Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend IM-3120-2 of BOX Rule 3120 (Position Limits) To Increase the Position Limits for Options on the Following Exchange Traded Funds: iShares China Large-Cap ETF, iShares MSCI EAFE ETF, iShares MSCI Emerging Markets ETF, iShares Russell 2000 ETF, iShares MSCI Brazil Capped ETF, iShares 20+ Year Treasury Bond Fund ETF, PowerShares QQQ Trust, and iShares MSCI Japan ETF, 13330-13336 [2018-06138]
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
mechanism of a free and open market
and a national market system. The
Exchange notes that referencing this
functionality in the Fees Schedule also
maintains transparency in the Fees
Schedule.
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 or
intermarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed change to allow FTIDs to be
submitted post-trade on the trade date
via Exchange system functionality will
provide a more efficient means for TPHs
to submit this information and is not
intended for competitive reasons and
only applies to Cboe Options. The
Exchange also notes that no rights or
obligations of Permit Holders are
affected by the change.
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 comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 5 and paragraph (f) of Rule
19b–4 6 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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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:
5 15
6 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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20:30 Mar 27, 2018
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–2018–023 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–2018–023. 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 such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
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–2018–023, and
should be submitted on or before April
18, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–06141 Filed 3–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82930; File No. SR–BOX–
2018–10]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend IM–
3120–2 of BOX Rule 3120 (Position
Limits) To Increase the Position Limits
for Options on the Following Exchange
Traded Funds: iShares China LargeCap ETF, iShares MSCI EAFE ETF,
iShares MSCI Emerging Markets ETF,
iShares Russell 2000 ETF, iShares
MSCI Brazil Capped ETF, iShares 20+
Year Treasury Bond Fund ETF,
PowerShares QQQ Trust, and iShares
MSCI Japan ETF
March 22, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 15,
2018, BOX Options Exchange LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
BOX Rule 3120 (Position Limits) to
increase the position limits for options
on the following exchange traded funds
(‘‘ETFs’’): 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’’),
PowerShares QQQ Trust (‘‘QQQQ’’),
and iShares MSCI Japan ETF (‘‘EWJ’’).
The text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s internet website at https://
boxoptions.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
1 15
7 17
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CFR 200.30–3(a)(12).
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2 17
Sfmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend IM–
3120–2 to BOX Rule 3120 (Position
Limits) to increase the position limits
for options on the following exchange
trade funds (‘‘ETFs’’): 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’’), PowerShares QQQ Trust
(‘‘QQQQ’’), and iShares MSCI Japan ETF
(‘‘EWJ’’).This is a competitive filing that
is based on a proposal recently
submitted by the Chicago Board Options
Exchange Incorporated (‘‘CBOE’’) and
approved by the Commission.3
Position limits are designed to
address potential manipulative schemes
and adverse market impact surrounding
the use of options, such as disrupting
the market in the security underlying
the options. The potential manipulative
schemes and adverse market impact are
balanced against the potential of setting
the limits so low as to discourage
participation in the options market. The
level of those position limits must be
balanced between curtailing potential
manipulation and the cost of preventing
potential hedging activity that could be
used for legitimate economic purposes.
Position limits for options on ETFs,
such as those subject to this proposal,
are determined pursuant to BOX Rule
3120, and vary according to the number
of outstanding shares and the trading
volume of the underlying stocks or ETFs
over the past six-months. Pursuant to
BOX Rule 3120, the largest in
capitalization and the most frequently
traded stocks and ETFs have an option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and
smaller capitalization stocks and ETFs
have position limits of 200,000, 75,000,
3 See Securities Exchange Act Release No. 82770
(February 23, 2018), 83 FR 8907 (March 1,
2018)(Order Granting Accelerated Approval SR–
SR–CBOE–2017–057).
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20:30 Mar 27, 2018
Jkt 244001
50,000 or 25,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.
Options on FXI, EFA, EWZ, TLT, and
EWJ are currently subject to the
standard position limit of 250,000
contracts as set forth in BOX Rule 3120.4
IM–3120–2 of BOX Rule 3120 sets forth
separate position limits for options on
specific ETFs as follows:
• Options on EEM are 500,000
contracts;
• Options on IWM are 500,000
contracts; and
• Options on QQQQ are 900,000
contracts.
The purpose of this proposal is to
amend IM–3120–2 to BOX Rule 3120 to
double the position and exercise limits
for FXI, EEM, IWM, EFA, EWZ, TLT,
QQQQ, and EWJ.5 As such, options on
FXI, EFA, EWZ, TLT, and EWJ would
no longer be subject to the standard
position limits set forth under BOX Rule
3120. Accordingly, IM–3120–2 would
be amended to set forth that the position
limits for options on FXI, EFA, EWZ,
TLT, and EWJ would be 500,000
contracts. These position limits equal
the current position limits for option on
IWM and EMM and are similar to the
current position limit for options on
QQQQ set forth in IM–3120–2. IM–
3120–2 would be further amended to
increase the position limits for the
remaining options subject to this
proposal as follows:
• The position limits for options on
EEM would be increased from 500,000
contracts to 1,000,000 contracts;
• The position limits on options on
IWM would be increased from 500,000
contracts to 1,000,000 contracts; and
• The position limits on options on
QQQQ would be increased from 900,000
contracts to 1,800,000 contracts.
In support of this proposal, the
Exchange represents that the above
listed ETFs qualify for either: (i) The
initial listing criteria set forth in
Exchange Rule 5020(h)(2) for ETFs
holding non-U.S. component securities;
or (ii) for ETFs listed pursuant to
generic listing standards for series of
portfolio depository receipts and index
fund shares based on international or
global indexes under which a
comprehensive surveillance agreement
(‘‘CSA’’) is not required.6 FXI tracks the
4 See https://www.theocc.com/webapps/delosearch.
5 By virtue of IM–3140–1 of BOX Rule 3140,
which is not being amended by this filing, the
exercise limit for FXI, EEM, IWM, EFA, EWZ, TLT,
QQQQ, and EWJ options would be similarly
increased. The Exchange notes that it also proposes
to make non-substantive corrections to the names
of IWM and EEM in IM–3120–2.
6 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
PO 00000
Frm 00110
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13331
performance of the FTSE China 50
Index, which is composed of the 50
largest Chinese stocks.7 EEM tracks the
performance of the MSCI Emerging
Markets Index, which is composed of
approximately 800 component
securities.8 ‘‘The MSCI Emerging
Markets Index consists of the following
21 emerging market country indices:
Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico,
Morocco, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand,
and Turkey.’’ 9 IWM tracks the
performance of the Russell 2000 Index,
which is composed of 2,000 small-cap
domestic stocks.10 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.11 ‘‘The MSCI EAFE Index is
designed to represent the performance
of large and mid-cap securities across 21
developed markets, including countries
in Europe, Australasia and the Far East,
excluding the U.S. and Canada.’’ 12 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.13 TLT tracks the
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.14 QQQQ
tracks the performance of the Nasdaq100 Index, which is composed of 100 of
the largest domestic and international
nonfinancial companies listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).15
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.16
BOX represents that more than 50%
of the weight of the securities held by
the options subject to this proposal are
also subject to a CSA.17 Additionally,
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See BOX Rule 5020(h)(2); BOX Rule
5030(h).
7 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
8 See https://us.ishares.com/product_info/fund/
overview/EEM.htm.
9 See https://www.msci.com/products/indices/
tools/#EM.
10 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
11 See https://www.ishares.com/us/products/
239623/.
12 See https://www.msci.com/eafe.
13 See https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
14 See https://www.ishares.com/us/products/
239454/.
15 See https://www.invesco.com/portal/site/us/
financial-professional/etfs/productdetail?
productId=QQQ&ticker=QQQ&title=powersharesqqq.
16 See https://www.ishares.com/us/products/
239665/EWJ.
