQQ to that of the SPDR S&P 500 ETF
(‘‘SPY’’), which currently has no
position limits, and states its belief that
the proposed position limit and QQQQ’s
trading behavior would continue to
address potential manipulative schemes
and adverse market impact surrounding
the use of options and trading in its
underlying shares.22
The Exchange states that the current
position limits for the options subject to
the proposal have inhibited the ability
of Market Makers to make markets on
the Exchange.23 Specifically, the
20 See Notice, supra note 4, at 41458–59.
Specifically, the Exchange states that the average
daily trading volumes for EEM and IWM,
respectively, were 52.12 million shares and 27.46
million shares, compared to 26.25 million shares for
QQQQ. With regard to the overlying options, the
average daily volumes for EEM and IWM options
were 287,357 contracts and 490,070 contracts,
respectively, as compared to 579,404 for QQQQ.
The Exchange further states that the total shares
outstanding for EEM were 797.4 million and for
IWM were 253.1 million compared to 351.6 million
for QQQQ. Finally, the Exchange states that the
fund market cap for EEM was $34,926.1 million and
IWM was $35,809.1 million compared to $50,359.7
million for QQQQ.
21 In connection with this change, the exercise
limits for these options would rise to 1.8 million
contracts. See supra note 13.
22 See Notice, supra note 4, at 41458. Specifically,
the Exchange states that the average daily trading
volume for QQQQ was 26.25 million shares
compared to 64.63 million shares for SPY, while the
average daily volume for options contracts
overlying QQQQ was 579,404, as compared to
2,575,153 for SPY. The Exchange further states that
the total shares outstanding for QQQQ were 351.6
million compared to 976.23 million for SPY.
Finally, the Exchange states that the fund market
cap for QQQQ was $50,359.7 million compared to
$240,540 million for SPY.
The Commission notes that the lack of position
limits for SPY is currently subject to a pilot
program. See Securities Exchange Act Release Nos.
67937 (September 27, 2012), 77 FR 60489 (October
3, 2012) (SR–CBOE–2012–091) (eliminating
position and exercise limits for SPY options on a
pilot basis); and 81017 (June 26, 2017), 82 FR 29960
(June 30, 2017) (SR–CBOE–2017–050) (extending
the SPY pilot program to July 12, 2018).
23 See Notice, supra note 4, at 41460. See also
Amendment No. 1, in which the Exchange states
that it submitted the proposal at the request of
market participants whose on-exchange activity has
been ‘‘hindered by existing position limits, causing
them to be unable to provide additional liquidity
not just on the Exchange, but also on other options
exchanges on which they participate.’’
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Exchange avers, the proposal is
designed to encourage Market Makers to
shift liquidity from over-the-counter
markets onto the Exchange, which, it
believes, will enhance the process of
price discovery conducted on the
Exchange through increased order
flow.24 The proposal will also benefit
institutional investors, retail traders,
and public customers, the Exchange
maintains, by providing them with a
more effective trading and hedging
vehicle.25
With regard to the concerns that
position limits generally are meant to
address, the Exchange represents that
‘‘the structure of the [ETFs] subject to
this proposal and the considerable
liquidity of the market for options on
those [ETFs] diminishes the opportunity
to manipulate [these] product[s] and
disrupt the underlying market[s] that a
lower position limit may protect
against.’’ 26 In Amendment No. 1, the
Exchange elaborates further and
describes at length: (i) The creation and
redemption process for ETFs (and a
similar process for the ETN that was
originally subject to the proposal 27); (ii)
the arbitrage activity that ensues when
such instruments are overpriced or are
trading at a discount to the securities on
which they are based and which, the
Exchange maintains, helps to keep the
instrument’s price in line with the value
of its underlying portfolio; and (iii) how
these processes, in the Exchange’s view,
serve to mitigate the potential price
impact of the ETF shares (or the ETN
that was originally subject to the
proposal) that might otherwise result
from increased position limits.28
In addition, in Amendment No. 1 the
Exchange states that (i) some of the
subject ETFs (and the ETN that was
originally subject to the proposal) are
based on broad-based indices that
24 See Notice, supra note 4, at 41460. See also
Amendment No. 1, in which the Exchange reiterates
its understanding that certain market participants
are opting to execute trades involving large
numbers of options contracts in the symbols subject
to the proposal in the over-the-counter market, and
argues that these large trades do not contribute to
the price discovery process performed on a lit
market.
25 See Notice, supra note 4, at 41460.
26 See id.
27 With regard to the ETN option originally
included in the proposal—VXX—the Exchange
acknowledged that there is no direct analogue to
ETF ‘‘creation,’’ but observed that the ETN issuer
may sell additional VXX shares from its inventory.
Regardless of whether VXX shares are redeemed or
new VXX shares are issued, the Exchange stated, an
issuer may transact in VIX futures in order to hedge
its exposure, resulting in an arbitrage process
similar to the one that exists for ETFs, as described
above, thereby helping to keep an ETN’s price in
line with the value of its underlying index. See
Amendment No. 1.
