Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules 412, Position Limits, and 414, Exercise Limits, 20875-20882 [2018-09696]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
Bylaws, and the NYSE Holdings
Operating Agreement, more specifically.
As a result, the Governing Documents
would be more consistent and persons
subject to the Exchange’s jurisdiction,
regulators, and the investing public
could more easily navigate and
understand the NYSE Group Certificate
and the other Governing Documents.
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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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:
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The proposed rule change is not
designed to address any competitive
issue but rather is meant to update and
streamline the NYSE Group Certificate
to make it more consistent with the use
of ‘‘Exchange’’ throughout the
Governing Documents and the
confidential information provisions in
the ICE Bylaws, the ICE Holdings
Bylaws, and the NYSE Holdings
Operating Agreement. The Exchange
believes that the proposed rule change
will serve to promote clarity and
consistency, thereby reducing burdens
on the marketplace and facilitating
investor protection. The proposed rule
change would result in no concentration
or other changes of ownership of
exchanges.
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
sradovich on DSK3GMQ082PROD with NOTICES
Because the foregoing 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 and Rule 19b–4(f)(6) thereunder.21
21 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change, along with a brief
description and 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. The Exchange
has satisfied this requirement.
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
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–
NYSE–2018–18 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–NYSE–2018–18. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
20875
submissions should refer to File
Number SR–NYSE–2018–18, and
should be submitted on or before May
29,2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09807 Filed 5–7–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83156; File No. SR–ISE–
2018–39]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend ISE Rules 412,
Position Limits, and 414, Exercise
Limits
May 2, 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 20,
2018, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend ISE
Rules 412, Position Limits, and 414,
Exercise Limits, to increase the position
and exercise limits for options on the
following exchange traded funds
(‘‘ETFs’’): iShares China Large-Cap ETF
(‘‘FXI’’), iShares MSCI EAFE ETF
(‘‘EFA’’), iShares MSCI Emerging
Markets ETF (‘‘EEM’’), iShares Russell
2000 ETF (‘‘IWM’’), iShares MSCI Brazil
Capped ETF (‘‘EWZ’’), iShares 20+ Year
Treasury Bond Fund ETF (‘‘TLT’’),
PowerShares QQQ Trust (‘‘QQQQ’’),
and iShares MSCI Japan Index (‘‘EWJ’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\08MYN1.SGM
08MYN1
20876
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
Position limits for options on ETFs
such as those subject to this proposal
are determined pursuant to Exchange
Rule 412, and, with certain exceptions,
vary by tier according to the number of
outstanding shares and the trading
volume of the underlying security.
Options in the highest tier—i.e., options
that overlie securities with the largest
numbers of outstanding shares and
trading volumes—have a standard
option position limit of 250,000
contracts (with adjustments for splits,
re-capitalizations, etc.) on the same side
of the market. In addition, Rule 412
currently sets forth separate position
limits for options on certain ETFs,
including 500,000 contracts for options
on EEM and IWM, and 900,000
contracts for options on QQQQ.
The Exchange proposes to revise Rule
412 to increase the position limits for
options on certain ETFs, as described
more fully below.3 The Exchange
believes that increasing the position
limits for these options will lead to a
more liquid and competitive market
environment for these options that will
benefit customers interested in these
products.
First, the Exchange proposes to
increase the position limits for options
on FXI, EFA, EWZ, TLT, and EWJ, each
of which fall into the highest standard
tier set forth in Exchange Rule 412(d)(5).
Rule 412, Supplementary Material .01,
would be amended to increase the
current position limit of 250,000
contracts for options on these securities
to 500,000 contracts.
Second, the Exchange proposes to
increase the position limits for options
on EEM and IWM from 500,000
contracts to 1,000,000 contracts.4
Finally, the Exchange proposes to
increase the position limits on options
on QQQQ from 900,000 contracts to
1,800,000 contracts.
In support of this proposal, the
Exchange represents that the above
listed ETFs qualify for either: (i) The
initial listing criteria set forth in
Exchange Rule 502(h) for ETFs holding
non-U.S. component securities; or (ii)
for ETFs listed pursuant to generic
listing standards for series of portfolio
depository receipts and index fund
shares based on international or global
indexes under which a comprehensive
surveillance agreement (‘‘CSA’’) is not
required.5 FXI tracks the performance of
the FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks.6 EEM tracks the performance of
the MSCI Emerging Markets Index,
which is composed of approximately
800 component securities.7 The MSCI
Emerging Markets Index consists of the
following 21 emerging market country
indices: Brazil, Chile, China, Colombia,
Czech Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico,
Morocco, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand,
and Turkey.8 IWM tracks the
performance of the Russell 2000 Index,
which is composed of 2,000 small-cap
domestic stocks.9 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.10 The MSCI EAFE Index is
designed to represent the performance
of large and mid-cap securities across 21
developed markets, including countries
in Europe, Australasia and the Far East,
excluding the U.S. and Canada.11 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.12 TLT tracks the
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.13 QQQQ
tracks the performance of the Nasdaq100 Index, which is composed of 100 of
the largest domestic and international
nonfinancial companies listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).14
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.15
The Exchange represents that more
than 50% of the weight of the securities
held by the options subject to this
proposal are also subject to a CSA.16
Additionally, the component securities
of the MSCI Emerging Markets Index on
which EEM is based for which the
primary market is in any one country
that is not subject to a CSA do not
represent 20% or more of the weight of
the MSCI Emerging Markets Index.17
Finally, the component securities of the
MSCI Emerging Markets Index on which
EEM is based, for which the primary
market is in any two countries that are
not subject to CSAs do not represent
33% or more of the weight of the MSCI
Emerging Markets Index.18
Market participants have increased
their demand for options on FXI, EFA,
EWZ, TLT, and EWJ for hedging and
trading purposes and the Exchange
believes the current position limits are
too low and may be a deterrent to
successful trading of options on these
securities.
3 ISE Rule 414 establishes exercise limits for the
corresponding options at the same levels as the
corresponding security’s position limits. Rule 414
would be amended such that the exercise limits for
each of these options would be increased to the
level of the new position limits.
4 The Exchange is also amending Rules 412 and
414 to update and correct the names of IWM and
EEM, which are currently referred to in that rule as
the iShares® Russell 2000® Index Fund and iShares
MSCI Emerging Markets Index Fund, respectively.
5 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See Exchange Rule 503(h).
6 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
7 See https://us.ishares.com/product_info/fund/
overview/EEM.htm.
8 See https://www.msci.com/products/indices/
tools/#EM.
9 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
10 See https://www.ishares.com/us/products/
239623/.
11 See https://www.msci.com/eafe.
12 See https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
13 See https://www.ishares.com/us/products/
239454/.
14 See https://www.invesco.com/portal/site/us/
financial-professional/etfs/productdetail
?productId=QQQ&ticker=QQQ&title=powersharesqqq.
15 See https://www.ishares.com/us/products/
239665/EWJ.
16 See Exchange Rule 502(h)(b)(2).
17 See Exchange Rule 502(h)(b)(3).
18 See Exchange Rule 502(h)(b)(4).
19 See Securities Exchange Act Release No. 82770
(February 23, 2018) (approving SR–CBOE–2017–
057).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
sradovich on DSK3GMQ082PROD with NOTICES
Position Limit Increase
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
The CBOE Analysis
The Commission has recently
approved a proposed rule change of the
Chicago Board Options Exchange
(‘‘CBOE’’) to increase position limits for
these same options.19 The discussion
that follows is based upon the CBOE’s
analysis presented in that proposal.
In its proposal, CBOE stated that it
had collected the following trading
statistics on the ETFs that are subject to
this proposal:
E:\FR\FM\08MYN1.SGM
08MYN1
20877
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
2017 ADV
(Mil. shares)
ETF
sradovich on DSK3GMQ082PROD with NOTICES
FXI ...................................................................................................................
EEM .................................................................................................................
IWM ..................................................................................................................
EFA ..................................................................................................................
EWZ .................................................................................................................
TLT ...................................................................................................................
QQQQ ..............................................................................................................
EWJ .................................................................................................................
SPY ..................................................................................................................
