Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Exchange Rule 6.57, Risk-Weighted Assets (“RWA”) Transactions, 42725-42732 [2018-18158]
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Federal Register / Vol. 83, No. 164 / Thursday, August 23, 2018 / Notices
TPHs on all their transactions that clear
in the customer range at the OCC.
The Exchange believes the proposal to
eliminate obsolete language with respect
to past ORF rates maintains clarity in
the rules and alleviates potential
confusion, thereby protecting investors
and the public interest.
IV. Solicitation of Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Electronic Comments
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. This
proposal does not create an unnecessary
or inappropriate intra-market burden on
competition because the ORF applies to
all customer activity, thereby raising
regulatory revenue to offset regulatory
expenses. It also supplements the
regulatory revenue derived from noncustomer activity. This proposal does
not create an unnecessary or
inappropriate inter-market burden on
competition because it is a regulatory
fee that supports regulation in
furtherance of the purposes of the Act.
The Exchange is obligated to ensure that
the amount of regulatory revenue
collected from the ORF, in combination
with its other regulatory fees and fines,
does not exceed regulatory costs.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 9 and paragraph (f) of Rule
19b–4 10 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
9 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
19:43 Aug 22, 2018
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18161 Filed 8–22–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
• 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 No. SR–C2–
2018–017 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 No.
SR–C2–2018–017. 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 No.
SR–C2–2018–017, and should be
submitted on or before September 13,
2018.
[Release No. 34–83870; File No. SR–CBOE–
2018–056]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Adopt
Exchange Rule 6.57, Risk-Weighted
Assets (‘‘RWA’’) Transactions
August 17, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 8,
2018, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III 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 its
rules to adopt Rule 6.57 to facilitate the
reduction of SPX options positions
maintained by Cboe Options MarketMakers.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
1 15
10 17
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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:
11 17
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CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt Rule
6.57 to facilitate the reduction of SPX
options positions maintained by Cboe
Options Market-Makers. Specifically,
the Exchange proposes to allow Trading
Permit Holders (‘‘TPHs’’) to execute a
risk-weighted asset package (‘‘RWA
Package’’) on the trading floor provided
that the requirements set forth in Rule
6.57 are satisfied.
Market-Makers are the primary source
of liquidity for listed options; as such,
Market-Maker liquidity is critically
important to a functioning options
market. However, bank capital
regulations that govern bank-affiliated
clearing firms are negatively impacting
the ability of Market-Makers clearing
through bank-affiliated clearing firms to
provide liquidity. The Exchange
believes reducing open SPX options
positions enables Market-Makers to
continue to provide the liquidity that is
critical to the options markets because
reducing open SPX positions helps to
reduce risk-weighted assets (RWA)
attributable to SPX options positions.
The Exchange developed Rule 6.56
(Compression Forums) to facilitate the
reduction of open options positions in
SPX (and concomitant RWA). Although
the compression forums have seen
limited success in reducing open SPX
positions, the compression forums do
not provide an adequate mechanism for
Market-Makers to reduce open SPX
positions across numerous options
series in one large transaction, and the
Exchange believes the ability for
Market-Makers to efficiently and
effectively reduce open SPX positions
across numerous options series in one
large transaction will help to reduce the
risk of market dislocation, especially
during periods of increased volume and
volatility.
Compression forums are an
inadequate, inefficient mechanism to
close open SPX positions across
numerous options series in one
transaction partly because the files the
Exchange generates pursuant to Rule
6.56 only identify individual series, call
spreads, put spreads, and box spreads
for which there is offsetting interest.
This means that the SPX positions
identified by the Exchange pursuant to
Rule 6.56 have, at most, four legs (by
definition box spreads have four legs
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and put/call spreads have two legs),
whereas the proposed RWA Package
will, by definition, contain at least 50
legs, which alone demonstrates that the
proposed RWA Package is a more
efficient mechanism for closing open
SPX positions across numerous options
series in one large transaction.
Moreover, the process of executing the
offsetting positions identified by the
Exchange pursuant to Rule 6.56 is much
less efficient than the instant RWA
Package proposal. For example, under
Rule 6.56 the Exchange identifies
offsetting positions for individual firms
that submit their SPX positions in
accordance with Rule 6.56. Depending
on the size of the SPX portfolio
submitted by the firm the Exchange may
identify 100s of different boxes, call
spreads, put spreads, and individual
series. In addition, there will be
multiple different potential
counterparties for the identified
positions. In order to execute just one of
the identified positions the firm can
seek out the potential counterparty with
offsetting interest (if the firm agrees to
let their identities be unmasked
pursuant to Rule 6.56(a)(5)); represent
the individual position (whether it be
one of the boxes, call spreads, put
spreads, or individual lines); negotiate a
suitable execution price; and execute
the transaction. This process must then
be repeated over and over again in order
to reduce open positions across a large
portfolio of SPX options positions. In
contrast, as discussed in more detail
below, an RWA Package will, by
definition, represent a large portfolio of
SPX options positions in one large
transaction (at least 50 series, etc.) as
opposed to, for example, representing
an individual box spread in a
compression forum that contains four
legs.
The Exchange believes that the ability
for Market-Makers to efficiently and
effectively reduce open SPX positions
across numerous options series in one
large transaction will help to reduce the
risk of market dislocation, especially
during periods of increased volume and
volatility. The Exchange Market-Makers
will be able to continue providing
liquidity during such times (increasing
the RWA attributed to the MarketMakers) because they will know that
they will have the opportunity to
subsequently reduce their open SPX
positions (and concomitant RWA)
across numerous options series in one
large transaction. Without such a
mechanism a Market-Maker may be
forced to limit their market-making
activity during periods of high volume
and volatility in order to prevent
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significant increases in RWA attributed
to the Market-Maker, which is a
scenario that may lead to market
dislocation. In short, in order to help
reduce the risk of market dislocation the
Exchange proposes to adopt Rule 6.57 to
provide a mechanism for Market-Makers
to reduce open SPX options positions
across numerous SPX options series in
one large transaction.
The Exchange proposes to define an
RWA Package as a set of SPX options
positions with at least: 50 options series;
10 contracts per options series; and
10,000 total contracts.3 The Exchange
believes that in addition to the other
requirements of Proposed Rule 6.57
(described in detail below), requiring an
RWA Package to contain at least 50
options series; at least 10 contracts per
options series; and at least 10,000 total
contracts will help to ensure that these
transactions are executed for the
purpose of reducing RWA attributable to
open positions and will result in a
significant net reduction of RWA. The
Exchange believes limiting RWA
Packages to SPX options positions will
similarly help to ensure that these
transactions are executed for the
purpose of reducing RWA because an
SPX options contract has a large
notional value, which exacerbates the
negative impact of bank capital
regulations.
Proposed Rule 6.57(b) provides that
Trading Permit Holders (‘‘TPHs’’) may
execute an RWA Package (an ‘‘RWA
transaction’’) in the SPX crowd on the
trading floor in accordance with
paragraph (c) if: (1) The RWA
transaction is initiated for the account(s)
of a Cboe Options Market-Maker,
provided that an RWA Package
consisting of SPX options from multiple
Market-Maker accounts may not be in
separate aggregation units or otherwise
subject to information barrier or account
segregation requirements; 4 (2) the RWA
transaction results in a change in
beneficial ownership (i.e., an RWA
transaction between a Cboe Options
Market-Maker and an entity unaffiliated
with the Cboe Options Market-Maker);
and (3) the Cboe Options Market-Maker
certifies that as of the beginning of the
extended trading hours session (i.e.,
2:00 a.m. Chicago time) on the trade
date in which the RWA Package is
received by the Exchange under
3 See
Proposed Rule 6.57(a).
prohibits positions in accounts among
different trading units for which accounts are
otherwise required to be maintained separately to
be represented as an RWA Package. Various rules
(for example, Regulation SHO in certain
circumstances) require accounts to be maintained
separately, and the proposed rule change is
consistent with those rules.
4 This
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paragraph (c) the Cboe Options MarketMaker held the positions identified in
the RWA Package and that the RWA
Package represents a net reduction of
RWA attributed to the Market-Maker
based on the positions held prior to the
beginning of extended trading hours.
The purpose of this filing is to facilitate
the closing of open positions in order to
reduce RWA attributed to Market-Maker
positions, which is negatively impacting
liquidity provision by Market-Makers.
Thus, the Exchange believes it’s
reasonable to limit the types of accounts
for which an RWA transaction may be
initiated to the account(s) of MarketMakers because, as previously noted,
Market-Makers are the primary source of
liquidity in the listed options market. In
addition, the requirement that the RWA
transaction be initiated for the
‘‘account(s)’’ of a Cboe Options MarketMaker is designed to, for example, allow
a Cboe Options Market-Maker to
represent positions for the marketmaking firm’s universal account or
represent positions for individual (or
multiple) Cboe Market-Maker accounts.
In addition, the change in beneficial
ownership and certification
requirements help to ensure that RWA
transactions will reduce a MarketMaker’s RWA. With regards to the
certification requirement it’s necessary
to identify a point in time at which the
Market-Maker holds positions that are to
be closed. The Exchange proposes that
the point in time be prior to the opening
of extended trading hours (i.e., 2:00 a.m.
Chicago time) on the Exchange because
this will enable Cboe Options MarketMakers to identify their settled options
positions (i.e., positions they hold after
the close of regular trading hours and
prior to the open of extended trading
hours).