28 See id.
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8909
underlie cash-settled options that are
economically equivalent to the relevant
ETF and have no position limits; and (ii)
others are based on broad-based indices
that underlie cash-settled options with
position limits reflecting a notional
value that is larger than the current
position limit for their ETF analogue.29
According to the Exchange, if certain
position limits are appropriate for the
options overlying the same index or an
analogue to the basket of securities that
the ETF tracks, then those same
economically equivalent position limits
should be appropriate for the option
overlying the ETF.30 The Exchange
believes that options on QQQ, IWM,
EEM, and EFA meet the criterion of
economic equivalence to cash-settled
options.31 For the other ETFs in the
proposal where this does not apply
(because there is currently no index
analogue approved for options trading),
the Exchange argues that, based on the
liquidity, breadth, and depth of the
underlying market, the index referenced
by the ETF would be considered a
broad-based index under the Exchange’s
rules.32 The Exchange also cites data in
support of its argument that the market
capitalization of the underlying index or
reference asset of each of the ETFs (and
the ETN that was originally subject to
the proposal) is large enough to absorb
any price movements that may be
caused by an oversized trade, and thus
justifies increasing position limits for
the options on these products.33
As noted, in Amendment No. 2, the
Exchange withdrew options on VXX
from the subject of the proposal, stating
that, ‘‘doing so will allow the Exchange
to provide the Commission with
additional support for increasing the
options on the VXX’s position limits,
which it expects to do through a
separate proposed rule change to be
submitted at a later date.’’ 34
Accordingly, this Order does not
address position limits on options on
VXX.
The Exchange also refers to other
provisions in its rules, noting, for
example, that the options reporting
requirements of Exchange Rule 4.13
would continue to be applicable to the
options subject to the proposal.35 As set
29 See
id.
id.
31 See id. The Exchange similarly included VXX
in this discussion, but subsequently withdrew the
increase in position limits for options on VXX from
the proposal in Amendment No. 2, as previously
noted. See supra note 11.
32 See Amendment No. 1.
33 See id.
34 See Amendment No. 2.
35 See Notice, supra note 4, at 41460.
30 See
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forth in Exchange Rule 4.13(a), each
Trading Permit Holder (‘‘TPH’’) must
report to the Exchange certain
information in relation to any customer
who, acting alone, or in concert with
others, on the previous business day
maintained aggregate long or short
positions on the same side of the market
of 200 or more contracts in any single
class of option contracts dealt in on the
Exchange.36 Further, Exchange Rule
4.13(b) requires each TPH (other than an
Exchange market-maker or Designated
Primary Market-Maker) 37 that maintains
a position in excess of 10,000 non-FLEX
equity option contracts on the same side
of the market, on behalf of its own
account or for the account of a
customer, to report to the Exchange
information as to whether such
positions are hedged, and provide
documentation as to how such contracts
are hedged.38
The Exchange also represents that the
existing surveillance procedures and
reporting requirements at the Exchange,
other options exchanges, and at the
several clearing firms are capable of
properly identifying unusual and/or
illegal trading activity.39 According to
the Exchange, its surveillance
procedures utilize daily monitoring of
market movements via automated
surveillance techniques to identify
unusual activity in both options and
underlying stocks.40 In addition, the
Exchange states that its surveillance
procedures have been effective for the
surveillance of trading in the options
subject to this proposal, and will
continue to be employed.41
The Exchange also argues that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a TPH
or its customer may try to maintain an
inordinately large unhedged position in
the options subject to this proposal.42
Current margin and risk-based haircut
methodologies, the Exchange states,
36 The report must include, for each such class of
options, the number of option contracts comprising
each such position and, in the case of short
positions, whether covered or uncovered. See
Exchange Rule 4.13(a).
37 According to the Exchange, market-makers
(including Designated Primary Market-Makers) are
exempt from the referenced reporting requirement
because market-maker information can be accessed
through the Exchange’s market surveillance
systems. See Notice, supra note 4, at 41459.
38 According to the Exchange, this information
would include, but would not be limited to, the
option position, whether such position is hedged
and, if so, a description of the hedge, and the
collateral used to carry the position, if applicable.
See id.
39 See id.
40 See id.
41 See id. at 41459 n.23.
42 See id. at 41459.
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serve to limit the size of positions
maintained by any one account by
increasing the margin and/or capital
that a TPH must maintain for a large
position held by itself or by its
customer.43 In addition, the Exchange
notes that the Commission’s net capital
rule, Rule 15c3–1 under the Act,44
imposes a capital charge on TPHs to the
extent of any margin deficiency
resulting from the higher margin
requirement.45
III. Comment Received in Response to
Order Instituting Proceedings
As noted above, the Commission
published an Order Instituting
Proceedings to determine whether to
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1.46 In the Order Instituting
Proceedings, the Commission sought
comment on the sufficiency and merit of
the Exchange’s statements in support of
the proposal, as modified by
Amendment No. 1, including, in
particular, whether the position and
exercise limit for each option as
proposed could impact markets
adversely.47
The Commission received one
comment letter in response to the Order
Instituting Proceedings.48 The
commenter expressed support for the
proposal, as then modified by
Amendment No. 1.49 The commenter
stated that the markets underlying the
ETFs subject to the proposal (and the
ETN that was originally subject to the
proposal), as modified by Amendment
No. 1, are sufficiently large to justify an
increase in position limits for the
associated options.50 The commenter
further stated that the creation and
redemption process for the underlying
products will absorb price volatility
caused by large trades in the underlying
ETFs (or the ETN that was originally
subject to the proposal).51 The
commenter also noted that the proposed
increases in position limits may
encourage existing trading activity in
the over-the-counter markets to move to
the Exchange.52 The commenter added
that even if it were assumed that the
options positions established following
a position limit increase represented
only new market entrants (and not a
migration of pre-existing over-the43 See
id. at 41459–60.
CFR 240.15c3–1.
45 See Notice, supra note 4, at 41460.
46 See Order Instituting Proceedings, supra note 9.
47 See id. at 57504.
48 See supra note 10.
49 See SIFMA Letter at 1–2.
50 See id. at 2.
51 See id.
52 See id.
44 17
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counter positions), a position limit
increase alone would not necessarily
result in added volatility in the
underlying instruments.53
IV. Discussion and Commission
Findings
The Commission finds that the
proposed rule change, as modified by
Amendment Nos. 1 and 2, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.54 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1 and 2, is consistent with Section
6(b)(5) of the Act,55 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, 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.