In support of its proposal to increase
the position limits for QQQQ to
1,800,000 contracts, CBOE compared
the trading characteristics of QQQQ to
that of the SPDR S&P 500 ETF (‘‘SPY’’),
which has no position limits. As shown
in the above table, the average daily
trading volume through August 14, 2017
for QQQQ was 26.25 million shares
compared to 64.63 million shares for
SPY. The total shares outstanding for
QQQQ are 351.6 million compared to
976.23 million for SPY. The fund
market cap for QQQQ is $50,359.7
million compared to $240,540 million
for SPY. SPY is one of the most actively
trading ETFs and is, therefore, subject to
no position limits. QQQQ is also very
actively traded, and while not to the
level of SPY, should be subject to the
proposed higher position limits based
on its trading characteristics when
compared to SPY. The proposed
position limit coupled with QQQQ’s
trading behavior would continue to
address potential manipulative schemes
and adverse market impact surrounding
the use of options and trading in its
underlying the options.
In support of its proposal to increase
the position limits for EEM and IWM
from 500,000 contracts to 1,000,000
contracts, CBOE also compared the
trading characteristics of EEM and IWM
to that of QQQQ, which currently has a
position limit of 900,000 contracts. As
shown in the above table, the average
daily trading volume through July 31,
2017 for EEM was 52.12 million shares
and IWM was 27.46 million shares
compared to 26.25 million shares for
QQQQ. The total shares outstanding for
EEM are 797.4 million and for IWM are
253.1 million compared to 351.6 million
for QQQQ. The fund market cap for
EEM is $34,926.1 million and IWM is
$35,809 million compared to $50,359.7
million for QQQQ. EEM, IWM and
QQQQ have similar trading
characteristics and subjecting EEM and
IWM to the proposed higher position
limit would continue be designed to
address potential manipulate schemes
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
15.08
52.12
27.46
19.42
17.08
8.53
26.25
6.06
64.63
that may arise from trading in the
options and their underlying securities.
These above trading characteristics for
QQQQ when compared to EEM and
IWM also justify increasing the position
limit for QQQQ. QQQQ has a higher
options ADV than EEM and IWM, a
higher numbers of shares outstanding
than IWM and a much higher market
cap than EEM and IWM which justify
doubling the position limit for QQQQ.
CBOE concluded that, based on these
statistics, and as stated above, the
proposed position limit coupled with
QQQQ’s trading behavior would
continue to address potential
manipulative schemes and adverse
market impact surrounding the use of
options and trading in the securities
underlying the options.
In support of its proposal to increase
the position limits for FXI, EFA, EWZ,
TLT, and EWJ from 250,000 contracts to
500,000 contracts, CBOE compared the
trading characteristics of FXI, EFA,
EWZ, TLT, and EWJ to that of EEM and
IWM, both of which currently have a
position limit of 500,000 contracts. As
shown in the above table, the average
daily trading volume through July 31,
2017 for FXI is 15.08 million shares,
EFA is 19.42 million shares, EWZ is
17.08 million shares, TLT is 8.53
million shares, and EWJ is 6.06 million
shares compared to 52.12 million shares
for EEM and 27.46 million shares for
IWM. The total shares outstanding for
FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60
million, and EWJ is 303.6 million
compared to 797.4 million for EEM and
253.1 million for IWM. The fund market
cap for FXI is $3,343.6 million, EFA is
$78,870.3 million, EWZ is $6,023.4
million, TLT is $7,442.4 million, and
EWJ is $16,625.1 million compared to
$34,926.1 million for EEM and
$35,809.1 million for IWM.
In Partial Amendment No. 1 to its
proposed rule change, CBOE provided
additional analysis and support for its
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
2017 ADV
(option
contracts)
71,944
287,357
490,070
98,844
95,152
80,476
579,404
4,715
2,575,153
Shares
outstanding
(Mil.)
78.6
797.4
253.1
1178.4
159.4
60.0
351.6
303.6
976.23
Fund
market
cap
($Mil.)
3,343.6
34,926.1
35,809.1
78,870.3
6,023.4
7,442
50,359.7
16,625.1
240,540.0
proposed rule change.20 According to
CBOE, market participants’ trading
activity has been adversely impacted by
the current position limits as such limits
have caused options trading in the
symbols subject to the proposed rule
change to move from exchanges to the
over-the-counter market. CBOE stated it
had submitted the proposed rule change
at the request of market participants
whose on-exchange activity has been
hindered by the existing position limits
causing them to be unable to provide
additional liquidity not just on CBOE,
but also on other options exchanges on
which they participate.
CBOE stated it understood that certain
market participants wishing to make
trades involving a large number of
options contracts in the symbols subject
to the proposed rule change are opting
to execute those trades in the over-thecounter market, that the over-the
counter transactions occur via bilateral
agreements the terms of which are not
publicly disclosed to other market
participants, and that therefore, these
large trades do not contribute to the
price discovery process performed on a
lit market. It stated that position limits
are designed to address potential
manipulative schemes and adverse
market impact surrounding the use of
options, such as disrupting the market
in the security underlying the options,
and that the potential manipulative
schemes and adverse market impact are
balanced against the potential of setting
the limits so low as to discourage
participation in the options market. It
stated that the level of those position
limits must be balanced between
curtailing potential manipulation and
the cost of preventing potential hedging
activity that could be used for legitimate
economic purposes.
CBOE observed that the ETFs that
underlie options subject to the proposed
rule change are highly liquid, and are
based on a broad set of highly liquid
securities and other reference assets,
20 See SR–CBOE–2017–057, Partial Amendment
No. 1 (November 22, 2017).
E:\FR\FM\08MYN1.SGM
08MYN1
sradovich on DSK3GMQ082PROD with NOTICES
20878
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
and noted that the Commission has
generally looked through to the liquidity
of securities comprising an index in
establishing position limits for cashsettled index options. It further noted
that options on certain broad-based
security indexes have no position limits.
CBOE observed that the Commission
has recognized the liquidity of the
securities comprising the underlying
interest of the SPDR S&P 500 ETF
(‘‘SPY’’) in permitting no position limits
on SPY options since 2012,21 and
expanded position limits for options on
EEM, IWM and QQQQ.
CBOE stated that the creation and
redemption process for these ETFs also
lessen the potential for manipulative
activity, explaining that when an ETF
company wants to create more ETF
shares, it looks to an Authorized
Participant, which is a market maker or
other large financial institution, to
acquire the securities the ETF is to hold.
For instance, IWM is designed to track
the performance of the Russell 2000
Index, the Authorized Participant will
purchase all the Russell 2000
constituent securities in the exact same
weight as the index, then deliver those
shares to the ETF provider. In exchange,
the ETF provider gives the Authorized
Participant a block of equally valued
ETF shares, on a one-for-one fair value
basis. The price is based on the net asset
value, not the market value at which the
ETF is trading. The creation of new ETF
units can be conducted all trading day
and is not subject to position limits.
This process can also work in reverse
where the ETF company seeks to
decrease the number of shares that are
available to trade. The creation and
redemption process, therefore, creates a
direct link to the underlying
components of the ETF, and serves to
mitigate potential price impact of the
ETF shares that might otherwise result
from increased position limits. The ETF
creation and redemption seeks to keep
ETF share prices trading in line with the
ETF’s underlying net asset value.
Because an ETF trades like a stock, its
price will fluctuate during the trading
day, due to simple supply and demand.
If demand to buy an ETF is high, for
instance, the ETF’s share price might
rise above the value of its underlying
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
21 See
Securities Exchange Act Release No. 67937
(September 27, 2012), 77 FR 60489 (October 3,
2012) (SR–CBOE–2012–091).
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
value. Likewise, if the ETF starts trading
at a discount to the securities it holds,
the Authorized Participant can buy
shares of the ETF and redeem them for
the underlying securities. Buying
undervalued ETF shares should drive
the price of the ETF back toward fair
value. This arbitrage process helps to
keep an ETF’s price in line with the
value of its underlying portfolio.