17 See BOX Rule 5020(h)(2).
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
the component securities of the MSCI
Emerging Markets Index on which EEM
is based for which the primary market
is in any one country that is not subject
to a CSA do not represent 20% or more
of the weight of the MSCI Emerging
Markets Index.18 Finally, the
component securities of the MSCI
Emerging Markets Index on which EEM
is based, for which the primary market
is in any two countries that are not
subject to CSAs do not represent 33% of
more of the weight of the MSCI
Emerging Markets Index.19
According to CBOE, market
participants have increased their
demand for options on FXI, EFA, EWZ,
2017 ADV
(million
shares)
ETF
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FXI ...................................................................................................................
EEM .................................................................................................................
IWM ..................................................................................................................
EFA ..................................................................................................................
EWZ .................................................................................................................
TLT ...................................................................................................................
QQQQ ..............................................................................................................
EWJ .................................................................................................................
SPY 21 ..............................................................................................................
The following analysis was conducted
by CBOE in support of its proposal.
BOX agrees with CBOE’s analysis
discussed below.
In support of its proposal to increase
the position limits for QQQQ to
1,800,000 contracts, CBOE compared
the trading characteristics of QQQQ to
that of the SPDR S&P 500 ETF (‘‘SPY’’),
which has no position limits. As shown
in CBOE’s above table, the average daily
trading volume through August 14, 2017
for QQQQ was 26.25 million shares
compared to 64.63 million shares for
SPY. The total shares outstanding for
QQQQ are 351.6 million compared to
976.23 million for SPY. The fund
market cap for QQQQ is $50,359.7
million compared to $240,540 million
for SPY. SPY is one of the most actively
trading ETFs and is, therefore, subject to
no position limits. QQQQ is also very
actively traded, and while not to the
level of SPY, should be subject to the
proposed higher position limits based
its trading characteristics when
compared to SPY. The proposed
position limit coupled with QQQQ’s
trading behavior would continue to
address potential manipulative schemes
and adverse market impact surrounding
the use of options and trading in its [sic]
underlying the options.
In support of its proposal to increase
the position limits for EEM and IWM
from 500,000 contracts to 1,000,000
contracts, CBOE also compared the
trading characteristics of EEM and IWM
to that of QQQQ, which currently has a
position limit of 900,000 contracts. As
shown in the above table, the average
daily trading volume through July 31,
18 See
19 See
BOX Rule 5020(h)(2)(ii)(B).
BOX Rule 5020(h)(2)(ii)(C).
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20:30 Mar 27, 2018
15.08
52.12
27.46
19.42
17.08
8.53
26.25
6.06
64.63
2017 for EEM was 52.12 million shares
and IWM was 27.46 million shares
compared to 26.25 million shares for
QQQQ. The total shares outstanding for
EEM are 797.4 million and for IWM are
253.1 million compared to 351.6 million
for QQQQ. The fund market cap for
EEM is $34,926.1 million and IWM is
$35,809 million compared to $50,359.7
million for QQQQ. EEM, IWM and
QQQQ have similar trading
characteristics and subjecting EEM and
IWM to the proposed higher position
limit would continue be designed to
address potential manipulate [sic]
schemes that may arise from trading in
the options and their underlying
securities. These above trading
characteristics for QQQQ when
compared to EEM and IWM also justify
increasing the position limit for QQQQ.
QQQQ has a higher options ADV than
EEM and IWM, a higher numbers [sic]
of shares outstanding than IWM and a
much higher market cap than EEM and
IWM which justify doubling the
position limit for QQQQ. Based on these
statistics, and as stated above, the
proposed position limit coupled with
QQQQ’s trading behavior would
continue to address potential
manipulative schemes and adverse
market impact surrounding the use of
options and trading in the securities
underlying the options.
In support of its proposal to increase
the position limits for FXI, EFA, EWZ,
TLT, and EWJ from 250,000 contracts to
500,000 contracts, CBOE compared the
trading characteristics of FXI, EFA,
EWZ, TLT and EWJ to that of EEM and
IWM, both of which currently have a
20 See
TLT, and EWJ for hedging and trading
purposes and the Exchange believes the
current position limits are too low and
may be a deterrent to successful trading
of options on these securities.20 CBOE
has collected the following trading
statistics on the ETFs that are subject to
this proposal:
2017 ADV
(option
contracts)
71,944
287,357
490,070
98,844
95,152
80,476
579,404
4,715
2,575,153
PO 00000
supra note 3.
is included here for comparison purposes.
Frm 00111
Fmt 4703
Sfmt 4703
78.6
797.4
253.1
1178.4
159.4
60.0
351.6
303.6
976.23
Fund market
cap
($million)
$3,343.6
34,926.1
35,809.1
78,870.3
6,023.4
7,442.4
50,359.7
16,625.1
240,540.0
position limit of 500,000 contracts. As
shown in the above table, the average
daily trading volume through July 31,
2017 for FXI is 15.08 million shares,
EFA is 19.42 million shares, EWZ is
17.08 million shares, TLT is 8.53
million shares, and EWJ is 6.06 million
shares compared to 52.12 million shares
for EEM and 27.46 million shares for
IWM. The total shares outstanding for
FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60
million and EWJ is 303.6 million
compared to 797.4 million for EEM and
253.1 million for IWM. The fund market
cap for FXI is $3,343.6 million, EFA is
$78,870.3 million, EWZ is $6,023.4
million, TLT is $7,442.4 million,, and
EWJ is $16,625.1 million compared to
$34,926.1 million for EEM and
$35,809.1 million for IWM. The above
trading characteristics of FXI, EFA,
EWZ, TLT and EWJ is either similar to
that of EEM and IWM or sufficiently
active enough so that the proposed limit
would continue to address potential
manipulative [sic] that may arise. EFA
has far more shares outstanding and a
larger fund market cap than EEM, IWM,
and QQQQ. EWJ has a more shares
outstanding than IWM and only slightly
less shares outstanding than QQQQ.
On the other hand, while FXI, EWZ,
and TLT do not exceed EEM, IWM or
QQQQ is any of the specified areas, they
are all actively trading so that market
participant’s trading activity has been
impacted by them being restricted by
the current position limits. The
Exchange believes that the trading
activity and these securities being based
on a broad basket of underlying
21 SPY
Jkt 244001
Shares
outstanding
(million)
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
securities alleviates any potential
manipulative activity that may arise. In
addition, as discussed in more detail
below, the Exchange’s existing
surveillance procedures and reporting
requirements at the Exchange, other
options exchanges, and at several
clearing firms are capable of properly
identifying unusual and/or illegal
trading activity.
According to CBOE, market
participants’ trading activity has been
adversely impacted by the current
position limits for FXI, EFA, EWZ, TLT,
and EWJ and such limits have caused
options trading in these symbols to
move from exchanges to the over-thecounter market. The Exchange
understands that certain market
participants wishing to make trades
involving a large number of options
contracts in the symbols subject to the
proposal are opting to execute those
trades in the over-the-counter market.
The over-the-counter transactions occur
via bi-lateral agreements, the terms of
which are not publicly disclosed to
other market participants. Therefore,
these large trades do not contribute to
the price discovery process performed
on a lit market.
The Exchange notes that the ETFs that
underlie options subject to this proposal
are highly liquid, and are based on a
broad set of highly liquid securities and
other reference assets.22 The Exchange
notes that the Commission has generally
looked through to the liquidity of
securities comprising an index in
establishing position limits for cashsettled index options. The Exchange
further notes that options on certain
broad-based security indexes have no
position limits. Likewise, the
Commission has recognized the
liquidity of the securities comprising
the underlying interest of the SPDR S&P
500 ETF (‘‘SPY’’) in permitting no
position limits on SPY options since
2012,23 and expanded position limits
for options on EEM, IWM, and QQQQ.
