Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify Rule 904, Commentary .07 To Expand Position Limits for Options on Certain Exchange-Traded Funds, 18093-18099 [2018-08615]
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Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices
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NYSEAMER–2018–14]
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Modify Rule 904,
Commentary .07 To Expand Position
Limits for Options on Certain
Exchange-Traded Funds
sradovich on DSK3GMQ082PROD with NOTICES
April 19, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b-4 thereunder,3
notice is hereby given that on April 6,
2018, NYSE American LLC (the
‘‘Exchange’’ or ‘‘NYSE American’’) filed
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to modify
Rule 904 (Position Limits), Commentary
.07 to expand position limits for options
on certain Exchange-Traded Funds
(ETFs). The proposed rule change is
available on the Exchange’s website at
www.nyse.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
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 904, Commentary .07 to expand
position limits for options on certain
ETFs. Specifically, the Exchange
proposes to expand the position limits
for options on the following ETFs:
iShares China Large-Cap ETF (‘‘FXI’’),
iShares MSCI EAFE ETF (‘‘EFA’’),
iShares MSCI Emerging Markets ETF
(‘‘EEM’’), iShares Russell 2000 ETF
(‘‘IWM’’), iShares MSCI Brazil Capped
ETF (‘‘EWZ’’), iShares 20+ Year
Treasury Bond Fund ETF (‘‘TLT’’),
PowerShares QQQ Trust (‘‘QQQQ’’),
and iShares MSCI Japan ETF (‘‘EWJ’’).
This is a competitive filing that is based
on a proposal recently submitted by the
Chicago Board Options Exchange
Incorporated (‘‘Cboe’’) and approved by
the Securities and Exchange
Commission (‘‘Commission’’).4
1 15
2 15
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4 See Securities Exchange Act Release No. 82770
(February 23, 2018), 83 FR 8907 (March 1, 2018)
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18093
Position Limit Increase
Position limits are designed to
address potential manipulative schemes
and adverse market impact surrounding
the use of options, such as disrupting
the market in the security underlying
the options. The potential manipulative
schemes and adverse market impact are
balanced against the potential of setting
the limits so low as to discourage
participation in the options market. The
level of those position limits must be
balanced between curtailing potential
manipulation and the cost of preventing
potential hedging activity that could be
used for legitimate economic purposes.
Position limits for options on ETFs,
such as those subject to this proposal,
are determined pursuant to Rule 904,
and vary according to the number of
outstanding shares and the trading
volume of the underlying stocks or ETFs
over the past six-months. Pursuant to
Rule 904, the largest in capitalization
and the most frequently traded stocks
and ETFs have an option position limit
of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the
same side of the market; and smaller
capitalization stocks and ETFs have
position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.
Options on FXI, EFA, EWZ, TLT, and
EWJ are currently subject to the
standard position limit of 250,000
contracts as set forth in Rule 904.5 Rule
904, Commentary .07 sets forth separate
position limits for options on specific
ETFs as follows:
• Options on EEM are 500,000
contracts;
• Options on IWM are 500,000
contracts; and
• Options on QQQQ are 900,000
contracts.
The purpose of this proposal is to
amend Rule 904, Commentary .07 to
double the position and exercise limits
for FXI, EEM, IWM, EFA, EWZ, TLT,
QQQQ, and EWJ.6 The Exchange notes
(Order Granting Accelerated Approval SR–SR–
CBOE–2017–057) (the ‘‘Cboe Approval Order’’).
5 See https://www.theocc.com/webapps/delosearch.
6 By virtue of Rule 905 (Exercise Limits), which
is not being amended by this filing, the exercise
limit for FXI, EEM, IWM, EFA, EWZ, TLT, QQQQ,
and EWJ options would be similarly increased. The
Exchange notes that it also proposes to make nonsubstantive changes corrections to the names of
IWM and EEM and to assign letters (a)–(f) to the
paragraphs in current Commentary .07 to the Rule
to make it easier to follow (and reference). See
proposed Commentary .07(a)–(f) to Rule 904. The
Exchange does not propose to alter the substances
of new paragraphs (a)–(e) of the Commentary.
Proposed changes to paragraph (f) are discussed
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18094
Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices
that it also proposes to make nonsubstantive changes corrections to the
names of IWM and EEM (replacing
‘‘Index Fund with ETF’’) and to assign
letters (a)—(f) to the paragraphs in
current Commentary .07 to the Rule to
make it easier to follow (and reference).7
As such, options on FXI, EFA, EWZ,
TLT, and EWJ would no longer be
subject to the standard position limits
set forth under Rule 904. Accordingly,
Commentary .07(f) would be amended
to set forth that the position limits for
options on FXI, EFA, EWZ, TLT, and
EWJ would be 500,000 contracts. These
position limits equal the current
position limits for option on IWM and
EMM and are similar to the current
position limit for options on QQQQ set
forth in Rule 904, Commentary .07.
Further, Rule 904 would also be
amended to increase the position limits
for the remaining options subject to this
proposal as follows:
• The position limits for options on
EEM would be increased from 500,000
contracts to 1,000,000 contracts;
• The position limits on options on
IWM would be increased from 500,000
contracts to 1,000,000 contracts;
• The position limits on options on
QQQQ would be increased from 900,000
contracts to 1,800,000 contracts.8
In support of this proposal, the
Exchange represents that the above
listed ETFs qualify for either: (i) The
initial listing criteria set forth in Rule
915, Commentary .06(b) 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.9 FXI tracks the
performance of the FTSE China 50
Index, which is composed of the 50
largest Chinese stocks.10 EEM tracks the
performance of the MSCI Emerging
Markets Index, which is composed of
approximately 800 component
securities.11 ‘‘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.’’ 12 IWM tracks the
performance of the Russell 2000 Index,
which is composed of 2,000 small-cap
domestic stocks.13 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.14 ‘‘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.’’ 15 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.16 TLT tracks the
2017 ADV
(Mil. shares)
ETF
sradovich on DSK3GMQ082PROD with NOTICES
FXI ...................................................................................................................
EEM .................................................................................................................
IWM ..................................................................................................................
EFA ..................................................................................................................
EWZ .................................................................................................................
TLT ...................................................................................................................
QQQQ ..............................................................................................................
EWJ .................................................................................................................
SPY 24 ..............................................................................................................
herein. See proposed Commentary .07(f) to Rule
904.
7 See proposed Commentary .07(a)–(f) to Rule
904. The Exchange does not propose to alter the
substances of new paragraphs (a)–(e) of the
Commentary. Proposed changes to paragraph (f) are
discussed herein. See proposed Commentary .07(f)
to Rule 904.
8 See proposed Commentary .07(f) to Rule 904.
9 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 Rule 915, Commentary .06(b)(ii)(A);
Rule 915, Commentary .06.
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15.08
52.12
27.46
19.42
17.08
8.53
26.25
6.06
64.63
10 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
11 See https://us.ishares.com/productinfo/fund/
overview/EEM.htm.
12 See https://www.msci.com/products/indices/
tools/#EM.
13 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
14 See https://www.ishares.com/us/products/
239623/.