CBOE stated that in proposing the
increased position limits, the Exchange
considered the availability of
economically equivalent products and
their respective position limits. For
instance, some of the ETFs underlying
options subject to the proposed rule
change are based on broad-based indices
that underlie cash settled options that
are economically equivalent to the ETF
options that are the subject of the
proposed rule change and have no
position limits. Other ETFs are based on
broad-based indexes that underlie cashsettled options with position limits
reflecting notional values that are larger
than the current position limits for ETF
analogues (EEM, EFA). Where there was
no approved index analogue, CBOE
stated its belief, based on the liquidity,
breadth and depth of the underlying
market, that the index referenced by the
ETF would be considered a broad-based
index.22 CBOE argued that if certain
position limits are appropriate for the
options overlying the same index or is
an analogue to the basket of securities
that the ETF tracks, then those same
economically equivalent position limits
should be appropriate for the option
overlying the ETF. In addition, CBOE
observed, the market capitalization of
the underlying index or reference asset
is large enough to absorb any price
movements that may be caused by an
oversized trade. Also, the Authorized
Participant or issuer may look to the
stocks comprising the analogous
underlying index or reference asset
when seeking to create additional ETF
shares are part of the creation/
redemption process to address supply
and demand or to mitigate the price
movement the price of the ETF. CBOE
offered the following specific examples
to illustrate:
QQQQ
For example, the PowerShares QQQ
Trust or QQQQ is an ETF that tracks the
Nasdaq 100 Index or NDX, which is an
index composed of 100 of the largest
non-financial securities listed on
Nasdaq. Options on NDX are currently
subject to no position limits but share
22 CBOE
Rule 24.4 and Exchange Rule 2004 set
forth the CBOE and the ISE position limits for
broad-based index options.
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
similar trading characteristics as QQQQ.
Based on QQQQ’s share price of
$154.54 23 and NDX’s index level of
6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX.
Assume that NDX was subject to the
standard position limit of 25,000
contracts for broad-based index options.
Based on the above comparison of
notional values, this would result in a
positon limit equivalent to 1,000,000
contracts for QQQQ as NDX’s analogue.
However, NDX is not subject to position
limits and has an average daily trading
volume of 15,300 contracts. QQQQ is
currently subject to a position limit of
900,000 contracts but has a much higher
average daily trading volume of 579,404
contracts. Furthermore, NDX currently
has a market capitalization of $17.2
trillion and QQQQ has a market
capitalization of $50,359.7 million, and
the component securities of NDX, in
aggregate, have traded an average of 440
million shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
QQQQ. The Commission has also
approved no position limit for NDX,
although it has a much lower average
daily trading volume than its analogue,
the QQQQ. Therefore, CBOE concluded
and the Exchange agrees it was
reasonable to increase the positon limit
for options on the QQQQ from 900,000
to 1,800,000 contracts.
IWM
The iShares Russell 2000 ETF or
IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an
index that is composed of 2,000 smallcap domestic companies in the Russell
3000 index. Options on RUT are
currently subject to no position limits
but share similar trading characteristics
as IWM. Based on IWM’s share price of
$144.77 and RUT’s index level of
1,486.88, approximately 10 contracts of
IWM equals one contract of RUT.
Assume that RUT was subject to the
standard position limit of 25,000
contracts for broad-based index options
under Exchange Rule 24.4(a). Based on
the above comparison of notional
values, this would result in a positon
limit equivalent to 250,000 contracts for
IWM as RUT’s analogue. However, RUT
is not subject to position limits and has
an average daily trading volume of
66,200 contracts. IWM is currently
subject to a position limit of 500,000
contracts but has a much higher average
daily trading volume of 490,070
23 CBOE stated that all share prices used in its
analysis were based on the closing price of the
security on November 16, 2017 and cited Yahoo
Finance as the source.
E:\FR\FM\08MYN1.SGM
08MYN1
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
contracts. The Commission has
approved no position limit for RUT,
although it has a much lower average
daily trading volume than its analogue,
the IWM. Furthermore, RUT currently
has a market capitalization of $2.4
trillion and IWM has a market
capitalization of $35,809.1 million, and
the component securities of RUT, in
aggregate, have traded an average of 270
million shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
IWM. Therefore, CBOE concluded and
the Exchange agrees it is reasonable to
increase the positon limit for options on
the IWM from 500,000 to 1,000,000
contracts.
EEM
EEM tracks the performance of the
MSCI Emerging Markets Index or MXEF,
which is composed of approximately
800 component securities following 21
emerging market country indices: Brazil,
Chile, China, Colombia, Czech Republic,
Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
Based on EEM’s share price of $47.06
and MXEF’s index level of 1,136.45,
approximately 24 contracts of EEM
equals one contract of MXEF. MXEF is
currently subject to the standard
position limit of 25,000 contracts for
broad-based index options. Based on the
above comparison of notional values,
this would result in a position limit
economically equivalent to 604,000
contracts for EEM as MXEF’s analogue.
However, MXEF has an average daily
trading volume of 180 contracts. EEM is
currently subject to a position limit of
500,000 contracts but has a much higher
average daily trading volume of 287,357
contracts. Furthermore, MXEF currently
has a market capitalization of $5.18
trillion and EEM has a market
capitalization of $34,926.1 million, and
the component securities of MXEF, in
aggregate, have traded an average of 33.6
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
EEM. Therefore, based on the
comparison of average daily trading
volume, CBOE believed and the
Exchange agrees that it is reasonable to
increase the positon limit for options on
the IWM from 500,000 to 1,000,000
contracts.
EFA
EFA tracks the performance of MSCI
EAFE Index or MXEA, which has over
900 component securities designed to
represent the performance of large and
mid-cap securities across 21 developed
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
markets, including countries in Europe,
Australasia and the Far East, excluding
the U.S. and Canada. Based on EFA’s
share price of $69.16 and MXEA’s index
level of 1,986.15, approximately 29
contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the
standard position limit of 25,000
contracts for broad-based index options.
Based on the above comparison of
notional values, this would result in a
positon limit economically equivalent to
721,000 contracts for EFA as MXEA’s
analogue. Furthermore, MXEA currently
has a market capitalization of $18.7
trillion and EFA has a market
capitalization of $78,870.3 million, and
the component securities of MXEA, in
aggregate, have traded an average of 4.6
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in the
EEM. However, MXEA has an average
daily trading volume of 270 contracts.
EFA is currently subject to a position
limit of 250,000 contracts but has a
much higher average daily trading
volume of 98,844 contracts. Based on
the above comparisons, CBOE believed
and the Exchange agrees that it is
reasonable to increase the positon limit
for options on the EFA from 250,000 to
500,000 contracts.
FXI
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks. There is currently no index
analogue for FXI approved for options
trading. However, the FTSE China 50
Index currently has a market
capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18
million, both large enough to absorb any
price movement cause by a large trade
in FXI. The components of the FTSE
China 50 Index, in aggregate, have an
average daily trading volume of 2.3
billion shares. FXI is currently subject to
a position limit of 250,000 contracts but
has a much higher average daily trading
volume of 15.08 million shares. Based
on the above comparisons, CBOE
believed, and that Exchange agrees, that
it is reasonable to increase the positon
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
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
20879
capitalization of $6,023.4 million, both
large enough to absorb any price
movement cause by a large trade in
EWZ. The components of the MSCI
Brazil 25/50 Index, in aggregate, have an
average daily trading volume of 285
million shares. EWZ is currently subject
to a position limit of 250,000 contracts
but has a much higher average daily
trading volume of 17.08 million shares.
Based on the above comparisons, CBOE
believed and the Exchange agrees that it
is reasonable to increase the positon
limit for options on the EWZ from
250,000 to 500,000 contracts.
TLT
TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index,
which is composed of long-term U.S.
Treasury bonds. There is currently no
index analogue for TLT approved for
options trading. However, the U.S.
Treasury market is one of the largest and
most liquid markets in the world, with
over $14 trillion outstanding and
turnover of approximately $500 billion
per day. TLT currently has a market
capitalization of $7,442.4 million, both
large enough to absorb any price
movement cause by a large trade in TLT.
Therefore, the potential for
manipulation will not increase solely
due the increase in position limits as set
forth in the proposed rule change. Based
on the above comparisons, CBOE
believed and the Exchange agrees it is
reasonable to increase the positon limit
for options on the TLT from 250,000 to
500,000 contracts.
EWJ
EWJ tracks the MSCI Japan Index,
which tracks the performance of large
and mid-sized companies in Japan.
There is currently no index analogue for
EWJ approved for options trading.
However, the MSCI Japan Index has a
market capitalization of $3.5 trillion and
EWJ has a market capitalization of
$16,625.1 million, and the component
securities of the MSCI Japan Index, in
aggregate, have traded an average of 1.1
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in EWJ.