The proposed position limits set forth
in the proposal would continue to
address potential manipulative activity
while allowing for potential hedging
activity for appropriate economic
purposes. The creation and redemption
process for these ETFs also lessen the
potential for manipulative activity.
When an ETF company wants to create
more ETF shares, it looks to an
Authorized Participant, which is a
market maker or other large financial
22 See supra providing trading statistics for each
ETF.
23 See Securities Exchange Act Release No. 67936
(September 27, 2012), 77 FR 60491 (October 3,
2012) (SR–BOX–2012–013).
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20:30 Mar 27, 2018
Jkt 244001
institution, to acquire the securities the
ETF is to hold. For instance, IWM is
designed to track the performance of the
Russell 2000 Index, the Authorized
Participant will purchase all the Russell
2000 constituent securities in the exact
same weight as the index, then deliver
those shares to the ETF provider. In
exchange, the ETF provider gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. The price is based
on the net asset value, not the market
value at which the ETF is trading. The
creation of new ETF units can be
conducted all trading day and is not
subject to position limits. This process
can also work in reverse where the ETF
company seeks to decrease the number
of shares that are available to trade. The
creation and redemption process,
therefore, creates a direct link to the
underlying components of the ETF, and
serves to mitigate potential price impact
of the ETF shares that might otherwise
result from increased position limits.
The ETF creation and redemption
seeks to keep ETF share prices trading
in line with the ETF’s underlying net
asset value. Because an ETF trades like
a stock, its price will fluctuate during
the trading day, due to simple supply
and demand. If demand to buy an ETF
is high, for instance, the ETF’s share
price might rise above the value of its
underlying securities. When this
happens, the Authorized Participant
believes the ETF may now be
overpriced, and can buy the underlying
shares that compose the ETF and then
sell ETF shares on the open market.
This should help drive the ETF’s share
price back toward fair value. Likewise,
if the ETF starts trading at a discount to
the securities it holds, the Authorized
Participant can buy shares of the ETF
and redeem them for the underlying
securities. Buying undervalued ETF
shares should drive the price of the ETF
back toward fair value. This arbitrage
process helps to keep an ETF’s price in
line with the value of its underlying
portfolio.
Some of the ETFs underlying options
subject to the proposal are based on
broad-based indices that underlie cash
settled options that are economically
equivalent to the ETF options that are
the subject of the proposal and have no
position limits. Other ETFs are based on
broad-based indexes that underlie cashsettled options with position limits
reflecting notional values that are larger
than the current position limits for ETF
analogues (EEM, EFA). Where there was
no approved index analogue, the
Exchange believes, based on the
liquidity, breadth and depth of the
underlying market, that the index
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13333
referenced by the ETF would be
considered a broad-based index.24 The
Exchange argues that if certain position
limits are appropriate for the options
overlying the same index or is 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. In addition, the
market capitalization of the underlying
index or reference asset is large enough
to absorb any price movements that may
be caused by an oversized trade. Also,
the Authorized Participant or issuer
may look to the stocks comprising the
analogous underlying index or reference
asset when seeking to create additional
ETF shares are part of the creation/
redemption process to address supply
and demand or to mitigate the price
movement the price of the ETF.
For example, the PowerShares QQQ
Trust or QQQQ is an ETF that tracks the
Nasdaq 100 Index or NDX, which is an
index composed of 100 of the largest
non-financial securities listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).
Options on NDX are currently subject to
the standard position limit of 25,000
contracts for broad-based index options
but share similar trading characteristics
as QQQQ.25 Based on QQQQ’s share
price of $154.54 26 and NDX’s index
level of 6,339.14, approximately 40
contracts of QQQQ equals one contract
of NDX. Based on the above comparison
of notional values, this would result in
a position limit equivalent to 1,000,000
contracts for QQQQ as NDX’s analogue.
NDX is subject to the standard position
limit of 25,000 contracts for broad-based
index options and has an average daily
trading volume of 15,300 contracts.
QQQQ is currently subject to a position
limit of 900,000 contracts but has a
much higher average daily trading
volume of 579,404 contracts.
Furthermore, NDX currently has a
market capitalization of $17.2 trillion
and QQQQ has a market capitalization
of $50,359.7 million, and the
component securities of NDX, in
aggregate, have traded an average of 440
million shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in the
QQQQ. The Exchange notes that other
exchanges allow no position limits for
NDX,27 although it has a much lower
24 See BOX Rule 6040, which sets forth the
position limits for broad-based index options.
25 Id.
26 All share prices used herein are based on the
closing price of the security on November 16, 2017.
Source: Yahoo Finance.
27 See CBOE Rule 24.4 sets forth the position
limits for broad-based index options.
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average daily trading volume than its
analogue, the QQQQ. Therefore, the
Exchange believes it is reasonable to
increase the position limit for options
on the QQQQ from 900,000 to 1,800,000
contracts.
The iShare [sic] Russell 2000 ETF or
IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an
index that composed of 2,000 small-cap
domestic companies in the Russell 3000
index. Options on RUT are currently
subject to the standard position limit of
25,000 contracts for broad-based index
options but share similar trading
characteristics as IWM.28 Based on
IWM’s share price of $144.77 and RUT’s
index level of 1,486.88, approximately
10 contracts of IWM equals one contract
of RUT. Based on the above comparison
of notional values, this would result in
a position limit equivalent to 250,000
contracts for IWM as RUT’s analogue.
The Exchange notes that at other
exchanges RUT is not subject to position
limits and has an average daily trading
volume of 66,200 contracts.29 IWM is
currently subject to a position limit of
500,000 contracts but has a much higher
average daily trading volume of 490,070
contracts. As mentioned above, other
exchanges have no position limits for
RUT,30 although it has a much lower
average daily trading volume than its
analogue, the IWM. Furthermore, RUT
currently has a market capitalization of
$2.4 trillion and IWM has a market
capitalization of $35,809.1 million, and
the component securities of RUT, in
aggregate, have traded an average of 270
million shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
IWM. Therefore, the Exchange believes
it is reasonable to increase the position
limit for options on the IWM from
500,000 to 1,000,000 contracts.
EEM tracks the performance of the
MSCI Emerging Markets Index or MXEF,
which is composed of approximately
800 component securities following 21
emerging market country indices: Brazil,
Chile, China, Colombia, Czech Republic,
Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
Below makes the same notional value
comparison as made above. Based on
EEM’s share price of $47.06 and MXEF’s
index level of 1,136.45, approximately
24 contracts of EEM equals one contract
of MXEF. MXEF is currently subject to
the standard position limit of 25,000
28 See BOX Rule 6040, which sets forth the
position limits for broad-based index options.
29 See CBOE Rule 24.4.
30 Id.
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contracts for broad-based index options
under BOX Rule 6040(a). Based on the
above comparison of notional values,
this would result in a position limit
economically equivalent to 604,000
contracts for EEM as MXEF’s analogue.
However, MXEF has an average daily
trading volume of 180 contracts. EEM is
currently subject to a position limit of
500,000 contracts but has a much higher
average daily trading volume of 287,357
contracts. Furthermore, MXEF currently
has a market capitalization of $5.18
trillion and EEM has a market
capitalization of $34,926.1 million, and
the component securities of MXEF, in
aggregate, have traded an average of 33.6
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
EEM. Therefore, based on the
comparison of average daily trading
volume, the Exchange believes it is
reasonable to increase the position limit
for options on the EEM from 500,000 to
1,000,000 contracts.
EFA tracks the performance of MSCI
EAFE Index or MXEA, which has over
900 component securities designed to
represent the performance of large and
mid-cap securities across 21 developed
markets, including countries in Europe,
Australasia and the Far East, excluding
the U.S. and Canada. Below makes the
same notional value comparison as
made above. Based on EFA’s share price
of $69.16 and MXEA’s index level of
1,986.15, approximately 29 contracts of
EFA equals one contract of MXEA.
