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, 18099-18106 [2018-08616]

Download as PDF Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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). sradovich on DSK3GMQ082PROD with NOTICES 51 17 VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 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 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 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 E:\FR\FM\25APN1.SGM 25APN1 18100 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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 sradovich on DSK3GMQ082PROD with NOTICES 1. Purpose The Exchange proposes to amend Rule 6.8–O, Commentary .06 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 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 6.8–O, and vary according to the number of 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’’). VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 outstanding shares and the trading volume of the underlying stocks or ETFs over the past six-months. Pursuant to Rule 6.8–O, 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 6.8–O.5 Rule 6.8–O, Commentary .06(f–(i) 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 6.8–O, Commentary .06 to double the position and exercise limits for FXI, EEM, IWM, EFA, EWZ, TLT, QQQQ, and EWJ.6 As such, options on FXI, EFA, EWZ, TLT, and EWJ would no longer be subject to the standard position limits set forth under Rule 6.8–O. Accordingly, Commentary .06 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 6.8–O, Commentary .06. Further, Rule 6.8–O 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; 5 See https://www.theocc.com/webapps/delosearch. 6 By virtue of Rule 6.9–O (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 collapse into one proposed paragraph the list of ETFs and applicable position limits, which would result in the deletion of current paragraphs (f)–(i) in Commentary .06 to the Rule. See proposed Commentary .06(f) to Rule 6.8–O. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 • The position limits on options on QQQQ would be increased from 900,000 contracts to 1,800,000 contracts.7 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 5.3–O(g)(2) for ETFs holding non-U.S. component securities; or (ii) for ETFs listed pursuant to generic listing standards for series of portfolio depository receipts and index fund shares based on international or global indexes under which a comprehensive surveillance agreement (‘‘CSA’’) is not required.8 FXI tracks the performance of the FTSE China 50 Index, which is composed of the 50 largest Chinese stocks.9 EEM tracks the performance of the MSCI Emerging Markets Index, which is composed of approximately 800 component securities.10 ‘‘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.’’ 11 IWM tracks the performance of the Russell 2000 Index, which is composed of 2,000 small-cap domestic stocks.12 EFA tracks the performance of MSCI EAFE Index, which has over 900 component securities.13 ‘‘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.’’ 14 EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is composed of shares of large and mid-size companies in Brazil.15 TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S. Treasury bonds.16 QQQQ tracks the performance of the Nasdaq100 Index, which is composed of 100 of 7 See id. 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 5.3–O(g)(2); Rule 5.3–O(g). 9 See https://www.ishares.com/us/products/ 239536/ishares-china-largecap-etf. 10 See https://us.ishares.com/productinfo/fund/ overview/EEM.htm. 11 See https://www.msci.com/products/indices/ tools/#EM. 12 See https://www.ishares.com/us/products/ 239710/ishares-russell-2000-etf. 13 See https://www.ishares.com/us/products/ 239623/. 14 See https://www.msci.com/eafe. 15 See https://www.ishares.com/us/products/ 239612/ishares-msci-brazil-capped-etf. 16 See https://www.ishares.com/us/products/ 239454. 8 The E:\FR\FM\25APN1.SGM 25APN1 18101 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market LLC (‘‘Nasdaq’’).17 EWJ tracks the MSCI Japan Index, which tracks the performance of large and midsized companies in Japan.18 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.19 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.20 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 2017 ADV (Mil. Shares) ETF sradovich on DSK3GMQ082PROD with NOTICES FXI ................................................................................................................... EEM ................................................................................................................. IWM .................................................................................................................. EFA .................................................................................................................. EWZ ................................................................................................................. TLT ................................................................................................................... QQQQ .............................................................................................................. EWJ ................................................................................................................. SPY 23 .............................................................................................................. 15.08 52.12 27.46 19.42 17.08 8.53 26.25 6.06 64.63 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 $50,359.7 million for QQQQ. EEM, IWM and QQQQ have similar trading characteristics and subjecting EEM and IWM to the proposed higher position limit would continue be designed to address potential manipulative schemes that may arise from trading in the options and their underlying securities. These above trading characteristics for QQQQ when compared to EEM and IWM also justify increasing the position limit for QQQQ. QQQQ has a higher options ADV than EEM and IWM, a higher number of shares outstanding than IWM and a much higher market cap than EEM and IWM which justify doubling the position limit for QQQQ. Based on these statistics, and as stated above, the proposed position limit coupled with QQQQ’s trading behavior would continue to address potential manipulative schemes and adverse 17 See https://www.invesco.com/portal/site/us/ financial-professional/etfs/productdetail? productId=QQQ&ticker=QQQ&title=powersharesqqq. 18 See https://www.ishares.com/us/products/ 239665/EWJ. 19 See Rule 5.3–O(g)(2). 