EWJ is currently subject to a position
limit of 250,000 contracts and has an
average daily trading volume of 6.6
million shares. Based on the above
comparisons, CBOE believed and the
Exchange agrees that it is reasonable to
increase the positon limit for options on
EWJ from 250,000 to 500,000 contracts.
ISE Analysis and Conclusions
ISE has reviewed the CBOE analysis
set forth above. On the basis of that
analysis ISE believes that market
E:\FR\FM\08MYN1.SGM
08MYN1
sradovich on DSK3GMQ082PROD with NOTICES
20880
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
participants’ trading activity could be
adversely impacted by the current
position limits for FXI, EFA, EWZ, TLT
and EWJ and such limits may cause
options trading in these symbols to
move from exchanges to the over-thecounter market. The above trading
characteristics of FXI, EFA, EWZ, TLT
and EWJ are either similar to those of
EEM and IWM or sufficiently active so
that the proposed limit would continue
to address potential manipulation that
may arise. Specifically, EFA has far
more shares outstanding and a larger
fund market cap than EEM, IWM, and
QQQQ. EWJ has more shares
outstanding than IWM and only slightly
fewer shares outstanding than QQQQ.
On the other hand, while FXI, EWZ
and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas,
they are all actively trading so that
market participants’ trading activity has
been impacted by them being restricted
by the current position limits. The
Exchange believes that the trading
activity and these securities being based
on a broad basket of underlying
securities alleviates concerns as to any
potential manipulative activity that may
arise. In addition, as discussed in more
detail below, the Exchange’s existing
surveillance procedures and reporting
requirements at the Exchange, at other
options exchanges, and at the several
clearing firms are capable of properly
identifying unusual and/or illegal
trading activity.
On the basis of CBOE’s analysis ISE
also believes that market participants’
trading activity could be adversely
impacted by the current position limits
for EEM, IWM and QQQQ. As discussed
above, EEM, IWM and QQQQ have
similar trading characteristics.
Subjecting EEM and IWM to the
proposed higher position limit would
continue be designed to address
potential manipulate schemes that may
arise from trading in the options and
their underlying securities. The trading
characteristics for QQQQ described
above, when compared to EEM and
IWM, also justify increasing the position
limit for QQQQ. QQQQ has a higher
options ADV than EEM and IWM, a
higher numbers of shares outstanding
than IWM and a much higher market
cap than EEM and IWM which justify
doubling the positon limit for QQQQ.
Based on these statistics, the proposed
position limit coupled with QQQQ’s
trading behavior would continue to
address potential manipulative schemes
and adverse market impact surrounding
the use of options and trading in its
underlying the options.
The Exchange believes that increasing
the position limits for the options
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
subject to this proposal would lead to a
more liquid and competitive market
environment for these options, which
will benefit customers interested in this
product. Under the proposal, the
reporting requirement for the above
options would be unchanged. Thus, the
Exchange would still require that each
Member file with the Exchange the
name, address and social security or tax
identification number of any customer,
as well as any Member, any general or
special partner of the Member, any
officer or director of the Member or any
participant, as such, in any joint, group
or syndicate account with the Member
or with any partner, officer or director
thereof, who, on the previous business
day held aggregate long or short
positions of 200 or more options
contracts of any single class of options
traded on the Exchange. The report is
also required to indicate for each such
class of options contracts the number of
options contracts comprising each such
position and, in case of short positions,
whether covered or uncovered.
Additionally, Electronic Access
Members that maintain an end of day
position in excess of 10,000 non-FLEX
equity options contracts on the same
side of the market on behalf of its own
account or for the account of a
customer, are required to report whether
such position is hedged and provide
documentation as to how such position
is hedged. This report is required at the
time the subject account exceeds the
10,000 contract threshold and thereafter,
for customer accounts, when the
position increases by 2,500 contracts
and for proprietary accounts when the
position increases by 5,000 contracts.
Finally, Members are also required to
report promptly to the Exchange any
instance in which the Member has
reason to believe that a person included
in Rule 415(a), acting alone or in concert
with others, has exceeded or is
attempting to exceed the position limits
established pursuant to Rule 412.24
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange,
other options exchanges, and at the
several clearing firms are capable of
properly identifying unusual and/or
illegal trading activity. In addition,
routine oversight inspections of the
Exchange’s regulatory programs by the
Commission have not uncovered any
material inconsistencies or
shortcomings in the manner in which
the Exchange’s market surveillance is
conducted. These procedures utilize
daily monitoring of market movements
24 See Exchange Rule 415 for reporting
requirements.
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
via automated surveillance techniques
to identify unusual activity in both
options and underlying stocks.25
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.26 The
positions for options subject to this
proposal are part of any reportable
positions and, thus, cannot be legally
hidden. Moreover, the Exchange’s
requirement that Members file reports
with the Exchange for any customer
who held aggregate large long or short
positions of any single class for the
previous day will continue to serve as
an important part of the Exchange’s
surveillance efforts.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a
member organization or its customer
may try to maintain an inordinately
large un-hedged position in the options
subject to this proposal. Current margin
and risk-based haircut methodologies
serve to limit the size of positions
maintained by any one account by
increasing the margin and/or capital
that a member organization must
maintain for a large position held by
itself or by its customer.27 In addition,
Rule 15c3–1 28 imposes a capital charge
on member organizations to the extent
of any margin deficiency resulting from
the higher margin requirement.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,29 in general, and furthers the
objectives of Section 6(b)(5) of the Act,30
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest. As
noted above, the Commission has
recently approved increasing position
limits to the levels proposed herein on
the same ETF options on the CBOE. The
Exchange believes that the proposed
position limits would continue to
address potential manipulative activity
while allowing for potential hedging
25 These procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed.
26 17 CFR 240.13d–1.
27 See Exchange Rule 1202(a), which provides
that a Member must elect to be bound by the initial
and maintenance margin requirements of either the
CBOE or the New York Stock Exchange as the same
may be in effect from time to time.
28 17 CFR 240.15c3–1.
29 15 U.S.C. 78f(b).
30 15 U.S.C. 78f(b)(5).
E:\FR\FM\08MYN1.SGM
08MYN1
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
activity for appropriate economic
purposes.
The current position limits for the
options subject to this proposal have
inhibited the ability of market makers to
make markets on the Exchange.
Specifically, the proposal is designed to
encourage market makers to shift
liquidity from over the counter markets
onto the Exchange, which will enhance
the process of price discovery
conducted on the Exchange through
increased order flow. The proposal will
also benefit institutional investors as
well as retail traders, and public
customers, by providing them with a
more effective trading and hedging
vehicle. In addition, the Exchange
believes that the structure of the ETFs
subject to this proposal and the
considerable liquidity of the market for
options on those ETFs diminishes the
opportunity to manipulate this product
and disrupt the underlying market that
a lower position limit may protect
against.
Increased position limits for select
actively traded options, such as that
proposed herein, is not novel and has
been previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for certain options.31
Additionally, the Commission has
approved similar proposed rule changes
to increase position limits for options on
highly liquid, actively-traded ETFs,32
including a proposal to permanently
eliminate the position and exercise
limits for options overlaying the S&P
500 Index, S&P 100 Index, Dow Jones
Industrial Average, Nasdaq 100 Index,
and the Russell 2000(R) Index
(‘‘RUT’’).33 In approving the permanent
elimination of position and exercise
limits for these index options, the
31 See Securities Exchange Act Release Nos.
67672 (August 15, 2012), 77 FR 50750 (August 22,
2012) (SR–NYSEAmex–2012–29); 67937
(September 27, 2012), 77 FR 60489 (October 3,
2012) (SR–CBOE–2012–091).
32 See Securities Exchange Act Release Nos.
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066); 64928 (July 20, 2011),
76 FR 44633 (July 26,2011) (SR–CBOE–2011–065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011)
(SR–PHLX–2011–58); and 55176 (January 25, 2007),
72 FR 4741 (February 1, 2017) (SR–CBOE–2007–
008.).