MXEA is currently subject to the
standard position limit of 25,000
contracts for broad-based index options
under BOX Rule 6040(a). Based on the
above comparison of notional values,
this would result in a position limit
economically equivalent to 721,000
contracts for EFA as MXEA’s analogue.
Furthermore, MXEA currently has a
market capitalization of $18.7 trillion
and EFA has a market capitalization of
$78,870.3 million, and the component
securities of MXEA, in aggregate, have
traded an average of 4.6 billion shares
per day in 2017, both large enough to
absorb any price movement cause by a
large trade in the EEM. However, MXEA
has an average daily trading volume of
270 contracts. EFA is currently subject
to a position limit of 250,000 contracts
but has a much higher average daily
trading volume of 98,844 contracts.
Based on the above comparisons, the
Exchange believes it is reasonable to
increase the position limit for options
on the EFA from 250,000 to 500,000
contracts.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
PO 00000
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stocks. There is currently no index
analogue for FXI approved for options
trading. However, the FTSE China 50
Index currently has a market
capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18
million, both large enough to absorb any
price movement cause by a large trade
in FXI. The components of the FTSE
China 50 Index, in aggregate, have an
average daily trading volume of 2.3
billion shares. FXI is currently subject to
a position limit of 000 contracts but has
a much higher average daily trading
volume of 15.08 million shares. Based
on the above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the FXI
from 250,000 to 500,000 contracts.
EWZ tracks the performance of the
MSCI Brazil 25/50 Index, which is
composed of shares of large and midsize companies in Brazil. There is
currently no index analogue for EWZ
approved for options trading. However,
the MSCI Brazil 25/50 Index currently
has a market capitalization of $700
billion and EWZ has a market
capitalization of $6,023.4 million, both
large enough to absorb any price
movement cause by a large trade in
EWZ. The components of the MSCI
Brazil 25/50 Index, in aggregate, have an
average daily trading volume of 285
million shares. EWZ is currently subject
to a position limit of 250,000 contracts
but has a much higher average daily
trading volume of 17.08 million shares.
Based on the above comparisons, the
Exchange believes it is reasonable to
increase the position limit for options
on the EWZ from 250,000 to 500,000
contracts.
TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index,
which is composed of long-term U.S.
Treasury bonds. There is currently no
index analogue for TLT approved for
options trading. However, the U.S.
Treasury market is one of the largest and
most liquid markets in the world, with
over $14 trillion outstanding and
turnover of approximately $500 billion
per day. TLT currently has a market
capitalization of $7,442.4 million, both
large enough to absorb any price
movement cause by a large trade in TLT.
Therefore, the potential for
manipulation will not increase solely
due the increase in position limits as set
forth in this proposal. Based on the
above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the TLT
from 250,000 to 500,000 contracts.
EWJ tracks the MSCI Japan Index,
which tracks the performance of large
and mid-sized companies in Japan.
There is currently no index analogue for
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EWJ approved for options trading.
However, the MSCI Japan Index has a
market capitalization of $3.5 trillion and
EWJ has a market capitalization of
$16,625.1 million, and the component
securities of the MSCI Japan Index, in
aggregate, have traded an average of 1.1
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in EWJ.
EWJ is currently subject to a position
limit of 250,000 contracts and has an
average daily trading volume of 6.6
million shares. Based on the above
comparisons, the Exchange believes it is
reasonable to increase the position limit
for options on EWJ from 250,000 to
500,000 contracts.
The Exchange believes that increasing
the position limits for the options
subject to this proposal would lead to a
more liquid and competitive market
environment for these options, which
will benefit customers interested in this
product. Under the proposal, the
reporting requirement for the above
options would be unchanged. Thus, the
Exchange would still require that each
BOX Participant that maintains a
position in the options on the same side
of the market, for its own account or for
the account of a customer, report certain
information to the Exchange. This
information would include, but would
not be limited to, the options’ position,
whether such position is hedged and, if
so, a description of the hedge, and the
collateral used to carry the position, if
applicable. Exchange Market Makers 31
would continue to be exempt from this
reporting requirement, as Market Maker
information can be accessed through the
Exchange’s market surveillance
systems.32 In addition, the general
reporting requirement for customer
accounts that maintain an aggregate
position of 200 or more options
contracts would remain at this level for
the options subject to this proposal.33
The Exchange believes 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. In addition,
31 A Market Maker ‘‘is an Options Participant
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in the Rule 8000 Series.
All Market Makers are designated as specialists on
the Exchange for all purposes under the Exchange
Act or Rules thereunder.’’ See BOX Rule 100(a)(31).
32 The Exchange notes that the Financial Industry
Regulatory Authority (‘‘FINRA’’), pursuant to a
regulatory services agreement, operates surveillance
on behalf of BOX. This type of Market Maker
information can be found through FINRA.
33 See BOX Rule 3150 for reporting requirements.
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routine oversight inspections of the
Exchange’s regulatory programs by the
Commission have not uncovered any
material inconsistencies or
shortcomings in the manner in which
the Exchange’s market surveillance is
conducted. These procedures utilize
daily monitoring of market movements
via automated surveillance techniques
to identify unusual activity in both
options and underlying stocks.34
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.35 The
positions for options subject to this
proposal are part of any reportable
positions and, thus, cannot be legally
hidden. Moreover, the Exchange’s
requirement that BOX Participants file
reports with the Exchange for any
customer who held aggregate large long
or short positions of any single class for
the previous day will continue to serve
as an important part of the Exchange’s
surveillance efforts.36
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a BOX
Participant or its customer may try to
maintain an inordinately large unhedged position in the options subject
to this proposal. Current margin and
risk-based haircut methodologies serve
to limit the size of positions maintained
by any one account by increasing the
margin and/or capital that a BOX
Participant must maintain for a large
position held by itself or by its
customer.37 In addition, Rule
15c3–1 38 imposes a capital charge on
BOX Participants to the extent of any
margin deficiency resulting from the
higher margin requirement.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),39 in general, and Section 6(b)(5)
of the Act,40 in particular, in that it is
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
34 These procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed by
FINRA on behalf of BOX.
35 17 CFR 240.13d–1.
36 The Exchange again notes that these
surveillance efforts are carried out by FINRA on
behalf of BOX.
37 See BOX Rule 10100 Series for a description of
margin requirements.
38 17 CFR 240.15c3–1.
39 15 U.S.C. 78f(b).
40 15 U.S.C. 78f(b)(5).
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13335
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 current position
limits for the options subject to this
proposal have inhibited the ability of
Market Makers to make markets on the
Exchange. Specifically, the proposal is
designed to encourage Market Makers to
shift liquidity from over the counter
markets onto the Exchange, which will
enhance the process of price discovery
conducted on the Exchange through
increased order flow. The proposal will
also benefit institutional investors as
well as retail traders, and public
customers, by providing them with a
more effective trading and hedging
vehicle. In addition, the Exchange
believes 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 this product
and disrupt the underlying market that
a lower position limit may protect
against.
Increased position limits for select
actively traded options, such as that
proposed herein, is not novel and has
been previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for options on SPY.41
Additionally, the Commission has
approved similar proposed rule changes
to increase position limits for options on
highly liquid, actively-traded ETFs,42
including a proposal to permanently
eliminate the position and exercise
limits for options overlaying the S&P
500 Index, S&P 100 Index, Dow Jones
Industrial Average, and Nasdaq 100
Index.43 In approving the permanent
elimination of position and exercise
limits, the Commission relied heavily
upon CBOE’s surveillance capabilities,
the Commission expressed trust in the
enhanced surveillance and reporting
41 See Securities Exchange Act Release Nos.
67672 (August 15, 2012), 77 FR 50750 (August 22,
2012)(SR–NYSEAmex-2012–29); 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR–
CBOE–2012–091); 67936 (September 27, 2012), 77
FR 60491 (October 3, 2012) (SR–BOX–2012–013).