Position and exercise limits serve as
a regulatory tool designed to address
manipulative schemes and adverse
market impact surrounding the use of
options. Since the inception of
standardized options trading, the
options exchanges have had rules
limiting the aggregate number of options
contracts that a member or customer
may hold or exercise.56 These position
and exercise limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate the
underlying market so as to benefit the
options positions.57 In particular,
position and exercise limits are
designed to minimize the potential for
mini-manipulations and for corners or
squeezes of the underlying market.58 In
addition, such limits serve to reduce the
possibility for disruption of the options
market itself, especially in illiquid
classes.59
Over the years, the Commission has
taken a gradual, evolutionary approach
toward expansion of position and
exercise limits for option products
53 See
id.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
55 15 U.S.C. 78f(b)(5).
56 See, e.g., Securities Exchange Act Release No.
45236 (January 4, 2002), 67 FR 1378 (January 10,
2002) (SR–Amex–2001–42).
57 See, e.g., Securities Exchange Act Release No.
47346 (February 11, 2003), 68 FR 8316 (February
20, 2003) (SR–CBOE–2002–26).
58 See id.
59 See id.
54 In
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overlying certain ETFs where there is
considerable liquidity in both the
underlying cash markets and the
options markets, and, in the case of
certain broad-based index options,
toward elimination of such limits
altogether.60 The Commission has been
careful to balance two competing
concerns when considering proposals
by self-regulatory organizations to
change position and exercise limits. The
Commission has recognized that the
limits can be useful to prevent investors
from disrupting the market in securities
underlying the options.61 At the same
time, the Commission has determined
that limits should not be established in
a manner that will unnecessarily
discourage participation in the options
market by institutions and other
investors with substantial hedging
needs or to prevent specialists and
market makers from adequately meeting
their obligations to maintain a fair and
orderly market.62
After careful consideration of the
proposal, as modified by Amendment
Nos. 1 and 2, and the comment
received, the Commission believes that
it is reasonable for the Exchange to
increase the position and exercise limits
for options on FXI, EFA, EWZ, TLT, and
EWJ to 500,000 contracts, for options on
EEM and IWM to 1,000,000 contracts,
and for options on QQQQ to 1,800,000
contracts. As noted above, the markets
for standardized options on these
securities and for the underlying
products themselves have substantial
trading volume and liquidity. The
Commission believes that this liquidity
would reduce the possibility of
manipulating these products and the
disruption in the underlying markets
that lower position limits may protect
against.
The Commission also has considered
the creation and redemption process for
the ETFs subject to the modified
proposal; the existence of an issuer
arbitrage mechanism that helps keep the
ETF’s price in line with the value of its
underlying portfolio when overpriced or
trading at a discount to the securities on
which it is based; and how these
60 The Commission’s incremental approach to
approving changes in position and exercise limits
for option products overlying certain ETFs is wellestablished. See, e.g., Securities Exchange Act
Release Nos. 67672 (August 15, 2012), 77 FR 50750,
50752 & n.42 (August 22, 2012) (SR–NYSEAmex–
2012–29) (approving proposed rule change to
eliminate position limits for SPY options on a pilot
basis); 64695 (June 17, 2011), 76 FR 36942, 36943
& n.19 (June 23, 2011) (SR–Phlx–2011–58)
(approving increase of SPY options position limit
to 900,000 contracts).
61 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11).
62 See id.
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processes serve to mitigate the potential
price impact of the ETF shares that
might otherwise result from increased
position limits.63
In addition, as discussed above, the
Exchange believes that current margin
and net capital requirements serve to
limit the size of positions maintained by
any one account.64 The Commission
agrees that these financial requirements
should help to address concerns that a
member or its customer may try to
maintain an inordinately large
unhedged position in the options
subject to this proposal and will help to
reduce risks if such a position is
established.
The Commission further agrees with
the Exchange that the reporting
requirements imposed by Exchange
Rule 4.13,65 as well as the Exchange’s
surveillance procedures, together with
those of other exchanges and clearing
firms,66 should help protect against
potential manipulation. The
Commission expects that the Exchange
will continue to monitor trading in the
options subject to this proposal for the
purpose of discovering and sanctioning
manipulative acts and practices, and to
reassess the position and exercise limits,
if and when appropriate, in light of its
findings.
In sum, given the measure of liquidity
for the options subject to this proposal
and the underlying products, the
creation and redemption process and
issuer arbitrage mechanisms that exist
relating to the underlying instruments,
the margin and capital requirements
cited above, the Exchange’s options
reporting requirements, and the
Exchange’s surveillance procedures and
agreements with other markets, the
Commission believes that increasing the
position and exercise limits for FXI,
EFA, EWZ, TLT, and EWJ options to
500,000 contracts, EEM and IWM
options to 1,000,000 contracts, and
QQQQ options to 1,800,000 contracts is
consistent with the Act.
V. Solicitation of Comments on
Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 2 is consistent with the
Act. Comments may be submitted by
any of the following methods:
63 See
supra notes 27–28 and accompanying text.
supra notes 42–45 and accompanying text.
65 See supra notes 35–38 and accompanying text.
66 See supra notes 39–41 and accompanying text.
64 See
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8911
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–2017–057 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–2017–057. 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2017–057, and
should be submitted on or before March
22, 2018.
VI. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment No. 2 in the Federal
Register. As discussed above, in
Amendment No. 2, the Exchange
revised its proposal to eliminate the
proposed increase to position limits for
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Federal Register / Vol. 83, No. 41 / Thursday, March 1, 2018 / Notices
options on VXX. The Commission notes
that Amendment No. 2 does not
otherwise modify the proposed rule
change, as modified by Amendment No.