Provided that paragraph (b) is
satisfied the Exchange proposes to allow
RWA Packages to be executed in
accordance with the procedure set forth
in paragraph (c). Proposed paragraph (c)
provides that: (1) After the opening of
regular trading hours and prior to 10:00
a.m. Chicago time, the Cboe Options
Market-Maker (or broker) must submit
the RWA Package to the Exchange in a
form and manner prescribed by the
Exchange. The submission must
contain: (i) A list of individual SPX
options series and the size of each
options series; (ii) the contact
information for the individual that will
represent the position on the trading
floor; and (iii) if prior to submitting an
RWA Package to the Exchange the
Market-Maker (or broker) has received a
bid or offer for the RWA Package, the
proposed net debit or credit price for the
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RWA Package.5 The Exchange believes
requiring RWA Packages to be received
by the Exchange after the opening of
regular trading hours and prior to 10:00
a.m. Chicago time will help to ensure
that RWA transactions can be executed
during regular trading hours, given that
proposed requirement of a two hour
request for quotes (‘‘RFQ’’) period,
which is described more fully below. In
addition, requiring the RWA Package
submission to contain a list of
individual SPX options series, the size
of each options series, and the contact
information for the individual
representing the RWA Package will
enable market participants to bid/offer
for the RWA Package on the trading
floor.
Upon the Exchange’s receipt of the
RWA Package, the Exchange will (i)
electronically notify TPHs
(electronically and via trading floor
loudspeaker) as soon as practicable of
the identity of the individual
representing the RWA Package in the
SPX trading crowd, which can be either
a Market-Maker or Floor Broker,
provided the individuals are available to
accept bids/offers for the RWA Package;
(ii) post in an electronic format on a
TPH-accessible site the list of individual
components of the RWA Package, the
net Package price, and the contact
information for the individual
representing the RWA Package on the
floor, which post will not include the
identity of the Market-Maker for whom
the RWA transaction is initiated (unless
the Market-Maker is representing the
RWA Package on the trading floor); and
(iii) notify TPHs that the RWA Package
has been posted and the time at which
the two-hour request-for-quote (‘‘RFQ’’)
period concludes.6 The Exchange
believes providing the RWA Package on
a TPH accessible website will give TPHs
sufficient information to price RWA
packages. In addition, identifying the
individual representing the RWA
Package on the trading floor and
providing a two hour RFQ period will
enable TPHs to respond to RWA
Packages. The Exchange believes
masking the identity of the MarketMaker for whom the RWA transaction is
initiated (unless the Market-Maker is
representing the RWA Package on the
trading floor) will encourage MarketMakers to initiate RWA transactions.
The Exchange proposes that the twohour RFQ Period commence upon on
[sic] the Exchange’s notification to the
SPX trading crowd of the identity of the
individual representing the RWA
5 See
6 See
PO 00000
Proposed Rule 6.57(c)(1).
Proposed Rule 6.57(c)(2).
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42727
Package on the floor.7 The Exchange
believes the two-hour period is
sufficient to allow TPHs to review,
price, and bid/offer for the RWA
Package because the RWA Package will
be available in an electronic format on
a TPH-accessible website, which
enables TPHs to more readily examine
and price the positions in the RWA
Package. Furthermore, the Exchange
understands that firms have access to
electronic systems that will aid them in
evaluating the SPX positions contained
in an RWA Package and to make a
reasonable assessment of the price at
which the firm is will to execute the
RWA Package. The Exchange also
proposes that upon the conclusion of
the RFQ period, the individual
representing the RWA Package in the
SPX trading crowd may (but is not
required to) accept a bid or offer for the
RWA Package, and the RFQ response
that represents the best bid or offer on
a net debit or credit basis for the RWA
Package has priority. The Exchange also
proposes in the event equal bids or
offers are received, the first RFQ
response at the best bid or offer on a net
debit or credit basis for the RWA
Package has priority.8 The Exchange
notes that the contemplated priority is
simply price/time priority, which is a
common priority mechanism in the
options industry. For example, Rule
6.45(i)(A) describes price-time priority
in the context of resting orders and
quotes in the electronic book. The best
bid/offer for the RWA Package during
the two hour RFQ period has priority
over inferior prices, and if two bid/
offers are made at the same price, the
bid/offer that is made first then has
priority—all of which is consistent with
the price-time priority described in Rule
6.45(i)(A).9 The Exchange notes that an
individual responding to an RWA
Package with a better bid/offer than a
previous bid/offer is necessarily
improving the bid/offer price for at least
part of the RWA Package (i.e., at least
one individual options series in the
RWA Package) because an improved net
debit/credit price necessarily means at
least one individual options series has
received a better price.
The Exchange also notes that an RWA
Package is similar to a complex order in
that a market participant cannot seek to
trade against only certain components of
the RWA Package (e.g., respond with a
7 See
Proposed Rule 6.57(c)(3).
id.
9 The Exchange notes that if the RWA Package
submission contains a bid/offer as contemplated by
paragraph (c) to Rule 6.57 and a matching bid/off
is made for the RWA Package in the SPX trading
crowd, the bid/offer contained in the original
submission has priority.
8 See
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bid/offer for half of the options series
instead of all of the options series in the
RWA Package). Complex orders
similarly cannot be split up into
individual options series by an
individual responding to a complex
order. For example, if a complex order
has three legs (i.e., three separate series),
a market participant responding to the
complex order cannot respond with a
bid/offer for leg #1, but not legs #2 or
#3. Instead, the complex order is bid/
offered upon based on a net debit/credit
basis for the complex order as is
contemplated for RWA Packages. For
example, if an RWA Package is for 50
legs, a market participant responding to
the RWA Package cannot respond with
a bid/offer for legs #1 through #25, but
not legs #26 through #50.
In addition, like complex orders,
market participants may bid/offer for an
RWA Package in whole or in a
permissible ratio if the package can be
divided into a proportional share. For
example, if a complex order consisting
of one leg for two contracts and another
leg for two contracts is represented on
the floor, a counterparty may bid/offer
for 100% of the order (i.e., two contracts
for each leg) or the counterparty may
bid/offer for a proportional share of the
complex order in the 1:1 ratio of the
order (i.e., one contract for each leg in
this example). Similarly, if an RWA
Package has 50 SPX options series and
200 contracts per options series, a
market participant may bid/offer for 100
contracts per leg or some other
proportional share of the RWA Package
in the ratio of the package. However, as
with complex orders, if the RWA
Package cannot be divided into a
proportional share, market participants
must bid/offer for the entire RWA
Package. For example, if a complex
order consists of one leg for one contract
and another leg for two contracts, the
complex order cannot be proportionally
subdivided to permit a partial trade in
the ratio of the order (i.e. 1:2); thus,
market participants must bid/offer for
the full size of the complex order (i.e.,
one contract on leg #1 and two contracts
on leg #2). With regards to RWA
Packages, if, for example, one leg is for
11 contracts and 49 other legs are for
200 contracts, the leg for 11 contracts
cannot be proportionally subdivided to
permit a partial trade in the ratio of the
order (i.e., 11:200); thus, market
participants would be required to bid/
offer for the entire RWA package in this
example.
As previously noted, the Exchange
believes that providing a two-hour RFQ
period will enable TPHs to respond to
RWA Packages. In addition, the
Exchange believes it’s appropriate for
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the best bid or offer made in response
to the representation of an RWA
Package to have priority; however,
recognizing that the best bid or offer
may not satisfy the initiator of the RWA
transaction, the Exchange believes its
appropriate to explicitly provide in
subparagraph (3) that individuals
representing RWA Packages do not have
to accept a bid or offer at the conclusion
of the RFQ period, which simply makes
it clear that the responses received
during an RFQ period are indeed quotes
with which the individual representing
the RWA Package may execute the RWA
Package. In addition, the Exchange
believes it’s important not to obligate
individuals representing RWA Packages
to split executions among TPHs that bid
or offer at the same price; rather, the
Exchange believes the proposal will
incentivize TPHs to provide bids or
offers that better existing bids or offers
because the first in time best bid or offer
will have priority. As previously noted,
this is consistent with the price-time
priority that is common in the options
industry.10
For example, suppose a market
participant submits to the Exchange an
RWA Package to buy for 50 SPX series
and 200 contracts on each leg, which
the Exchange announces to the trading
floor and posts to the website. During
the RFQ Period, which lasts from 1:00
p.m. to 3:00 p.m., the following offers to
buy the RWA Package are represented
on the floor:
• 1:10 p.m.: Floor Broker A offers to
sell 100 contracts on each leg for a total
of $50,000.
• 1:15 p.m.: Floor Broker B offers to
sell 100 contracts on each leg for a total
of $49,000.
• 2:00 p.m.: Floor Broker C offers to
sell 100 contracts on each leg for a total
of $50,000.
Pursuant to price-time priority, Floor
Broker B made the best offer, and will
trade 100 contracts on each leg with the
RWA Package for $49,000, leaving 100
contracts on each leg remaining in the
RWA Package. Floor Brokers A and C
offered the same price for the same
amount. Pursuant to price-time priority
Floor Broker A made its offer first, and
thus will trade 100 contracts on each leg
with the remaining portion of the RWA
Package for $50,000. Floor Broker C will
not participate in the trade.
Furthermore, the RWA Package is
considered executed (and a contract
formed) upon the acceptance of a bid or
offer by the individual representing the
RWA Package following the conclusion
of the RFQ Period. The Exchange
10 Cboe Options Rule 6.45 permits price-time
priority in certain classes.
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proposes that if the individual
representing the RWA Package accepts a
bid or offer for the RWA Package, the
individual representing the RWA
Package on the trading floor must, prior
to the close of regular trading hours,
cause a report to be submitted to the
Exchange in a form and manner
prescribed by the Exchange which sets
forth the time of the execution of the
RWA Package, the net execution price
for the RWA Package, and the execution
prices for the individual components of
the RWA Package.11 The Exchange
believes the reporting requirements will
enable the Exchange to maintain an
adequate audit trail and, if necessary,
review individual RWA transactions.
