Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Section (a) of Exchange Rule 1001, Position Limits, To Increase the Position Limits for Options, 13316-13322 [2018-06140]
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Section 806(e)(1)(G) of the Clearing
Supervision Act provides that OCC may
implement the changes if it has not
received an objection to the proposed
changes within 60 days of the later of (i)
the date that the Commission receives
the Advance Notice, or (ii) the date that
any additional information requested by
the Commission is received,6 unless
extended as described below.
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act, the
Commission may extend the review
period of an advance notice for an
additional 60 days, if the changes
proposed in the advance notice raise
novel or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension.7
On January 11, 2018, the Commission
requested OCC provide it with
additional information regarding the
proposal,8 tolling the Commission’s 60day review period for the Advance
Notice.9 On January 23, 2018, OCC
provided the Commission with a
response to its request for information.
Accordingly, the new 60-day review
period commenced on January 23, 2018
and runs through March 24, 2018.
However, the Commission finds the
Advance Notice complex because OCC
proposes to make detailed, substantial,
and numerous changes to its margin
methodology, the System for Theoretical
Analysis and Numerical Simulations,
used to calculate clearing member
margin requirements. Therefore, the
Commission finds it appropriate to
extend the review period of the
Advance Notice for an additional 60
days pursuant to Section 806(e)(1)(H) of
the Clearing Supervision Act.10
Secretary, Commission, available at https://
www.sec.gov/comments/sr-occ-2017-022/
occ2017022.htm. Since the proposal contained in
the Proposed Rule Change was also filed as an
Advance Notice, all public comments received on
the proposal are considered regardless of whether
the comments are submitted to the Proposed Rule
Change or the Advance Notice.
6 12 U.S.C. 5465(e)(1)(G).
7 12 U.S.C. 5465(e)(1)(H).
8 See Memorandum from Office of Clearance and
Settlement, Division of Trading and Markets, dated
January 12, 2018, available at https://www.sec.gov/
comments/sr-occ-2017–811/occ2017811.htm.
9 See Section 806(e)(1) of the Clearing
Supervision Act (stating that the Commission’s
period for review of an advance notice was tolled
and shall be 60 days from the date the information
requested by the Commission is received by the
Commission).
10 The proposal in the Proposed Rule Change and
the Advance Notice shall not take effect until all
regulatory actions required with respect to the
proposal are completed.
A Notice of Designation of Longer Period for
Commission Action on the Proposed Rule Change
was published in the Federal Register on January
24, 2018. Exchange Act Release No. 82534 (Jan. 18,
2018), 83 FR 3376 (Jan. 24, 2018).
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Accordingly, the Commission,
pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act, extends the
review period for an additional 60 days
so that the Commission shall have until
May 23, 2018 to issue an objection or
non-objection to the Advance Notice
(File No. SR–OCC–2017–811).
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018–06160 Filed 3–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82932; File No. SR–Phlx–
2018–24]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Section (a) of
Exchange Rule 1001, Position Limits,
To Increase the Position Limits for
Options
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 9,
2018, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Section (a) of Exchange Rule 1001,
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 Index (‘‘EWJ’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
115
217
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Position Limit Increase
Position limits for options on ETFs
such as those subject to this proposal
are determined pursuant to Exchange
Rule 1001, and, with certain exceptions,
vary by tier according to the number of
outstanding shares and the trading
volume of the underlying security.3
Options in the highest tier—i.e., options
that overlie securities with the largest
numbers of outstanding shares and
trading volumes—have a standard
option position limit of 250,000
contracts (with adjustments for splits,
re-capitalizations, etc.) on the same side
of the market. In addition, Rule 1001
currently sets forth separate position
limits for options on certain ETFs,
including 500,000 contracts for options
on EEM and IWM, and 900,000
contracts for options on QQQQ.
The Exchange proposes to revise Rule
1001 to increase the position limits for
options on certain ETFs, as described
more fully below. The Exchange
believes that increasing the position
limits for these options will lead to a
more liquid and competitive market
environment for these options that will
benefit customers interested in these
products.