1, which was subject to a full noticeand-comment period. Rather,
Amendment No. 2 serves to narrow the
scope of the original proposal by
maintaining the existing position limit
of 250,000 contracts for options on VXX.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,67 to approve the proposed
rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,68 that the
proposed rule change, as modified by
Amendment Nos. 1 and 2 (SR–CBOE–
2017–057), be, and hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–04128 Filed 2–28–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82769; File No. SR–
CboeEDGX–2018–006]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend
EDGX Rule 21.1(c) To Further Align the
Exchange’s Rules With That of Cboe
BZX Exchange, Inc. as They Relate to
the Equity Options Platform
amozie on DSK30RV082PROD with NOTICES
February 23, 2018.
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 February
13, 2018, Cboe EDGX Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘EDGX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange has designated this
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
67 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
69 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).
68 15
VerDate Sep<11>2014
17:26 Feb 28, 2018
19b–4(f)(6)(iii) thereunder,4 which
renders it effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
amend Exchange Rule 21.1(c) to further
align the Exchange’s rules with the Rule
21.1(c) of Cboe BZX Exchange, Inc.
(‘‘BZX Options’’), an options platform
affiliated with the Exchange.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe EDGX Exchange, Inc.
*
*
*
*
*
Rule 21.1. Definitions
The following definitions apply to
Chapter XXI for the trading of options
listed on EDGX Options.
(a)–(b) (No change).
(c) The term ‘‘Order’’ shall mean a
single order submitted to the System by
a User and shall include both
Attributable and Non-Attributable
Orders, as defined below. The System
shall treat all Orders as NonAttributable Orders unless a User has
entered instructions to treat such Orders
as [Non-]Attributable Orders.
(1)–(2) (No change).
(d)–(i) (No change).
*
*
*
*
*
The text of the proposed rule change
is available at the Exchange’s website at
www.markets.cboe.com, at the principal
office of the Exchange, 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Exchange Rule 21.1(c) to further align
the Exchange’s rules with the Rule
21.1(c) of Cboe BZX Exchange, Inc.
(‘‘BZX Options’’), an options platform
affiliated with the Exchange.
Pursuant to EDGX Options Rule
21.1(c) the default treatment on EDGX
Options is that an order is an
Attributable Order unless a User directs
otherwise. This is the opposite of BZX
Options, which provides that the default
treatment is that an order is a NonAttributable Order unless a User directs
otherwise. In order to align the
Exchange’s rules with BZX Options
rules the Exchange seeks to amend
EDGX Options Rule 21.1(c) to provide
that an order is a Non-Attributable
Order unless a User directs otherwise.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 5 in general, and furthers the
objectives of Section 6(b)(5) of the Act 6
in particular, in that it is designed to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
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.
The proposed rule change does not
propose to implement new or unique
functionality that has not been
previously filed with the Commission.
The Exchange notes that the proposed
rule text is based on BZX Options Rule
21.1(c). The proposed rule change is
intended to further align BZX Options
Rule 21.1(c) with the rules of BZX
Options in order to provide consistent
functionality across the Exchange and
its affiliate. More consistent
functionality between the Exchange and
BZX Options will reduce complexity
and may help to avoid potential
confusion by Users of the Exchange that
are also participants on BZX Options.
As such, the proposed rule change will
foster cooperation and coordination
with persons engaged in facilitating
transactions in securities and will
remove impediments to and perfect the
mechanism of a free and open market
and national market system.
5 15
4 17
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6 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 83, Number 41 (Thursday, March 1, 2018)]
[Notices]
[Pages 8907-8912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04128]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82770; File No. SR-CBOE-2017-057]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Amend
Interpretation and Policy .07 of Exchange Rule 4.11, Position Limits,
To Increase the Position Limits for Options on Certain Exchange Traded
Products
February 23, 2018.
I. Introduction
On August 15, 2017, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with
[[Page 8908]]
the Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend
Interpretation and Policy .07 of Exchange Rule 4.11, Position Limits,
to increase the position limits for options on the following exchange
traded funds (``ETFs'') and exchange traded note (``ETN''): iShares
China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares
MSCI Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF
(``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year
Treasury Bond Fund ETF (``TLT''), iPath S&P 500 VIX Short-Term Futures
ETN (``VXX''),\3\ PowerShares QQQ Trust (``QQQQ''), and iShares MSCI
Japan ETF (``EWJ''). The proposed rule change was published for comment
in the Federal Register on August 31, 2017.\4\ On October 11, 2017,
pursuant to Section 19(b)(2) of the Act,\5\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change.\6\
The Commission received no comments on the original proposal.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ As noted below, the Exchange subsequently amended its
proposal to remove the proposed increase in position limits for
options on the VXX ETN. See infra note 11.
\4\ See Securities Exchange Act Release No. 81483 (August 25,
2017), 82 FR 41457 (``Notice'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 81853, 82 FR 48300
(October 17, 2017). The Commission designated November 29, 2017 as
the deadline for the Commission to approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
---------------------------------------------------------------------------
On November 22, 2017, the Exchange submitted Amendment No. 1 to the
proposed rule change.\7\ On November 29, 2017, the Commission published
notice of Amendment No. 1 and instituted proceedings under Section
19(b)(2)(B) of the Act \8\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.\9\
The Commission received one comment letter on the proposed rule change
in response to the Order Instituting Proceedings.\10\ On February 21,
2018, the Exchange filed Amendment No. 2 to the proposed rule
change.\11\ The Commission is publishing this notice to solicit comment
on Amendment No. 2, and is approving the proposed rule change, as
modified by Amendment Nos. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------
\7\ In Amendment No. 1, the Exchange provided additional
justification and analysis in support of the proposal, which is
summarized below. The full text of Amendment No. 1 has been placed
in the public comment file for SR-CBOE-2017-57 and is available at:
https://www.sec.gov/comments/sr-cboe-2017-057/cboe2017057-2715774-161526.pdf.