33 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001) (SR–CBOE–2001–22) (elimination of
position and exercise limits on SPX, OEX, and DJX
options) (‘‘SPX, OEX, and DJX Position Limit
Elimination Approval Order’’); 52650 (October 21,
2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
2005–41) (elimination of position and exercise
limits on NDX options) (‘‘NDX Position Limit
Elimination Approval Order’’); 56651 (October 12,
2007), 72 FR 59130 (October 18, 2007) (SR–Phlx–
2007–71) (‘‘RUT Position Limit Elimination
Approval Order’’).
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
Commission relied heavily upon the
Exchange’s surveillance capabilities,
and the Commission expressed trust in
the enhanced surveillance and reporting
safeguards that the Exchange took in
order to detect and deter possible
manipulative behavior which might
arise from eliminating position and
exercise limits.34 Furthermore, as
described more fully above, options on
other ETFs have the position limits
proposed herein and those ETFs have
trading characteristics and trading
volumes that are similar to those of the
ETFs subject to this proposed rule
change.
Last, the Commission has expressed
the belief that removing position and
exercise limits may bring additional
depth and liquidity without increasing
concerns regarding intermarket
manipulation or disruption of the
options or the underlying securities.35
The Exchange’s enhanced surveillance
and reporting safeguards continue to be
designed to deter and detect possible
manipulative behavior which might
arise from eliminating position and
exercise limits.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. On the
contrary, the Exchange believes that the
proposed rule change will result in
additional opportunities to achieve the
investment and trading objectives of
market participants seeking efficient
trading and hedging vehicles, to the
benefit of investors, market participants,
and the marketplace in general.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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
34 Id.
35 Id.
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
20881
19(b)(3)(A)(iii) of the Act 36 and
subparagraph (f)(6) of Rule 19b–4
thereunder.37
A proposed rule change filed under
Rule 19b–4(f)(6) 38 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 39 permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become effective and
operative immediately upon filing. The
Exchange states that waiver of the
operative delay would permit the
Exchange to immediately implement the
proposed rule change to increase the
position limits as proposed herein and
thereby seamlessly continue to offer
traders and the investing public the
ability to use these products as effective
hedging and trading vehicles. The
Exchange further states that waiver
would allow the Exchange to remain
competitive with other exchanges. The
Commission believes that waiver of the
30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission hereby waives the 30-day
operative delay and designates the
proposed rule change as operative upon
filing.40
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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,
36 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and 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. The Exchange
has satisfied this requirement.
38 17 CFR 240.19b–4(f)(6).
39 17 CFR 240.19b–4(f)(6)(iii).
40 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
37 17
E:\FR\FM\08MYN1.SGM
08MYN1
20882
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
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–
ISE–2018–39 on the subject line.
Paper Comments
sradovich on DSK3GMQ082PROD with NOTICES
• 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–ISE–2018–39. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2018–39 and should be
submitted on or before May 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09696 Filed 5–7–18; 8:45 am]
BILLING CODE 8011–01–P
41 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:41 May 07, 2018
Jkt 244001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83153; File No. SR–FICC–
2018–003]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Amend the Fee Structure of the
Government Securities Division
Rulebook
May 2, 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 27,
2018, Fixed Income Clearing
Corporation (‘‘FICC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency. 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
The proposed rule change would
amend the Fee Structure of the FICC
Government Securities Division
(‘‘GSD’’) Rulebook (‘‘GSD Rules’’) 3 with
respect to the fees associated with the
delivery-versus-payment (‘‘DVP’’)
service as well as make other changes,
as described in greater detail below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency 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
1. Purpose
The purpose of this proposed rule
change is to amend the Fee Structure of
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms not defined herein are defined
in the GSD Rules, available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf.
2 17
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
the GSD Rules with respect to the fees
associated with the DVP service and
make other changes 4 in order to reduce
complexity and to better align pricing
with the costs of services provided by
GSD. The proposed rule change would
also make conforming, clarifying, and
technical changes. Taken collectively,
the proposed rule changes are designed
to be revenue neutral for GSD and may
eliminate perceived pricing barriers to
entry, as described below.
(i) Background
GSD provides clearance and
settlement services for trades executed
by its Members in the U.S. government
securities market. GSD supports and
facilitates these services through
transaction processing and position
management.
Transaction processing for the DVP
service includes the recording and
comparison of transactions submitted to
GSD for clearance and settlement
through GSD’s comparison system, the
Real-Time Trade Matching system.
Position management for the DVP
service includes trade netting, trade
settlement, and the management of
credit risks, market risks, and liquidity
risks associated with transactions
submitted to GSD for clearance and
settlement.
(ii) Current Fees
Members are assessed fees in
accordance with the GSD Fee Structure.
The current GSD Fee Structure covers a
multitude of fees that are assessed on
Members based upon their activities and
the services utilized. The number of fees
and the methods by which they are
calculated makes the current GSD Fee
Structure unnecessarily complex. In
addition, due to changes in technology
and regulatory environment, certain fees
in the current GSD Fee Structure have
become misaligned with the costs of
services provided by GSD.
4 FICC is not proposing changes to fees
specifically associated with either the GCF Repo®
Service or the CCIT Service at this time because
those fees are more aligned with the costs of
providing such services. However, as further
discussed below in Item II.(A)1.(iii) (entitled
‘‘PROPOSED FEE CHANGES’’), FICC is proposing
a change to the minimum monthly fee. The
minimum monthly fee is not specific to any service
and would apply to each account of either a
Comparison-Only Member or a Netting Member;
such account of a Netting Member could include
GCF Repo and/or CCIT activity. The minimum
monthly fee for an account would not apply if the
total monthly fees incurred by the account pursuant
to proposed Sections I, II, and IV of the GSD Fee
Structure exceed $2,500. CCIT Members are not
subject to the minimum monthly fee.
For additional information on the GCF Repo
Service and the CCIT Service, please refer to GSD
Rule 20 and GSD Rule 3B, respectively. See GSD
Rule 20 and GSD Rule 3B. GSD Rules, id.
E:\FR\FM\08MYN1.SGM
08MYN1
]]>Agencies
[Federal Register Volume 83, Number 89 (Tuesday, May 8, 2018)]
[Notices]
[Pages 20875-20882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09696]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83156; File No. SR-ISE-2018-39]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules
412, Position Limits, and 414, Exercise Limits
May 2, 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 20, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend ISE Rules 412, Position Limits, and
414, Exercise Limits, to increase the position and exercise limits for
options on the following exchange traded funds (``ETFs''): iShares
China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares
MSCI Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF
(``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year
Treasury Bond Fund ETF (``TLT''), PowerShares QQQ Trust (``QQQQ''), and
iShares MSCI Japan Index (``EWJ'').
The text of the proposed rule change is available on the Exchange's
website at https://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
[[Page 20876]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Position Limit Increase
Position limits for options on ETFs such as those subject to this
proposal are determined pursuant to Exchange Rule 412, and, with
certain exceptions, vary by tier according to the number of outstanding
shares and the trading volume of the underlying security. Options in
the highest tier--i.e., options that overlie securities with the
largest numbers of outstanding shares and trading volumes--have a
standard option position limit of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the same side of the market.
In addition, Rule 412 currently sets forth separate position limits for
options on certain ETFs, including 500,000 contracts for options on EEM
and IWM, and 900,000 contracts for options on QQQQ.
The Exchange proposes to revise Rule 412 to increase the position
limits for options on certain ETFs, as described more fully below.\3\
The Exchange believes that increasing the position limits for these
options will lead to a more liquid and competitive market environment
for these options that will benefit customers interested in these
products.
---------------------------------------------------------------------------
\3\ ISE Rule 414 establishes exercise limits for the
corresponding options at the same levels as the corresponding
security's position limits. Rule 414 would be amended such that the
exercise limits for each of these options would be increased to the
level of the new position limits.
---------------------------------------------------------------------------
First, the Exchange proposes to increase the position limits for
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the
highest standard tier set forth in Exchange Rule 412(d)(5). Rule 412,
Supplementary Material .01, would be amended to increase the current
position limit of 250,000 contracts for options on these securities to
500,000 contracts.
Second, the Exchange proposes to increase the position limits for
options on EEM and IWM from 500,000 contracts to 1,000,000
contracts.\4\
---------------------------------------------------------------------------
\4\ The Exchange is also amending Rules 412 and 414 to update
and correct the names of IWM and EEM, which are currently referred
to in that rule as the iShares[supreg] Russell 2000[supreg] Index
Fund and iShares MSCI Emerging Markets Index Fund, respectively.