42 See Securities Exchange Act Release Nos.
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012)(SR–CBOE–2012–066); 64928 (July 20, 2011),
76 FR 44633 (July 26, 2011) (SR–CBOE–2011–065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011)
(SR–PHLX–2011–58); and 55155 (January 23, 2007),
72 FR 4741 (February 1, 2017) (SR–CBOE–2007–
008.).
43 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001) (SR–CBOE–2001–22); 52650 (October 21,
2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
2005–41) (‘‘NDX Approval’’).
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safeguards that CBOE took in order to
detect and deter possible manipulative
behavior which might arise from
eliminating position and exercise
limits.44 Furthermore, as described
more fully above, options on other ETFs
have the position limits proposed
herein, but their trading volumes are
significantly lower than the ETFs
subject to the proposed rule change.
Lastly, the Commission expressed the
belief that removing position and
exercise limits may bring additional
depth and liquidity without increasing
concerns regarding intermarket
manipulation or disruption of the
options or the underlying securities.45
The Exchange believes that BOX’s
enhanced surveillance and reporting
safeguards continue to be designed to
deter and detect possible manipulative
behavior which might arise from
eliminating position and exercise limits.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposed
rule change will result in additional
opportunities to achieve the investment
and trading objectives of market
participants seeking efficient trading
and hedging vehicles, to the benefit of
investors, market participants, and the
marketplace in general.
Further, the Exchange notes that the
rule change is being proposed as a
competitive response to a filing
submitted by CBOE that was recently
approved by the Commission.46
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative 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
44 See
NDX Approval at 62149.
45 Id.
46 See
supra, note 3.
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19(b)(3)(A) of the Act 47 and Rule 19b–
4(f)(6) thereunder.48
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 49 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 50
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
BOX Participants that are also members
at CBOE where these increased position
limits are currently in place. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission hereby waives the
operative delay and designates the
proposal as operative upon filing.51
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 shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
47 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
49 17 CFR 240.19b–4(f)(6).
50 17 CFR 240.19b–4(f)(6)(iii).
51 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
48 17
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Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2018–10 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–BOX–2018–10. 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 such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
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–BOX–2018–10, and should
be submitted on or before April 18,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–06138 Filed 3–27–18; 8:45 am]
BILLING CODE 8011–01–P
52 17
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[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Notices]
[Pages 13330-13336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82930; File No. SR-BOX-2018-10]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To Amend
IM-3120-2 of BOX Rule 3120 (Position Limits) To Increase the Position
Limits for Options on the Following Exchange Traded Funds: iShares
China Large-Cap ETF, iShares MSCI EAFE ETF, iShares MSCI Emerging
Markets ETF, iShares Russell 2000 ETF, iShares MSCI Brazil Capped ETF,
iShares 20+ Year Treasury Bond Fund ETF, PowerShares QQQ Trust, and
iShares MSCI Japan ETF
March 22, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 15, 2018, BOX Options Exchange LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend BOX Rule 3120 (Position Limits) to
increase the position limits for options on the following exchange
traded funds (``ETFs''): 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''),
PowerShares QQQ Trust (``QQQQ''), and iShares MSCI Japan ETF (``EWJ'').
The text of the proposed rule change is available from the principal
office of the Exchange, at the Commission's Public Reference Room and
also on the Exchange's internet website at https://boxoptions.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included
[[Page 13331]]
statements concerning the purpose of, and basis for, the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The self-regulatory organization has
prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend IM-3120-2 to BOX Rule 3120 (Position
Limits) to increase the position limits for options on the following
exchange trade funds (``ETFs''): 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''), PowerShares QQQ Trust (``QQQQ''), and iShares MSCI Japan ETF
(``EWJ'').This is a competitive filing that is based on a proposal
recently submitted by the Chicago Board Options Exchange Incorporated
(``CBOE'') and approved by the Commission.\3\
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\3\ See Securities Exchange Act Release No. 82770 (February 23,
2018), 83 FR 8907 (March 1, 2018)(Order Granting Accelerated
Approval SR-SR-CBOE-2017-057).
---------------------------------------------------------------------------
Position limits are designed to address potential manipulative
schemes and adverse market impact surrounding the use of options, such
as disrupting the market in the security underlying the options. The
potential manipulative schemes and adverse market impact are balanced
against the potential of setting the limits so low as to discourage
participation in the options market. The level of those position limits
must be balanced between curtailing potential manipulation and the cost
of preventing potential hedging activity that could be used for
legitimate economic purposes. Position limits for options on ETFs, such
as those subject to this proposal, are determined pursuant to BOX Rule
3120, and vary according to the number of outstanding shares and the
trading volume of the underlying stocks or ETFs over the past six-
months. Pursuant to BOX Rule 3120, the largest in capitalization and
the most frequently traded stocks and ETFs have an option position
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market; and smaller
capitalization stocks and ETFs have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on FXI,
EFA, EWZ, TLT, and EWJ are currently subject to the standard position
limit of 250,000 contracts as set forth in BOX Rule 3120.\4\ IM-3120-2
of BOX Rule 3120 sets forth separate position limits for options on
specific ETFs as follows:
---------------------------------------------------------------------------
\4\ See https://www.theocc.com/webapps/delo-search.
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Options on EEM are 500,000 contracts;
Options on IWM are 500,000 contracts; and
Options on QQQQ are 900,000 contracts.
The purpose of this proposal is to amend IM-3120-2 to BOX Rule 3120
to double the position and exercise limits for FXI, EEM, IWM, EFA, EWZ,
TLT, QQQQ, and EWJ.\5\ As such, options on FXI, EFA, EWZ, TLT, and EWJ
would no longer be subject to the standard position limits set forth
under BOX Rule 3120. Accordingly, IM-3120-2 would be amended to set
forth that the position limits for options on FXI, EFA, EWZ, TLT, and
EWJ would be 500,000 contracts. These position limits equal the current
position limits for option on IWM and EMM and are similar to the
current position limit for options on QQQQ set forth in IM-3120-2. IM-
3120-2 would be further amended to increase the position limits for the
remaining options subject to this proposal as follows:
---------------------------------------------------------------------------
\5\ By virtue of IM-3140-1 of BOX Rule 3140, which is not being
amended by this filing, the exercise limit for FXI, EEM, IWM, EFA,
EWZ, TLT, QQQQ, and EWJ options would be similarly increased. The
Exchange notes that it also proposes to make non-substantive
corrections to the names of IWM and EEM in IM-3120-2.
---------------------------------------------------------------------------
The position limits for options on EEM would be increased
from 500,000 contracts to 1,000,000 contracts;
The position limits on options on IWM would be increased
from 500,000 contracts to 1,000,000 contracts; and
The position limits on options on QQQQ would be increased
from 900,000 contracts to 1,800,000 contracts.
In support of this proposal, the Exchange represents that the above
listed ETFs qualify for either: (i) The initial listing criteria set
forth in Exchange Rule 5020(h)(2) for ETFs holding non-U.S. component
securities; or (ii) for ETFs listed pursuant to generic listing
standards for series of portfolio depository receipts and index fund
shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required.\6\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\7\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\8\ ``The MSCI Emerging Markets Index consists of
the following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.'' \9\ IWM tracks the performance
of the Russell 2000 Index, which is composed of 2,000 small-cap
domestic stocks.\10\ EFA tracks the performance of MSCI EAFE Index,
which has over 900 component securities.\11\ ``The MSCI EAFE Index is
designed to represent the performance of large and mid-cap securities
across 21 developed markets, including countries in Europe, Australasia
and the Far East, excluding the U.S. and Canada.'' \12\ EWZ tracks the
performance of the MSCI Brazil 25/50 Index, which is composed of shares
of large and mid-size companies in Brazil.\13\ TLT tracks the
performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed
of long-term U.S. Treasury bonds.\14\ QQQQ tracks the performance of
the Nasdaq-100 Index, which is composed of 100 of the largest domestic
and international nonfinancial companies listed on the Nasdaq Stock
Market LLC (``Nasdaq'').\15\ EWJ tracks the MSCI Japan Index, which
tracks the performance of large and mid-sized companies in Japan.\16\
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\6\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See BOX Rule 5020(h)(2); BOX Rule 5030(h).
