Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2360 (Options) To Increase Position Limits on Options on Certain Exchange-Traded Funds, 47666-47673 [2018-20435]
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47666
Federal Register / Vol. 83, No. 183 / Thursday, September 20, 2018 / Notices
potential risk presented by this product,
collect financial resources in proportion
to such risk, and liquidate this product
in the event of a CP default, all of which
should help ensure ICC’s ability to
maintain the financial resources it needs
to provide its critical services and
function as a central counter party,
thereby promoting the prompt and
accurate settlement of EM Contracts and
other credit default swap transactions.
For the same reasons, the Commission
believes that the rule change would help
assure the safeguarding of securities or
funds in the custody or control of ICC,
and would be consistent with the
protection of investors and the public
interest.
Therefore, the Commission finds that
acceptance of the additional EM
Contract, on the terms and conditions
set out in ICC’s Rules, is consistent with
the prompt and accurate clearance and
settlement of securities transactions and
derivative agreements, contracts, and
transactions cleared by ICC, the
safeguarding of securities and funds in
the custody or control of ICC, and the
protection of investors and the public
interest, within the meaning of Section
17A(b)(3)(F) of the Act.12
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and in
particular with the requirements of
Section 17A of the Act,13 and the rules
and regulations thereunder.
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 14 that the
proposed rule change (SR–ICC–2018–
007) be, and hereby is, approved.15
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–20434 Filed 9–19–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84127; File No. SR–FINRA–
2018–034]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 2360
(Options) To Increase Position Limits
on Options on Certain ExchangeTraded Funds
position limit for conventional options
on the following exchange-traded funds
(‘‘ETF’’): The Standard and Poor’s
Depositary Receipts Trust (‘‘SPY’’),
iShares Russell 2000 ETF (‘‘IWM’’),
PowerShares QQQ Trust (‘‘QQQ’’),
iShares MSCI Emerging Markets ETF
(‘‘EEM’’), iShares China Large-Cap ETF
(‘‘FXI’’), iShares MSCI EAFE ETF
(‘‘EFA’’), iShares MSCI Brazil Capped
ETF (‘‘EWZ’’), iShares 20+ Year
Treasury Bond Fund ETF (‘‘TLT’’), and
iShares MSCI Japan ETF (‘‘EWJ’’).
Below is the text of the proposed rule
change. Proposed new language is in
italics; proposed deletions are in
brackets.
*
*
*
*
*
2360. Options
(a) No Change.
(b) Requirements
September 14, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
31, 2018, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 2360 (Options) to increase the
(1) through (2) No Change.
(3) Position Limits
(A) Stock Options—
(i) through (ii) No Change.
(iii) Conventional Equity Options
a. For purposes of this paragraph (b),
standardized equity option contracts of
the put class and call class on the same
side of the market overlying the same
security shall not be aggregated with
conventional equity option contracts or
FLEX Equity Option contracts overlying
the same security on the same side of
the market. Conventional equity option
contracts of the put class and call class
on the same side of the market overlying
the same security shall be subject to a
position limit of:
1. through 5. No Change.
6. for selected conventional options
on exchange-traded funds (‘‘ETF’’), the
position limits are listed in the chart
below:
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Security underlying option
Position limit
The DIAMONDS Trust (DIA) ....................................................................................................................
The Standard and Poor’s Depositary Receipts Trust (SPY) ...................................................................
The iShares Russell 2000 [Index Fund]ETF (IWM) .................................................................................
The PowerShares QQQ Trust (QQQ[Q]) .................................................................................................
The iShares MSCI Emerging Markets [Index Fund]ETF (EEM) ..............................................................
iShares China Large-Cap ETF (FXI) .......................................................................................................
iShares MSCI EAFE ETF (EFA) ..............................................................................................................
iShares MSCI Brazil Capped ETF (EWZ) ................................................................................................
iShares 20+ Year Treasury Bond Fund ETF (TLT) .................................................................................
iShares MSCI Japan ETF (EWJ) .............................................................................................................
12 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78q–1.
14 15 U.S.C. 78s(b)(2).
15 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
13 15
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300,000 contracts.
[900,000]1,800,000
[500,000]1,000,000
[900,000]1,800,000
[500,000]1,000,000
500,000 contracts.
500,000 contracts.
500,000 contracts.
500,000 contracts.
500,000 contracts.