First, the Exchange proposes to
increase the position limits for options
on FXI, EFA, EWZ, TLT, and EWJ, each
of which fall into the highest standard
tier set forth in Exchange Rule
1001(g)(i). Rule 1001(a) would be
amended to increase the current
3 Pursuant to Exchange Rule 1002, which
provides that the exercise limits for ETF options are
equivalent to their position limits, the exercise
limits for each of these options would be increased
to the level of the new position limits.
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
position limit of 250,000 contracts for
options on these securities to 500,000
contracts.
Second, the Exchange proposes to
increase the position limits for options
on EEM and IWM from 500,000
contracts to 1,000,000 contracts.4
Finally, the Exchange proposes to
increase the position limits on options
on QQQQ 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 1009 Commentary .06 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.5 FXI
tracks the performance of the FTSE
China 50 Index, which is composed of
the 50 largest Chinese stocks.6 EEM
tracks the performance of the MSCI
Emerging Markets Index, which is
composed of approximately 800
component securities.7 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.8 IWM tracks the
performance of the Russell 2000 Index,
which is composed of 2,000 small-cap
domestic stocks.9 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.10 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.11 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.12 TLT tracks the
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.13 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’’).14
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.15
The Exchange 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.16
Additionally, the component securities
2017 ADV
(Mil. Shares)
ETF
FXI ...................................................................................................
EEM .................................................................................................
IWM ..................................................................................................
EFA ..................................................................................................
EWZ .................................................................................................
TLT ...................................................................................................
QQQQ ..............................................................................................
EWJ .................................................................................................
SPY ..................................................................................................
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.17
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% o2 [sic] more of the weight of the
MSCI Emerging Markets Index.18
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.
The CBOE Analysis
The Commission has recently
approved a proposed rule change of the
Chicago Board Options Exchange
(‘‘CBOE’’) to increase position limits for
these same options.19 The discussion
that follows is based upon the CBOE’s
analysis presented in that proposal.
In its proposal, CBOE stated that it
had collected the following trading
statistics on the ETFs that are subject to
this proposal:
2017 ADV
(option contracts)
15.08
52.12
27.46
19.42
17.08
8.53
26.25
6.06
64.63
13317
Shares
outstanding
(Mil.)
71,944
287,357
490,070
98,844
95,152
80,476
579,404
4,715
2,575,153
78.6
797.4
253.1
1178.4
159.4
60.0
351.6
303.6
976.23
Fund market
cap
($Mil.)
$3,343.6
34,926.1
35,809.1
78,870.3
6,023.4
7,442
50,359.7
16,625.1
240,540.0
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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 the 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
4 The Exchange is also amending Rule 1001(a) to
update and correct the names of IWM and EEM,
which are currently referred to in that rule as the
iShares® Russell 2000® Index and iShares MSCI
Emerging Markets Index Fund, respectively.
5 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 Exchange Rule 1009 Commentary .06;
Exchange Rule 1010, Commentary .08.
6 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
7 See https://us.ishares.com/product_info/fund/
overview/EEM.htm.
8 See https://www.msci.com/products/indices/
tools/#EM.
9 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
10 See https://www.ishares.com/us/products/
239623/.
11 See https://www.msci.com/eafe.
12 See https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
13 See https://www.ishares.com/us/products/
239454/.
14 See https://www.invesco.com/portal/site/us/
financial-professional/etfs/productdetail?
productId=QQQ&ticker=QQQ&title=powersharesqqq.
15 See https://www.ishares.com/us/products/
239665/EWJ.
16 See Exchange Rule 1009 Commentary .06.
17 See Exchange Rule 1009 Commentary
.06(b)(ii)(B).
18 See Exchange Rule 1009 Commentary
.06(b)(ii)(C).
19 See Securities Exchange Act Release No. 82770
(February 23, 2018) (approving SR–CBOE–2017–
057).
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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
on 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. CBOE
concluded that, 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,
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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.
In Partial Amendment No. 1 to its
proposed rule change, CBOE provided
additional analysis and support for its
proposed rule change.20 According to
CBOE, market participants’ trading
activity has been adversely impacted by
the current position limits as such limits
have caused options trading in the
symbols subject to the proposed rule
change to move from exchanges to the
over-the-counter market. CBOE stated it
had submitted the proposed rule change
at the request of market participants
whose on-exchange activity has been
hindered by the existing position limits
causing them to be unable to provide
additional liquidity not just on CBOE,
but also on other options exchanges on
which they participate.