15 See https://www.msci.com/eafe.
16 See https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.17 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’’).18
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.19
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.20
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.21
Finally, the component securities of the
MSCI Emerging Markets Index on which
EEM is based, for which the primary
market is in any two countries that are
not subject to CSAs do not represent
33% of more of the weight of the MSCI
Emerging Markets Index.22
In seeking to expand position limits
for the same ETFs at issue in this
proposal, Cboe represented that market
participants have increased their
demand for options on FXI, EFA, EWZ,
TLT, and EWJ for hedging and trading
purposes and, in support of this claim,
presented the trading statistics set forth
in the table below.23
2017 ADV
(option contracts)
71,944
287,357
490,070
98,844
95,152
80,476
579,404
4,715
2,575,153
Shares
outstanding
(Mil.)
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
7,442.4
50,359.7
16,625.1
240,540.0
17 See https://www.ishares.com/us/products/
239454.
18 See https://www.invesco.com/portal/site/us/
financial-professional/etfs/product
detail?productId=QQQ&ticker=QQQ&title=
powershares-qqq.
19 See https://www.ishares.com/us/products/
239665/EWJ.
20 See Rule 915, Commentary .06.
21 See Rule 915, Commentary .06(b)(ii)(A).
22 See Rule 915, Commentary .06(b)(ii)(B).
23 See Cboe Approval Order, supra note 4.
24 SPDR S&P 500 ETF (‘‘SPY’’) is included here
for comparison purposes.
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Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices
The Exchange agrees and believes the
current position limits are too low and
may be a deterrent to successful trading
of options on these securities. The
analysis that follows was likewise
conducted by Cboe in support of its
proposal. The Exchange agrees with
Cboe’s analysis discussed below.
In support of its proposal to increase
the position limits for QQQQ to
1,800,000 contracts, Cboe compared the
trading characteristics of QQQQ to that
of SPY, which has no position limits. As
shown in Cboe’s above table, the
average daily trading volume through
August 14, 2017 for QQQQ was 26.25
million shares compared to 64.63
million shares for SPY. The total shares
outstanding for QQQQ are 351.6 million
compared to 976.23 million for SPY.
The fund market cap for QQQQ is
$50,359.7 million compared to $240,540
million for SPY. SPY is one of the most
actively trading ETFs and is subject to
no position limits. QQQQ is also very
actively traded, and while not to the
level of SPY, should be subject to the
proposed higher position limits based
its trading characteristics when
compared to SPY. The proposed
position limit coupled with QQQQ’s
trading behavior would continue to
address potential manipulative schemes
and adverse market impact surrounding
the use of options and trading in
securities 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 manipulative 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 number of shares outstanding
than IWM and a much higher market
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cap than EEM and IWM which justify
doubling the position limit for QQQQ.
Based on these statistics, and as stated
above, the proposed position limit
coupled with QQQQ’s trading behavior
would continue to address potential
manipulative schemes and adverse
market impact surrounding the use of
options and trading in the securities
underlying the options.
In support of its proposal to increase
the position limits for FXI, EFA, EWZ,
TLT, and EWJ from 250,000 contracts to
500,000 contracts, Cboe compared the
trading characteristics of FXI, EFA,
EWZ, TLT and EWJ to that of EEM and
IWM, both of which currently have a
position limit of 500,000 contracts. As
shown in the above table, the average
daily trading volume through July 31,
2017 for FXI is 15.08 million shares,
EFA is 19.42 million shares, EWZ is
17.08 million shares, TLT is 8.53
million shares, and EWJ is 6.06 million
shares compared to 52.12 million shares
for EEM and 27.46 million shares for
IWM. The total shares outstanding for
FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60
million and EWJ is 303.6 million
compared to 797.4 million for EEM and
253.1 million for IWM. The fund market
cap for FXI is $3,343.6 million, EFA is
$78,870.3 million, EWZ is $6,023.4
million, TLT is $7,442.4 million, and
EWJ is $16,625.1 million compared to
$34,926.1 million for EEM and
$35,809.1 million for IWM. The above
trading characteristics of FXI, EFA,
EWZ, TLT and EWJ is either similar to
that of EEM and IWM or sufficiently
active enough so that the proposed limit
would continue to address potential
manipulation that may arise. EFA has
far more shares outstanding and a larger
fund market cap than EEM, IWM, and
QQQQ. EWJ has a more shares
outstanding than IWM and only slightly
less shares outstanding than QQQQ.
On the other hand, while FXI, EWZ,
and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas,
they are all actively trading so that
market participant’s trading activity has
been impacted by them being restricted
by the current position limits. The
Exchange believes that the trading
activity and these securities being based
on a broad basket of underlying
securities alleviates any potential
manipulative activity that may arise. In
addition, as discussed in more detail
below, the Exchange’s existing
surveillance procedures and reporting
requirements at the Exchange, other
options exchanges, and at several
clearing firms are capable of properly
identifying unusual and/or illegal
trading activity.
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18095
According to Cboe, market
participants’ trading activity has been
adversely impacted by the current
position limits for FXI, EFA, EWZ, TLT,
and EWJ and such limits have caused
options trading in these symbols to
move from exchanges to the over-thecounter market.25 The Exchange
understands that certain market
participants wishing to make trades
involving a large number of options
contracts in the symbols subject to the
proposal are opting to execute those
trades in the over-the-counter market.
The over-the-counter transactions occur
via bi-lateral agreements, the terms of
which are not publicly disclosed to
other market participants. Therefore,
these large trades do not contribute to
the price discovery process performed
on a lit market.
The Exchange notes that the ETFs that
underlie options subject to this proposal
are highly liquid, and are based on a
broad set of highly liquid securities and
other reference assets.26 The Exchange
notes that the Commission has generally
looked through to the liquidity of
securities comprising an index in
establishing position limits for cashsettled index options. The Exchange
further notes that options on certain
broad-based security indexes have no
position limits. Likewise, the
Commission has recognized the
liquidity of the securities comprising
the underlying interest of SPY in
permitting no position limits on SPY
options since 2012,27 and expanded
position limits for options on EEM,
IWM, and QQQQ.
The proposed position limits set forth
in the proposal would continue to
address potential manipulative activity
while allowing for potential hedging
activity for appropriate economic
purposes. The creation and redemption
process for these ETFs also lessen the
potential for manipulative activity.
When an ETF company wants to create
more ETF shares, it looks to an
Authorized Participant, which is a
market maker or other large financial
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
25 See SR–CBOE–2017–057, Partial Amendment
No. 1 (November 22, 2017).
26 See supra nn. 9–18 (providing trading statistics
for each ETF at issue in this proposal).
27 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012).
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equally valued ETF shares, on a one-forone fair value basis. The price is based
on the net asset value, not the market
value at which the ETF is trading. This
process can also work in reverse where
the ETF company seeks to decrease the
number of shares that are available to
trade. The creation and redemption
process, therefore, creates a direct link
to the underlying components of the
ETF, and serves to mitigate potential
price impact of the ETF shares that
might otherwise result from increased
position limits.