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ See Securities Exchange Act Release No. 82168, 82 FR 57501
(December 5, 2017) (``Order Instituting Proceedings'').
\10\ See Letter to Brent J. Fields, Secretary, Commission, from
Ellen Greene, Managing Director, Securities Industry and Financial
Markets Association, dated December 19, 2017 (``SIFMA Letter'').
\11\ In Amendment No. 2, the Exchange revised its proposal to
eliminate the proposed increase to position limits for options on
VXX. The full text of Amendment No. 2 has been placed in the comment
file for SR-CBOE-2017-57 and is available at: https://www.sec.gov/comments/sr-cboe-2017-057/cboe2017057-3120566-161917.pdf.
---------------------------------------------------------------------------
II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2
Currently, position limits for options on ETFs such as those
subject to the proposal, as amended,\12\ are determined pursuant to
Exchange Rule 4.11, and, with certain exceptions, vary by tier
according to the number of outstanding shares and past six-month
trading volume of the underlying security.\13\ Options in the highest
tier--i.e., options that overlie securities with the largest numbers of
outstanding shares and trading volume--have a standard option position
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market.\14\ In addition,
Interpretation and Policy .07 of Exchange Rule 4.11 currently sets
forth separate position limits for options on certain ETFs, including
500,000 contracts for options on EEM and IWM, and 900,000 contracts for
options on QQQQ.
---------------------------------------------------------------------------
\12\ See Notice, supra note 4, at 41458, for descriptions
provided by the Exchange regarding the composition and design of the
underlying securities of each of the options subject to this
proposal.
\13\ Pursuant to Exchange Rule 4.12, Interpretation and Policy
.02, which provides that the exercise limits for ETF options are
equivalent to their position limits, the exercise limits for each of
these options would be increased to the level of the new position
limits.
\14\ To be eligible for this tier, the recent six-month trading
volume of the underlying security must have totaled at least
100,000,000 shares; or the most recent six-month trading volume of
the underlying security must have totaled at least 75,000,000 shares
and the underlying security must have at least 300,000,000 shares
currently outstanding.
---------------------------------------------------------------------------
In the proposal, as amended, the Exchange proposes to revise
Interpretation and Policy .07 to Exchange Rule 4.11 to increase the
position limits for options on certain ETFs, as described more fully
below. The Exchange states its belief that increasing the position
limits for these options will lead to a more liquid and competitive
market environment for these options that will benefit customers
interested in these products.\15\
---------------------------------------------------------------------------
\15\ See Notice, supra note 4, at 41459.
---------------------------------------------------------------------------
First, the Exchange proposes to increase the position limits for
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the
highest standard tier set forth in Rule 4.11. The Exchange proposes to
increase the current position limit of 250,000 contracts for options on
these securities to 500,000 contracts.\16\ In support of this change,
the Exchange compares certain trading characteristics of FXI, EFA, EWZ,
TLT, and EWJ (the average daily trading volume of the security and of
the overlying option), as well as the number of outstanding shares and
market capitalization of each of these securities, to the same figures
for EEM and IWM, both of which currently have a position limit of
500,000 contracts.\17\ Referencing this data, the Exchange maintains
that the trading characteristics of FXI, EFA, EWZ, TLT, and EWJ are
either similar to that of EEM and IWM or reflect trading activity
sufficient to assure that the proposed position limit would continue to
address potential manipulation.\18\
---------------------------------------------------------------------------
\16\ In connection with this change, the exercise limits for
these options would rise to 500,000 contracts. See supra note 13.
\17\ See Notice, supra note 4, at 41459. With respect to trading
characteristics, specifically, the Exchange states that the average
daily trading volumes of FXI, EFA, EWZ, TLT, and EWJ for the periods
analyzed were 15.08 million shares, 19.42 million shares, 17.08
million shares, 8.53 million shares, and 6.06 million shares,
respectively. The figures for EEM and IWM were 52.12 million shares
and 27.46 million shares. With regard to the overlying options,
trading volumes for the first group were 71,944 contracts, 98,844
contracts, 95,152 contracts, 80,476 contracts, and 4,715 contracts,
while trading volumes for EEM options and IWM options were 287,357
and 490,070, respectively. The Exchange further states that the
total shares outstanding for FXI was 78.6 million, EFA was 1178.4
million, EWZ was 159.4 million, TLT was 60 million, and EWJ was
303.6 million compared to 797.4 million for EEM and 253.1 million
for IWM. Finally, the Exchange states that the fund market cap for
FXI was $3,343.6 million, EFA was $78,870.3 million, EWZ was
$6,023.4 million, TLT was $7,442.4 million, and EWJ was $16,625.1
million compared to $34,926.1 million for EEM and $35,809.1 million
for IWM.
\18\ See id. With respect to FXI, EWZ, and TLT, the Exchange
acknowledges that these securities are not as actively traded as EEM
and IWM, but notes that each is based on a broad basket of
underlying securities and maintains that trading of each is
sufficiently active so as to alleviate concerns about potential
manipulative activity. Id.
---------------------------------------------------------------------------
In addition, the Exchange proposes to increase the position limits
for options on EEM and IWM from 500,000 contracts to 1,000,000
contracts.\19\ In support of this change, the Exchange compares the
trading characteristics of
[[Page 8909]]
EEM and IWM to that of QQQQ, which currently has a position limit of
900,000 contracts, and states its belief that, given the respective
trading behaviors of EEM and IWM, the proposed position limits would
continue to address potential manipulative schemes and adverse market
impact on trading in the options and their underlying shares.\20\
---------------------------------------------------------------------------
\19\ In connection with this change, the exercise limits for
these options would rise to 1,000,000 contracts. See supra note 13.