Additionally, the Exchange proposes
to adopt Interpretation and Policy .01 to
provide that to the extent applicable, all
other Rules of the Exchange, including
Rule 6.9(e), apply to the procedure set
forth in proposed Rule 6.57. The
Exchange also proposes to provide in
Interpretation and Policy .01 that the
following Rules are either superseded
by proposed Rule 6.57 or do not apply
to the above procedures: 6.9(a)
through(d) and (f), 6.41, 6.44, 6.45, 6.47,
and 6.74) [sic] and that there may be
other rules of the Exchange that do not,
by their terms, apply to the transfer
procedure set forth in this Rule 6.57. As
previously noted, proposed Rule 6.57 is
a special procedure designed to provide
a mechanism which allows Cboe
Market-Makers to reduce open SPX
options positions across numerous
options series in one large transaction,
and in order to give the effect to the
procedures set forth in Rule 6.57 it is
necessary for Rule 6.57 to supersede
rules that provide for potentially
conflicting procedures (e.g., Rules 6.9(a)
through (d) and (f), 6.41, 6.44, 6.45,
6.47, and 6.74). The Exchange notes that
this is patterned from Rule 6.49A,
which also provided that Rule 6.49A
supersede Rules 6.41, 6.44, 6.45, 6.47,
and 6.74.
Specifically, the Exchange proposes to
explicitly provide that Rule 6.9(e)
applies to the procedures set forth in
Rule 6.57. This reference to Rule 6.9 is
patterned from Rule 6.49A, which
explicitly referenced Rule 6.9 in its
entirety as applying to Rule 6.49A.
Contrary to Rule 6.49A, however, the
Exchange proposes that only paragraph
(e) of Rule 6.9 apply to Rule 6.57 instead
of Rule 6.9 in its entirety. Rule 6.9(e)
governs trading based on knowledge of
imminent undisclosed solicited
transactions, and the Exchange believes
it’s important for such rules to apply to
Rule 6.57. The Exchange believes Rule
11 See
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Proposed Rule 6.57(c)(4).
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6.9(a) through (d) and (f) are sufficiently
superseded by the procedures set forth
in Rule 6.57(c). Specifically, Rule 6.9(a)
through (d) sets forth the priority for
several different scenarios in which an
order and solicited order on the
opposite side of that order may be
represented on the floor, and the
priority that will apply in each scenario.
Rule 6.9(a) governs solicited
transactions involving a disclosed
original order and matching solicited
order that improves the market; Rule
6.9(b) governs solicited transactions
involving a disclosed original order that
is later modified to meet a solicited
order improving the market; Rule 6.9(c)
governs solicited transactions involving
disclosed original order that is later
modified to meet a solicited order not
improving the market; and Rule 6.9(d)
involves solicited transactions involving
an undisclosed original order.
Additionally, Rule 6.9(f), which requires
solicited orders to be marked, would not
be necessary, as it would be known that
an order was solicited for an RWA
Package at the time they were provided
to the Exchange in accordance with
proposed Rule 6.57.
Pursuant to proposed Rule 6.57, an
RWA Package, including any solicited
orders to trade against the RWA
Package, must be represented in a single
way (by notification to the Exchange,
which then announces the package to
the trading floor). As a result, an RWA
Package and corresponding solicited
order could never be undisclosed.
Additionally, pursuant to the proposed
process, if the Market-Maker receives a
bid or offer for the RWA Package prior
to submitting it to the Exchange (as it
would if it had a solicited order), the
proposed price must be disclosed. As a
result, for every RWA Package with a
solicited order, the Exchange will
announce them and the proposed price
to the crowd at the same time, and thus
the solicitation would have occurred
before the RWA Package was disclosed
to the crowd. Therefore, Rule 6.9(a)
would not apply, as that paragraph
covers a situation in which an order is
disclosed prior to solicitation. There is
also no method in the proposed process
for modifying the RWA Package or any
solicited order. Rule 6.9(b) and (c)
address situations in which a
represented order is later modified to
meet a solicited order, and thus would
not apply to RWA Packages. Lastly, Rule
6.9(f) is inapplicable to Rule 6.57
because following the procedures set
forth in Rule 6.57 will provide all
necessary information for Exchange
purposes.
Proposed Rule 6.57(c) also sets forth
the specific priority of RWA
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Jkt 244001
Transactions, and thus no other priority
rules would apply. The Exchange
believes it is consistent with Exchange
Act and helps to remove impediments
to and perfect the mechanism of a free
and open market and, in general, helps
protect investors and the public interest
to explicitly identify the priority
applicable to RWA Packages in Rule
6.57(c) because it will help to avoid
confusion as to the priority applicable to
RWA Packages. More importantly, the
priority set forth in Rule 6.57(c) is
consistent with Exchange Act because
the proposed priority is simply pricetime priority, which is common in the
options industry.
With regards to the instant proposal
Rule 6.41—Meaning of Premium Bids
and Offers—is inapplicable because
Rule 6.41 is already inapplicable to
index options such as SPX options.
Thus, an RWA Package, which by
definition can only contain SPX
options, will not be subject to Rule 6.41.
The Exchange believes it is consistent
with Exchange Act and helps to remove
impediments to and perfect the
mechanism of a free and open market
and, in general, helps protect investors
and the public interest to explicitly
provide that Rule 6.57 supersedes Rule
6.41 to avoid any possible confusion
regarding the applicability of Rule 6.41
to RWA Package execution.12
In addition, Rule 6.44—Bids and
Offers in Relation to Units of Trading—
is inapplicable to the instant proposal.
Rule 6.44 sets forth the meaning of bids
and offers for one contract where RWA
Packages must be for more than one
contract. The Exchange believes it is
consistent with Exchange Act and helps
to remove impediments to and perfect
the mechanism of a free and open
market and, in general, helps protect
investors and the public interest to
explicitly provide that Rule 6.57
supersedes Rule 6.44 to avoid any
possible confusion regarding the
applicability of Rule 6.44 to RWA
Package execution.
Furthermore, Rule 6.45—Order and
Quote Priority and Allocation; Rule
6.47—Priority on Split-Price
Transactions Occurring in Open Outcry;
and Rule 6.74—Crossing Orders—are
superseded by Rule 6.57. Rules 6.45,
6.47, and 6.74 set forth priority in
various scenarios, which is superseded
by Rule 6.57 because the priority of bids
and offers for RWA Packages is set forth
in Rule 6.57(c)(3). In the same manner
that Rule 6.47 describes the priority for
a particular scenario (i.e., split-price)
instead of describing that priority in
12 The Exchange notes that Rule 24.8—Meaning of
Premium Bids and Offers—applies to index options.
PO 00000
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42729
Rule 6.45, the Exchange believes it best
to describe priority for this particular
scenario (i.e., RWA Packages) in a
separate rule. Additionally, as
previously noted, the priority set forth
in Rule 6.57 is based on price-time
priority, which is a longstanding
priority method in the options industry.
Moreover, the Exchange believes it is
consistent with Exchange Act for the
priority of bids/offers in the context of
RWA Packages to be based on price-time
priority as price-time priority is a
common standard in the options
industry.
Importantly, it is critical that RWA
Packages be executed without regard to
the specific priority set forth in Rule
6.45, 6.47, or 6.74. RWA Packages are,
by design, very large and very
complicated orders that are specifically
intended to help SPX Market-Makers
reduce the RWA associated with open
SPX positions. Rules 6.45, 6.47, and
6.74, including provisions in those rules
that require orders to cede priority to
individual legs in the electronic book,
are not designed to accommodate the
execution of such large, complicated,
uniquely purposed orders. Thus, the
Exchange believes the significantly large
size and complexity of RWA packages
make it necessary to deviate from Rules
6.45, 6.47, 6.74.
Additionally, the limited purpose of
RWA Packages and the temporary
nature of the proposed rule further
support the need to permit executions of
RWA Packages without regard to the
priority in current rules. As discussed
above, the purpose of RWA Packages is
to reduce the risk-weighted assets
attributable to Market-Makers’ SPX
options positions. Requiring trades
against the leg markets may interfere
with the desired reduction in RWA
associated with the package, and may
cause execution of the package to be less
efficient. Efficient reductions in RWA
pursuant to the proposed rule change
may free up capital, which will to
enable Market-Makers to continue to
provide liquidity to the SPX market,
which liquidity benefits all market
participants. The Exchange believes the
narrow scope of the proposed rule
change and the limited, beneficial
purpose of RWA Packages make
allowing RWA Packages to execute
without interacting with pre-existing
interest on the electronic book
appropriate and important to support
the provision of liquidity in the SPX
market.13
13 S&P 500 Option Variance Basket Trades, a
particular basket of SPX options with a limited
purpose, may execute without interacting with pre-
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Moreover, the Exchange expects many
potential counterparties to be solicited
prior to the RWA Package being sent to
the Exchange or announced in the SPX
trading crowd. These solicitations will
likely result in a net package price at
which the counterparty is willing to
execute the RWA Package. If parties
representing RWA Packages were
required to cede priority to individual
legs in the electronic order book many
RWA Packages would likely go
unexecuted as the execution of one leg
of an RWA Package would disrupt the
net execution price and the weighting/
risk profile of the RWA package.
Additionally, the size and complexity of
RWA Packages make it functionally
difficult for RWA Packages to interact
with the electronic book under normal
circumstances. To the extent one leg of
an RWA Package could execute with an
order in the electronic book, the
remaining orders on the electronic book
(complex order book or simple order
book) are unlikely to have the necessary
size and depth across a large portfolio
of options to satisfy the terms of an
RWA Package. Thus, requiring RWA
Packages to follow the priority in Rule
6.45, 6.47, or 6.74 would effectively
prevent RWA Packages from being
executed.
The Exchange believes it is consistent
with Exchange Act and helps to remove
impediments to and perfect the
mechanism of a free and open market
and, in general, helps protect investors
and the public interest to deviate from
existing priority rules because doing so
will allow RWA Packages to be
executed, which, in turn, will help
reduce the RWA associated with a
Market-Maker’s SPX Position, and, in
turn, will reduce the risk of market
dislocation, especially during periods of
increased volume and volatility [sic].