The ETF creation and redemption
seeks to keep ETF share prices trading
in line with the ETF’s underlying net
asset value. Because an ETF trades like
a stock, its price will fluctuate during
the trading day, due to simple supply
and demand. If demand to buy an ETF
is high, for instance, the ETF’s share
price might rise above the value of its
underlying securities. When this
happens, the Authorized Participant
believes the ETF may now be
overpriced, and can buy the underlying
shares that compose the ETF and then
sell ETF shares on the open market.
This should help drive the ETF’s share
price back toward fair value. Likewise,
if the ETF starts trading at a discount to
the securities it holds, the Authorized
Participant can buy shares of the ETF
and redeem them for the underlying
securities. Buying undervalued ETF
shares should drive the price of the ETF
back toward fair value. This arbitrage
process helps to keep an ETF’s price in
line with the value of its underlying
portfolio.
Some of the ETFs underlying options
subject to the proposal are based on
broad-based indices that underlie cash
settled options that are economically
equivalent to the ETF options that are
the subject of the proposal and have no
position limits. Other ETFs are based on
broad-based indexes that underlie cashsettled options with position limits
reflecting notional values that are larger
than the current position limits for ETF
analogues (EEM, EFA). Where there was
no approved index analogue, the
Exchange believes, based on the
liquidity, breadth and depth of the
underlying market, that the index
referenced by the ETF would be
considered a broad-based index.28 The
Exchange argues that if certain position
limits are appropriate for the options
overlying the same index or is an
analogue to the basket of securities that
the ETF tracks, then those same
economically equivalent position limits
should be appropriate for the option
28 See Rule 904C(b) (Position Limits) (describing
position limits for Broad Stock Index Group).
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overlying the ETF. In addition, the
market capitalization of the underlying
index or reference asset is large enough
to absorb any price movements that may
be caused by an oversized trade. Also,
the Authorized Participant or issuer
may look to the stocks comprising the
analogous underlying index or reference
asset when seeking to create additional
ETF shares are part of the creation/
redemption process to address supply
and demand or to mitigate the price
movement the price of the ETF.
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 the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).
Options on NDX are currently subject to
the standard position limit of 25,000
contracts for broad-based index options
but share similar trading characteristics
as QQQQ.29 Based on QQQQ’s share
price of $154.54 30 and NDX’s index
level of 6,339.14, approximately 40
contracts of QQQQ equals one contract
of NDX. Based on the above comparison
of notional values, this would result in
a position limit equivalent to 1,000,000
contracts for QQQQ as NDX’s analogue.
NDX is subject to the standard position
limit of 25,000 contracts for broad-based
index options and has an average daily
trading volume of 15,300 contracts.
QQQQ is currently subject to a position
limit of 900,000 contracts but has a
much higher average daily trading
volume of 579,404 contracts.
Furthermore, NDX currently has a
market capitalization of $17.2 trillion
and QQQQ has a market capitalization
of $50,359.7 million, and the
component securities of NDX, in
aggregate, have traded an average of 440
million shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in the
QQQQ. The Exchange notes that other
exchanges allow no position limits for
NDX,31 although it has a much lower
average daily trading volume than its
analogue, the QQQQ. Therefore, the
Exchange believes it is reasonable to
increase the position limit for options
on the QQQQ from 900,000 to 1,800,000
contracts.
IWM
The iShares Russell 2000 ETF or
IWM, is an ETF that also tracks the
29 See
id.
share prices used herein are based on the
closing price of the security on November 16, 2017.
Source: Yahoo Finance.
31 See Cboe Rule 24.4 sets forth position limits for
broad-based index options.
Russell 2000 Index or RUT, which is an
index that composed of 2,000 small-cap
domestic companies in the Russell 3000
index. Options on RUT are currently
subject to the standard position limit of
25,000 contracts for broad-based index
options but share similar trading
characteristics as IWM.32 Based on
IWM’s share price of $144.77 and RUT’s
index level of 1,486.88, approximately
10 contracts of IWM equals one contract
of RUT. Based on the above comparison
of notional values, this would result in
a position limit equivalent to 250,000
contracts for IWM as RUT’s analogue.
The Exchange notes that at other
exchanges RUT is not subject to position
limits and has an average daily trading
volume of 66,200 contracts.33 IWM is
currently subject to a position limit of
500,000 contracts but has a much higher
average daily trading volume of 490,070
contracts. As mentioned above, other
exchanges have no position limits for
RUT,34 although it has a much lower
average daily trading volume than its
analogue, the IWM. Furthermore, RUT
currently has a market capitalization of
$2.4 trillion and IWM has a market
capitalization of $35,809.1 million, and
the component securities of RUT, in
aggregate, have traded an average of 270
million shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
IWM. Therefore, the Exchange believes
it is reasonable to increase the position
limit for options on the IWM from
500,000 to 1,000,000 contracts.
EEM
EEM tracks the performance of the
MSCI Emerging Markets Index or MXEF,
which is composed of approximately
800 component securities following 21
emerging market country indices: Brazil,
Chile, China, Colombia, Czech Republic,
Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
Below makes the same notional value
comparison as made above. Based on
EEM’s share price of $47.06 and MXEF’s
index level of 1,136.45, approximately
24 contracts of EEM equals one contract
of MXEF. MXEF is currently subject to
the standard position limit of 25,000
contracts for Broad Stock Index Group
options under Rule 904C(b). 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
30 All
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32 See Rule 904C(b) (Position Limits) (describing
position limits for Broad Stock Index Group).
33 See Cboe Rule 24.4.
34 See id.
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sradovich on DSK3GMQ082PROD with NOTICES
analogue. However, MXEF has an
average daily trading volume of 180
contracts. EEM is currently subject to a
position limit of 500,000 contracts but
has a much higher average daily trading
volume of 287,357 contracts.
Furthermore, MXEF currently has a
market capitalization of $5.18 trillion
and EEM has a market capitalization of
$34,926.1 million, and the component
securities of MXEF, in aggregate, have
traded an average of 33.6 billion shares
per day in 2017, both large enough to
absorb any price movement cause by a
large trade in the EEM. Therefore, based
on the comparison of average daily
trading volume, the Exchange believes it
is reasonable to increase the position
limit for options on the EEM from
500,000 to 1,000,000 contracts.
EFA
EFA tracks the performance of MSCI
EAFE Index or MXEA, which has over
900 component securities designed to
represent the performance of large and
mid-cap securities across 21 developed
markets, including countries in Europe,
Australasia and the Far East, excluding
the U.S. and Canada. Below makes the
same notional value comparison as
made above. Based on EFA’s share price
of $69.16 and MXEA’s index level of
1,986.15, approximately 29 contracts of
EFA equals one contract of MXEA.
MXEA is currently subject to the
standard position limit of 25,000
contracts for Broad Stock Index Group
options under Rule 904C(b). Based on
the above comparison of notional
values, this would result in a position
limit economically equivalent to
721,000 contracts for EFA as MXEA’s
analogue. Furthermore, MXEA currently
has a market capitalization of $18.7
trillion and EFA has a market
capitalization of $78,870.3 million, and
the component securities of MXEA, in
aggregate, have traded an average of 4.6
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
EEM. However, MXEA has an average
daily trading volume of 270 contracts.