CBOE stated it understood that certain
market participants wishing to make
trades involving a large number of
options contracts in the symbols subject
to the proposed rule change are opting
to execute those trades in the over-thecounter market, that the over-the
counter transactions occur via bi-lateral
agreements the terms of which are not
publicly disclosed to other market
participants, and that therefore, these
large trades do not contribute to the
price discovery process performed on a
lit market. It stated that 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,
and that 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. It
stated that the level of those position
limits must be balanced between
curtailing potential manipulation and
the cost of preventing potential hedging
20 See
SR–CBOE–2017–057, Partial Amendment
No. 1 (November 22, 2017).
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activity that could be used for legitimate
economic purposes.
CBOE observed that the ETFs that
underlie options subject to the proposed
rule change are highly liquid, and are
based on a broad set of highly liquid
securities and other reference assets,
and noted that the Commission has
generally looked through to the liquidity
of securities comprising an index in
establishing position limits for cashsettled index options. It further noted
that options on certain broad-based
security indexes have no position limits.
CBOE observed that 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 2012,21 and
expanded position limits for options on
EEM, IWM and QQQQ.
CBOE stated that the creation and
redemption process for these ETFs also
lessen the potential for manipulative
activity, explaining that 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
21 See Securities Exchange Act Release No. 67937
(September 27, 2012), 77 FR 60489 (October 3,
2012) (SR–CBOE–2012–091).
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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.
CBOE stated that in proposing the
increased position limits, the Exchange
considered the availability of
economically equivalent products and
their respective position limits. For
instance, some of the ETFs underlying
options subject to the proposed rule
change 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
proposed rule change 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, CBOE
stated its belief, 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.22 CBOE argued 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, CBOE
observed, 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. CBOE
offered the following specific examples
to illustrate:
22 CBOE
Rule 24.4 and Exchange Rule 1001A(a)
set forth the CBOE and the Phlx position limits for
broad-based index options.
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QQQQ
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
Nasdaq. Options on NDX are currently
subject to no position limits but share
similar trading characteristics as QQQQ.
Based on QQQQ’s share price of
$154.54 23 and NDX’s index level of
6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX.
Assume that NDX was subject to the
standard position limit of 25,000
contracts for broad-based index options.
Based on the above comparison of
notional values, this would result in a
positon [sic] limit equivalent to
1,000,000 contracts for QQQQ as NDX’s
analogue. However, NDX is not subject
to position limits 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 cause by a large trade in the
QQQQ. The Commission has also
approved no position limit for NDX,
although it has a much lower average
daily trading volume than its analogue,
the QQQQ. Therefore, CBOE concluded
and the Exchange agrees it was
reasonable to increase the positon [sic]
limit for options on the QQQQ from
900,000 to 1,800,000 contracts.
IWM
The iShares Russell 2000 ETF or
IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an
index that is composed of 2,000 smallcap domestic companies in the Russell
3000 index. Options on RUT are
currently subject to no position limits
but share similar trading characteristics
as IWM. 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.
Assume that RUT was subject to the
standard position limit of 25,000
contracts for broad-based index options
under Exchange Rule 24.4(a). Based on
the above comparison of notional
23 CBOE stated that all share prices used in its
analysis were based on the closing price of the
security on November 16, 2017 and cited Yahoo
Finance as the source.
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values, this would result in a positon
[sic] limit equivalent to 250,000
contracts for IWM as RUT’s analogue.
However, RUT is not subject to position
limits and has an average daily trading
volume of 66,200 contracts. 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. The Commission has
approved no position limit for RUT,
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, CBOE concluded and
the Exchange agrees it is reasonable to
increase the positon [sic] limit for
options on the IWM from 500,000 to
1,000,000 contracts.
EEM
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.
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. 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, CBOE believed and the
Exchange agrees that it is reasonable to
increase the positon [sic] limit for
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EWZ
options on the IWM from 500,000 to
1,000,000 contracts.
EFA
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. 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.