\20\ See Notice, supra note 4, at 41458-59. Specifically, the
Exchange states that the average daily trading volumes for EEM and
IWM, respectively, were 52.12 million shares and 27.46 million
shares, compared to 26.25 million shares for QQQQ. With regard to
the overlying options, the average daily volumes for EEM and IWM
options were 287,357 contracts and 490,070 contracts, respectively,
as compared to 579,404 for QQQQ. The Exchange further states that
the total shares outstanding for EEM were 797.4 million and for IWM
were 253.1 million compared to 351.6 million for QQQQ. Finally, the
Exchange states that the fund market cap for EEM was $34,926.1
million and IWM was $35,809.1 million compared to $50,359.7 million
for QQQQ.
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Finally, the Exchange proposes to increase the position limits for
options on QQQQ from 900,000 contracts to 1,800,000 contracts.\21\ In
support of this change, the Exchange compares the trading and other
characteristics of QQQQ to that of the SPDR S&P 500 ETF (``SPY''),
which currently has no position limits, and states its belief that the
proposed position limit and QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in its underlying
shares.\22\
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\21\ In connection with this change, the exercise limits for
these options would rise to 1.8 million contracts. See supra note
13.
\22\ See Notice, supra note 4, at 41458. Specifically, the
Exchange states that the average daily trading volume for QQQQ was
26.25 million shares compared to 64.63 million shares for SPY, while
the average daily volume for options contracts overlying QQQQ was
579,404, as compared to 2,575,153 for SPY. The Exchange further
states that the total shares outstanding for QQQQ were 351.6 million
compared to 976.23 million for SPY. Finally, the Exchange states
that the fund market cap for QQQQ was $50,359.7 million compared to
$240,540 million for SPY.
The Commission notes that the lack of position limits for SPY is
currently subject to a pilot program. See Securities Exchange Act
Release Nos. 67937 (September 27, 2012), 77 FR 60489 (October 3,
2012) (SR-CBOE-2012-091) (eliminating position and exercise limits
for SPY options on a pilot basis); and 81017 (June 26, 2017), 82 FR
29960 (June 30, 2017) (SR-CBOE-2017-050) (extending the SPY pilot
program to July 12, 2018).
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The Exchange states that the current position limits for the
options subject to the proposal have inhibited the ability of Market
Makers to make markets on the Exchange.\23\ Specifically, the Exchange
avers, the proposal is designed to encourage Market Makers to shift
liquidity from over-the-counter markets onto the Exchange, which, it
believes, will enhance the process of price discovery conducted on the
Exchange through increased order flow.\24\ The proposal will also
benefit institutional investors, retail traders, and public customers,
the Exchange maintains, by providing them with a more effective trading
and hedging vehicle.\25\
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\23\ See Notice, supra note 4, at 41460. See also Amendment No.
1, in which the Exchange states that it submitted the proposal at
the request of market participants whose on-exchange activity has
been ``hindered by existing position limits, causing them to be
unable to provide additional liquidity not just on the Exchange, but
also on other options exchanges on which they participate.''
\24\ See Notice, supra note 4, at 41460. See also Amendment No.
1, in which the Exchange reiterates its understanding that certain
market participants are opting to execute trades involving large
numbers of options contracts in the symbols subject to the proposal
in the over-the-counter market, and argues that these large trades
do not contribute to the price discovery process performed on a lit
market.
\25\ See Notice, supra note 4, at 41460.
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With regard to the concerns that position limits generally are
meant to address, the Exchange represents that ``the structure of the
[ETFs] subject to this proposal and the considerable liquidity of the
market for options on those [ETFs] diminishes the opportunity to
manipulate [these] product[s] and disrupt the underlying market[s] that
a lower position limit may protect against.'' \26\ In Amendment No. 1,
the Exchange elaborates further and describes at length: (i) The
creation and redemption process for ETFs (and a similar process for the
ETN that was originally subject to the proposal \27\); (ii) the
arbitrage activity that ensues when such instruments are overpriced or
are trading at a discount to the securities on which they are based and
which, the Exchange maintains, helps to keep the instrument's price in
line with the value of its underlying portfolio; and (iii) how these
processes, in the Exchange's view, serve to mitigate the potential
price impact of the ETF shares (or the ETN that was originally subject
to the proposal) that might otherwise result from increased position
limits.\28\
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\26\ See id.
\27\ With regard to the ETN option originally included in the
proposal--VXX--the Exchange acknowledged that there is no direct
analogue to ETF ``creation,'' but observed that the ETN issuer may
sell additional VXX shares from its inventory. Regardless of whether
VXX shares are redeemed or new VXX shares are issued, the Exchange
stated, an issuer may transact in VIX futures in order to hedge its
exposure, resulting in an arbitrage process similar to the one that
exists for ETFs, as described above, thereby helping to keep an
ETN's price in line with the value of its underlying index. See
Amendment No. 1.
\28\ See id.
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In addition, in Amendment No. 1 the Exchange states that (i) some
of the subject ETFs (and the ETN that was originally subject to the
proposal) are based on broad-based indices that underlie cash-settled
options that are economically equivalent to the relevant ETF and have
no position limits; and (ii) others are based on broad-based indices
that underlie cash-settled options with position limits reflecting a
notional value that is larger than the current position limit for their
ETF analogue.\29\ According to the Exchange, if certain position limits
are appropriate for the options overlying the same index or an analogue
to the basket of securities that the ETF tracks, then those same
economically equivalent position limits should be appropriate for the
option overlying the ETF.\30\ The Exchange believes that options on
QQQ, IWM, EEM, and EFA meet the criterion of economic equivalence to
cash-settled options.\31\ For the other ETFs in the proposal where this
does not apply (because there is currently no index analogue approved
for options trading), the Exchange argues that, based on the liquidity,
breadth, and depth of the underlying market, the index referenced by
the ETF would be considered a broad-based index under the Exchange's
rules.\32\ The Exchange also cites data in support of its argument that
the market capitalization of the underlying index or reference asset of
each of the ETFs (and the ETN that was originally subject to the
proposal) is large enough to absorb any price movements that may be
caused by an oversized trade, and thus justifies increasing position
limits for the options on these products.\33\
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\29\ See id.