In addition, the Exchange proposes to
adopt Interpretation and Policy .02 to
provide that nothing in paragraph (a) of
Rule 6.57 prevents a Market-Maker from
executing transactions (opening or
closing) during the RFQ period in the
normal operation of the Market-Maker’s
business. Market-Makers have
affirmative obligations, and the
Exchange believes the adoption of
Interpretation and Policy .02 helps
ensure that Rule 6.57 does not prevent
Cboe Options Market-Makers from
satisfying their affirmative obligations
by, for example, buying and selling
options series during the RFQ period in
the normal course of their operations.
Finally, the Exchange proposes to
adopt Interpretation and Policy .03 to
implement Rule 6.57 for a limited term
ending two years from the approval date
of this rule filing.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.14 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 15 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 16 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule will help facilitate the
reduction of open SPX options positions
(and concomitant RWA), which helps to
protect investors and the public interest
by enabling Market-Makers to continue
to provide liquidity that is critical to the
SPX options markets. Although the
Exchange is seeking to limit RWA
transactions to those initiated by Cboe
Options Market-Makers, the proposal is
not designed to permit discrimination
between customers, issuers, brokers, or
dealers; rather, the proposal seeks to
alleviate the negative impact of bank
capital requirements on the primary
liquidity providers in the listed options
market (i.e., Market-Makers), who are
disproportionately impacted by bank
capital requirements governing bankaffiliated clearing firms. The Exchange
believes the ability for Market-Makers to
efficiently and effectively reduce open
positions across numerous options
series in one large transaction will help
to reduce the risk of market dislocation,
especially during periods of increased
volume and volatility. Market-Makers
will be able to continue providing
liquidity during such times (increasing
the RWA attributed to the Market14 15
existing interest on the electronic book. See Rule
6.53B(c).
VerDate Sep<11>2014
19:43 Aug 22, 2018
Jkt 244001
15 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
16 Id.
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
Makers) because they will know that
they can subsequently reduce their open
positions (and concomitant RWA)
across numerous options series in one
large transaction.
Furthermore, the Rule 6.57 is
patterned on Rule 6.49A, which sets
forth similar procedures for on-floor
transfers. In addition, generally, Rule
6.57 is an exception to various Exchange
trading rules because RWA Packages are
designed to carry out the important
purpose of reducing RWA, and the
construction and procedures set forth in
Rule 6.57 are necessary to carry out that
purpose. RWA Packages are large in size
(at least 10,000 options) and broad in
construction (at least 50 separate
options series) and must be closing
transactions because the purpose of
RWA Packages is to significantly reduce
RWA associated with Market-Maker
positions to enable Market-Makers to
continue to provide critical liquidity to
SPX options. In order to functionally
execute such a large portfolio of SPX
options the Exchange believes it is
necessary for the procedures to deviate
from certain current exchange trading
rules. The Exchange believes the narrow
scope of the proposed rule change and
the limited, beneficial purpose of RWA
Packages make allowing RWA Packages
to execute without interacting with preexisting interest on the electronic book
appropriate and important to support
the provision of liquidity in the SPX
market.17 Specifically, the Exchange
believes it is necessary and proper for
interpretation and policy .01 to specify
that Rules 6.9(a) through (d) and (f),
6.41, 6.44, 6.45, 6.47, and 6.74 are either
supersede [sic] by, or do not apply to,
Rule 6.57.
As previously noted above, the
proposed procedure for RWA Packages
sets forth the specific manner in which
RWA Packages and any solicited orders
must be represented, and thus the
situations described in Rule 6.9(a)
through (d) and (f) would never occur.
The proposed rule makes clear that
these provisions are superseded by the
proposed rule.
In addition, Rule 6.41 is inapplicable
to RWA Packages because Rule 6.41 is
inapplicable to index options such as
SPX options. Thus, an RWA Package,
which by definition can only contain
SPX options, will not be subject to Rule
6.41. Furthermore, Rule 6.44 sets forth
the meaning of bids and offers for one
contract where RWA Packages must be
for more than one contract; thus, Rule
17 S&P 500 Option Variance Basket Trades, a
particular basket of SPX options with a limited
purpose, may execute without interacting with preexisting interest on the electronic book. See Rule
6.53B(c).
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6.44 is similarly inapplicable to RWA
Packages. The Exchange believes it is
consistent with Exchange Act and helps
to remove impediments to and perfect
the mechanism of a free and open
market and, in general, helps protect
investors and the public interest to
explicitly provide that Rule 6.57
supersedes Ruls [sic] 6.41 and 6.44 to
avoid any possible confusion regarding
the applicability of Rules 6.41 and 6.44
to RWA Package execution.
In particular, the Exchange believes it
is critical that RWA Packages be
executed without regard to the specific
priority set forth in Rule 6.45, 6.47, or
6.74 because the size of the RWA
Packages (at least 50 SPX options series,
10 options per series, and at least 10,000
options) makes it functionally
impossible for RWA Packages to interact
with the electronic book as orders on
the electronic book (complex order book
or simple order book) do not have the
necessary size and depth across a large
portfolio of options to satisfy the terms
of an RWA Package. Thus, requiring
RWA Packages to follow the priority in
Rule 6.45, 6.47, or 6.74 would prevent
RWA Packages from being executed.
Given the limited purpose and
significant size and complexity of RWA
Packages, the Exchange believes it is
consistent with Exchange Act and helps
remove impediments to and perfect the
mechanism of a free and open market
and, in general, helps protect investors
and the public interest to permit RWA
transactions to deviate from existing
priority rules. This will permit [sic]
because doing so will allow RWA
Packages to be executed in an efficient
manner, which, in turn, will help
reduce the RWA associated with a
Market-Maker’s SPX positions, and, in
turn, will reduce the risk of market
dislocation, especially during periods of
increased volume and volatility.
To the extent Cboe Market-Makers
cannot reduce options positions in an
efficient and effective manner their
ability to continue to provide liquidity
may be impaired. As noted, the
procedures set forth in Rule 6.57 are
similar to the procedures set forth in
Rule 6.49A. The Exchange believes the
procedures set forth in Rule 6.57
improve on the procedures set forth in
Rule 6.49A as Rule 6.57, among other
things, provides for the publication of
RWA Packages in an electronic format,
which allows for a fair process by which
TPHs may review, price, and bid/offer
for an RWA Package.
In addition, the Exchange believes
proposed Interpretation and Policy .02,
which provides that nothing in
paragraph (a) of Rule 6.57 prevents a
Market-Maker from executing
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19:43 Aug 22, 2018
Jkt 244001
42731
transactions (opening or closing) during
the RFQ period in the normal operation
of the Market-Maker’s business, is
consistent with Exchange Act and helps
to remove impediments to and perfect
the mechanism of a free and open
market and, in general, helps protect
investors and the public interest by
helping to ensure Market-Makers
continue to perform their affirmative
obligations during the trading day.
Finally, the Exchange believes
proposed Interpretation and Policy .03,
which indicates that Rule 6.57 is to be
adopted for a limited term ending two
years from the approval date of this rule
filing, is consistent with Exchange Act
and helps to remove impediments to
and perfect the mechanism of a free and
open market and, in general, helps
protect investors and the public interest
by allowing the Exchange to evaluate at
the end of the two-year period whether
Rule 6.57 continues to be a useful tool
to reduce RWA associated with SPX
options positions.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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:
Cboe Options 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 Act. Although the
Exchange is seeking to limit RWA
transactions to those initiated by Cboe
Options Market-Makers, the Exchange
does not believe the proposed rule
change will impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act because the
proposal seeks to alleviate the negative
impact of bank capital requirements on
the primary liquidity providers in the
listed options market (i.e., MarketMakers), who are disproportionately
impacted by bank capital requirements
governing bank-affiliated clearing firms.
Use of the proposed process is
voluntary, and all Market-Makers with
SPX positions may engage in RWA
transactions. The proposed rule change
proposes a process that may be carried
out only [sic] the Exchange’s trading
floor in a product that trades solely on
the Exchange. RWA Transactions have a
limited purpose, which is to reduce
RWA attributable to Market-Makers’
SPX open positions in order to free up
capital and enable Market-Makers to
continue to provide the liquidity to the
SPX market, which liquidity benefits all
market participants. This is not
intended to be a competitive trading
tool.
PO 00000
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Sfmt 4703
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2018–056 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2018–056. 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
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Federal Register / Vol. 83, No. 164 / Thursday, August 23, 2018 / Notices
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–CBOE–2018–056 and
should be submitted on or before
September 7, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–18158 Filed 8–22–18; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–83882; File No. SR–FINRA–
2018–032]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 6710 To Modify the
Dissemination Protocols for Agency
Debt Securities
August 17, 2018.
daltland on DSKBBV9HB2PROD with NOTICES
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 August
16, 2018, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
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 FINRA. 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
FINRA is proposing to amend FINRA
Rule 6710 to modify the dissemination
18 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
19:43 Aug 22, 2018
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
VerDate Sep<11>2014
protocols with respect to Agency Debt
Securities.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
Jkt 244001
FINRA requires members to report to
the Trade Reporting and Compliance
Engine (‘‘TRACE’’) transactions in
TRACE-Eligible Securities,3 including
securities that meet the definition of
‘‘Agency Debt Security.’’ 4 FINRA
disseminates transaction information on
Agency Debt Securities and displays
either the actual size (volume) of the
transaction or a capped amount,
depending on whether the security is
rated as Investment Grade,5 Non3 Rule 6710 generally defines a ‘‘TRACE-Eligible
Security’’ as: A debt security that is United States
(‘‘U.S.’’) dollar-denominated and is: (1) Issued by a
U.S. or foreign private issuer, and, if a ‘‘restricted
security’’ as defined in Securities Act Rule
144(a)(3), sold pursuant to Securities Act Rule
144A; (2) issued or guaranteed by an Agency as
defined in Rule 6710(k) or a Government-Sponsored
Enterprise as defined in Rule 6710(n); or (3) a U.S.
Treasury Security as defined in Rule 6710(p).
‘‘TRACE-Eligible Security’’ does not include a debt
security that is issued by a foreign sovereign or a
Money Market Instrument as defined in Rule
6710(o).