Based on the above comparison of
notional values, this would result in a
positon [sic] 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, CBOE believed
and the Exchange agrees that it is
reasonable to increase the positon [sic]
limit for options on the EFA from
250,000 to 500,000 contracts.
daltland on DSKBBV9HB2PROD with NOTICES
FXI
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 250,000 contracts but
has a much higher average daily trading
volume of 15.08 million shares. Based
on the above comparisons, CBOE
believed, and that Exchange agrees, that
it is reasonable to increase the positon
[sic] limit for options on the FXI from
250,000 to 500,000 contracts.
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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, CBOE
believed and the Exchange agrees that it
is reasonable to increase the positon
[sic] limit for options on the EWZ from
250,000 to 500,000 contracts.
TLT
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 the proposed rule change. Based
on the above comparisons, CBOE
believed and the Exchange agrees it is
reasonable to increase the positon [sic]
limit for options on the TLT from
250,000 to 500,000 contracts.
EWJ
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
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
PO 00000
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Fmt 4703
Sfmt 4703
average daily trading volume of 6.6
million shares. Based on the above
comparisons, CBOE believed and the
Exchange agrees that it is reasonable to
increase the positon [sic] limit for
options on EWJ from 250,000 to 500,000
contracts.
Phlx Analysis and Conclusions
Phlx has reviewed the CBOE analysis
set forth above. On the basis of that
analysis Phlx believes that market
participants’ trading activity could be
adversely impacted by the current
position limits for FXI, EFA, EWZ, TLT
and EWJ and such limits may cause
options trading in these symbols to
move from exchanges to the over-thecounter market. The above trading
characteristics of FXI, EFA, EWZ, TLT
and EWJ are either similar to those of
EEM and IWM or sufficiently active so
that the proposed limit would continue
to address potential manipulation that
may arise. Specifically, EFA has far
more shares outstanding and a larger
fund market cap than EEM, IWM, and
QQQQ. EWJ has more shares
outstanding than IWM and only slightly
fewer shares outstanding than QQQQ.
On the other hand, while FXI, EWZ
and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas,
they are all actively trading so that
market participants’ 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
securities alleviates concerns as to 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, at other
options exchanges, and at the several
clearing firms are capable of properly
identifying unusual and/or illegal
trading activity.
On the basis of CBOE’s analysis Phlx
also believes that market participants’
trading activity could be adversely
impacted by the current position limits
for EEM, IWM and QQQQ. As discussed
above, EEM, IWM and QQQQ have
similar trading characteristics.
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. The
trading characteristics for QQQQ
described above, 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
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outstanding than IWM and a much
higher market cap than EEM and IWM
which justify doubling the positon [sic]
limit for QQQQ. Based on these
statistics, 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.
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
member and member organization 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. Registered
option traders (‘‘ROTs’’) and specialists
would continue to be exempt from this
reporting requirement, as ROT and
specialist information can be accessed
through the Exchange’s market
surveillance systems. 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.24
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.25
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.26 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 members and member
organizations 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.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a
member organization 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 member organization must
maintain for a large position held by
itself or by its customer.27 In addition,
Rule 15c3–1 28 imposes a capital charge
on member organizations to the extent
of any margin deficiency resulting from
the higher margin requirement.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,29 in general, and furthers the
objectives of Section 6(b)(5) of the Act,30
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest. As
noted above, the Commission has
recently approved increasing position
limits to the levels proposed herein on
the same ETF options on the CBOE. The
Exchange believes that the proposed
position limits would continue to
address potential manipulative activity
while allowing for potential hedging
activity for appropriate economic
purposes.
The current position limits for the
options subject to this proposal have
inhibited the ability of ROTs and
specialists to make markets on the
Exchange. Specifically, the proposal is
26 17
24 See
Exchange Rule 1003 for reporting
requirements.
25 These procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed.
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20:30 Mar 27, 2018
Jkt 244001
CFR 240.13d–1.
Exchange Rule 721 for a description of
margin requirements.
28 17 CFR 240.15c3–1.
29 15 U.S.C. 78f(b).
30 15 U.S.C. 78f(b)(5).