\30\ See id.
\31\ See id. The Exchange similarly included VXX in this
discussion, but subsequently withdrew the increase in position
limits for options on VXX from the proposal in Amendment No. 2, as
previously noted. See supra note 11.
\32\ See Amendment No. 1.
\33\ See id.
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As noted, in Amendment No. 2, the Exchange withdrew options on VXX
from the subject of the proposal, stating that, ``doing so will allow
the Exchange to provide the Commission with additional support for
increasing the options on the VXX's position limits, which it expects
to do through a separate proposed rule change to be submitted at a
later date.'' \34\ Accordingly, this Order does not address position
limits on options on VXX.
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\34\ See Amendment No. 2.
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The Exchange also refers to other provisions in its rules, noting,
for example, that the options reporting requirements of Exchange Rule
4.13 would continue to be applicable to the options subject to the
proposal.\35\ As set
[[Page 8910]]
forth in Exchange Rule 4.13(a), each Trading Permit Holder (``TPH'')
must report to the Exchange certain information in relation to any
customer who, acting alone, or in concert with others, on the previous
business day maintained aggregate long or short positions on the same
side of the market of 200 or more contracts in any single class of
option contracts dealt in on the Exchange.\36\ Further, Exchange Rule
4.13(b) requires each TPH (other than an Exchange market-maker or
Designated Primary Market-Maker) \37\ that maintains a position in
excess of 10,000 non-FLEX equity option contracts on the same side of
the market, on behalf of its own account or for the account of a
customer, to report to the Exchange information as to whether such
positions are hedged, and provide documentation as to how such
contracts are hedged.\38\
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\35\ See Notice, supra note 4, at 41460.
\36\ The report must include, for each such class of options,
the number of option contracts comprising each such position and, in
the case of short positions, whether covered or uncovered. See
Exchange Rule 4.13(a).
\37\ According to the Exchange, market-makers (including
Designated Primary Market-Makers) are exempt from the referenced
reporting requirement because market-maker information can be
accessed through the Exchange's market surveillance systems. See
Notice, supra note 4, at 41459.
\38\ According to the Exchange, this information would include,
but would not be limited to, the option position, whether such
position is hedged and, if so, a description of the hedge, and the
collateral used to carry the position, if applicable. See id.
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The Exchange also represents that the existing surveillance
procedures and reporting requirements at the Exchange, other options
exchanges, and at the several clearing firms are capable of properly
identifying unusual and/or illegal trading activity.\39\ According to
the Exchange, its surveillance procedures utilize daily monitoring of
market movements via automated surveillance techniques to identify
unusual activity in both options and underlying stocks.\40\ In
addition, the Exchange states that its surveillance procedures have
been effective for the surveillance of trading in the options subject
to this proposal, and will continue to be employed.\41\
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\39\ See id.
\40\ See id.
\41\ See id. at 41459 n.23.
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The Exchange also argues that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a TPH or its customer may try to maintain an inordinately
large unhedged position in the options subject to this proposal.\42\
Current margin and risk-based haircut methodologies, the Exchange
states, serve to limit the size of positions maintained by any one
account by increasing the margin and/or capital that a TPH must
maintain for a large position held by itself or by its customer.\43\ In
addition, the Exchange notes that the Commission's net capital rule,
Rule 15c3-1 under the Act,\44\ imposes a capital charge on TPHs to the
extent of any margin deficiency resulting from the higher margin
requirement.\45\
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\42\ See id. at 41459.
\43\ See id. at 41459-60.
\44\ 17 CFR 240.15c3-1.
\45\ See Notice, supra note 4, at 41460.
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III. Comment Received in Response to Order Instituting Proceedings
As noted above, the Commission published an Order Instituting
Proceedings to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment No. 1.\46\ In the Order
Instituting Proceedings, the Commission sought comment on the
sufficiency and merit of the Exchange's statements in support of the
proposal, as modified by Amendment No. 1, including, in particular,
whether the position and exercise limit for each option as proposed
could impact markets adversely.\47\
---------------------------------------------------------------------------
\46\ See Order Instituting Proceedings, supra note 9.
\47\ See id. at 57504.
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The Commission received one comment letter in response to the Order
Instituting Proceedings.\48\ The commenter expressed support for the
proposal, as then modified by Amendment No. 1.\49\ The commenter stated
that the markets underlying the ETFs subject to the proposal (and the
ETN that was originally subject to the proposal), as modified by
Amendment No. 1, are sufficiently large to justify an increase in
position limits for the associated options.\50\ The commenter further
stated that the creation and redemption process for the underlying
products will absorb price volatility caused by large trades in the
underlying ETFs (or the ETN that was originally subject to the
proposal).\51\ The commenter also noted that the proposed increases in
position limits may encourage existing trading activity in the over-
the-counter markets to move to the Exchange.\52\ The commenter added
that even if it were assumed that the options positions established
following a position limit increase represented only new market
entrants (and not a migration of pre-existing over-the-counter
positions), a position limit increase alone would not necessarily
result in added volatility in the underlying instruments.\53\
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\48\ See supra note 10.
\49\ See SIFMA Letter at 1-2.
\50\ See id. at 2.
\51\ See id.
\52\ See id.
\53\ See id.
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IV. Discussion and Commission Findings
The Commission finds that the proposed rule change, as modified by
Amendment Nos. 1 and 2, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\54\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1 and 2, is
consistent with Section 6(b)(5) of the Act,\55\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, 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.