4 ‘‘Agency Debt Security’’ generally includes a
debt security (i) issued or guaranteed by an Agency
as defined in Rule 6710(k); (ii) issued or guaranteed
by a Government-Sponsored Enterprise (‘‘GSE’’) as
defined in Rule 6710(n); or (iii) issued by a trust
or other entity that was established or sponsored by
a GSE for the purpose of issuing debt securities,
where such enterprise provides collateral to the
trust or other entity or retains a material net
economic interest in the reference tranches
associated with the securities issued by the trust or
other entity. Rule 6710(n) provides that
‘‘Government-Sponsored Enterprise’’ has the same
meaning as defined in 2 U.S.C. 622(8).
5 Rule 6710 provides that ‘‘Investment Grade’’
means ‘‘a TRACE-Eligible Security that, if rated by
only one nationally recognized statistical rating
organization (‘‘NRSRO’’), is rated in one of the four
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
Investment Grade,6 or is unrated. For
transactions in Agency Debt Securities
that are either Investment Grade or
unrated, FINRA disseminates the actual
size of the trade for transactions less
than or equal to $5 million in par value
traded, thus providing actual
transaction size up to $5 million, and
disseminates ‘‘$5MM+’’ for trades
exceeding $5 million in par value
traded.7 For transactions in Agency Debt
Securities that are Non-Investment
Grade, FINRA disseminates the actual
size of the trade for transactions less
than or equal to $1 million in par value,
and disseminates ‘‘1MM+’’ for trades
exceeding $1 million in par value
traded.8
FINRA is proposing to apply a $5
million dissemination cap to all Agency
Debt Securities, regardless of the rating
assigned to the security. When adopting
the original dissemination caps for
Agency Debt Securities, FINRA believed
that unrated Agency Debt Securities
should default to the $5 million
dissemination cap due to factors such as
that they trade more consistently with
Investment Grade securities that are
subject to the $5 million dissemination
cap. While Non-Investment Grade
Agency Debt Securities have been
disseminated with the $1 million
dissemination cap, FINRA is not aware
of the existence of any Non-Investment
Grade Agency Debt Securities other than
credit risk transfer securities (‘‘CRTs’’),
a type of Agency Debt Security issued
by Fannie Mae (‘‘Fannie’’) and Freddie
Mac (‘‘Freddie’’). Based on experience
gained with CRTs and in consultation
with Fannie and Freddie, FINRA
highest generic rating categories; or if rated by more
than one NRSRO, is rated in one of the four highest
generic rating categories by all or a majority of such
NRSROs; provided that if the NRSROs assign
ratings that are evenly divided between (i) the four
highest generic ratings and (ii) ratings lower than
the four highest generic ratings, FINRA will classify
the TRACE-Eligible Security as Non-Investment
Grade for purposes of TRACE. If a TRACE-Eligible
Security is unrated, for purposes of TRACE, FINRA
may classify the TRACE-Eligible Security as an
Investment Grade security. FINRA will classify an
unrated Agency Debt Security as defined in [Rule
6710(l)] as an Investment Grade security for
purposes of the dissemination of transaction
volume.’’ See FINRA Rule 6710(h).
6 Rule 6710 provides that ‘‘Non-Investment
Grade’’ means ‘‘a TRACE-Eligible Security that, if
rated by only one NRSRO, is rated lower than one
of the four highest generic rating categories; or if
rated by more than one NRSRO, is rated lower than
one of the four highest generic rating categories by
all or a majority of such NRSROs. Except as
provided in paragraph (h), if a TRACE-Eligible
Security is unrated, FINRA may classify the
TRACE-Eligible Security as a Non-Investment Grade
security.’’ See FINRA Rule 6710(i).
7 See Securities Exchange Act Release No. 59733
(April 8, 2009), 74 FR 17709 (April 16, 2009)
(Notice of Filing of File No. SR–FINRA–2009–010).
8 See supra note 7.
E:\FR\FM\23AUN1.SGM
23AUN1
]]>Agencies
[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42725-42732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18158]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83870; File No. SR-CBOE-2018-056]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Exchange Rule 6.57, Risk-
Weighted Assets (``RWA'') Transactions
August 17, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 8, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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 its rules to adopt Rule 6.57 to
facilitate the reduction of SPX options positions maintained by Cboe
Options Market-Makers.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set
[[Page 42726]]
forth in sections A, B, and C below, of the most significant aspects of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Rule 6.57 to facilitate the
reduction of SPX options positions maintained by Cboe Options Market-
Makers. Specifically, the Exchange proposes to allow Trading Permit
Holders (``TPHs'') to execute a risk-weighted asset package (``RWA
Package'') on the trading floor provided that the requirements set
forth in Rule 6.57 are satisfied.
Market-Makers are the primary source of liquidity for listed
options; as such, Market-Maker liquidity is critically important to a
functioning options market. However, bank capital regulations that
govern bank-affiliated clearing firms are negatively impacting the
ability of Market-Makers clearing through bank-affiliated clearing
firms to provide liquidity. The Exchange believes reducing open SPX
options positions enables Market-Makers to continue to provide the
liquidity that is critical to the options markets because reducing open
SPX positions helps to reduce risk-weighted assets (RWA) attributable
to SPX options positions. The Exchange developed Rule 6.56 (Compression
Forums) to facilitate the reduction of open options positions in SPX
(and concomitant RWA). Although the compression forums have seen
limited success in reducing open SPX positions, the compression forums
do not provide an adequate mechanism for Market-Makers to reduce open
SPX positions across numerous options series in one large transaction,
and the Exchange believes the ability for Market-Makers to efficiently
and effectively reduce open SPX positions across numerous options
series in one large transaction will help to reduce the risk of market
dislocation, especially during periods of increased volume and
volatility.
Compression forums are an inadequate, inefficient mechanism to
close open SPX positions across numerous options series in one
transaction partly because the files the Exchange generates pursuant to
Rule 6.56 only identify individual series, call spreads, put spreads,
and box spreads for which there is offsetting interest. This means that
the SPX positions identified by the Exchange pursuant to Rule 6.56
have, at most, four legs (by definition box spreads have four legs and
put/call spreads have two legs), whereas the proposed RWA Package will,
by definition, contain at least 50 legs, which alone demonstrates that
the proposed RWA Package is a more efficient mechanism for closing open
SPX positions across numerous options series in one large transaction.
Moreover, the process of executing the offsetting positions identified
by the Exchange pursuant to Rule 6.56 is much less efficient than the
instant RWA Package proposal. For example, under Rule 6.56 the Exchange
identifies offsetting positions for individual firms that submit their
SPX positions in accordance with Rule 6.56. Depending on the size of
the SPX portfolio submitted by the firm the Exchange may identify 100s
of different boxes, call spreads, put spreads, and individual series.
In addition, there will be multiple different potential counterparties
for the identified positions. In order to execute just one of the
identified positions the firm can seek out the potential counterparty
with offsetting interest (if the firm agrees to let their identities be
unmasked pursuant to Rule 6.56(a)(5)); represent the individual
position (whether it be one of the boxes, call spreads, put spreads, or
individual lines); negotiate a suitable execution price; and execute
the transaction. This process must then be repeated over and over again
in order to reduce open positions across a large portfolio of SPX
options positions. In contrast, as discussed in more detail below, an
RWA Package will, by definition, represent a large portfolio of SPX
options positions in one large transaction (at least 50 series, etc.)
as opposed to, for example, representing an individual box spread in a
compression forum that contains four legs.
The Exchange believes that the ability for Market-Makers to
efficiently and effectively reduce open SPX positions across numerous
options series in one large transaction will help to reduce the risk of
market dislocation, especially during periods of increased volume and
volatility. The Exchange Market-Makers will be able to continue
providing liquidity during such times (increasing the RWA attributed to
the Market-Makers) because they will know that they will have the
opportunity to subsequently reduce their open SPX positions (and
concomitant RWA) across numerous options series in one large
transaction. Without such a mechanism a Market-Maker may be forced to
limit their market-making activity during periods of high volume and
volatility in order to prevent significant increases in RWA attributed
to the Market-Maker, which is a scenario that may lead to market
dislocation. In short, in order to help reduce the risk of market
dislocation the Exchange proposes to adopt Rule 6.57 to provide a
mechanism for Market-Makers to reduce open SPX options positions across
numerous SPX options series in one large transaction.
The Exchange proposes to define an RWA Package as a set of SPX
options positions with at least: 50 options series; 10 contracts per
options series; and 10,000 total contracts.\3\ The Exchange believes
that in addition to the other requirements of Proposed Rule 6.57
(described in detail below), requiring an RWA Package to contain at
least 50 options series; at least 10 contracts per options series; and
at least 10,000 total contracts will help to ensure that these
transactions are executed for the purpose of reducing RWA attributable
to open positions and will result in a significant net reduction of
RWA. The Exchange believes limiting RWA Packages to SPX options
positions will similarly help to ensure that these transactions are
executed for the purpose of reducing RWA because an SPX options
contract has a large notional value, which exacerbates the negative
impact of bank capital regulations.
---------------------------------------------------------------------------
\3\ See Proposed Rule 6.57(a).
---------------------------------------------------------------------------
Proposed Rule 6.57(b) provides that Trading Permit Holders
(``TPHs'') may execute an RWA Package (an ``RWA transaction'') in the
SPX crowd on the trading floor in accordance with paragraph (c) if: (1)
The RWA transaction is initiated for the account(s) of a Cboe Options
Market-Maker, provided that an RWA Package consisting of SPX options
from multiple Market-Maker accounts may not be in separate aggregation
units or otherwise subject to information barrier or account
segregation requirements; \4\ (2) the RWA transaction results in a
change in beneficial ownership (i.e., an RWA transaction between a Cboe
Options Market-Maker and an entity unaffiliated with the Cboe Options
Market-Maker); and (3) the Cboe Options Market-Maker certifies that as
of the beginning of the extended trading hours session (i.e., 2:00 a.m.