---------------------------------------------------------------------------
Finally, the Exchange proposes to increase the position limits on
options on QQQQ from 900,000 contracts to 1,800,000 contracts.
In support of this proposal, the Exchange represents that the above
listed ETFs qualify for either: (i) The initial listing criteria set
forth in Exchange Rule 502(h) for ETFs holding non-U.S. component
securities; or (ii) for ETFs listed pursuant to generic listing
standards for series of portfolio depository receipts and index fund
shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required.\5\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\7\ The MSCI Emerging Markets Index consists of
the following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of
the Russell 2000 Index, which is composed of 2,000 small-cap domestic
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has
over 900 component securities.\10\ The MSCI EAFE Index is designed to
represent the performance of large and mid-cap securities across 21
developed markets, including countries in Europe, Australasia and the
Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance
of the MSCI Brazil 25/50 Index, which is composed of shares of large
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S.
Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100
Index, which is composed of 100 of the largest domestic and
international nonfinancial companies listed on the Nasdaq Stock Market
LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the
performance of large and mid-sized companies in Japan.\15\
---------------------------------------------------------------------------
\5\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Exchange Rule 503(h).
\6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\7\ See https://us.ishares.com/product_info/fund/overview/EEM.htm.
\8\ See https://www.msci.com/products/indices/tools/#EM.
\9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\10\ See https://www.ishares.com/us/products/239623/.
\11\ See https://www.msci.com/eafe.
\12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\13\ See https://www.ishares.com/us/products/239454/.
\14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
\15\ See https://www.ishares.com/us/products/239665/EWJ.
---------------------------------------------------------------------------
The Exchange represents that more than 50% of the weight of the
securities held by the options subject to this proposal are also
subject to a CSA.\16\ Additionally, the component securities of the
MSCI Emerging Markets Index on which EEM is based for which the primary
market is in any one country that is not subject to a CSA do not
represent 20% or more of the weight of the MSCI Emerging Markets
Index.\17\ Finally, the component securities of the MSCI Emerging
Markets Index on which EEM is based, for which the primary market is in
any two countries that are not subject to CSAs do not represent 33% or
more of the weight of the MSCI Emerging Markets Index.\18\
---------------------------------------------------------------------------
\16\ See Exchange Rule 502(h)(b)(2).
\17\ See Exchange Rule 502(h)(b)(3).
\18\ See Exchange Rule 502(h)(b)(4).
---------------------------------------------------------------------------
Market participants have increased their demand for options on FXI,
EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the
Exchange believes the current position limits are too low and may be a
deterrent to successful trading of options on these securities.
The CBOE Analysis
The Commission has recently approved a proposed rule change of the
Chicago Board Options Exchange (``CBOE'') to increase position limits
for these same options.\19\ The discussion that follows is based upon
the CBOE's analysis presented in that proposal.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 82770 (February 23,
2018) (approving SR-CBOE-2017-057).
---------------------------------------------------------------------------
In its proposal, CBOE stated that it had collected the following
trading statistics on the ETFs that are subject to this proposal:
[[Page 20877]]
----------------------------------------------------------------------------------------------------------------
2017 ADV Shares
ETF 2017 ADV (option outstanding Fund market
(Mil. shares) contracts) (Mil.) cap ($Mil.)
----------------------------------------------------------------------------------------------------------------
FXI............................................. 15.08 71,944 78.6 3,343.6
EEM............................................. 52.12 287,357 797.4 34,926.1
IWM............................................. 27.46 490,070 253.1 35,809.1
EFA............................................. 19.42 98,844 1178.4 78,870.3
EWZ............................................. 17.08 95,152 159.4 6,023.4
TLT............................................. 8.53 80,476 60.0 7,442
QQQQ............................................ 26.25 579,404 351.6 50,359.7
EWJ............................................. 6.06 4,715 303.6 16,625.1
SPY............................................. 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------
In support of its proposal to increase the position limits for QQQQ
to 1,800,000 contracts, CBOE compared the trading characteristics of
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position
limits. As shown in the above table, the average daily trading volume
through August 14, 2017 for QQQQ was 26.25 million shares compared to
64.63 million shares for SPY. The total shares outstanding for QQQQ are
351.6 million compared to 976.23 million for SPY. The fund market cap
for QQQQ is $50,359.7 million compared to $240,540 million for SPY. SPY
is one of the most actively trading ETFs and is, therefore, subject to
no position limits. QQQQ is also very actively traded, and while not to
the level of SPY, should be subject to the proposed higher position
limits based on its trading characteristics when compared to SPY. The
proposed position limit coupled with QQQQ's trading behavior would
continue to address potential manipulative schemes and adverse market
impact surrounding the use of options and trading in its underlying the
options.
In support of its proposal to increase the position limits for EEM
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also
compared the trading characteristics of EEM and IWM to that of QQQQ,
which currently has a position limit of 900,000 contracts. As shown in
the above table, the average daily trading volume through July 31, 2017
for EEM was 52.12 million shares and IWM was 27.46 million shares
compared to 26.25 million shares for QQQQ. The total shares outstanding
for EEM are 797.4 million and for IWM are 253.1 million compared to
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1
million and IWM is $35,809 million compared to $50,359.7 million for
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and
subjecting EEM and IWM to the proposed higher position limit would
continue be designed to address potential manipulate schemes that may
arise from trading in the options and their underlying securities.
These above trading characteristics for QQQQ when compared to EEM and
IWM also justify increasing the position limit for QQQQ. QQQQ has a
higher options ADV than EEM and IWM, a higher numbers of shares
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the position limit for QQQQ. CBOE concluded
that, based on these statistics, and as stated above, the proposed
position limit coupled with QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in the securities underlying
the options.
In support of its proposal to increase the position limits for FXI,
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts,
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and
EWJ to that of EEM and IWM, both of which currently have a position
limit of 500,000 contracts. As shown in the above table, the average
daily trading volume through July 31, 2017 for FXI is 15.08 million
shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT
is 8.53 million shares, and EWJ is 6.06 million shares compared to
52.12 million shares for EEM and 27.46 million shares for IWM. The
total shares outstanding for FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6
million compared to 797.4 million for EEM and 253.1 million for IWM.
The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3
million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is
$16,625.1 million compared to $34,926.1 million for EEM and $35,809.1
million for IWM.
In Partial Amendment No. 1 to its proposed rule change, CBOE
provided additional analysis and support for its proposed rule
change.\20\ According to CBOE, market participants' trading activity
has been adversely impacted by the current position limits as such
limits have caused options trading in the symbols subject to the
proposed rule change to move from exchanges to the over-the-counter
market. CBOE stated it had submitted the proposed rule change at the
request of market participants whose on-exchange activity has been
hindered by the existing position limits causing them to be unable to
provide additional liquidity not just on CBOE, but also on other
options exchanges on which they participate.
---------------------------------------------------------------------------
\20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22,
2017).
---------------------------------------------------------------------------
CBOE stated it understood that certain market participants wishing
to make trades involving a large number of options contracts in the
symbols subject to the proposed rule change are opting to execute those
trades in the over-the-counter market, that the over-the counter
transactions occur via bilateral agreements the terms of which are not
publicly disclosed to other market participants, and that therefore,
these large trades do not contribute to the price discovery process
performed on a lit market. It stated that position limits are designed
to address potential manipulative schemes and adverse market impact
surrounding the use of options, such as disrupting the market in the
security underlying the options, and that the potential manipulative
schemes and adverse market impact are balanced against the potential of
setting the limits so low as to discourage participation in the options
market. It stated that the level of those position limits must be
balanced between curtailing potential manipulation and the cost of
preventing potential hedging activity that could be used for legitimate
economic purposes.
CBOE observed that the ETFs that underlie options subject to the
proposed rule change are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets,
[[Page 20878]]
and noted that the Commission has generally looked through to the
liquidity of securities comprising an index in establishing position
limits for cash-settled index options. It further noted that options on
certain broad-based security indexes have no position limits. CBOE
observed that the Commission has recognized the liquidity of the
securities comprising the underlying interest of the SPDR S&P 500 ETF
(``SPY'') in permitting no position limits on SPY options since
2012,\21\ and expanded position limits for options on EEM, IWM and
QQQQ.