EFA is currently subject to a position
limit of 250,000 contracts but has a
much higher average daily trading
volume of 98,844 contracts. Based on
the above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the EFA
from 250,000 to 500,000 contracts.
FXI
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
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trading. However, the FTSE China 50
Index currently has a market
capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18
million, both large enough to absorb any
price movement cause by a large trade
in FXI. The components of the FTSE
China 50 Index, in aggregate, have an
average daily trading volume of 2.3
billion shares. FXI is currently subject to
a position limit of 000 contracts but has
a much higher average daily trading
volume of 15.08 million shares. Based
on the above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the FXI
from 250,000 to 500,000 contracts.
EWZ
EWZ tracks the performance of the
MSCI Brazil 25/50 Index, which is
composed of shares of large and midsize companies in Brazil. There is
currently no index analogue for EWZ
approved for options trading. However,
the MSCI Brazil 25/50 Index currently
has a market capitalization of $700
billion and EWZ has a market
capitalization of $6,023.4 million, both
large enough to absorb any price
movement cause by a large trade in
EWZ. The components of the MSCI
Brazil 25/50 Index, in aggregate, have an
average daily trading volume of 285
million shares. EWZ is currently subject
to a position limit of 250,000 contracts
but has a much higher average daily
trading volume of 17.08 million shares.
Based on the above comparisons, the
Exchange believes it is reasonable to
increase the position limit for options
on the EWZ from 250,000 to 500,000
contracts.
TLT
TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index,
which is composed of long-term U.S.
Treasury bonds. There is currently no
index analogue for TLT approved for
options trading. However, the U.S.
Treasury market is one of the largest and
most liquid markets in the world, with
over $14 trillion outstanding and
turnover of approximately $500 billion
per day. TLT currently has a market
capitalization of $7,442.4 million, both
large enough to absorb any price
movement cause by a large trade in TLT.
Therefore, the potential for
manipulation will not increase solely
due the increase in position limits as set
forth in this proposal. Based on the
above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the TLT
from 250,000 to 500,000 contracts.
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18097
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 caused by a large trade in
EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and
has an average daily trading volume of
6.6 million shares. Based on the above
comparisons, the Exchange believes it is
reasonable to increase the position limit
for options on EWJ from 250,000 to
500,000 contracts.
Exchange Analysis and Conclusions
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
ATP Holder that maintains a position in
the options on the same side of the
market, for its own account or for the
account of a customer, report certain
information to the Exchange. This
information would include, but would
not be limited to, the options’ position,
whether such position is hedged and, if
so, a description of the hedge, and the
collateral used to carry the position, if
applicable. Exchange Market Makers 35
would continue to be exempt from this
reporting requirement, as Market Maker
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
35 A Market Maker ‘‘A Market Maker is an ATP
Holder that is registered with the Exchange for the
purpose of making transactions as a dealerspecialist on the Floor of the Exchange or for the
purpose of submitting quotes electronically and
making transactions as a dealer specialist through
the System. A Market Maker submitting quotes
remotely is not eligible to participate in trades
affected in open outcry except to the extent that
such Market Maker’s quotation represents the BBO.
Market Makers are designated as specialists on the
Exchange for all purposes under the Securities
Exchange Act of 1934 and the Rules and
Regulations thereunder.’’ See Rule 920(a).
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Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices
this level for the options subject to this
proposal.36
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.37
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.38 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 ATP Holders 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 an
ATP Holder or its customer may try to
maintain an inordinately large unhedged position in the options subject
to this proposal. Current margin and
risk-based haircut methodologies serve
to limit the size of positions maintained
by any one account by increasing the
margin and/or capital that an ATP
Holder must maintain for a large
position held by itself or by its
customer.39 In addition, Rule 15c3–1 40
imposes a capital charge on ATP
Holders to the extent of any margin
deficiency resulting from the higher
margin requirement.
sradovich on DSK3GMQ082PROD with NOTICES
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with Section
6(b) of the Act 41 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,42 in that it is designed to prevent
36 See
Rule 906 (Reporting of Options Positions).
procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed.
38 17 CFR 240.13d–1.
39 See Rule 462 (Minimum Margins).
40 17 CFR 240.15c3–1.
41 15 U.S.C. 78f(b).
42 15 U.S.C. 78f(b)(5).
37 These
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Jkt 244001
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) requirement that the
rules of an exchange not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.43
The current position limits for the
options subject to this proposal have
inhibited the ability of Market Makers to
make markets on the Exchange.
Specifically, the proposal is designed to
encourage Market Makers to shift
liquidity from over the counter markets
onto the Exchange, which will enhance
the process of price discovery
conducted on the Exchange through
increased order flow. The proposal will
also benefit institutional investors as
well as retail traders, and public
customers, by providing them with a
more effective trading and hedging
vehicle. In addition, the Exchange
believes that the structure of the ETFs
subject to this proposal and the
considerable liquidity of the market for
options on those ETFs diminishes the
opportunity to manipulate this product
and disrupt the underlying market that
a lower position limit may protect
against. Increased position limits for
select actively traded options, such as
that proposed herein, is not novel and
has been previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for options on SPY.44
Additionally, the Commission has
approved similar proposed rule changes
to increase position limits for options on
highly liquid, actively-traded ETFs,45
including a proposal to permanently
43 Id.
44 See Securities Exchange Act Release Nos.
67937 (September 27, 2012), 77 FR 60489 (October
3, 2012) (SR–CBOE–2012–091); 67936 (September
27, 2012), 77 FR 60491 (October 3, 2012) (SR–BOX–
2012–013); 68001 (October 5, 2012), 77 FR 62303
(October 12, 2012) (SR–NYSEArca–2012–112);
67672 (August 15, 2012), 77 FR 50750 (August 22,
2012) (SR–NYSEAmex–2012–29).
45 See Securities Exchange Act Release Nos.
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066); 64928 (July 20, 2011),
76 FR 44633 (July 26, 2011) (SR–CBOE–2011–065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011)
(SR–PHLX–2011–58); and 55155 (January 23, 2007),
72 FR 4741 (February 1, 2017) (SR–CBOE–2007–
008).
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eliminate the position and exercise
limits for options overlaying the S&P
500 Index, S&P 100 Index, Dow Jones
Industrial Average, and Nasdaq 100
Index.46 In approving the permanent
elimination of position and exercise
limits, the Commission relied heavily
upon Cboe’s surveillance capabilities,
the Commission expressed trust in the
enhanced surveillance and reporting
safeguards that Cboe took in order to
detect and deter possible manipulative
behavior which might arise from
eliminating position and exercise
limits.47 Furthermore, as described
more fully above, options on other ETFs
have the position limits proposed
herein, but their trading volumes are
significantly lower than the ETFs
subject to the proposed rule change.