16 17
contracts.
contracts.
contracts.
contracts.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
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b. No Change.
(B) through (D) No Change.
(4) through (24) No Change.
(c) No Change.
• • • Supplementary Material:——
*
.01 through .03 No Change.
*
*
*
*
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
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
FINRA Rule 2360(b)(3)(A) imposes a
position limit on the number of equity
options contracts in each class on the
same side of the market that can be held
or written by a member, a person
associated with a member, or a customer
or a group of customers acting in
concert. Position limits are intended to
prevent the establishment of options
positions that can be used to manipulate
or disrupt the underlying market or
might create incentives to manipulate or
disrupt the underlying market so as to
benefit the options position. In addition,
position limits serve to reduce the
potential for disruption of the options
market itself, especially in illiquid
options classes.4 This consideration has
been balanced by the concern that the
limits ‘‘not be established at levels that
are so low as to discourage participation
in the options market by institutions
and other investors with substantial
hedging needs or to prevent specialists
and market makers from adequately
meeting their obligations to maintain a
fair and orderly market.’’ 5
Rule 2360(b)(3)(A)(i) does not
independently establish a position limit
for standardized equity options. Rather,
the position limit established by the
rules of an options exchange for a
4 See Securities Exchange Act Release No. 40969
(January 22, 1999), 64 FR 4911, 4912–4913
(February 1, 1999) (Order Approving File No. SR–
CBOE–98–23) (citing H.R. No. IFC–3, 96th Cong.,
1st Sess. at 189–91 (Comm. Print 1978)).
5 Id. at 4913.
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particular equity option is the
applicable position limit for purposes of
Rule 2360.6 Rule 2360(b)(3)(A)(iii)
provides that conventional equity
options are subject to a basic position
limit of 25,000 contracts or a higher tier
for conventional option contracts on
securities that underlie exchange-traded
options qualifying for such higher tier as
determined by the rules of the options
exchanges. In addition, FINRA lists
position limits for options on securities
that have higher position limits—
currently, only the ETFs listed in Rule
2360(b)(3)(A)(iii)a.6.—that also
generally mirror the options exchange
position limits.7 At this time, FINRA
proposes to conform to the options
exchanges’ recent amendments that
increased (or in the case of SPY
decreased from the pilot program) the
position limit options on the following
ETFs: SPY, IWM, QQQ, EEM, FXI, EFA,
EWZ, TLT and EWJ.8
6 See e.g., CBOE Rule 4.11; ISE Rule 412;
NASDAQ PHLX Rule 1001; NYSE American Rule
904; NYSE Arca Rule 6.8; MIAX Rule 307; BOX
Rule 3120 and IM–3120–2; Nasdaq Chapter III,
Section 7; BX Chapter III, Section 7; and BZX Rule
18.7.
7 The options exchanges have recently revised the
position limit on SPY options to 1,800,000 contracts
after expiration of a pilot program on July 12, 2018
that eliminated position limits on SPY options.
FINRA retained its position for conventional
options on SPY at 900,000 contracts. The proposed
rule change proposes to increase the position limit
on SPY to 1,800,000 consistent with the options
exchanges updating the position limit on SPY to
1,800,000 contracts. See Securities Exchange Act
Release No. 83349 (May 30, 2018), 83 FR 26123
(June 5, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR–MIAX–2018–11). See
also Securities Exchange Act Release No. 83412
(June 12, 2018), 83 FR 28298 (June 18, 2018) (Notice
of Filing and Immediate Effectiveness of File No.
SR–PHLX–2018–44); Securities Exchange Act
Release No. 83414 (June 12, 2018), 83 FR 28296
(June 18, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR–BOX–2018–22);
Securities Exchange Act Release No. 83415 (June
12, 2018), 83 FR 28274 (June 18, 2018) (Notice of
Filing and Immediate Effectiveness of File No. SR–
CBOE–2018–042); Securities Exchange Act Release
No. 83413 (June 12, 2018), 83 FR 28277 (June 18,
2018) (Notice of Filing and Immediate Effectiveness
of File No. SR–NYSEArca-2018–44); and Securities
Exchange Act Release No. 83417 (June 12, 2018), 83
FR 28279 (June 18, 2018) (Notice of Filing and
Immediate Effectiveness of File No. SR–
NYSEAMER–2018–26).