---------------------------------------------------------------------------
\21\ See Securities Exchange Act Release No. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
---------------------------------------------------------------------------
CBOE stated that the creation and redemption process for these ETFs
also lessen the potential for manipulative activity, explaining that
when an ETF company wants to create more ETF shares, it looks to an
Authorized Participant, which is a market maker or other large
financial institution, to acquire the securities the ETF is to hold.
For instance, IWM is designed to track the performance of the Russell
2000 Index, the Authorized Participant will purchase all the Russell
2000 constituent securities in the exact same weight as the index, then
deliver those shares to the ETF provider. In exchange, the ETF provider
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. The price is based on the net asset
value, not the market value at which the ETF is trading. The creation
of new ETF units can be conducted all trading day and is not subject to
position limits. This process can also work in reverse where the ETF
company seeks to decrease the number of shares that are available to
trade. The creation and redemption process, therefore, creates a direct
link to the underlying components of the ETF, and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits. The ETF creation and redemption seeks
to keep ETF share prices trading in line with the ETF's underlying net
asset value. Because an ETF trades like a stock, its price will
fluctuate during the trading day, due to simple supply and demand. If
demand to buy an ETF is high, for instance, the ETF's share price might
rise above the value of its underlying securities. When this happens,
the Authorized Participant believes the ETF may now be overpriced, and
can buy the underlying shares that compose the ETF and then sell ETF
shares on the open market. This should help drive the ETF's share price
back toward fair value. Likewise, if the ETF starts trading at a
discount to the securities it holds, the Authorized Participant can buy
shares of the ETF and redeem them for the underlying securities. Buying
undervalued ETF shares should drive the price of the ETF back toward
fair value. This arbitrage process helps to keep an ETF's price in line
with the value of its underlying portfolio.
CBOE stated that in proposing the increased position limits, the
Exchange considered the availability of economically equivalent
products and their respective position limits. For instance, some of
the ETFs underlying options subject to the proposed rule change are
based on broad-based indices that underlie cash settled options that
are economically equivalent to the ETF options that are the subject of
the proposed rule change and have no position limits. Other ETFs are
based on broad-based indexes that underlie cash-settled options with
position limits reflecting notional values that are larger than the
current position limits for ETF analogues (EEM, EFA). Where there was
no approved index analogue, CBOE stated its belief, based on the
liquidity, breadth and depth of the underlying market, that the index
referenced by the ETF would be considered a broad-based index.\22\ CBOE
argued that if certain position limits are appropriate for the options
overlying the same index or is an analogue to the basket of securities
that the ETF tracks, then those same economically equivalent position
limits should be appropriate for the option overlying the ETF. In
addition, CBOE observed, the market capitalization of the underlying
index or reference asset is large enough to absorb any price movements
that may be caused by an oversized trade. Also, the Authorized
Participant or issuer may look to the stocks comprising the analogous
underlying index or reference asset when seeking to create additional
ETF shares are part of the creation/redemption process to address
supply and demand or to mitigate the price movement the price of the
ETF. CBOE offered the following specific examples to illustrate:
---------------------------------------------------------------------------
\22\ CBOE Rule 24.4 and Exchange Rule 2004 set forth the CBOE
and the ISE position limits for broad-based index options.
---------------------------------------------------------------------------
QQQQ
For example, the PowerShares QQQ Trust or QQQQ is an ETF that
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100
of the largest non-financial securities listed on Nasdaq. Options on
NDX are currently subject to no position limits but share similar
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX. Assume that NDX was subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a positon limit equivalent to 1,000,000 contracts for QQQQ as
NDX's analogue. However, NDX is not subject to position limits and has
an average daily trading volume of 15,300 contracts. QQQQ is currently
subject to a position limit of 900,000 contracts but has a much higher
average daily trading volume of 579,404 contracts. Furthermore, NDX
currently has a market capitalization of $17.2 trillion and QQQQ has a
market capitalization of $50,359.7 million, and the component
securities of NDX, in aggregate, have traded an average of 440 million
shares per day in 2017, both large enough to absorb any price movement
cause by a large trade in the QQQQ. The Commission has also approved no
position limit for NDX, although it has a much lower average daily
trading volume than its analogue, the QQQQ. Therefore, CBOE concluded
and the Exchange agrees it was reasonable to increase the positon limit
for options on the QQQQ from 900,000 to 1,800,000 contracts.
---------------------------------------------------------------------------
\23\ CBOE stated that all share prices used in its analysis were
based on the closing price of the security on November 16, 2017 and
cited Yahoo Finance as the source.
---------------------------------------------------------------------------
IWM
The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an index that is composed of 2,000
small-cap domestic companies in the Russell 3000 index. Options on RUT
are currently subject to no position limits but share similar trading
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's
index level of 1,486.88, approximately 10 contracts of IWM equals one
contract of RUT. Assume that RUT was subject to the standard position
limit of 25,000 contracts for broad-based index options under Exchange
Rule 24.4(a). Based on the above comparison of notional values, this
would result in a positon limit equivalent to 250,000 contracts for IWM
as RUT's analogue. However, RUT is not subject to position limits and
has an average daily trading volume of 66,200 contracts. IWM is
currently subject to a position limit of 500,000 contracts but has a
much higher average daily trading volume of 490,070
[[Page 20879]]
contracts. The Commission has approved no position limit for RUT,
although it has a much lower average daily trading volume than its
analogue, the IWM. Furthermore, RUT currently has a market
capitalization of $2.4 trillion and IWM has a market capitalization of
$35,809.1 million, and the component securities of RUT, in aggregate,
have traded an average of 270 million shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
IWM. Therefore, CBOE concluded and the Exchange agrees it is reasonable
to increase the positon limit for options on the IWM from 500,000 to
1,000,000 contracts.
EEM
EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities
following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts
of EEM equals one contract of MXEF. MXEF is currently subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a position limit economically equivalent to 604,000 contracts
for EEM as MXEF's analogue. However, MXEF has an average daily trading
volume of 180 contracts. EEM is currently subject to a position limit
of 500,000 contracts but has a much higher average daily trading volume
of 287,357 contracts. Furthermore, MXEF currently has a market
capitalization of $5.18 trillion and EEM has a market capitalization of
$34,926.1 million, and the component securities of MXEF, in aggregate,
have traded an average of 33.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. Therefore, based on the comparison of average daily trading
volume, CBOE believed and the Exchange agrees that it is reasonable to
increase the positon limit for options on the IWM from 500,000 to
1,000,000 contracts.
EFA
EFA tracks the performance of MSCI EAFE Index or MXEA, which has
over 900 component securities designed to represent the performance of
large and mid-cap securities across 21 developed markets, including
countries in Europe, Australasia and the Far East, excluding the U.S.
and Canada. Based on EFA's share price of $69.16 and MXEA's index level
of 1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the standard position limit of
25,000 contracts for broad-based index options. Based on the above
comparison of notional values, this would result in a positon limit
economically equivalent to 721,000 contracts for EFA as MXEA's
analogue. Furthermore, MXEA currently has a market capitalization of
$18.7 trillion and EFA has a market capitalization of $78,870.3
million, and the component securities of MXEA, in aggregate, have
traded an average of 4.6 billion shares per day in 2017, both large
enough to absorb any price movement cause by a large trade in the EEM.
However, MXEA has an average daily trading volume of 270 contracts. EFA
is currently subject to a position limit of 250,000 contracts but has a
much higher average daily trading volume of 98,844 contracts. Based on
the above comparisons, CBOE believed and the Exchange agrees that it is
reasonable to increase the positon limit for options on the EFA from
250,000 to 500,000 contracts.
FXI
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement cause by a large trade in FXI. The components
of the FTSE China 50 Index, in aggregate, have an average daily trading
volume of 2.3 billion shares. FXI is currently subject to a position
limit of 250,000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, CBOE
believed, and that Exchange agrees, that it is reasonable to increase
the positon limit for options on the FXI from 250,000 to 500,000
contracts.
EWZ
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement cause
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, CBOE believed and the
Exchange agrees that it is reasonable to increase the positon limit for
options on the EWZ from 250,000 to 500,000 contracts.
TLT
TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement cause by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due the increase in position
limits as set forth in the proposed rule change. Based on the above
comparisons, CBOE believed and the Exchange agrees it is reasonable to
increase the positon limit for options on the TLT from 250,000 to
500,000 contracts.