Lastly, the Commission expressed the
belief that removing position and
exercise limits may bring additional
depth and liquidity without increasing
concerns regarding intermarket
manipulation or disruption of the
options or the underlying securities.48
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 would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposed
rule change will result in additional
opportunities to achieve the investment
and trading objectives of market
participants seeking efficient trading
and hedging vehicles, to the benefit of
investors, market participants, and the
marketplace in general.
Further, the Exchange notes that the
rule change is being proposed as a
competitive response to a filing
submitted by Cboe that was recently
approved by the Commission.49
46 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001) (SR–CBOE–2001–22); 52650 (October 21,
2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
2005–41) (‘‘NDX Approval’’).
47 See id., NDX Approval, 70 FR 62147, at 62149.
48 Id.
49 See supra note 4.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 50 and Rule 19b–
4(f)(6) thereunder.51
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 52 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 53
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
ATP Holders that are also members at
CBOE where these increased position
limits are currently in place. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission hereby waives the
operative delay and designates the
proposal as operative upon filing.54
50 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
52 17 CFR 240.19b–4(f)(6).
53 17 CFR 240.19b–4(f)(6)(iii).
54 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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51 17
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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 rule-comments@
sec.gov. Please include File Number SR–
NYSEAMER–2018–14 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–NYSEAMER–2018–14. 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
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18099
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–NYSEAMER–2018–14, and
should be submitted on or before May
16, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–08615 Filed 4–24–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83066; File No. SR–
NYSEArca–2018–23]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Modify Rule 6.8–O,
Commentary .06 To Expand Position
Limits for Options on Certain
Exchange-Traded Funds
April 19, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on April 13,
2018, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to modify
Rule 6.8–O (Position Limits),
Commentary .06 to expand position
limits for options on certain ExchangeTraded Funds (ETFs). The proposed
rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
55 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 83, Number 80 (Wednesday, April 25, 2018)]
[Notices]
[Pages 18093-18099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08615]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83065; File No. SR-NYSEAMER-2018-14]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Modify
Rule 904, Commentary .07 To Expand Position Limits for Options on
Certain Exchange-Traded Funds
April 19, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on April 6, 2018, NYSE American LLC (the ``Exchange'' or
``NYSE American'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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 modify Rule 904 (Position Limits),
Commentary .07 to expand position limits for options on certain
Exchange-Traded Funds (ETFs). The proposed rule change is available on
the Exchange's website at www.nyse.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 self-regulatory organization
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 those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 904, Commentary .07 to expand
position limits for options on certain ETFs. Specifically, the Exchange
proposes to expand the position limits for options on the following
ETFs: iShares China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF
(``EFA''), iShares MSCI Emerging Markets ETF (``EEM''), iShares Russell
2000 ETF (``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares
20+ Year Treasury Bond Fund ETF (``TLT''), PowerShares QQQ Trust
(``QQQQ''), and iShares MSCI Japan ETF (``EWJ''). This is a competitive
filing that is based on a proposal recently submitted by the Chicago
Board Options Exchange Incorporated (``Cboe'') and approved by the
Securities and Exchange Commission (``Commission'').\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 82770 (February 23,
2018), 83 FR 8907 (March 1, 2018) (Order Granting Accelerated
Approval SR-SR-CBOE-2017-057) (the ``Cboe Approval Order'').
---------------------------------------------------------------------------
Position Limit Increase
Position limits are designed to address potential manipulative
schemes and adverse market impact surrounding the use of options, such
as disrupting the market in the security underlying the options. The
potential manipulative schemes and adverse market impact are balanced
against the potential of setting the limits so low as to discourage
participation in the options market. The level of those position limits
must be balanced between curtailing potential manipulation and the cost
of preventing potential hedging activity that could be used for
legitimate economic purposes. Position limits for options on ETFs, such
as those subject to this proposal, are determined pursuant to Rule 904,
and vary according to the number of outstanding shares and the trading
volume of the underlying stocks or ETFs over the past six-months.
Pursuant to Rule 904, the largest in capitalization and the most
frequently traded stocks and ETFs have an option position limit of
250,000 contracts (with adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and smaller capitalization stocks
and ETFs have position limits of 200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market. Options on FXI, EFA, EWZ, TLT, and EWJ are
currently subject to the standard position limit of 250,000 contracts
as set forth in Rule 904.\5\ Rule 904, Commentary .07 sets forth
separate position limits for options on specific ETFs as follows:
---------------------------------------------------------------------------
\5\ See https://www.theocc.com/webapps/delo-search.
---------------------------------------------------------------------------
Options on EEM are 500,000 contracts;
Options on IWM are 500,000 contracts; and
Options on QQQQ are 900,000 contracts.
The purpose of this proposal is to amend Rule 904, Commentary .07
to double the position and exercise limits for FXI, EEM, IWM, EFA, EWZ,
TLT, QQQQ, and EWJ.\6\ The Exchange notes
[[Page 18094]]
that it also proposes to make non-substantive changes corrections to
the names of IWM and EEM (replacing ``Index Fund with ETF'') and to
assign letters (a)--(f) to the paragraphs in current Commentary .07 to
the Rule to make it easier to follow (and reference).\7\
---------------------------------------------------------------------------
\6\ By virtue of Rule 905 (Exercise Limits), which is not being
amended by this filing, the exercise limit for FXI, EEM, IWM, EFA,
EWZ, TLT, QQQQ, and EWJ options would be similarly increased. The
Exchange notes that it also proposes to make non-substantive changes
corrections to the names of IWM and EEM and to assign letters (a)-
(f) to the paragraphs in current Commentary .07 to the Rule to make
it easier to follow (and reference). See proposed Commentary .07(a)-
(f) to Rule 904. The Exchange does not propose to alter the
substances of new paragraphs (a)-(e) of the Commentary. Proposed
changes to paragraph (f) are discussed herein. See proposed
Commentary .07(f) to Rule 904.
\7\ See proposed Commentary .07(a)-(f) to Rule 904. The Exchange
does not propose to alter the substances of new paragraphs (a)-(e)
of the Commentary. Proposed changes to paragraph (f) are discussed
herein. See proposed Commentary .07(f) to Rule 904.
---------------------------------------------------------------------------
As such, options on FXI, EFA, EWZ, TLT, and EWJ would no longer be
subject to the standard position limits set forth under Rule 904.
Accordingly, Commentary .07(f) would be amended to set forth that the
position limits for options on FXI, EFA, EWZ, TLT, and EWJ would be
500,000 contracts. These position limits equal the current position
limits for option on IWM and EMM and are similar to the current
position limit for options on QQQQ set forth in Rule 904, Commentary
.07. Further, Rule 904 would also be amended to increase the position
limits for the remaining options subject to this proposal as follows:
The position limits for options on EEM would be increased
from 500,000 contracts to 1,000,000 contracts;
The position limits on options on IWM would be increased
from 500,000 contracts to 1,000,000 contracts;
The position limits on options on QQQQ would be increased
from 900,000 contracts to 1,800,000 contracts.\8\
---------------------------------------------------------------------------
\8\ See proposed Commentary .07(f) to Rule 904.