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\54\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\55\ 15 U.S.C. 78f(b)(5).
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Position and exercise limits serve as a regulatory tool designed to
address manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.\56\
These position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate the underlying market so as to benefit the
options positions.\57\ In particular, position and exercise limits are
designed to minimize the potential for mini-manipulations and for
corners or squeezes of the underlying market.\58\ In addition, such
limits serve to reduce the possibility for disruption of the options
market itself, especially in illiquid classes.\59\
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\56\ See, e.g., Securities Exchange Act Release No. 45236
(January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-2001-42).
\57\ See, e.g., Securities Exchange Act Release No. 47346
(February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-CBOE-2002-
26).
\58\ See id.
\59\ See id.
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Over the years, the Commission has taken a gradual, evolutionary
approach toward expansion of position and exercise limits for option
products
[[Page 8911]]
overlying certain ETFs where there is considerable liquidity in both
the underlying cash markets and the options markets, and, in the case
of certain broad-based index options, toward elimination of such limits
altogether.\60\ The Commission has been careful to balance two
competing concerns when considering proposals by self-regulatory
organizations to change position and exercise limits. The Commission
has recognized that the limits can be useful to prevent investors from
disrupting the market in securities underlying the options.\61\ At the
same time, the Commission has determined that limits should not be
established in a manner that will unnecessarily discourage
participation in the options market by institutions and other investors
with substantial hedging needs or to prevent specialists and market
makers from adequately meeting their obligations to maintain a fair and
orderly market.\62\
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\60\ The Commission's incremental approach to approving changes
in position and exercise limits for option products overlying
certain ETFs is well-established. See, e.g., Securities Exchange Act
Release Nos. 67672 (August 15, 2012), 77 FR 50750, 50752 & n.42
(August 22, 2012) (SR-NYSEAmex-2012-29) (approving proposed rule
change to eliminate position limits for SPY options on a pilot
basis); 64695 (June 17, 2011), 76 FR 36942, 36943 & n.19 (June 23,
2011) (SR-Phlx-2011-58) (approving increase of SPY options position
limit to 900,000 contracts).
\61\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
\62\ See id.
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After careful consideration of the proposal, as modified by
Amendment Nos. 1 and 2, and the comment received, the Commission
believes that it is reasonable for the Exchange to increase the
position and exercise limits for options on FXI, EFA, EWZ, TLT, and EWJ
to 500,000 contracts, for options on EEM and IWM to 1,000,000
contracts, and for options on QQQQ to 1,800,000 contracts. As noted
above, the markets for standardized options on these securities and for
the underlying products themselves have substantial trading volume and
liquidity. The Commission believes that this liquidity would reduce the
possibility of manipulating these products and the disruption in the
underlying markets that lower position limits may protect against.
The Commission also has considered the creation and redemption
process for the ETFs subject to the modified proposal; the existence of
an issuer arbitrage mechanism that helps keep the ETF's price in line
with the value of its underlying portfolio when overpriced or trading
at a discount to the securities on which it is based; and how these
processes serve to mitigate the potential price impact of the ETF
shares that might otherwise result from increased position limits.\63\
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\63\ See supra notes 27-28 and accompanying text.
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In addition, as discussed above, the Exchange believes that current
margin and net capital requirements serve to limit the size of
positions maintained by any one account.\64\ The Commission agrees that
these financial requirements should help to address concerns that a
member or its customer may try to maintain an inordinately large
unhedged position in the options subject to this proposal and will help
to reduce risks if such a position is established.
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\64\ See supra notes 42-45 and accompanying text.
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The Commission further agrees with the Exchange that the reporting
requirements imposed by Exchange Rule 4.13,\65\ as well as the
Exchange's surveillance procedures, together with those of other
exchanges and clearing firms,\66\ should help protect against potential
manipulation. The Commission expects that the Exchange will continue to
monitor trading in the options subject to this proposal for the purpose
of discovering and sanctioning manipulative acts and practices, and to
reassess the position and exercise limits, if and when appropriate, in
light of its findings.
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\65\ See supra notes 35-38 and accompanying text.
\66\ See supra notes 39-41 and accompanying text.
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In sum, given the measure of liquidity for the options subject to
this proposal and the underlying products, the creation and redemption
process and issuer arbitrage mechanisms that exist relating to the
underlying instruments, the margin and capital requirements cited
above, the Exchange's options reporting requirements, and the
Exchange's surveillance procedures and agreements with other markets,
the Commission believes that increasing the position and exercise
limits for FXI, EFA, EWZ, TLT, and EWJ options to 500,000 contracts,
EEM and IWM options to 1,000,000 contracts, and QQQQ options to
1,800,000 contracts is consistent with the Act.
V. Solicitation of Comments on Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 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 [email protected]. Please include
File Number SR-CBOE-2017-057 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-2017-057. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2017-057, and should be submitted
on or before March 22, 2018.
VI. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
No. 2 in the Federal Register. As discussed above, in Amendment No. 2,
the Exchange revised its proposal to eliminate the proposed increase to
position limits for
[[Page 8912]]
options on VXX. The Commission notes that Amendment No. 2 does not
otherwise modify the proposed rule change, as modified by Amendment No.
1, which was subject to a full notice-and-comment period. Rather,
Amendment No. 2 serves to narrow the scope of the original proposal by
maintaining the existing position limit of 250,000 contracts for
options on VXX. Accordingly, the Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,\67\ to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, on an accelerated basis.
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\67\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\68\ that the proposed rule change, as modified by Amendment Nos. 1
and 2 (SR-CBOE-2017-057), be, and hereby is, approved on an accelerated
basis.
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\68\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-04128 Filed 2-28-18; 8:45 am]
BILLING CODE 8011-01-P