Chicago time) on the trade date in which the RWA Package is received by
the Exchange under
[[Page 42727]]
paragraph (c) the Cboe Options Market-Maker held the positions
identified in the RWA Package and that the RWA Package represents a net
reduction of RWA attributed to the Market-Maker based on the positions
held prior to the beginning of extended trading hours. The purpose of
this filing is to facilitate the closing of open positions in order to
reduce RWA attributed to Market-Maker positions, which is negatively
impacting liquidity provision by Market-Makers. Thus, the Exchange
believes it's reasonable to limit the types of accounts for which an
RWA transaction may be initiated to the account(s) of Market-Makers
because, as previously noted, Market-Makers are the primary source of
liquidity in the listed options market. In addition, the requirement
that the RWA transaction be initiated for the ``account(s)'' of a Cboe
Options Market-Maker is designed to, for example, allow a Cboe Options
Market-Maker to represent positions for the market-making firm's
universal account or represent positions for individual (or multiple)
Cboe Market-Maker accounts.
---------------------------------------------------------------------------
\4\ This prohibits positions in accounts among different trading
units for which accounts are otherwise required to be maintained
separately to be represented as an RWA Package. Various rules (for
example, Regulation SHO in certain circumstances) require accounts
to be maintained separately, and the proposed rule change is
consistent with those rules.
---------------------------------------------------------------------------
In addition, the change in beneficial ownership and certification
requirements help to ensure that RWA transactions will reduce a Market-
Maker's RWA. With regards to the certification requirement it's
necessary to identify a point in time at which the Market-Maker holds
positions that are to be closed. The Exchange proposes that the point
in time be prior to the opening of extended trading hours (i.e., 2:00
a.m. Chicago time) on the Exchange because this will enable Cboe
Options Market-Makers to identify their settled options positions
(i.e., positions they hold after the close of regular trading hours and
prior to the open of extended trading hours).
Provided that paragraph (b) is satisfied the Exchange proposes to
allow RWA Packages to be executed in accordance with the procedure set
forth in paragraph (c). Proposed paragraph (c) provides that: (1) After
the opening of regular trading hours and prior to 10:00 a.m. Chicago
time, the Cboe Options Market-Maker (or broker) must submit the RWA
Package to the Exchange in a form and manner prescribed by the
Exchange. The submission must contain: (i) A list of individual SPX
options series and the size of each options series; (ii) the contact
information for the individual that will represent the position on the
trading floor; and (iii) if prior to submitting an RWA Package to the
Exchange the Market-Maker (or broker) has received a bid or offer for
the RWA Package, the proposed net debit or credit price for the RWA
Package.\5\ The Exchange believes requiring RWA Packages to be received
by the Exchange after the opening of regular trading hours and prior to
10:00 a.m. Chicago time will help to ensure that RWA transactions can
be executed during regular trading hours, given that proposed
requirement of a two hour request for quotes (``RFQ'') period, which is
described more fully below. In addition, requiring the RWA Package
submission to contain a list of individual SPX options series, the size
of each options series, and the contact information for the individual
representing the RWA Package will enable market participants to bid/
offer for the RWA Package on the trading floor.
---------------------------------------------------------------------------
\5\ See Proposed Rule 6.57(c)(1).
---------------------------------------------------------------------------
Upon the Exchange's receipt of the RWA Package, the Exchange will
(i) electronically notify TPHs (electronically and via trading floor
loudspeaker) as soon as practicable of the identity of the individual
representing the RWA Package in the SPX trading crowd, which can be
either a Market-Maker or Floor Broker, provided the individuals are
available to accept bids/offers for the RWA Package; (ii) post in an
electronic format on a TPH-accessible site the list of individual
components of the RWA Package, the net Package price, and the contact
information for the individual representing the RWA Package on the
floor, which post will not include the identity of the Market-Maker for
whom the RWA transaction is initiated (unless the Market-Maker is
representing the RWA Package on the trading floor); and (iii) notify
TPHs that the RWA Package has been posted and the time at which the
two-hour request-for-quote (``RFQ'') period concludes.\6\ The Exchange
believes providing the RWA Package on a TPH accessible website will
give TPHs sufficient information to price RWA packages. In addition,
identifying the individual representing the RWA Package on the trading
floor and providing a two hour RFQ period will enable TPHs to respond
to RWA Packages. The Exchange believes masking the identity of the
Market-Maker for whom the RWA transaction is initiated (unless the
Market-Maker is representing the RWA Package on the trading floor) will
encourage Market-Makers to initiate RWA transactions.
---------------------------------------------------------------------------
\6\ See Proposed Rule 6.57(c)(2).
---------------------------------------------------------------------------
The Exchange proposes that the two-hour RFQ Period commence upon on
[sic] the Exchange's notification to the SPX trading crowd of the
identity of the individual representing the RWA Package on the
floor.\7\ The Exchange believes the two-hour period is sufficient to
allow TPHs to review, price, and bid/offer for the RWA Package because
the RWA Package will be available in an electronic format on a TPH-
accessible website, which enables TPHs to more readily examine and
price the positions in the RWA Package. Furthermore, the Exchange
understands that firms have access to electronic systems that will aid
them in evaluating the SPX positions contained in an RWA Package and to
make a reasonable assessment of the price at which the firm is will to
execute the RWA Package. The Exchange also proposes that upon the
conclusion of the RFQ period, the individual representing the RWA
Package in the SPX trading crowd may (but is not required to) accept a
bid or offer for the RWA Package, and the RFQ response that represents
the best bid or offer on a net debit or credit basis for the RWA
Package has priority. The Exchange also proposes in the event equal
bids or offers are received, the first RFQ response at the best bid or
offer on a net debit or credit basis for the RWA Package has
priority.\8\ The Exchange notes that the contemplated priority is
simply price/time priority, which is a common priority mechanism in the
options industry. For example, Rule 6.45(i)(A) describes price-time
priority in the context of resting orders and quotes in the electronic
book. The best bid/offer for the RWA Package during the two hour RFQ
period has priority over inferior prices, and if two bid/offers are
made at the same price, the bid/offer that is made first then has
priority--all of which is consistent with the price-time priority
described in Rule 6.45(i)(A).\9\ The Exchange notes that an individual
responding to an RWA Package with a better bid/offer than a previous
bid/offer is necessarily improving the bid/offer price for at least
part of the RWA Package (i.e., at least one individual options series
in the RWA Package) because an improved net debit/credit price
necessarily means at least one individual options series has received a
better price.
---------------------------------------------------------------------------
\7\ See Proposed Rule 6.57(c)(3).
\8\ See id.
\9\ The Exchange notes that if the RWA Package submission
contains a bid/offer as contemplated by paragraph (c) to Rule 6.57
and a matching bid/off is made for the RWA Package in the SPX
trading crowd, the bid/offer contained in the original submission
has priority.
---------------------------------------------------------------------------
The Exchange also notes that an RWA Package is similar to a complex
order in that a market participant cannot seek to trade against only
certain components of the RWA Package (e.g., respond with a
[[Page 42728]]
bid/offer for half of the options series instead of all of the options
series in the RWA Package). Complex orders similarly cannot be split up
into individual options series by an individual responding to a complex
order. For example, if a complex order has three legs (i.e., three
separate series), a market participant responding to the complex order
cannot respond with a bid/offer for leg #1, but not legs #2 or #3.
Instead, the complex order is bid/offered upon based on a net debit/
credit basis for the complex order as is contemplated for RWA Packages.
For example, if an RWA Package is for 50 legs, a market participant
responding to the RWA Package cannot respond with a bid/offer for legs
#1 through #25, but not legs #26 through #50.
In addition, like complex orders, market participants may bid/offer
for an RWA Package in whole or in a permissible ratio if the package
can be divided into a proportional share. For example, if a complex
order consisting of one leg for two contracts and another leg for two
contracts is represented on the floor, a counterparty may bid/offer for
100% of the order (i.e., two contracts for each leg) or the
counterparty may bid/offer for a proportional share of the complex
order in the 1:1 ratio of the order (i.e., one contract for each leg in
this example). Similarly, if an RWA Package has 50 SPX options series
and 200 contracts per options series, a market participant may bid/
offer for 100 contracts per leg or some other proportional share of the
RWA Package in the ratio of the package. However, as with complex
orders, if the RWA Package cannot be divided into a proportional share,
market participants must bid/offer for the entire RWA Package. For
example, if a complex order consists of one leg for one contract and
another leg for two contracts, the complex order cannot be
proportionally subdivided to permit a partial trade in the ratio of the
order (i.e. 1:2); thus, market participants must bid/offer for the full
size of the complex order (i.e., one contract on leg #1 and two
contracts on leg #2). With regards to RWA Packages, if, for example,
one leg is for 11 contracts and 49 other legs are for 200 contracts,
the leg for 11 contracts cannot be proportionally subdivided to permit
a partial trade in the ratio of the order (i.e., 11:200); thus, market
participants would be required to bid/offer for the entire RWA package
in this example.
As previously noted, the Exchange believes that providing a two-
hour RFQ period will enable TPHs to respond to RWA Packages. In
addition, the Exchange believes it's appropriate for the best bid or
offer made in response to the representation of an RWA Package to have
priority; however, recognizing that the best bid or offer may not
satisfy the initiator of the RWA transaction, the Exchange believes its
appropriate to explicitly provide in subparagraph (3) that individuals
representing RWA Packages do not have to accept a bid or offer at the
conclusion of the RFQ period, which simply makes it clear that the
responses received during an RFQ period are indeed quotes with which
the individual representing the RWA Package may execute the RWA
Package. In addition, the Exchange believes it's important not to
obligate individuals representing RWA Packages to split executions
among TPHs that bid or offer at the same price; rather, the Exchange
believes the proposal will incentivize TPHs to provide bids or offers
that better existing bids or offers because the first in time best bid
or offer will have priority. As previously noted, this is consistent
with the price-time priority that is common in the options
industry.\10\
---------------------------------------------------------------------------
\10\ Cboe Options Rule 6.45 permits price-time priority in
certain classes.