---------------------------------------------------------------------------
In support of this proposal, the Exchange represents that the above
listed ETFs qualify for either: (i) The initial listing criteria set
forth in Rule 915, Commentary .06(b) 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.\9\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\10\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\11\ ``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.'' \12\ IWM tracks the performance
of the Russell 2000 Index, which is composed of 2,000 small-cap
domestic stocks.\13\ EFA tracks the performance of MSCI EAFE Index,
which has over 900 component securities.\14\ ``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.'' \15\ EWZ tracks the
performance of the MSCI Brazil 25/50 Index, which is composed of shares
of large and mid-size companies in Brazil.\16\ TLT tracks the
performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed
of long-term U.S. Treasury bonds.\17\ 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'').\18\ EWJ tracks the MSCI Japan Index, which
tracks the performance of large and mid-sized companies in Japan.\19\
---------------------------------------------------------------------------
\9\ 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 Rule 915, Commentary .06(b)(ii)(A); Rule 915,
Commentary .06.
\10\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\11\ See https://us.ishares.com/productinfo/fund/overview/EEM.htm.
\12\ See https://www.msci.com/products/indices/tools/#EM.
\13\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\14\ See https://www.ishares.com/us/products/239623/.
\15\ See https://www.msci.com/eafe.
\16\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\17\ See https://www.ishares.com/us/products/239454.
\18\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\19\ 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.\20\ 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.\21\ Finally, the component securities of the MSCI Emerging
Markets Index on which EEM is based, for which the primary market is in
any two countries that are not subject to CSAs do not represent 33% of
more of the weight of the MSCI Emerging Markets Index.\22\
---------------------------------------------------------------------------
\20\ See Rule 915, Commentary .06.
\21\ See Rule 915, Commentary .06(b)(ii)(A).
\22\ See Rule 915, Commentary .06(b)(ii)(B).
---------------------------------------------------------------------------
In seeking to expand position limits for the same ETFs at issue in
this proposal, Cboe represented that market participants have increased
their demand for options on FXI, EFA, EWZ, TLT, and EWJ for hedging and
trading purposes and, in support of this claim, presented the trading
statistics set forth in the table below.\23\
---------------------------------------------------------------------------
\23\ See Cboe Approval Order, supra note 4.
\24\ SPDR S&P 500 ETF (``SPY'') is included here for comparison
purposes.
----------------------------------------------------------------------------------------------------------------
2017 ADV Shares
ETF 2017 ADV (option outstanding Fund market
(Mil. shares) contracts) (Mil.) cap ($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 7,442.4
QQQQ............................................ 26.25 579,404 351.6 50,359.7
EWJ............................................. 6.06 4,715 303.6 16,625.1
SPY 24.......................................... 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------
[[Page 18095]]
The Exchange agrees and believes the current position limits are
too low and may be a deterrent to successful trading of options on
these securities. The analysis that follows was likewise conducted by
Cboe in support of its proposal. The Exchange agrees with Cboe's
analysis discussed below.
In support of its proposal to increase the position limits for QQQQ
to 1,800,000 contracts, Cboe compared the trading characteristics of
QQQQ to that of SPY, which has no position limits. As shown in Cboe's
above table, the average daily trading volume through August 14, 2017
for QQQQ was 26.25 million shares compared to 64.63 million shares for
SPY. The total shares outstanding for QQQQ are 351.6 million compared
to 976.23 million for SPY. The fund market cap for QQQQ is $50,359.7
million compared to $240,540 million for SPY. SPY is one of the most
actively trading ETFs and is subject to no position limits. QQQQ is
also very actively traded, and while not to the level of SPY, should be
subject to the proposed higher position limits based its trading
characteristics when compared to SPY. The proposed position limit
coupled with QQQQ's trading behavior would continue to address
potential manipulative schemes and adverse market impact surrounding
the use of options and trading in securities 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 manipulative 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 number of shares
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the position limit for QQQQ. Based on these
statistics, and as stated above, the proposed position limit coupled
with QQQQ's trading behavior would continue to address potential
manipulative schemes and adverse market impact surrounding the use of
options and trading in the securities underlying the options.
In support of its proposal to increase the position limits for FXI,
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts,
Cboe compared the trading characteristics of FXI, EFA, EWZ, TLT and EWJ
to that of EEM and IWM, both of which currently have a position limit
of 500,000 contracts. As shown in the above table, the average daily
trading volume through July 31, 2017 for FXI is 15.08 million shares,
EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT is 8.53
million shares, and EWJ is 6.06 million shares compared to 52.12
million shares for EEM and 27.46 million shares for IWM. The total
shares outstanding for FXI is 78.6 million, EFA is 1178.4 million, EWZ
is 159.4 million, TLT is 60 million and EWJ is 303.6 million compared
to 797.4 million for EEM and 253.1 million for IWM. The fund market cap
for FXI is $3,343.6 million, EFA is $78,870.3 million, EWZ is $6,023.4
million, TLT is $7,442.4 million, and EWJ is $16,625.1 million compared
to $34,926.1 million for EEM and $35,809.1 million for IWM. The above
trading characteristics of FXI, EFA, EWZ, TLT and EWJ is either similar
to that of EEM and IWM or sufficiently active enough so that the
proposed limit would continue to address potential manipulation that
may arise. EFA has far more shares outstanding and a larger fund market
cap than EEM, IWM, and QQQQ. EWJ has a more shares outstanding than IWM
and only slightly less shares outstanding than QQQQ.
On the other hand, while FXI, EWZ, and TLT do not exceed EEM, IWM
or QQQQ in any of the specified areas, they are all actively trading so
that market participant's trading activity has been impacted by them
being restricted by the current position limits. The Exchange believes
that the trading activity and these securities being based on a broad
basket of underlying securities alleviates any potential manipulative
activity that may arise. In addition, as discussed in more detail
below, the Exchange's existing surveillance procedures and reporting
requirements at the Exchange, other options exchanges, and at several
clearing firms are capable of properly identifying unusual and/or
illegal trading activity.
According to Cboe, market participants' trading activity has been
adversely impacted by the current position limits for FXI, EFA, EWZ,
TLT, and EWJ and such limits have caused options trading in these
symbols to move from exchanges to the over-the-counter market.\25\ The
Exchange understands that certain market participants wishing to make
trades involving a large number of options contracts in the symbols
subject to the proposal are opting to execute those trades in the over-
the-counter market. The over-the-counter transactions occur via bi-
lateral agreements, the terms of which are not publicly disclosed to
other market participants. Therefore, these large trades do not
contribute to the price discovery process performed on a lit market.
---------------------------------------------------------------------------
\25\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22,
2017).
---------------------------------------------------------------------------
The Exchange notes that the ETFs that underlie options subject to
this proposal are highly liquid, and are based on a broad set of highly
liquid securities and other reference assets.\26\ The Exchange notes
that the Commission has generally looked through to the liquidity of
securities comprising an index in establishing position limits for
cash-settled index options. The Exchange further notes that options on
certain broad-based security indexes have no position limits. Likewise,
the Commission has recognized the liquidity of the securities
comprising the underlying interest of SPY in permitting no position
limits on SPY options since 2012,\27\ and expanded position limits for
options on EEM, IWM, and QQQQ.