27 See
PO 00000
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Sfmt 4703
13321
designed to encourage ROTs and
specialists 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 certain options.31
Additionally, the Commission has
approved similar proposed rule changes
to increase position limits for options on
highly liquid, actively-traded ETFs,32
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, Nasdaq 100 Index,
and the Russell 2000(R) Index
(‘‘RUT’’).33 In approving the permanent
elimination of position and exercise
limits for these index options, the
Commission relied heavily upon the
Exchange’s surveillance capabilities,
and the Commission expressed trust in
the enhanced surveillance and reporting
safeguards that the Exchange took in
order to detect and deter possible
manipulative behavior which might
31 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).
32 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 55176 (January 25, 2007),
72 FR 4741 (February 1, 2017) (SR–CBOE– 2007–
008.).
33 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001) (SR–CBOE–2001–22) (elimination of
position and exercise limits on SPX, OEX, and DJX
options) (‘‘SPX, OEX, and DJX Position Limit
Elimination Approval Order’’); 52650 (October 21,
2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
2005–41) (elimination of position and exercise
limits on NDX options) (‘‘NDX Position Limit
Elimination Approval Order’’); 56651 (October 12,
2007), 72 FR 59130 (October 18, 2007) (SR–Phlx–
2007–71) (‘‘RUT Position Limit Elimination
Approval Order’’).
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arise from eliminating position and
exercise limits.34 Furthermore, as
described more fully above, options on
other ETFs have the position limits
proposed herein and those ETFs have
trading characteristics and trading
volumes that are similar to those of the
ETFs subject to this proposed rule
change.
Last, the Commission has 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.35
The Exchange’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. On the
contrary, 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.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
daltland on DSKBBV9HB2PROD with NOTICES
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 36 and Rule 19b–
4(f)(6) thereunder.37
34 Id.
35 Id.
36 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
37 17
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A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 38 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 39
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 effective and
operative upon filing. The Exchange
states that waiver of the operative delay
would permit the Exchange to
immediately implement the proposed
rule change to increase the position
limits as proposed herein and thereby
seamlessly continue to offer traders and
the investing public the ability to use
these products as effective hedging and
trading vehicles. The Exchange further
states that waiver would allow the
Exchange to remain competitive with
other exchanges. 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.40
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
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
38 17 CFR 240.19b–4(f)(6).
39 17 CFR 240.19b–4(f)(6)(iii).
40 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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• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2018–24 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–Phlx–2018–24. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet 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–Phlx–2018–24, and should
be submitted on or before April 18,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–06140 Filed 3–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting; Cancellation
FEDERAL REGISTER CITATION OF PREVIOUS
ANNOUNCEMENT: To be published.
41 17
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]]>Agencies
[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Notices]
[Pages 13316-13322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06140]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82932; File No. SR-Phlx-2018-24]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Section
(a) of Exchange Rule 1001, Position Limits, To Increase the Position
Limits for Options
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 9, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\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 Section (a) of Exchange Rule 1001,
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
Index (``EWJ'').
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Position Limit Increase
Position limits for options on ETFs such as those subject to this
proposal are determined pursuant to Exchange Rule 1001, and, with
certain exceptions, vary by tier according to the number of outstanding
shares and the trading volume of the underlying security.\3\ Options in
the highest tier--i.e., options that overlie securities with the
largest numbers of outstanding shares and trading volumes--have a
standard option position limit of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the same side of the market.
In addition, Rule 1001 currently sets forth separate position limits
for options on certain ETFs, including 500,000 contracts for options on
EEM and IWM, and 900,000 contracts for options on QQQQ.
---------------------------------------------------------------------------
\3\ Pursuant to Exchange Rule 1002, which provides that the
exercise limits for ETF options are equivalent to their position
limits, the exercise limits for each of these options would be
increased to the level of the new position limits.
---------------------------------------------------------------------------
The Exchange proposes to revise Rule 1001 to increase the position
limits for options on certain ETFs, as described more fully below. The
Exchange believes that increasing the position limits for these options
will lead to a more liquid and competitive market environment for these
options that will benefit customers interested in these products.
First, the Exchange proposes to increase the position limits for
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the
highest standard tier set forth in Exchange Rule 1001(g)(i). Rule
1001(a) would be amended to increase the current
[[Page 13317]]
position limit of 250,000 contracts for options on these securities to
500,000 contracts.