EWJ
EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for EWJ approved for options trading. However, the MSCI Japan
Index has a market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement cause by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, CBOE
believed and the Exchange agrees that it is reasonable to increase the
positon limit for options on EWJ from 250,000 to 500,000 contracts.
ISE Analysis and Conclusions
ISE has reviewed the CBOE analysis set forth above. On the basis of
that analysis ISE believes that market
[[Page 20880]]
participants' trading activity could be adversely impacted by the
current position limits for FXI, EFA, EWZ, TLT and EWJ and such limits
may cause options trading in these symbols to move from exchanges to
the over-the-counter market. The above trading characteristics of FXI,
EFA, EWZ, TLT and EWJ are either similar to those of EEM and IWM or
sufficiently active so that the proposed limit would continue to
address potential manipulation that may arise. Specifically, EFA has
far more shares outstanding and a larger fund market cap than EEM, IWM,
and QQQQ. EWJ has more shares outstanding than IWM and only slightly
fewer shares outstanding than QQQQ.
On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas, they are all actively trading so
that market participants' trading activity has been impacted by them
being restricted by the current position limits. The Exchange believes
that the trading activity and these securities being based on a broad
basket of underlying securities alleviates concerns as to any potential
manipulative activity that may arise. In addition, as discussed in more
detail below, the Exchange's existing surveillance procedures and
reporting requirements at the Exchange, at other options exchanges, and
at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity.
On the basis of CBOE's analysis ISE also believes that market
participants' trading activity could be adversely impacted by the
current position limits for EEM, IWM and QQQQ. As discussed above, EEM,
IWM and QQQQ have similar trading characteristics. Subjecting EEM and
IWM to the proposed higher position limit would continue be designed to
address potential manipulate schemes that may arise from trading in the
options and their underlying securities. The trading characteristics
for QQQQ described above, when compared to EEM and IWM, also justify
increasing the position limit for QQQQ. QQQQ has a higher options ADV
than EEM and IWM, a higher numbers of shares outstanding than IWM and a
much higher market cap than EEM and IWM which justify doubling the
positon limit for QQQQ. Based on these statistics, the proposed
position limit coupled with QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in its underlying the
options.
The Exchange believes that increasing the position limits for the
options subject to this proposal would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in this product. Under the proposal, the reporting
requirement for the above options would be unchanged. Thus, the
Exchange would still require that each Member file with the Exchange
the name, address and social security or tax identification number of
any customer, as well as any Member, any general or special partner of
the Member, any officer or director of the Member or any participant,
as such, in any joint, group or syndicate account with the Member or
with any partner, officer or director thereof, who, on the previous
business day held aggregate long or short positions of 200 or more
options contracts of any single class of options traded on the
Exchange. The report is also required to indicate for each such class
of options contracts the number of options contracts comprising each
such position and, in case of short positions, whether covered or
uncovered. Additionally, Electronic Access Members that maintain an end
of day position in excess of 10,000 non-FLEX equity options contracts
on the same side of the market on behalf of its own account or for the
account of a customer, are required to report whether such position is
hedged and provide documentation as to how such position is hedged.
This report is required at the time the subject account exceeds the
10,000 contract threshold and thereafter, for customer accounts, when
the position increases by 2,500 contracts and for proprietary accounts
when the position increases by 5,000 contracts. Finally, Members are
also required to report promptly to the Exchange any instance in which
the Member has reason to believe that a person included in Rule 415(a),
acting alone or in concert with others, has exceeded or is attempting
to exceed the position limits established pursuant to Rule 412.\24\
---------------------------------------------------------------------------
\24\ See Exchange Rule 415 for reporting requirements.
---------------------------------------------------------------------------
The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange, other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\25\
---------------------------------------------------------------------------
\25\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
---------------------------------------------------------------------------
Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\26\ The positions for
options subject to this proposal are part of any reportable positions
and, thus, cannot be legally hidden. Moreover, the Exchange's
requirement that Members 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.
---------------------------------------------------------------------------
\26\ 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 a member organization or its customer may try to maintain
an inordinately large un-hedged position in the options subject to this
proposal. Current margin and risk-based haircut methodologies serve to
limit the size of positions maintained by any one account by increasing
the margin and/or capital that a member organization must maintain for
a large position held by itself or by its customer.\27\ In addition,
Rule 15c3-1 \28\ imposes a capital charge on member organizations to
the extent of any margin deficiency resulting from the higher margin
requirement.
---------------------------------------------------------------------------
\27\ See Exchange Rule 1202(a), which provides that a Member
must elect to be bound by the initial and maintenance margin
requirements of either the CBOE or the New York Stock Exchange as
the same may be in effect from time to time.
\28\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. As noted above, the Commission has recently approved
increasing position limits to the levels proposed herein on the same
ETF options on the CBOE. The Exchange believes that the proposed
position limits would continue to address potential manipulative
activity while allowing for potential hedging
[[Page 20881]]
activity for appropriate economic purposes.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The current position limits for the options subject to this
proposal have inhibited the ability of market makers to make markets on
the Exchange. Specifically, the proposal is designed to encourage
market makers to shift liquidity from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow. The proposal will also
benefit institutional investors as well as retail traders, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of the
ETFs subject to this proposal and the considerable liquidity of the
market for options on those ETFs diminishes the opportunity to
manipulate this product and disrupt the underlying market that a lower
position limit may protect against.
Increased position limits for select actively traded options, such
as that proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved,
on a pilot basis, eliminating position limits for certain options.\31\
Additionally, the Commission has approved similar proposed rule changes
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ including a proposal to permanently eliminate the
position and exercise limits for options overlaying the S&P 500 Index,
S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent
elimination of position and exercise limits for these index options,
the Commission relied heavily upon the Exchange's surveillance
capabilities, and the Commission expressed trust in the enhanced
surveillance and reporting safeguards that the Exchange took in order
to detect and deter possible manipulative behavior which might arise
from eliminating position and exercise limits.\34\ Furthermore, as
described more fully above, options on other ETFs have the position
limits proposed herein and those ETFs have trading characteristics and
trading volumes that are similar to those of the ETFs subject to this
proposed rule change.
---------------------------------------------------------------------------
\31\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
\32\ See Securities Exchange Act Release Nos. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928
(July 20, 2011), 76 FR 44633 (July 26,2011) (SR-CBOE-2011-065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017)
(SR-CBOE-2007-008.).
\33\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination
of position and exercise limits on SPX, OEX, and DJX options)
(``SPX, OEX, and DJX Position Limit Elimination Approval Order'');
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX
options) (``NDX Position Limit Elimination Approval Order''); 56651
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71)
(``RUT Position Limit Elimination Approval Order'').
\34\ Id.
---------------------------------------------------------------------------
Last, the Commission has expressed the belief that removing
position and exercise limits may bring additional depth and liquidity
without increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.\35\ The
Exchange's enhanced surveillance and reporting safeguards continue to
be designed to deter and detect possible manipulative behavior which
might arise from eliminating position and exercise limits.
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. On the contrary, the Exchange
believes that the proposed rule change will result in additional
opportunities to achieve the investment and trading objectives of
market participants seeking efficient trading and hedging vehicles, to
the benefit of investors, market participants, and the marketplace in
general.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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)(iii) of the Act \36\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\37\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78s(b)(3)(A)(iii).
\37\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and 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.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \38\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \39\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Exchange states that waiver of the operative delay would permit the
Exchange to immediately implement the proposed rule change to increase
the position limits as proposed herein and thereby seamlessly continue
to offer traders and the investing public the ability to use these
products as effective hedging and trading vehicles. The Exchange
further states that waiver would allow the Exchange to remain
competitive with other exchanges. The Commission believes that waiver
of the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposed rule
change as operative upon filing.\40\
---------------------------------------------------------------------------
\38\ 17 CFR 240.19b-4(f)(6).
\39\ 17 CFR 240.19b-4(f)(6)(iii).
\40\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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,
[[Page 20882]]
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-ISE-2018-39 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-ISE-2018-39. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2018-39 and should be submitted on
or before May 29, 2018.
---------------------------------------------------------------------------
\41\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09696 Filed 5-7-18; 8:45 am]
BILLING CODE 8011-01-P