---------------------------------------------------------------------------
\26\ See supra nn. 9-18 (providing trading statistics for each
ETF at issue in this proposal).
\27\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012).
---------------------------------------------------------------------------
The proposed position limits set forth in the proposal would
continue to address potential manipulative activity while allowing for
potential hedging activity for appropriate economic purposes. The
creation and redemption process for these ETFs also lessen the
potential for manipulative activity. When an ETF company wants to
create more ETF shares, it looks to an Authorized Participant, which is
a market maker or other large financial institution, to acquire the
securities the ETF is to hold. For instance, IWM is designed to track
the performance of the Russell 2000 Index, the Authorized Participant
will purchase all the Russell 2000 constituent securities in the exact
same weight as the index, then deliver those shares to the ETF
provider. In exchange, the ETF provider gives the Authorized
Participant a block of
[[Page 18096]]
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. This process can also work in reverse where the ETF company
seeks to decrease the number of shares that are available to trade. The
creation and redemption process, therefore, creates a direct link to
the underlying components of the ETF, and serves to mitigate potential
price impact of the ETF shares that might otherwise result from
increased position limits.
The ETF creation and redemption seeks to keep ETF share prices
trading in line with the ETF's underlying net asset value. Because an
ETF trades like a stock, its price will fluctuate during the trading
day, due to simple supply and demand. If demand to buy an ETF is high,
for instance, the ETF's share price might rise above the value of its
underlying securities. When this happens, the Authorized Participant
believes the ETF may now be overpriced, and can buy the underlying
shares that compose the ETF and then sell ETF shares on the open
market. This should help drive the ETF's share price back toward fair
value. Likewise, if the ETF starts trading at a discount to the
securities it holds, the Authorized Participant can buy shares of the
ETF and redeem them for the underlying securities. Buying undervalued
ETF shares should drive the price of the ETF back toward fair value.
This arbitrage process helps to keep an ETF's price in line with the
value of its underlying portfolio.
Some of the ETFs underlying options subject to the proposal are
based on broad-based indices that underlie cash settled options that
are economically equivalent to the ETF options that are the subject of
the proposal and have no position limits. Other ETFs are based on
broad-based indexes that underlie cash-settled options with position
limits reflecting notional values that are larger than the current
position limits for ETF analogues (EEM, EFA). Where there was no
approved index analogue, the Exchange believes, based on the liquidity,
breadth and depth of the underlying market, that the index referenced
by the ETF would be considered a broad-based index.\28\ The Exchange
argues that if certain position limits are appropriate for the options
overlying the same index or is an analogue to the basket of securities
that the ETF tracks, then those same economically equivalent position
limits should be appropriate for the option overlying the ETF. In
addition, the market capitalization of the underlying index or
reference asset is large enough to absorb any price movements that may
be caused by an oversized trade. Also, the Authorized Participant or
issuer may look to the stocks comprising the analogous underlying index
or reference asset when seeking to create additional ETF shares are
part of the creation/redemption process to address supply and demand or
to mitigate the price movement the price of the ETF.
---------------------------------------------------------------------------
\28\ See Rule 904C(b) (Position Limits) (describing position
limits for Broad Stock Index Group).
---------------------------------------------------------------------------
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 the Nasdaq Stock
Market LLC (``Nasdaq''). Options on NDX are currently subject to the
standard position limit of 25,000 contracts for broad-based index
options but share similar trading characteristics as QQQQ.\29\ Based on
QQQQ's share price of $154.54 \30\ and NDX's index level of 6,339.14,
approximately 40 contracts of QQQQ equals one contract of NDX. Based on
the above comparison of notional values, this would result in a
position limit equivalent to 1,000,000 contracts for QQQQ as NDX's
analogue. NDX is subject to the standard position limit of 25,000
contracts for broad-based index options and has an average daily
trading volume of 15,300 contracts. QQQQ is currently subject to a
position limit of 900,000 contracts but has a much higher average daily
trading volume of 579,404 contracts. Furthermore, NDX currently has a
market capitalization of $17.2 trillion and QQQQ has a market
capitalization of $50,359.7 million, and the component securities of
NDX, in aggregate, have traded an average of 440 million shares per day
in 2017, both large enough to absorb any price movement caused by a
large trade in the QQQQ. The Exchange notes that other exchanges allow
no position limits for NDX,\31\ although it has a much lower average
daily trading volume than its analogue, the QQQQ. Therefore, the
Exchange believes it is reasonable to increase the position limit for
options on the QQQQ from 900,000 to 1,800,000 contracts.
---------------------------------------------------------------------------
\29\ See id.
\30\ All share prices used herein are based on the closing price
of the security on November 16, 2017. Source: Yahoo Finance.
\31\ See Cboe Rule 24.4 sets forth position limits for broad-
based index options.
---------------------------------------------------------------------------
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 composed of 2,000
small-cap domestic companies in the Russell 3000 index. Options on RUT
are currently subject to the standard position limit of 25,000
contracts for broad-based index options but share similar trading
characteristics as IWM.\32\ Based on IWM's share price of $144.77 and
RUT's index level of 1,486.88, approximately 10 contracts of IWM equals
one contract of RUT. Based on the above comparison of notional values,
this would result in a position limit equivalent to 250,000 contracts
for IWM as RUT's analogue. The Exchange notes that at other exchanges
RUT is not subject to position limits and has an average daily trading
volume of 66,200 contracts.\33\ IWM is currently subject to a position
limit of 500,000 contracts but has a much higher average daily trading
volume of 490,070 contracts. As mentioned above, other exchanges have
no position limits for RUT,\34\ although it has a much lower average
daily trading volume than its analogue, the IWM. Furthermore, RUT
currently has a market capitalization of $2.4 trillion and IWM has a
market capitalization of $35,809.1 million, and the component
securities of RUT, in aggregate, have traded an average of 270 million
shares per day in 2017, both large enough to absorb any price movement
cause by a large trade in the IWM. Therefore, the Exchange believes it
is reasonable to increase the position limit for options on the IWM
from 500,000 to 1,000,000 contracts.
---------------------------------------------------------------------------
\32\ See Rule 904C(b) (Position Limits) (describing position
limits for Broad Stock Index Group).
\33\ See Cboe Rule 24.4.
\34\ See id.
---------------------------------------------------------------------------
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. Below makes the same notional
value comparison as made above. Based on EEM's share price of $47.06
and MXEF's index level of 1,136.45, approximately 24 contracts of EEM
equals one contract of MXEF. MXEF is currently subject to the standard
position limit of 25,000 contracts for Broad Stock Index Group options
under Rule 904C(b). 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
[[Page 18097]]
analogue. However, MXEF has an average daily trading volume of 180
contracts. EEM is currently subject to a position limit of 500,000
contracts but has a much higher average daily trading volume of 287,357
contracts. Furthermore, MXEF currently has a market capitalization of
$5.18 trillion and EEM has a market capitalization of $34,926.1
million, and the component securities of MXEF, in aggregate, have
traded an average of 33.6 billion shares per day in 2017, both large
enough to absorb any price movement cause by a large trade in the EEM.