---------------------------------------------------------------------------
For example, suppose a market participant submits to the Exchange
an RWA Package to buy for 50 SPX series and 200 contracts on each leg,
which the Exchange announces to the trading floor and posts to the
website. During the RFQ Period, which lasts from 1:00 p.m. to 3:00
p.m., the following offers to buy the RWA Package are represented on
the floor:
1:10 p.m.: Floor Broker A offers to sell 100 contracts on
each leg for a total of $50,000.
1:15 p.m.: Floor Broker B offers to sell 100 contracts on
each leg for a total of $49,000.
2:00 p.m.: Floor Broker C offers to sell 100 contracts on
each leg for a total of $50,000.
Pursuant to price-time priority, Floor Broker B made the best
offer, and will trade 100 contracts on each leg with the RWA Package
for $49,000, leaving 100 contracts on each leg remaining in the RWA
Package. Floor Brokers A and C offered the same price for the same
amount. Pursuant to price-time priority Floor Broker A made its offer
first, and thus will trade 100 contracts on each leg with the remaining
portion of the RWA Package for $50,000. Floor Broker C will not
participate in the trade.
Furthermore, the RWA Package is considered executed (and a contract
formed) upon the acceptance of a bid or offer by the individual
representing the RWA Package following the conclusion of the RFQ
Period. The Exchange proposes that if the individual representing the
RWA Package accepts a bid or offer for the RWA Package, the individual
representing the RWA Package on the trading floor must, prior to the
close of regular trading hours, cause a report to be submitted to the
Exchange in a form and manner prescribed by the Exchange which sets
forth the time of the execution of the RWA Package, the net execution
price for the RWA Package, and the execution prices for the individual
components of the RWA Package.\11\ The Exchange believes the reporting
requirements will enable the Exchange to maintain an adequate audit
trail and, if necessary, review individual RWA transactions.
---------------------------------------------------------------------------
\11\ See Proposed Rule 6.57(c)(4).
---------------------------------------------------------------------------
Additionally, the Exchange proposes to adopt Interpretation and
Policy .01 to provide that to the extent applicable, all other Rules of
the Exchange, including Rule 6.9(e), apply to the procedure set forth
in proposed Rule 6.57. The Exchange also proposes to provide in
Interpretation and Policy .01 that the following Rules are either
superseded by proposed Rule 6.57 or do not apply to the above
procedures: 6.9(a) through(d) and (f), 6.41, 6.44, 6.45, 6.47, and
6.74) [sic] and that there may be other rules of the Exchange that do
not, by their terms, apply to the transfer procedure set forth in this
Rule 6.57. As previously noted, proposed Rule 6.57 is a special
procedure designed to provide a mechanism which allows Cboe Market-
Makers to reduce open SPX options positions across numerous options
series in one large transaction, and in order to give the effect to the
procedures set forth in Rule 6.57 it is necessary for Rule 6.57 to
supersede rules that provide for potentially conflicting procedures
(e.g., Rules 6.9(a) through (d) and (f), 6.41, 6.44, 6.45, 6.47, and
6.74). The Exchange notes that this is patterned from Rule 6.49A, which
also provided that Rule 6.49A supersede Rules 6.41, 6.44, 6.45, 6.47,
and 6.74.
Specifically, the Exchange proposes to explicitly provide that Rule
6.9(e) applies to the procedures set forth in Rule 6.57. This reference
to Rule 6.9 is patterned from Rule 6.49A, which explicitly referenced
Rule 6.9 in its entirety as applying to Rule 6.49A. Contrary to Rule
6.49A, however, the Exchange proposes that only paragraph (e) of Rule
6.9 apply to Rule 6.57 instead of Rule 6.9 in its entirety. Rule 6.9(e)
governs trading based on knowledge of imminent undisclosed solicited
transactions, and the Exchange believes it's important for such rules
to apply to Rule 6.57. The Exchange believes Rule
[[Page 42729]]
6.9(a) through (d) and (f) are sufficiently superseded by the
procedures set forth in Rule 6.57(c). Specifically, Rule 6.9(a) through
(d) sets forth the priority for several different scenarios in which an
order and solicited order on the opposite side of that order may be
represented on the floor, and the priority that will apply in each
scenario. Rule 6.9(a) governs solicited transactions involving a
disclosed original order and matching solicited order that improves the
market; Rule 6.9(b) governs solicited transactions involving a
disclosed original order that is later modified to meet a solicited
order improving the market; Rule 6.9(c) governs solicited transactions
involving disclosed original order that is later modified to meet a
solicited order not improving the market; and Rule 6.9(d) involves
solicited transactions involving an undisclosed original order.
Additionally, Rule 6.9(f), which requires solicited orders to be
marked, would not be necessary, as it would be known that an order was
solicited for an RWA Package at the time they were provided to the
Exchange in accordance with proposed Rule 6.57.
Pursuant to proposed Rule 6.57, an RWA Package, including any
solicited orders to trade against the RWA Package, must be represented
in a single way (by notification to the Exchange, which then announces
the package to the trading floor). As a result, an RWA Package and
corresponding solicited order could never be undisclosed. Additionally,
pursuant to the proposed process, if the Market-Maker receives a bid or
offer for the RWA Package prior to submitting it to the Exchange (as it
would if it had a solicited order), the proposed price must be
disclosed. As a result, for every RWA Package with a solicited order,
the Exchange will announce them and the proposed price to the crowd at
the same time, and thus the solicitation would have occurred before the
RWA Package was disclosed to the crowd. Therefore, Rule 6.9(a) would
not apply, as that paragraph covers a situation in which an order is
disclosed prior to solicitation. There is also no method in the
proposed process for modifying the RWA Package or any solicited order.
Rule 6.9(b) and (c) address situations in which a represented order is
later modified to meet a solicited order, and thus would not apply to
RWA Packages. Lastly, Rule 6.9(f) is inapplicable to Rule 6.57 because
following the procedures set forth in Rule 6.57 will provide all
necessary information for Exchange purposes.
Proposed Rule 6.57(c) also sets forth the specific priority of RWA
Transactions, and thus no other priority rules would apply. The
Exchange believes it is consistent with Exchange Act and helps to
remove impediments to and perfect the mechanism of a free and open
market and, in general, helps protect investors and the public interest
to explicitly identify the priority applicable to RWA Packages in Rule
6.57(c) because it will help to avoid confusion as to the priority
applicable to RWA Packages. More importantly, the priority set forth in
Rule 6.57(c) is consistent with Exchange Act because the proposed
priority is simply price-time priority, which is common in the options
industry.
With regards to the instant proposal Rule 6.41--Meaning of Premium
Bids and Offers--is inapplicable because Rule 6.41 is already
inapplicable to index options such as SPX options. Thus, an RWA
Package, which by definition can only contain SPX options, will not be
subject to Rule 6.41. The Exchange believes it is consistent with
Exchange Act and helps to remove impediments to and perfect the
mechanism of a free and open market and, in general, helps protect
investors and the public interest to explicitly provide that Rule 6.57
supersedes Rule 6.41 to avoid any possible confusion regarding the
applicability of Rule 6.41 to RWA Package execution.\12\
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\12\ The Exchange notes that Rule 24.8--Meaning of Premium Bids
and Offers--applies to index options.
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In addition, Rule 6.44--Bids and Offers in Relation to Units of
Trading--is inapplicable to the instant proposal. Rule 6.44 sets forth
the meaning of bids and offers for one contract where RWA Packages must
be for more than one contract. The Exchange believes it is consistent
with Exchange Act and helps to remove impediments to and perfect the
mechanism of a free and open market and, in general, helps protect
investors and the public interest to explicitly provide that Rule 6.57
supersedes Rule 6.44 to avoid any possible confusion regarding the
applicability of Rule 6.44 to RWA Package execution.
Furthermore, Rule 6.45--Order and Quote Priority and Allocation;
Rule 6.47--Priority on Split-Price Transactions Occurring in Open
Outcry; and Rule 6.74--Crossing Orders--are superseded by Rule 6.57.
Rules 6.45, 6.47, and 6.74 set forth priority in various scenarios,
which is superseded by Rule 6.57 because the priority of bids and
offers for RWA Packages is set forth in Rule 6.57(c)(3). In the same
manner that Rule 6.47 describes the priority for a particular scenario
(i.e., split-price) instead of describing that priority in Rule 6.45,
the Exchange believes it best to describe priority for this particular
scenario (i.e., RWA Packages) in a separate rule. Additionally, as
previously noted, the priority set forth in Rule 6.57 is based on
price-time priority, which is a longstanding priority method in the
options industry. Moreover, the Exchange believes it is consistent with
Exchange Act for the priority of bids/offers in the context of RWA
Packages to be based on price-time priority as price-time priority is a
common standard in the options industry.
Importantly, it is critical that RWA Packages be executed without
regard to the specific priority set forth in Rule 6.45, 6.47, or 6.74.
RWA Packages are, by design, very large and very complicated orders
that are specifically intended to help SPX Market-Makers reduce the RWA
associated with open SPX positions. Rules 6.45, 6.47, and 6.74,
including provisions in those rules that require orders to cede
priority to individual legs in the electronic book, are not designed to
accommodate the execution of such large, complicated, uniquely purposed
orders. Thus, the Exchange believes the significantly large size and
complexity of RWA packages make it necessary to deviate from Rules
6.45, 6.47, 6.74.
Additionally, the limited purpose of RWA Packages and the temporary
nature of the proposed rule further support the need to permit
executions of RWA Packages without regard to the priority in current
rules. As discussed above, the purpose of RWA Packages is to reduce the
risk-weighted assets attributable to Market-Makers' SPX options
positions. Requiring trades against the leg markets may interfere with
the desired reduction in RWA associated with the package, and may cause
execution of the package to be less efficient. Efficient reductions in
RWA pursuant to the proposed rule change may free up capital, which
will to enable Market-Makers to continue to provide liquidity to the
SPX market, which liquidity benefits all market participants. The
Exchange believes the narrow scope of the proposed rule change and the
limited, beneficial purpose of RWA Packages make allowing RWA Packages
to execute without interacting with pre-existing interest on the
electronic book appropriate and important to support the provision of
liquidity in the SPX market.\13\
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\13\ S&P 500 Option Variance Basket Trades, a particular basket
of SPX options with a limited purpose, may execute without
interacting with pre-existing interest on the electronic book. See
Rule 6.53B(c).