\7\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\8\ See https://us.ishares.com/product_info/fund/overview/EEM.htm.
\9\ See https://www.msci.com/products/indices/tools/#EM.
\10\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\11\ See https://www.ishares.com/us/products/239623/.
\12\ See https://www.msci.com/eafe.
\13\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\14\ See https://www.ishares.com/us/products/239454/.
\15\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\16\ See https://www.ishares.com/us/products/239665/EWJ.
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BOX represents that more than 50% of the weight of the securities
held by the options subject to this proposal are also subject to a
CSA.\17\ Additionally,
[[Page 13332]]
the component securities of the MSCI Emerging Markets Index on which
EEM is based for which the primary market is in any one country that is
not subject to a CSA do not represent 20% or more of the weight of the
MSCI Emerging Markets Index.\18\ Finally, the component securities of
the MSCI Emerging Markets Index on which EEM is based, for which the
primary market is in any two countries that are not subject to CSAs do
not represent 33% of more of the weight of the MSCI Emerging Markets
Index.\19\
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\17\ See BOX Rule 5020(h)(2).
\18\ See BOX Rule 5020(h)(2)(ii)(B).
\19\ See BOX Rule 5020(h)(2)(ii)(C).
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According to CBOE, market participants have increased their demand
for options on FXI, EFA, EWZ, TLT, and EWJ for hedging and trading
purposes and the Exchange believes the current position limits are too
low and may be a deterrent to successful trading of options on these
securities.\20\ CBOE has collected the following trading statistics on
the ETFs that are subject to this proposal:
---------------------------------------------------------------------------
\20\ See supra note 3.
\21\ SPY is included here for comparison purposes.
----------------------------------------------------------------------------------------------------------------
2017 ADV 2017 ADV Shares
ETF (million (option outstanding Fund market
shares) contracts) (million) cap ($million)
----------------------------------------------------------------------------------------------------------------
FXI............................................. 15.08 71,944 78.6 $3,343.6
EEM............................................. 52.12 287,357 797.4 34,926.1
IWM............................................. 27.46 490,070 253.1 35,809.1
EFA............................................. 19.42 98,844 1178.4 78,870.3
EWZ............................................. 17.08 95,152 159.4 6,023.4
TLT............................................. 8.53 80,476 60.0 7,442.4
QQQQ............................................ 26.25 579,404 351.6 50,359.7
EWJ............................................. 6.06 4,715 303.6 16,625.1
SPY \21\........................................ 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------
The following analysis was conducted by CBOE in support of its
proposal. BOX agrees with CBOE's analysis discussed below.
In support of its proposal to increase the position limits for QQQQ
to 1,800,000 contracts, CBOE compared the trading characteristics of
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position
limits. As shown in CBOE's above table, the average daily trading
volume through August 14, 2017 for QQQQ was 26.25 million shares
compared to 64.63 million shares for SPY. The total shares outstanding
for QQQQ are 351.6 million compared to 976.23 million for SPY. The fund
market cap for QQQQ is $50,359.7 million compared to $240,540 million
for SPY. SPY is one of the most actively trading ETFs and is,
therefore, subject to no position limits. QQQQ is also very actively
traded, and while not to the level of SPY, should be subject to the
proposed higher position limits based its trading characteristics when
compared to SPY. The proposed position limit coupled with QQQQ's
trading behavior would continue to address potential manipulative
schemes and adverse market impact surrounding the use of options and
trading in its [sic] underlying the options.
In support of its proposal to increase the position limits for EEM
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also
compared the trading characteristics of EEM and IWM to that of QQQQ,
which currently has a position limit of 900,000 contracts. As shown in
the above table, the average daily trading volume through July 31, 2017
for EEM was 52.12 million shares and IWM was 27.46 million shares
compared to 26.25 million shares for QQQQ. The total shares outstanding
for EEM are 797.4 million and for IWM are 253.1 million compared to
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1
million and IWM is $35,809 million compared to $50,359.7 million for
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and
subjecting EEM and IWM to the proposed higher position limit would
continue be designed to address potential manipulate [sic] schemes that
may arise from trading in the options and their underlying securities.
These above trading characteristics for QQQQ when compared to EEM and
IWM also justify increasing the position limit for QQQQ. QQQQ has a
higher options ADV than EEM and IWM, a higher numbers [sic] of shares
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the position limit for QQQQ. Based on these
statistics, and as stated above, the proposed position limit coupled
with QQQQ's trading behavior would continue to address potential
manipulative schemes and adverse market impact surrounding the use of
options and trading in the securities underlying the options.
In support of its proposal to increase the position limits for FXI,
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts,
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT and EWJ
to that of EEM and IWM, both of which currently have a position limit
of 500,000 contracts. As shown in the above table, the average daily
trading volume through July 31, 2017 for FXI is 15.08 million shares,
EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT is 8.53
million shares, and EWJ is 6.06 million shares compared to 52.12
million shares for EEM and 27.46 million shares for IWM. The total
shares outstanding for FXI is 78.6 million, EFA is 1178.4 million, EWZ
is 159.4 million, TLT is 60 million and EWJ is 303.6 million compared
to 797.4 million for EEM and 253.1 million for IWM. The fund market cap
for FXI is $3,343.6 million, EFA is $78,870.3 million, EWZ is $6,023.4
million, TLT is $7,442.4 million,, and EWJ is $16,625.1 million
compared to $34,926.1 million for EEM and $35,809.1 million for IWM.
The above trading characteristics of FXI, EFA, EWZ, TLT and EWJ is
either similar to that of EEM and IWM or sufficiently active enough so
that the proposed limit would continue to address potential
manipulative [sic] that may arise. EFA has far more shares outstanding
and a larger fund market cap than EEM, IWM, and QQQQ. EWJ has a more
shares outstanding than IWM and only slightly less shares outstanding
than QQQQ.
On the other hand, while FXI, EWZ, and TLT do not exceed EEM, IWM
or QQQQ is any of the specified areas, they are all actively trading so
that market participant's trading activity has been impacted by them
being restricted by the current position limits. The Exchange believes
that the trading activity and these securities being based on a broad
basket of underlying
[[Page 13333]]
securities alleviates any potential manipulative activity that may
arise. In addition, as discussed in more detail below, the Exchange's
existing surveillance procedures and reporting requirements at the
Exchange, other options exchanges, and at several clearing firms are
capable of properly identifying unusual and/or illegal trading
activity.
According to CBOE, market participants' trading activity has been
adversely impacted by the current position limits for FXI, EFA, EWZ,
TLT, and EWJ and such limits have caused options trading in these
symbols to move from exchanges to the over-the-counter market. The
Exchange understands that certain market participants wishing to make
trades involving a large number of options contracts in the symbols
subject to the proposal are opting to execute those trades in the over-
the-counter market. The over-the-counter transactions occur via bi-
lateral agreements, the terms of which are not publicly disclosed to
other market participants. Therefore, these large trades do not
contribute to the price discovery process performed on a lit market.
The Exchange notes that the ETFs that underlie options subject to
this proposal are highly liquid, and are based on a broad set of highly
liquid securities and other reference assets.\22\ The Exchange notes
that the Commission has generally looked through to the liquidity of
securities comprising an index in establishing position limits for
cash-settled index options. The Exchange further notes that options on
certain broad-based security indexes have no position limits. Likewise,
the Commission has recognized the liquidity of the securities
comprising the underlying interest of the SPDR S&P 500 ETF (``SPY'') in
permitting no position limits on SPY options since 2012,\23\ and
expanded position limits for options on EEM, IWM, and QQQQ.