Second, the Exchange proposes to increase the position limits for
options on EEM and IWM from 500,000 contracts to 1,000,000
contracts.\4\
---------------------------------------------------------------------------
\4\ The Exchange is also amending Rule 1001(a) to update and
correct the names of IWM and EEM, which are currently referred to in
that rule as the iShares[supreg] Russell 2000[supreg] Index and
iShares MSCI Emerging Markets Index Fund, respectively.
---------------------------------------------------------------------------
Finally, the Exchange proposes to increase the position limits on
options on QQQQ 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 1009 Commentary .06 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.\5\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\7\ 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.\8\ IWM tracks the performance of
the Russell 2000 Index, which is composed of 2,000 small-cap domestic
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has
over 900 component securities.\10\ 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.\11\ EWZ tracks the performance
of the MSCI Brazil 25/50 Index, which is composed of shares of large
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S.
Treasury bonds.\13\ 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'').\14\ EWJ tracks the MSCI Japan Index, which tracks the
performance of large and mid-sized companies in Japan.\15\
---------------------------------------------------------------------------
\5\ 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 Exchange Rule 1009 Commentary .06; Exchange Rule 1010,
Commentary .08.
\6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\7\ See https://us.ishares.com/product_info/fund/overview/EEM.htm.
\8\ See https://www.msci.com/products/indices/tools/#EM.
\9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\10\ See https://www.ishares.com/us/products/239623/.
\11\ See https://www.msci.com/eafe.
\12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\13\ See https://www.ishares.com/us/products/239454/.
\14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\15\ See https://www.ishares.com/us/products/239665/EWJ.
---------------------------------------------------------------------------
The Exchange 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.\16\ Additionally, 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.\17\ 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% o2
[sic] more of the weight of the MSCI Emerging Markets Index.\18\
---------------------------------------------------------------------------
\16\ See Exchange Rule 1009 Commentary .06.
\17\ See Exchange Rule 1009 Commentary .06(b)(ii)(B).
\18\ See Exchange Rule 1009 Commentary .06(b)(ii)(C).
---------------------------------------------------------------------------
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.
The CBOE Analysis
The Commission has recently approved a proposed rule change of the
Chicago Board Options Exchange (``CBOE'') to increase position limits
for these same options.\19\ The discussion that follows is based upon
the CBOE's analysis presented in that proposal.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 82770 (February 23,
2018) (approving SR-CBOE-2017-057).
---------------------------------------------------------------------------
In its proposal, CBOE stated that it had collected the following
trading statistics on the ETFs that are subject to this proposal:
----------------------------------------------------------------------------------------------------------------
Shares
ETF 2017 ADV (Mil. 2017 ADV (option outstanding Fund market cap
Shares) contracts) (Mil.) ($Mil.)
----------------------------------------------------------------------------------------------------------------
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
QQQQ.................................... 26.25 579,404 351.6 50,359.7
EWJ..................................... 6.06 4,715 303.6 16,625.1
SPY..................................... 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------
SGPO Galley
End:?>
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 the 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
[[Page 13318]]
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 on 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. CBOE concluded
that, 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.
In Partial Amendment No. 1 to its proposed rule change, CBOE
provided additional analysis and support for its proposed rule
change.\20\ According to CBOE, market participants' trading activity
has been adversely impacted by the current position limits as such
limits have caused options trading in the symbols subject to the
proposed rule change to move from exchanges to the over-the-counter
market. CBOE stated it had submitted the proposed rule change at the
request of market participants whose on-exchange activity has been
hindered by the existing position limits causing them to be unable to
provide additional liquidity not just on CBOE, but also on other
options exchanges on which they participate.
---------------------------------------------------------------------------
\20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22,
2017).
---------------------------------------------------------------------------
CBOE stated it understood that certain market participants wishing
to make trades involving a large number of options contracts in the
symbols subject to the proposed rule change are opting to execute those
trades in the over-the-counter market, that the over-the counter
transactions occur via bi-lateral agreements the terms of which are not
publicly disclosed to other market participants, and that therefore,
these large trades do not contribute to the price discovery process
performed on a lit market. It stated that 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, and that 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. It stated that 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.