20 See Rule 5.3–O(g)(2)(B)(ii). VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 33% of more of the weight of the MSCI Emerging Markets Index.21 In seeking to expand position limits for the same ETFs at issue in this proposal, Cboe represented that market participants have increased their demand for options on FXI, EFA, EWZ, TLT, and EWJ for hedging and trading purposes and, in support of this claim, presented the trading statistics set forth in the table below.22 2017 ADV (option contracts) 71,944 287,357 490,070 98,844 95,152 80,476 579,404 4,715 2,575,153 Shares outstanding (Mil.) 78.6 797.4 253.1 1178.4 159.4 60.0 351.6 303.6 976.23 Fund market cap ($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 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 21 See Rule 5.3–O(g)(2)(B)(iii). Cboe Approval Order, supra note 4. 23 SPDR S&P 500 ETF (‘‘SPY’’) is included here for comparison purposes. 22 See E:\FR\FM\25APN1.SGM 25APN1 sradovich on DSK3GMQ082PROD with NOTICES 18102 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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-thecounter market.24 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.25 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 24 See SR–CBOE–2017–057, Partial Amendment No. 1 (November 22, 2017). 25 See supra nn. 9–18 (providing trading statistics for each ETF at issue in this proposal). VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 options since 2012,26 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 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 26 See Securities Exchange Act Release No. 68001 (October 5, 2012), 77 FR 62303 (October 12, 2012) (SR–NYSEArca–2012–112). PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 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.27 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. 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.28 Based on QQQQ’s share price of $154.54 29 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 27 See Rule 5.15–O (Position Limits for BroadBased Index Options). 28 See id. 29 All share prices used herein are based on the closing price of the security on November 16, 2017. Source: Yahoo Finance. E:\FR\FM\25APN1.SGM 25APN1 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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,30 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. sradovich on DSK3GMQ082PROD with NOTICES 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.31 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.32 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,33 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 caused by a large trade in the 30 See Cboe Rule 24.4 sets forth position limits for broad-based index options. 31 See Rule 5.15–O (Position Limits for BroadBased Index Options). 32 See Cboe Rule 24.4. 33 See id. VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 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-based index options under Rule 5.15–O(a). Based on the above comparison of notional values, this would result in a position limit economically equivalent to 604,000 contracts for EEM as MXEF’s analogue. However, MXEF has an average daily trading volume of 180 contracts. EEM is currently subject to a position limit of 500,000 contracts but has a much higher average daily trading volume of 287,357 contracts. Furthermore, MXEF currently has a market capitalization of $5.18 trillion and EEM has a market capitalization of $34,926.1 million, and the component securities of MXEF, in aggregate, have traded an average of 33.6 billion shares per day in 2017, both large enough to absorb any price movement caused 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-based index options under Rule 5.15–O(a). Based on the above comparison of notional values, PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 18103 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 caused 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 caused 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 E:\FR\FM\25APN1.SGM 25APN1 18104 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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 caused 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. sradovich on DSK3GMQ082PROD with NOTICES EWJ EWJ tracks the MSCI Japan Index, which tracks the performance of large and mid-sized companies in Japan. There is currently no index analogue for EWJ approved for options trading. However, the MSCI Japan Index has a market capitalization of $3.5 trillion and EWJ has a market capitalization of $16,625.1 million, and the component securities of the MSCI Japan Index, in aggregate, have traded an average of 1.1 billion shares per day in 2017, both large enough to absorb any price movement cause by a large trade in EWJ. EWJ is currently subject to a position limit of 250,000 contracts and has an average daily trading volume of 6.6 million shares. Based on the above comparisons, 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 OTP Holder or OTP Firm 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 VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 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 34 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 this level for the options subject to this proposal.35 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.36 Furthermore, large stock holdings must be disclosed to the Commission by way of Schedules 13D or 13G.37 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 OTP Holders and OTP Firms 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 OTP Holder or OTP Firm or its customer may try to maintain an inordinately 34 A Market Maker ‘‘is an individual who 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 NYSE Arca OX electronic trading system. Registered 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 6.3–O(a)(31). 35 See Rule 6.6–O (Reporting of Options Positions). 36 These procedures have been effective for the surveillance of trading the options subject to this proposal and will continue to be employed. 37 17 CFR 240.13d–1. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 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 OTP Holder or OTP Firm must maintain for a large position held by itself or by its customer.38 In addition, Rule 15c3–1 39 imposes a capital charge on OTP Holders or OTP Firms to the extent of any margin deficiency resulting from the higher margin requirement. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act 40 in general, and furthers the objectives of Section 6(b)(5) of the Act,41 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.42 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 38 See Rule 5.25–O (Margins). CFR 240.15c3–1. 40 15 U.S.C. 78f(b). 41 15 U.S.C. 78f(b)(5). 42 Id. 39 17 E:\FR\FM\25APN1.SGM 25APN1 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 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.43 Additionally, the Commission has approved similar proposed rule changes to increase position limits for options on highly liquid, actively-traded ETFs,44 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.45 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.46 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.47 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. 