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[[Page 42730]]
Moreover, the Exchange expects many potential counterparties to be
solicited prior to the RWA Package being sent to the Exchange or
announced in the SPX trading crowd. These solicitations will likely
result in a net package price at which the counterparty is willing to
execute the RWA Package. If parties representing RWA Packages were
required to cede priority to individual legs in the electronic order
book many RWA Packages would likely go unexecuted as the execution of
one leg of an RWA Package would disrupt the net execution price and the
weighting/risk profile of the RWA package. Additionally, the size and
complexity of RWA Packages make it functionally difficult for RWA
Packages to interact with the electronic book under normal
circumstances. To the extent one leg of an RWA Package could execute
with an order in the electronic book, the remaining orders on the
electronic book (complex order book or simple order book) are unlikely
to have the necessary size and depth across a large portfolio of
options to satisfy the terms of an RWA Package. Thus, requiring RWA
Packages to follow the priority in Rule 6.45, 6.47, or 6.74 would
effectively prevent RWA Packages from being executed.
The Exchange believes it is consistent with Exchange Act and helps
to remove impediments to and perfect the mechanism of a free and open
market and, in general, helps protect investors and the public interest
to deviate from existing priority rules because doing so will allow RWA
Packages to be executed, which, in turn, will help reduce the RWA
associated with a Market-Maker's SPX Position, and, in turn, will
reduce the risk of market dislocation, especially during periods of
increased volume and volatility [sic].
In addition, the Exchange proposes to adopt Interpretation and
Policy .02 to provide that nothing in paragraph (a) of Rule 6.57
prevents a Market-Maker from executing transactions (opening or
closing) during the RFQ period in the normal operation of the Market-
Maker's business. Market-Makers have affirmative obligations, and the
Exchange believes the adoption of Interpretation and Policy .02 helps
ensure that Rule 6.57 does not prevent Cboe Options Market-Makers from
satisfying their affirmative obligations by, for example, buying and
selling options series during the RFQ period in the normal course of
their operations.
Finally, the Exchange proposes to adopt Interpretation and Policy
.03 to implement Rule 6.57 for a limited term ending two years from the
approval date of this rule filing.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
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In particular, the Exchange believes the proposed rule will help
facilitate the reduction of open SPX options positions (and concomitant
RWA), which helps to protect investors and the public interest by
enabling Market-Makers to continue to provide liquidity that is
critical to the SPX options markets. Although the Exchange is seeking
to limit RWA transactions to those initiated by Cboe Options Market-
Makers, the proposal is not designed to permit discrimination between
customers, issuers, brokers, or dealers; rather, the proposal seeks to
alleviate the negative impact of bank capital requirements on the
primary liquidity providers in the listed options market (i.e., Market-
Makers), who are disproportionately impacted by bank capital
requirements governing bank-affiliated clearing firms. The Exchange
believes the ability for Market-Makers to efficiently and effectively
reduce open positions across numerous options series in one large
transaction will help to reduce the risk of market dislocation,
especially during periods of increased volume and volatility. Market-
Makers will be able to continue providing liquidity during such times
(increasing the RWA attributed to the Market-Makers) because they will
know that they can subsequently reduce their open positions (and
concomitant RWA) across numerous options series in one large
transaction.
Furthermore, the Rule 6.57 is patterned on Rule 6.49A, which sets
forth similar procedures for on-floor transfers. In addition,
generally, Rule 6.57 is an exception to various Exchange trading rules
because RWA Packages are designed to carry out the important purpose of
reducing RWA, and the construction and procedures set forth in Rule
6.57 are necessary to carry out that purpose. RWA Packages are large in
size (at least 10,000 options) and broad in construction (at least 50
separate options series) and must be closing transactions because the
purpose of RWA Packages is to significantly reduce RWA associated with
Market-Maker positions to enable Market-Makers to continue to provide
critical liquidity to SPX options. In order to functionally execute
such a large portfolio of SPX options the Exchange believes it is
necessary for the procedures to deviate from certain current exchange
trading rules. The Exchange believes the narrow scope of the proposed
rule change and the limited, beneficial purpose of RWA Packages make
allowing RWA Packages to execute without interacting with pre-existing
interest on the electronic book appropriate and important to support
the provision of liquidity in the SPX market.\17\ Specifically, the
Exchange believes it is necessary and proper for interpretation and
policy .01 to specify that Rules 6.9(a) through (d) and (f), 6.41,
6.44, 6.45, 6.47, and 6.74 are either supersede [sic] by, or do not
apply to, Rule 6.57.
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\17\ S&P 500 Option Variance Basket Trades, a particular basket
of SPX options with a limited purpose, may execute without
interacting with pre-existing interest on the electronic book. See
Rule 6.53B(c).
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As previously noted above, the proposed procedure for RWA Packages
sets forth the specific manner in which RWA Packages and any solicited
orders must be represented, and thus the situations described in Rule
6.9(a) through (d) and (f) would never occur. The proposed rule makes
clear that these provisions are superseded by the proposed rule.
In addition, Rule 6.41 is inapplicable to RWA Packages because Rule
6.41 is inapplicable to index options such as SPX options. Thus, an RWA
Package, which by definition can only contain SPX options, will not be
subject to Rule 6.41. Furthermore, Rule 6.44 sets forth the meaning of
bids and offers for one contract where RWA Packages must be for more
than one contract; thus, Rule
[[Page 42731]]
6.44 is similarly inapplicable to RWA Packages. The Exchange believes
it is consistent with Exchange Act and helps to remove impediments to
and perfect the mechanism of a free and open market and, in general,
helps protect investors and the public interest to explicitly provide
that Rule 6.57 supersedes Ruls [sic] 6.41 and 6.44 to avoid any
possible confusion regarding the applicability of Rules 6.41 and 6.44
to RWA Package execution.
In particular, the Exchange believes it is critical that RWA
Packages be executed without regard to the specific priority set forth
in Rule 6.45, 6.47, or 6.74 because the size of the RWA Packages (at
least 50 SPX options series, 10 options per series, and at least 10,000
options) makes it functionally impossible for RWA Packages to interact
with the electronic book as orders on the electronic book (complex
order book or simple order book) do not have the necessary size and
depth across a large portfolio of options to satisfy the terms of an
RWA Package. Thus, requiring RWA Packages to follow the priority in
Rule 6.45, 6.47, or 6.74 would prevent RWA Packages from being
executed. Given the limited purpose and significant size and complexity
of RWA Packages, the Exchange believes it is consistent with Exchange
Act and helps remove impediments to and perfect the mechanism of a free
and open market and, in general, helps protect investors and the public
interest to permit RWA transactions to deviate from existing priority
rules. This will permit [sic] because doing so will allow RWA Packages
to be executed in an efficient manner, which, in turn, will help reduce
the RWA associated with a Market-Maker's SPX positions, and, in turn,
will reduce the risk of market dislocation, especially during periods
of increased volume and volatility.
To the extent Cboe Market-Makers cannot reduce options positions in
an efficient and effective manner their ability to continue to provide
liquidity may be impaired. As noted, the procedures set forth in Rule
6.57 are similar to the procedures set forth in Rule 6.49A. The
Exchange believes the procedures set forth in Rule 6.57 improve on the
procedures set forth in Rule 6.49A as Rule 6.57, among other things,
provides for the publication of RWA Packages in an electronic format,
which allows for a fair process by which TPHs may review, price, and
bid/offer for an RWA Package.
In addition, the Exchange believes proposed Interpretation and
Policy .02, which provides that nothing in paragraph (a) of Rule 6.57
prevents a Market-Maker from executing transactions (opening or
closing) during the RFQ period in the normal operation of the Market-
Maker's business, is consistent with Exchange Act and helps to remove
impediments to and perfect the mechanism of a free and open market and,
in general, helps protect investors and the public interest by helping
to ensure Market-Makers continue to perform their affirmative
obligations during the trading day.
Finally, the Exchange believes proposed Interpretation and Policy
.03, which indicates that Rule 6.57 is to be adopted for a limited term
ending two years from the approval date of this rule filing, is
consistent with Exchange Act and helps to remove impediments to and
perfect the mechanism of a free and open market and, in general, helps
protect investors and the public interest by allowing the Exchange to
evaluate at the end of the two-year period whether Rule 6.57 continues
to be a useful tool to reduce RWA associated with SPX options
positions.
B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options 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 Act. Although the Exchange is
seeking to limit RWA transactions to those initiated by Cboe Options
Market-Makers, the Exchange does not believe the proposed rule change
will impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act because the
proposal seeks to alleviate the negative impact of bank capital
requirements on the primary liquidity providers in the listed options
market (i.e., Market-Makers), who are disproportionately impacted by
bank capital requirements governing bank-affiliated clearing firms. Use
of the proposed process is voluntary, and all Market-Makers with SPX
positions may engage in RWA transactions. The proposed rule change
proposes a process that may be carried out only [sic] the Exchange's
trading floor in a product that trades solely on the Exchange. RWA
Transactions have a limited purpose, which is to reduce RWA
attributable to Market-Makers' SPX open positions in order to free up
capital and enable Market-Makers to continue to provide the liquidity
to the SPX market, which liquidity benefits all market participants.
This is not intended to be a competitive trading tool.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2018-056 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2018-056. 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
[[Page 42732]]
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-CBOE-2018-056 and should be
submitted on or before September 7, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18158 Filed 8-22-18; 8:45 am]
BILLING CODE 8011-01-P