CBOE observed that the ETFs that underlie options subject to the
proposed rule change are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets, and noted that the
Commission has generally looked through to the liquidity of securities
comprising an index in establishing position limits for cash-settled
index options. It further noted that options on certain broad-based
security indexes have no position limits. CBOE observed that 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,\21\ and expanded position
limits for options on EEM, IWM and QQQQ.
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
---------------------------------------------------------------------------
CBOE stated that the creation and redemption process for these ETFs
also lessen the potential for manipulative activity, explaining that
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
[[Page 13319]]
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.
CBOE stated that in proposing the increased position limits, the
Exchange considered the availability of economically equivalent
products and their respective position limits. For instance, some of
the ETFs underlying options subject to the proposed rule change 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 proposed rule change 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, CBOE stated its belief, 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.\22\ CBOE
argued 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, CBOE observed, 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. CBOE offered the following specific examples to illustrate:
---------------------------------------------------------------------------
\22\ CBOE Rule 24.4 and Exchange Rule 1001A(a) set forth the
CBOE and the Phlx position limits for broad-based index options.
---------------------------------------------------------------------------
QQQQ
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 Nasdaq. Options on
NDX are currently subject to no position limits but share similar
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX. Assume that NDX was subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a positon [sic] limit equivalent to 1,000,000 contracts for
QQQQ as NDX's analogue. However, NDX is not subject to position limits
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 cause by a large trade in the QQQQ. The Commission has
also approved no position limit for NDX, although it has a much lower
average daily trading volume than its analogue, the QQQQ. Therefore,
CBOE concluded and the Exchange agrees it was reasonable to increase
the positon [sic] limit for options on the QQQQ from 900,000 to
1,800,000 contracts.
---------------------------------------------------------------------------
\23\ CBOE stated that all share prices used in its analysis were
based on the closing price of the security on November 16, 2017 and
cited Yahoo Finance as the source.
---------------------------------------------------------------------------
IWM
The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an index that is composed of 2,000
small-cap domestic companies in the Russell 3000 index. Options on RUT
are currently subject to no position limits but share similar trading
characteristics as IWM. 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. Assume that RUT was subject to the standard position
limit of 25,000 contracts for broad-based index options under Exchange
Rule 24.4(a). Based on the above comparison of notional values, this
would result in a positon [sic] limit equivalent to 250,000 contracts
for IWM as RUT's analogue. However, RUT is not subject to position
limits and has an average daily trading volume of 66,200 contracts. 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. The
Commission has approved no position limit for RUT, 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, CBOE
concluded and the Exchange agrees it is reasonable to increase the
positon [sic] limit for options on the IWM from 500,000 to 1,000,000
contracts.
EEM
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. 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. 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, CBOE believed and the Exchange agrees that it is reasonable to
increase the positon [sic] limit for
[[Page 13320]]
options on the IWM from 500,000 to 1,000,000 contracts.
EFA
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. 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. Based on the above
comparison of notional values, this would result in a positon [sic]
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, CBOE believed and the Exchange agrees that it is
reasonable to increase the positon [sic] limit for options on the EFA
from 250,000 to 500,000 contracts.
FXI
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 250,000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, CBOE
believed, and that Exchange agrees, that it is reasonable to increase
the positon [sic] limit for options on the FXI from 250,000 to 500,000
contracts.
EWZ
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, CBOE believed and the
Exchange agrees that it is reasonable to increase the positon [sic]
limit for options on the EWZ from 250,000 to 500,000 contracts.
TLT
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 the proposed rule change. Based on the above
comparisons, CBOE believed and the Exchange agrees it is reasonable to
increase the positon [sic] limit for options on the TLT from 250,000 to
500,000 contracts.
EWJ
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 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, CBOE
believed and the Exchange agrees that it is reasonable to increase the
positon [sic] limit for options on EWJ from 250,000 to 500,000
contracts.
Phlx Analysis and Conclusions
Phlx has reviewed the CBOE analysis set forth above. On the basis
of that analysis Phlx believes that market participants' trading
activity could be adversely impacted by the current position limits for
FXI, EFA, EWZ, TLT and EWJ and such limits may cause options trading in
these symbols to move from exchanges to the over-the-counter market.