43 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); 67672 (August 15, 2012), 77 FR 50750 (August 22, 2012)(SR–NYSEAmex–2012–29); 68001 (October 5, 2012), 77 FR 62303 (October 12, 2012) (SR–NYSEArca–2012–112). 44 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). 45 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’’). 46 See id., NDX Approval, 70 FR 62147, at 62149. 47 Id. VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 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.48 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 49 and Rule 19b– 4(f)(6) thereunder.50 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 51 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 52 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 48 See supra note 4. U.S.C. 78s(b)(3)(A). 50 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. 51 17 CFR 240.19b–4(f)(6). 52 17 CFR 240.19b–4(f)(6)(iii). 49 15 PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 18105 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 OTP Holders and OTP Firms 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.53 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– NYSEArca–2018–23 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–NYSEArca-2018–23. 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/ 53 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). E:\FR\FM\25APN1.SGM 25APN1 18106 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Notices 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–NYSEArca–2018–23, and should be submitted on or before May 16, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–08616 Filed 4–24–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83072; File No. SR–ICEEU– 2018–006] Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change, SecurityBased Swap Submission or Advance Notice Relating to Amendments to the ICE Clear Europe CDS End-of-Day Pricing Policy sradovich on DSK3GMQ082PROD with NOTICES April 19, 2018 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 5, 2018, ICE Clear Europe Limited (‘‘ICE Clear Europe’’ or the ‘‘Clearing House’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule changes described in Items I, II, and III below, which Items 54 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:12 Apr 24, 2018 Jkt 244001 have been prepared primarily by ICE Clear Europe. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change ICE Clear Europe proposes revisions to its CDS End-of-Day Price Discovery Policy (‘‘Price Discovery Policy’’) related to the bid-offer width (‘‘BOW’’) methodology for credit default swap (‘‘CDS’’) contracts. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ICE Clear Europe included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. ICE Clear Europe has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (a) Purpose ICE Clear Europe proposes revising its Price Discovery Policy to enhance the methodology used to determine bidoffer widths (‘‘BOWs’’) for CDS Contracts to incorporate a new variability band methodology, and to make certain other updates and clarifications. Each business day, ICE Clear Europe determines end-of-day (‘‘EOD’’) levels for CDS Contracts through its Price Discovery Policy, based on EOD submissions from its CDS Clearing Members. ICE Clear Europe uses these levels for mark-to-market and risk management purposes. As part of this price discovery process, ICE Clear Europe determines BOWs for each eligible CDS Contract. The BOW is intended to estimate the bid-offer width for the two-way market available for each clearing-eligible instrument at the specified determination time on each business day. The BOWs are then used in ICE Clear Europe’s price discovery process as inputs in the determination of EOD levels and firm trades, and other risk management matters. The current methodology for determining BOWs is based on observed intraday quotes and an assessment of the current level of market variability. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Based on this information, ICE Clear Europe determines a consensus BOW for each relevant instrument. The amendments remove from the Price Discovery Policy an alternative approach for calculating consensus BOWs using exponentially weighting moving averages that was planned but never implemented. The amendments restate the current methodology in use (which is based on specified averages of BOW time series). The amendments also adopt a new variability band approach for widening BOWs in certain market conditions. Under volatile or fast-moving market conditions, BOWs may temporarily be wider than observed in intraday quotes. Currently, ICE Clear Europe’s clearing risk department monitors market conditions and may apply manual adjustments to BOWs as appropriate to take into account such conditions. ICE Clear Europe proposes to capture such market conditions in a more comprehensive and automated way through a methodology that computes a variability level and a variability band for each of the main risk factors based on a time series of intraday quote midlevels for the most actively traded instrument (‘‘MATI’’) of the considered risk factor. The BOW will be automatically adjusted based on the variability band, as discussed herein. For index instruments, under the revised approach, ICE Clear Europe will compute a variability level for each of the main index risk factors. For each instrument, ICE Clear Europe’s systems establish a time series of intraday quote mid-levels for the MATI. If the last midlevel in the time series is below the prior day’s EOD level by more than one pre-defined BOW for regime 3, the variability level is the difference between the prior day’s EOD level and the minimum mid-level in the time series, divided by the pre-defined BOW. For intraday mid-levels falling within one pre-defined regime 3 BOW from the prior day’s EOD level, the variability level is set to 1.0 if the range of midlevels in the time series is less than or equal to the pre-defined regime 3 BOW, and set to 1.2 if the range of mid-levels in the time series is greater than the predefined regime 3 BOW. Under the revised policy, ICE Clear Europe will establish variability bands (from zero to three) that correspond to specific ranges of variability level (with band zero having the lowest range of variability level). ICE Clear Europe will then group index risk factors into specific market-proxy groups, CDX (covering the North American investment grade and high yield index risk factors) and iTraxx (covering the E:\FR\FM\25APN1.SGM 25APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 80 (Wednesday, April 25, 2018)]
[Notices]
[Pages 18099-18106]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08616]