Therefore, based on the comparison of average daily trading volume, the
Exchange believes it is reasonable to increase the position limit for
options on the EEM from 500,000 to 1,000,000 contracts.
EFA
EFA tracks the performance of MSCI EAFE Index or MXEA, which has
over 900 component securities designed to represent the performance of
large and mid-cap securities across 21 developed markets, including
countries in Europe, Australasia and the Far East, excluding the U.S.
and Canada. Below makes the same notional value comparison as made
above. Based on EFA's share price of $69.16 and MXEA's index level of
1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the standard position limit of
25,000 contracts for Broad Stock Index Group options under Rule
904C(b). Based on the above comparison of notional values, this would
result in a position limit economically equivalent to 721,000 contracts
for EFA as MXEA's analogue. Furthermore, MXEA currently has a market
capitalization of $18.7 trillion and EFA has a market capitalization of
$78,870.3 million, and the component securities of MXEA, in aggregate,
have traded an average of 4.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. However, MXEA has an average daily trading volume of 270
contracts. EFA is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 98,844
contracts. Based on the above comparisons, the Exchange believes it is
reasonable to increase the position limit for options on the EFA from
250,000 to 500,000 contracts.
FXI
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement cause by a large trade in FXI. The components
of the FTSE China 50 Index, in aggregate, have an average daily trading
volume of 2.3 billion shares. FXI is currently subject to a position
limit of 000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on the FXI from 250,000 to 500,000 contracts.
EWZ
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement cause
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, the Exchange believes
it is reasonable to increase the position limit for options on the EWZ
from 250,000 to 500,000 contracts.
TLT
TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement cause by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due the increase in position
limits as set forth in this proposal. Based on the above comparisons,
the Exchange believes it is reasonable to increase the position limit
for options on the TLT from 250,000 to 500,000 contracts.
EWJ
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 caused by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on EWJ from 250,000 to 500,000 contracts.
Exchange Analysis and Conclusions
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 ATP Holder that maintains a
position in the options on the same side of the market, for its own
account or for the account of a customer, report certain information to
the Exchange. This information would include, but would not be limited
to, the options' position, whether such position is hedged and, if so,
a description of the hedge, and the collateral used to carry the
position, if applicable. Exchange Market Makers \35\ would continue to
be exempt from this reporting requirement, as Market Maker 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
[[Page 18098]]
this level for the options subject to this proposal.\36\
---------------------------------------------------------------------------
\35\ A Market Maker ``A Market Maker is an ATP Holder that is
registered with the Exchange for the purpose of making transactions
as a dealer-specialist on the Floor of the Exchange or for the
purpose of submitting quotes electronically and making transactions
as a dealer specialist through the System. A Market Maker submitting
quotes remotely is not eligible to participate in trades affected in
open outcry except to the extent that such Market Maker's quotation
represents the BBO. Market Makers are designated as specialists on
the Exchange for all purposes under the Securities Exchange Act of
1934 and the Rules and Regulations thereunder.'' See Rule 920(a).
\36\ See Rule 906 (Reporting of Options Positions).
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange, other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\37\
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\37\ 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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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\38\ 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 ATP Holders 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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\38\ 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 an ATP Holder 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 an ATP Holder must maintain for a large
position held by itself or by its customer.\39\ In addition, Rule 15c3-
1 \40\ imposes a capital charge on ATP Holders to the extent of any
margin deficiency resulting from the higher margin requirement.
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\39\ See Rule 462 (Minimum Margins).
\40\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \41\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\42\ in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) requirement that the rules of an exchange not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\43\
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
\43\ Id.
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The current position limits for the options subject to this
proposal have inhibited the ability of Market Makers to make markets on
the Exchange. Specifically, the proposal is designed to encourage
Market Makers to shift liquidity from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow. The proposal will also
benefit institutional investors as well as retail traders, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of the
ETFs subject to this proposal and the considerable liquidity of the
market for options on those ETFs diminishes the opportunity to
manipulate this product and disrupt the underlying market that a lower
position limit may protect against. Increased position limits for
select actively traded options, such as that proposed herein, is not
novel and has been previously approved by the Commission. For example,
the Commission has previously approved, on a pilot basis, eliminating
position limits for options on SPY.\44\ Additionally, the Commission
has approved similar proposed rule changes to increase position limits
for options on highly liquid, actively-traded ETFs,\45\ including a
proposal to permanently eliminate the position and exercise limits for
options overlaying the S&P 500 Index, S&P 100 Index, Dow Jones
Industrial Average, and Nasdaq 100 Index.\46\ In approving the
permanent elimination of position and exercise limits, the Commission
relied heavily upon Cboe's surveillance capabilities, the Commission
expressed trust in the enhanced surveillance and reporting safeguards
that Cboe took in order to detect and deter possible manipulative
behavior which might arise from eliminating position and exercise
limits.\47\ Furthermore, as described more fully above, options on
other ETFs have the position limits proposed herein, but their trading
volumes are significantly lower than the ETFs subject to the proposed
rule change.
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\44\ See Securities Exchange Act Release Nos. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091); 67936
(September 27, 2012), 77 FR 60491 (October 3, 2012) (SR-BOX-2012-
013); 68001 (October 5, 2012), 77 FR 62303 (October 12, 2012) (SR-
NYSEArca-2012-112); 67672 (August 15, 2012), 77 FR 50750 (August 22,
2012) (SR-NYSEAmex-2012-29).
\45\ See Securities Exchange Act Release Nos. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928
(July 20, 2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55155 (January 23, 2007), 72 FR 4741 (February 1, 2017)
(SR-CBOE-2007-008).
\46\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22); 52650
(October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-2005-41)
(``NDX Approval'').
\47\ See id., NDX Approval, 70 FR 62147, at 62149.
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Lastly, the Commission expressed the belief that removing position
and exercise limits may bring additional depth and liquidity without
increasing concerns regarding intermarket manipulation or disruption of
the options or the underlying securities.\48\ 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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\48\ 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 would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change will result in additional opportunities to
achieve the investment and trading objectives of market participants
seeking efficient trading and hedging vehicles, to the benefit of
investors, market participants, and the marketplace in general.
Further, the Exchange notes that the rule change is being proposed
as a competitive response to a filing submitted by Cboe that was
recently approved by the Commission.\49\
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\49\ See supra note 4.
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[[Page 18099]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \50\ and Rule 19b-4(f)(6) thereunder.\51\
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\50\ 15 U.S.C. 78s(b)(3)(A).
\51\ 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 \52\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \53\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
ATP Holders that are also members at CBOE where these increased
position limits are currently in place. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
waives the operative delay and designates the proposal as operative
upon filing.\54\
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\52\ 17 CFR 240.19b-4(f)(6).
\53\ 17 CFR 240.19b-4(f)(6)(iii).
\54\ 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-NYSEAMER-2018-14 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-NYSEAMER-2018-14. 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-NYSEAMER-2018-14, and should be
submitted on or before May 16, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08615 Filed 4-24-18; 8:45 am]
BILLING CODE 8011-01-P