The above trading characteristics of FXI, EFA, EWZ, TLT and EWJ are
either similar to those of EEM and IWM or sufficiently active so that
the proposed limit would continue to address potential manipulation
that may arise. Specifically, EFA has far more shares outstanding and a
larger fund market cap than EEM, IWM, and QQQQ. EWJ has more shares
outstanding than IWM and only slightly fewer shares outstanding than
QQQQ.
On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas, they are all actively trading so
that market participants' 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 securities alleviates concerns as to 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, at other options exchanges, and
at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity.
On the basis of CBOE's analysis Phlx also believes that market
participants' trading activity could be adversely impacted by the
current position limits for EEM, IWM and QQQQ. As discussed above, EEM,
IWM and QQQQ have similar trading characteristics. 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. The trading
characteristics for QQQQ described above, 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
[[Page 13321]]
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the positon [sic] limit for QQQQ. Based on these
statistics, 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.
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 member and member organization
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. Registered option
traders (``ROTs'') and specialists would continue to be exempt from
this reporting requirement, as ROT and specialist information can be
accessed through the Exchange's market surveillance systems. 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.\24\
---------------------------------------------------------------------------
\24\ See Exchange Rule 1003 for reporting requirements.
---------------------------------------------------------------------------
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.\25\
---------------------------------------------------------------------------
\25\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
---------------------------------------------------------------------------
Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\26\ 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 members and member organizations 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.
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\26\ 17 CFR 240.13d-1.
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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 member organization 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 member organization must maintain for
a large position held by itself or by its customer.\27\ In addition,
Rule 15c3-1 \28\ imposes a capital charge on member organizations to
the extent of any margin deficiency resulting from the higher margin
requirement.
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\27\ See Exchange Rule 721 for a description of margin
requirements.
\28\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. As noted above, the Commission has recently approved
increasing position limits to the levels proposed herein on the same
ETF options on the CBOE. The Exchange believes that the proposed
position limits would continue to address potential manipulative
activity while allowing for potential hedging activity for appropriate
economic purposes.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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The current position limits for the options subject to this
proposal have inhibited the ability of ROTs and specialists to make
markets on the Exchange. Specifically, the proposal is designed to
encourage ROTs and specialists 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 certain options.\31\
Additionally, the Commission has approved similar proposed rule changes
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ 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, Nasdaq 100 Index, and the
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent
elimination of position and exercise limits for these index options,
the Commission relied heavily upon the Exchange's surveillance
capabilities, and the Commission expressed trust in the enhanced
surveillance and reporting safeguards that the Exchange took in order
to detect and deter possible manipulative behavior which might
[[Page 13322]]
arise from eliminating position and exercise limits.\34\ Furthermore,
as described more fully above, options on other ETFs have the position
limits proposed herein and those ETFs have trading characteristics and
trading volumes that are similar to those of the ETFs subject to this
proposed rule change.
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\31\ 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).
\32\ 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 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017)
(SR-CBOE- 2007-008.).
\33\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination
of position and exercise limits on SPX, OEX, and DJX options)
(``SPX, OEX, and DJX Position Limit Elimination Approval Order'');
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX
options) (``NDX Position Limit Elimination Approval Order''); 56651
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71)
(``RUT Position Limit Elimination Approval Order'').
\34\ Id.
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Last, the Commission has 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.\35\ The
Exchange'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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\35\ 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. On the contrary, 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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 \36\ and Rule 19b-4(f)(6) thereunder.\37\
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\36\ 15 U.S.C. 78s(b)(3)(A).
\37\ 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 \38\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \39\ 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 effective and operative upon
filing. The Exchange states that waiver of the operative delay would
permit the Exchange to immediately implement the proposed rule change
to increase the position limits as proposed herein and thereby
seamlessly continue to offer traders and the investing public the
ability to use these products as effective hedging and trading
vehicles. The Exchange further states that waiver would allow the
Exchange to remain competitive with other exchanges. 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.\40\
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\38\ 17 CFR 240.19b-4(f)(6).
\39\ 17 CFR 240.19b-4(f)(6)(iii).
\40\ 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-Phlx-2018-24 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-Phlx-2018-24. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet 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-Phlx-2018-24, and should be submitted on
or before April 18, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06140 Filed 3-27-18; 8:45 am]
BILLING CODE 8011-01-P