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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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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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
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.

[[Page 18100]]

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 6.8-O, Commentary .06 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\
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\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'').
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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 6.8-
O, 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 6.8-O, 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 6.8-O.\5\ Rule 6.8-O, Commentary .06(f-(i) sets
forth separate position limits for options on specific ETFs as follows:
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\5\ See https://www.theocc.com/webapps/delo-search.
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Options on EEM are 500,000 contracts;
Options on IWM are 500,000 contracts; and
Options on QQQQ are 900,000 contracts.
The purpose of this proposal is to amend Rule 6.8-O, Commentary .06
to double the position and exercise limits for FXI, EEM, IWM, EFA, EWZ,
TLT, QQQQ, and EWJ.\6\
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\6\ By virtue of Rule 6.9-O (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 collapse into
one proposed paragraph the list of ETFs and applicable position
limits, which would result in the deletion of current paragraphs
(f)-(i) in Commentary .06 to the Rule. See proposed Commentary
.06(f) to Rule 6.8-O.
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As such, options on FXI, EFA, EWZ, TLT, and EWJ would no longer be
subject to the standard position limits set forth under Rule 6.8-O.
Accordingly, Commentary .06 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 6.8-O, Commentary
.06. Further, Rule 6.8-O 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.\7\
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\7\ See id.
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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 5.3-O(g)(2) for ETFs holding non-U.S. component
securities; or (ii) for ETFs listed pursuant to generic listing
standards for series of portfolio depository receipts and index fund
shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required.\8\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\9\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\10\ ``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.'' \11\ IWM tracks the performance
of the Russell 2000 Index, which is composed of 2,000 small-cap
domestic stocks.\12\ EFA tracks the performance of MSCI EAFE Index,
which has over 900 component securities.\13\ ``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.'' \14\ EWZ tracks the
performance of the MSCI Brazil 25/50 Index, which is composed of shares
of large and mid-size companies in Brazil.\15\ TLT tracks the
performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed
of long-term U.S. Treasury bonds.\16\ QQQQ tracks the performance of
the Nasdaq-100 Index, which is composed of 100 of