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\22\ See supra providing trading statistics for each ETF.
\23\ See Securities Exchange Act Release No. 67936 (September
27, 2012), 77 FR 60491 (October 3, 2012) (SR-BOX-2012-013).
---------------------------------------------------------------------------
The proposed position limits set forth in the proposal would
continue to address potential manipulative activity while allowing for
potential hedging activity for appropriate economic purposes. The
creation and redemption process for these ETFs also lessen the
potential for manipulative activity. When an ETF company wants to
create more ETF shares, it looks to an Authorized Participant, which is
a market maker or other large financial institution, to acquire the
securities the ETF is to hold. For instance, IWM is designed to track
the performance of the Russell 2000 Index, the Authorized Participant
will purchase all the Russell 2000 constituent securities in the exact
same weight as the index, then deliver those shares to the ETF
provider. In exchange, the ETF provider gives the Authorized
Participant a block of equally valued ETF shares, on a one-for-one fair
value basis. The price is based on the net asset value, not the market
value at which the ETF is trading. The creation of new ETF units can be
conducted all trading day and is not subject to position limits. This
process can also work in reverse where the ETF company seeks to
decrease the number of shares that are available to trade. The creation
and redemption process, therefore, creates a direct link to the
underlying components of the ETF, and serves to mitigate potential
price impact of the ETF shares that might otherwise result from
increased position limits.
The ETF creation and redemption seeks to keep ETF share prices
trading in line with the ETF's underlying net asset value. Because an
ETF trades like a stock, its price will fluctuate during the trading
day, due to simple supply and demand. If demand to buy an ETF is high,
for instance, the ETF's share price might rise above the value of its
underlying securities. When this happens, the Authorized Participant
believes the ETF may now be overpriced, and can buy the underlying
shares that compose the ETF and then sell ETF shares on the open
market. This should help drive the ETF's share price back toward fair
value. Likewise, if the ETF starts trading at a discount to the
securities it holds, the Authorized Participant can buy shares of the
ETF and redeem them for the underlying securities. Buying undervalued
ETF shares should drive the price of the ETF back toward fair value.
This arbitrage process helps to keep an ETF's price in line with the
value of its underlying portfolio.
Some of the ETFs underlying options subject to the proposal are
based on broad-based indices that underlie cash settled options that
are economically equivalent to the ETF options that are the subject of
the proposal and have no position limits. Other ETFs are based on
broad-based indexes that underlie cash-settled options with position
limits reflecting notional values that are larger than the current
position limits for ETF analogues (EEM, EFA). Where there was no
approved index analogue, the Exchange believes, based on the liquidity,
breadth and depth of the underlying market, that the index referenced
by the ETF would be considered a broad-based index.\24\ The Exchange
argues that if certain position limits are appropriate for the options
overlying the same index or is 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. In
addition, the market capitalization of the underlying index or
reference asset is large enough to absorb any price movements that may
be caused by an oversized trade. Also, the Authorized Participant or
issuer may look to the stocks comprising the analogous underlying index
or reference asset when seeking to create additional ETF shares are
part of the creation/redemption process to address supply and demand or
to mitigate the price movement the price of the ETF.
---------------------------------------------------------------------------
\24\ See BOX Rule 6040, which sets forth the position limits for
broad-based index options.
---------------------------------------------------------------------------
For example, the PowerShares QQQ Trust or QQQQ is an ETF that
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100
of the largest non-financial securities listed on the Nasdaq Stock
Market LLC (``Nasdaq''). Options on NDX are currently subject to the
standard position limit of 25,000 contracts for broad-based index
options but share similar trading characteristics as QQQQ.\25\ Based on
QQQQ's share price of $154.54 \26\ and NDX's index level of 6,339.14,
approximately 40 contracts of QQQQ equals one contract of NDX. Based on
the above comparison of notional values, this would result in a
position limit equivalent to 1,000,000 contracts for QQQQ as NDX's
analogue. NDX is subject to the standard position limit of 25,000
contracts for broad-based index options and has an average daily
trading volume of 15,300 contracts. QQQQ is currently subject to a
position limit of 900,000 contracts but has a much higher average daily
trading volume of 579,404 contracts. Furthermore, NDX currently has a
market capitalization of $17.2 trillion and QQQQ has a market
capitalization of $50,359.7 million, and the component securities of
NDX, in aggregate, have traded an average of 440 million shares per day
in 2017, both large enough to absorb any price movement caused by a
large trade in the QQQQ. The Exchange notes that other exchanges allow
no position limits for NDX,\27\ although it has a much lower
[[Page 13334]]
average daily trading volume than its analogue, the QQQQ. Therefore,
the Exchange believes it is reasonable to increase the position limit
for options on the QQQQ from 900,000 to 1,800,000 contracts.
---------------------------------------------------------------------------
\25\ Id.
\26\ All share prices used herein are based on the closing price
of the security on November 16, 2017. Source: Yahoo Finance.
\27\ See CBOE Rule 24.4 sets forth the position limits for
broad-based index options.
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The iShare [sic] Russell 2000 ETF or IWM, is an ETF that also
tracks the Russell 2000 Index or RUT, which is an index that composed
of 2,000 small-cap domestic companies in the Russell 3000 index.
Options on RUT are currently subject to the standard position limit of
25,000 contracts for broad-based index options but share similar
trading characteristics as IWM.\28\ Based on IWM's share price of
$144.77 and RUT's index level of 1,486.88, approximately 10 contracts
of IWM equals one contract of RUT. Based on the above comparison of
notional values, this would result in a position limit equivalent to
250,000 contracts for IWM as RUT's analogue. The Exchange notes that at
other exchanges RUT is not subject to position limits and has an
average daily trading volume of 66,200 contracts.\29\ IWM is currently
subject to a position limit of 500,000 contracts but has a much higher
average daily trading volume of 490,070 contracts. As mentioned above,
other exchanges have no position limits for RUT,\30\ although it has a
much lower average daily trading volume than its analogue, the IWM.
Furthermore, RUT currently has a market capitalization of $2.4 trillion
and IWM has a market capitalization of $35,809.1 million, and the
component securities of RUT, in aggregate, have traded an average of
270 million shares per day in 2017, both large enough to absorb any
price movement cause by a large trade in the IWM. Therefore, the
Exchange believes it is reasonable to increase the position limit for
options on the IWM from 500,000 to 1,000,000 contracts.
---------------------------------------------------------------------------
\28\ See BOX Rule 6040, which sets forth the position limits for
broad-based index options.
\29\ See CBOE Rule 24.4.
\30\ Id.
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EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities
following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey. Below makes the same notional
value comparison as made above. Based on EEM's share price of $47.06
and MXEF's index level of 1,136.45, approximately 24 contracts of EEM
equals one contract of MXEF. MXEF is currently subject to the standard
position limit of 25,000 contracts for broad-based index options under
BOX Rule 6040(a). Based on the above comparison of notional values,
this would result in a position limit economically equivalent to
604,000 contracts for EEM as MXEF's analogue. However, MXEF has an
average daily trading volume of 180 contracts. EEM is currently subject
to a position limit of 500,000 contracts but has a much higher average
daily trading volume of 287,357 contracts. Furthermore, MXEF currently
has a market capitalization of $5.18 trillion and EEM has a market
capitalization of $34,926.1 million, and the component securities of
MXEF, in aggregate, have traded an average of 33.6 billion shares per
day in 2017, both large enough to absorb any price movement cause by a
large trade in the EEM. Therefore, based on the comparison of average
daily trading volume, the Exchange believes it is reasonable to
increase the position limit for options on the EEM from 500,000 to
1,000,000 contracts.