[[Page 18101]]

the largest domestic and international nonfinancial companies listed on
the Nasdaq Stock Market LLC (``Nasdaq'').\17\ EWJ tracks the MSCI Japan
Index, which tracks the performance of large and mid-sized companies in
Japan.\18\
---------------------------------------------------------------------------

\8\ 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 5.3-O(g)(2); Rule 5.3-O(g).
\9\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\10\ See https://us.ishares.com/productinfo/fund/overview/EEM.htm.
\11\ See https://www.msci.com/products/indices/tools/#EM.
\12\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\13\ See https://www.ishares.com/us/products/239623/.
\14\ See https://www.msci.com/eafe.
\15\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\16\ See https://www.ishares.com/us/products/239454.
\17\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\18\ 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.\19\ 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.\20\ 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.\21\
---------------------------------------------------------------------------

\19\ See Rule 5.3-O(g)(2).
\20\ See Rule 5.3-O(g)(2)(B)(ii).
\21\ See Rule 5.3-O(g)(2)(B)(iii).
---------------------------------------------------------------------------

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.\22\
---------------------------------------------------------------------------

\22\ See Cboe Approval Order, supra note 4.

----------------------------------------------------------------------------------------------------------------
2017 ADV Shares
ETF 2017 ADV (Mil. (option outstanding Fund market
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 \23\........................................ 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\23\ SPDR S&P 500 ETF (``SPY'') is included here for comparison
purposes.
---------------------------------------------------------------------------

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

[[Page 18102]]

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.\24\ 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.
---------------------------------------------------------------------------

\24\ 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.\25\ 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,\26\ and expanded position limits for
options on EEM, IWM, and QQQQ.
---------------------------------------------------------------------------

\25\ See supra nn. 9-18 (providing trading statistics for each
ETF at issue in this proposal).
\26\ See Securities Exchange Act Release No. 68001 (October 5,
2012), 77 FR 62303 (October 12, 2012) (SR-NYSEArca-2012-112).
---------------------------------------------------------------------------

The proposed position limits set forth in the proposal would
continue to address potential manipulative activity while allowing for
potential hedging activity for appropriate economic purposes. The
creation and redemption process for these ETFs also lessen the
potential for manipulative activity. When an ETF company wants to
create more ETF shares, it looks to an Authorized Participant, which is
a market maker or other large financial institution, to acquire the
securities the ETF is to hold. For instance, IWM is designed to track
the performance of the Russell 2000 Index, the Authorized Participant
will purchase all the Russell 2000 constituent securities in the exact
same weight as the index, then deliver those shares to the ETF
provider. In exchange, the ETF provider gives the Authorized
Participant a block of equally valued ETF shares, on a one-for-one fair
value basis. The price is based on the net asset value, not the market
value at which the ETF is trading. 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.\27\ 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.
---------------------------------------------------------------------------

\27\ See Rule 5.15-O (Position Limits for Broad-Based Index
Options).
---------------------------------------------------------------------------

QQQQ
For example, the PowerShares QQQ Trust or QQQQ is an ETF that
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100
of the largest non-financial securities listed on 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.\28\ Based on
QQQQ's share price of $154.54 \29\ 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

[[Page 18103]]

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,\30\ 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.
---------------------------------------------------------------------------

\28\ See id.
\29\ All share prices used herein are based on the closing price
of the security on November 16, 2017. Source: Yahoo Finance.
\30\ 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.\31\ 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.\32\ 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,\33\ 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
caused 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.
---------------------------------------------------------------------------

\31\ See Rule 5.15-O (Position Limits for Broad-Based Index
Options).
\32\ See Cboe Rule 24.4.
\33\ 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-based index options under
Rule 5.15-O(a). Based on the above comparison of notional values, this
would result in a position limit economically equivalent to 604,000
contracts for EEM as MXEF's analogue. However, MXEF has an average
daily trading volume of 180 contracts. EEM is currently subject to a
position limit of 500,000 contracts but has a much higher average daily
trading volume of 287,357 contracts. Furthermore, MXEF currently has a
market capitalization of $5.18 trillion and EEM has a market
capitalization of $34,926.1 million, and the component securities of
MXEF, in aggregate, have traded an average of 33.6 billion shares per
day in 2017, both large enough to absorb any price movement caused 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-based index options under Rule 5.15-O(a).
Based on the above comparison of notional values, this would result in
a position limit economically equivalent to 721,000 contracts for EFA
as MXEA's analogue. Furthermore, MXEA currently has a market
capitalization of $18.7 trillion and EFA has a market capitalization of
$78,870.3 million, and the component securities of MXEA, in aggregate,
have traded an average of 4.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. However, MXEA has an average daily trading volume of 270
contracts. EFA is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 98,844
contracts. Based on the above comparisons, the Exchange believes it is
reasonable to increase the position limit for options on the EFA from
250,000 to 500,000 contracts.
FXI
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 caused 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 caused
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

[[Page 18104]]

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 caused 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 cause by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on EWJ from 250,000 to 500,000 contracts.
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 OTP Holder or OTP Firm 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 \34\ 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 this level for the options subject to this
proposal.\35\
---------------------------------------------------------------------------

\34\ A Market Maker ``is an individual who 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 NYSE Arca OX electronic trading
system. Registered 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 6.3-
O(a)(31).
\35\ See Rule 6.6-O (Reporting of Options Positions).
---------------------------------------------------------------------------

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.\36\
---------------------------------------------------------------------------

\36\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
---------------------------------------------------------------------------

Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\37\ 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 OTP Holders and OTP Firms 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.
---------------------------------------------------------------------------

\37\ 17 CFR 240.13d-1.
---------------------------------------------------------------------------

The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that an OTP Holder or OTP Firm 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 OTP Holder
or OTP Firm must maintain for a large position held by itself or by its
customer.\38\ In addition, Rule 15c3-1 \39\ imposes a capital charge on
OTP Holders or OTP Firms to the extent of any margin deficiency
resulting from the higher margin requirement.
---------------------------------------------------------------------------

\38\ See Rule 5.25-O (Margins).
\39\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act \40\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\41\ 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.\42\
---------------------------------------------------------------------------

\40\ 15 U.S.C. 78f(b).
\41\ 15 U.S.C. 78f(b)(5).
\42\ Id.
---------------------------------------------------------------------------

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

[[Page 18105]]

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.\43\ Additionally, the Commission
has approved similar proposed rule changes to increase position limits
for options on highly liquid, actively-traded ETFs,\44\ 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.\45\ 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.\46\ 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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\43\ 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); 67672 (August 15, 2012), 77 FR 50750 (August 22, 2012)(SR-
NYSEAmex-2012-29); 68001 (October 5, 2012), 77 FR 62303 (October 12,
2012) (SR-NYSEArca-2012-112).
\44\ 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).
\45\ 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'').
\46\ 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.\47\ 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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\47\ 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.\48\
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\48\ 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 \49\ and Rule 19b-4(f)(6) thereunder.\50\
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\49\ 15 U.S.C. 78s(b)(3)(A).
\50\ 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 \51\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \52\ 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
OTP Holders and OTP Firms 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.\53\
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\51\ 17 CFR 240.19b-4(f)(6).
\52\ 17 CFR 240.19b-4(f)(6)(iii).
\53\ 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-NYSEArca-2018-23 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-NYSEArca-2018-23. 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/

[[Page 18106]]

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-NYSEArca-2018-23, and should
be submitted on or before May 16, 2018.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08616 Filed 4-24-18; 8:45 am]
BILLING CODE 8011-01-P

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