EFA tracks the performance of MSCI EAFE Index or MXEA, which has
over 900 component securities designed to represent the performance of
large and mid-cap securities across 21 developed markets, including
countries in Europe, Australasia and the Far East, excluding the U.S.
and Canada. Below makes the same notional value comparison as made
above. Based on EFA's share price of $69.16 and MXEA's index level of
1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the standard position limit of
25,000 contracts for broad-based index options under BOX Rule 6040(a).
Based on the above comparison of notional values, this would result in
a position limit economically equivalent to 721,000 contracts for EFA
as MXEA's analogue. Furthermore, MXEA currently has a market
capitalization of $18.7 trillion and EFA has a market capitalization of
$78,870.3 million, and the component securities of MXEA, in aggregate,
have traded an average of 4.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. However, MXEA has an average daily trading volume of 270
contracts. EFA is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 98,844
contracts. Based on the above comparisons, the Exchange believes it is
reasonable to increase the position limit for options on the EFA from
250,000 to 500,000 contracts.
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement cause by a large trade in FXI. The components
of the FTSE China 50 Index, in aggregate, have an average daily trading
volume of 2.3 billion shares. FXI is currently subject to a position
limit of 000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on the FXI from 250,000 to 500,000 contracts.
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement cause
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, the Exchange believes
it is reasonable to increase the position limit for options on the EWZ
from 250,000 to 500,000 contracts.
TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement cause by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due the increase in position
limits as set forth in this proposal. Based on the above comparisons,
the Exchange believes it is reasonable to increase the position limit
for options on the TLT from 250,000 to 500,000 contracts.
EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for
[[Page 13335]]
EWJ approved for options trading. However, the MSCI Japan Index has a
market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement cause by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on EWJ from 250,000 to 500,000 contracts.
The Exchange believes that increasing the position limits for the
options subject to this proposal would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in this product. Under the proposal, the reporting
requirement for the above options would be unchanged. Thus, the
Exchange would still require that each BOX Participant that maintains a
position in the options on the same side of the market, for its own
account or for the account of a customer, report certain information to
the Exchange. This information would include, but would not be limited
to, the options' position, whether such position is hedged and, if so,
a description of the hedge, and the collateral used to carry the
position, if applicable. Exchange Market Makers \31\ would continue to
be exempt from this reporting requirement, as Market Maker information
can be accessed through the Exchange's market surveillance systems.\32\
In addition, the general reporting requirement for customer accounts
that maintain an aggregate position of 200 or more options contracts
would remain at this level for the options subject to this
proposal.\33\
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\31\ A Market Maker ``is an Options Participant registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in the Rule 8000 Series. All Market
Makers are designated as specialists on the Exchange for all
purposes under the Exchange Act or Rules thereunder.'' See BOX Rule
100(a)(31).
\32\ The Exchange notes that the Financial Industry Regulatory
Authority (``FINRA''), pursuant to a regulatory services agreement,
operates surveillance on behalf of BOX. This type of Market Maker
information can be found through FINRA.
\33\ See BOX Rule 3150 for reporting requirements.
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The Exchange believes 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. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\34\
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\34\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed by FINRA on behalf of BOX.
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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\35\ The positions for
options subject to this proposal are part of any reportable positions
and, thus, cannot be legally hidden. Moreover, the Exchange's
requirement that BOX Participants file reports with the Exchange for
any customer who held aggregate large long or short positions of any
single class for the previous day will continue to serve as an
important part of the Exchange's surveillance efforts.\36\
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\35\ 17 CFR 240.13d-1.
\36\ The Exchange again notes that these surveillance efforts
are carried out by FINRA on behalf of BOX.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a BOX Participant or its customer may try to maintain an
inordinately large un-hedged position in the options subject to this
proposal. Current margin and risk-based haircut methodologies serve to
limit the size of positions maintained by any one account by increasing
the margin and/or capital that a BOX Participant must maintain for a
large position held by itself or by its customer.\37\ In addition, Rule
15c3-1 \38\ imposes a capital charge on BOX Participants to the extent
of any margin deficiency resulting from the higher margin requirement.
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\37\ See BOX Rule 10100 Series for a description of margin
requirements.
\38\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\39\ in general, and Section 6(b)(5) of the Act,\40\ in
particular, in that it is 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 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 current position limits for the options subject to
this proposal have inhibited the ability of Market Makers to make
markets on the Exchange. Specifically, the proposal is designed to
encourage Market Makers to shift liquidity from over the counter
markets onto the Exchange, which will enhance the process of price
discovery conducted on the Exchange through increased order flow. The
proposal will also benefit institutional investors as well as retail
traders, and public customers, by providing them with a more effective
trading and hedging vehicle. In addition, the Exchange believes 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 this product and disrupt the underlying
market that a lower position limit may protect against.
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\39\ 15 U.S.C. 78f(b).
\40\ 15 U.S.C. 78f(b)(5).
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Increased position limits for select actively traded options, such
as that proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved,
on a pilot basis, eliminating position limits for options on SPY.\41\
Additionally, the Commission has approved similar proposed rule changes
to increase position limits for options on highly liquid, actively-
traded ETFs,\42\ including a proposal to permanently eliminate the
position and exercise limits for options overlaying the S&P 500 Index,
S&P 100 Index, Dow Jones Industrial Average, and Nasdaq 100 Index.\43\
In approving the permanent elimination of position and exercise limits,
the Commission relied heavily upon CBOE's surveillance capabilities,
the Commission expressed trust in the enhanced surveillance and
reporting
[[Page 13336]]
safeguards that CBOE took in order to detect and deter possible
manipulative behavior which might arise from eliminating position and
exercise limits.\44\ Furthermore, as described more fully above,
options on other ETFs have the position limits proposed herein, but
their trading volumes are significantly lower than the ETFs subject to
the proposed rule change.
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\41\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012)(SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091); 67936 (September 27, 2012), 77 FR 60491 (October 3, 2012) (SR-
BOX-2012-013).
\42\ See Securities Exchange Act Release Nos. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012)(SR-CBOE-2012-066); 64928 (July
20, 2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065); 64695
(June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-58); and
55155 (January 23, 2007), 72 FR 4741 (February 1, 2017) (SR-CBOE-
2007-008.).
\43\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22); 52650
(October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-2005-41)
(``NDX Approval'').
\44\ See NDX Approval at 62149.
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Lastly, the Commission expressed the belief that removing position
and exercise limits may bring additional depth and liquidity without
increasing concerns regarding intermarket manipulation or disruption of
the options or the underlying securities.\45\ The Exchange believes
that BOX's enhanced surveillance and reporting safeguards continue to
be designed to deter and detect possible manipulative behavior which
might arise from eliminating position and exercise limits.
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\45\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes that the
proposed rule change will result in additional opportunities to achieve
the investment and trading objectives of market participants seeking
efficient trading and hedging vehicles, to the benefit of investors,
market participants, and the marketplace in general.
Further, the Exchange notes that the rule change is being proposed
as a competitive response to a filing submitted by CBOE that was
recently approved by the Commission.\46\
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\46\ See supra, note 3.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative 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 \47\ and Rule 19b-4(f)(6) thereunder.\48\
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\47\ 15 U.S.C. 78s(b)(3)(A).
\48\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \49\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \50\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
BOX Participants that are also members at CBOE where these increased
position limits are currently in place. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
waives the operative delay and designates the proposal as operative
upon filing.\51\
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\49\ 17 CFR 240.19b-4(f)(6).
\50\ 17 CFR 240.19b-4(f)(6)(iii).
\51\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BOX-2018-10 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-BOX-2018-10. 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. 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-BOX-2018-10, and should be submitted on
or before April 18, 2018.
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\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06138 Filed 3-27-18; 8:45 am]
BILLING CODE 8011-01-P