8 See note 7 for discussion regarding position
limits for options on SPY. See also Securities
Exchange Act Release No. 82770 (February 23,
2018), 83 FR 8907 (March 1, 2018) (Order Granting
Accelerated Approval of File No. SR–CBOE–2017–
057). See also Securities Exchange Act Release No.
82931 (March 22, 2018), 83 FR 13323 (March 28,
2018) (Notice of Filing and Immediate Effectiveness
of File No. SR–MIAX–2018–10); Securities
Exchange Act Release No. 82930 (March 22, 2018),
83 FR 13330 (March 28, 2018) (Notice of Filing and
Immediate Effectiveness of File No. SR–BOX–2018–
10); Securities Exchange Act Release No. 82932
(March 22, 2018), 83 FR 13316 (March 28, 2018)
(Notice of Filing and Immediate Effectiveness of
File No. SR–PHLX–2018–24); Securities Exchange
Act Release No. 83066 (April 19, 2018), 83 FR
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The proposed rule change would
amend the table provided in Rule
2360(b)(3)(A)(iii)a.6. as follows:
• The position limits for options on
SPY would be increased from 900,000
contracts to 1,800,000 contracts;
• The position limit for options on
IWM would be increased from 500,000
contracts to 1,000,000 contracts;
• The position limit for options on
QQQ would be increased from 900,000
contracts to 1,800,000 contracts; and
• The position limit for options on
EEM would be increased from 500,000
contracts to 1,000,000 contracts.
In addition, the proposed rule change
would add to the table provided in Rule
2360(b)(3)(A)(iii)a.6. as follows, with the
effect of each ETF being increased from
the current position limit of 250,000
contracts:
• The position limit for options on
FXI would be increased to 500,000
contracts;
• The position limit for options on
EFA would be increased to 500,000
contracts;
• The position limit for options on
EWZ would be increased to 500,000
contracts;
• The position limit for options on
TLT would be increased to 500,000
contracts; and
• The position limit for options on
EWJ would be increased to 500,000
contracts.9
In support of the proposed rule
change, as noted by Cboe, position
limits are determined by the option
exchange’s requirements according to
the number of outstanding shares and
the trading volume of the underlying
ETF over the past six months.10 The
ETFs that underlie options subject to the
proposed rule change are highly liquid,
and are based on a broad set of highly
liquid securities and other reference
assets. The above listed ETFs are listed
on various national securities exchanges
and meet their listing standards.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks.11 EEM tracks the performance of
18099 (April 25, 2018) (Notice of Filing and
Immediate Effectiveness of File No. SR–NYSEArca2018–23) and Securities Exchange Act Release No.
83065 (April 19, 2018), 83 FR 18093 (April 25,
2018) (Notice of Filing and Immediate Effectiveness
of File No. SR–NYSEAMER–2018–14).
9 The proposed rule filing would also make
certain wording changes to the listing of the names
of the ETFs and change in two places ‘‘Index Fund’’
to ‘‘ETF’’. The proposed rule filing would also
revise the symbol of The PowerShares QQQ Trust
to ‘‘QQQ.’’
10 See for example, Cboe Rule 4.11 Interpretations
and Policies: .02.
11 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
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the MSCI Emerging Markets Index,
which is composed of approximately
800 component securities from
emerging market countries from all over
the world.12 IWM tracks the
performance of the Russell 2000 Index,
which is composed of 2,000 small-cap
domestic stocks.13 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.14 The MSCI EAFE Index is
designed to represent the performance
of large and mid-cap securities across 21
developed markets, including countries
in Europe, Australia and the Far East,
excluding the U.S. and Canada.15 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.16 TLT tracks the
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.17 QQQ
tracks the performance of the Nasdaq100 Index, which is composed of 100 of
the largest domestic and international
non-financial companies listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).18
2017 ADV
(mil. shares)
ETF
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FXI ...................................................................................................................
EEM .................................................................................................................
IWM ..................................................................................................................
EFA ..................................................................................................................
EWZ .................................................................................................................
TLT ...................................................................................................................
QQQ .................................................................................................................
EWJ .................................................................................................................
SPY ..................................................................................................................
15.08
52.12
27.46
19.42
17.08
8.53
26.25
6.06
64.63
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.19 SPY tracks
the performance of the S&P 500® Index,
which is an index of diversified large
cap U.S. companies.20
In support of this proposal, all trading
and other statistics, except SPY which
were compiled by FINRA, have been
compiled by Cboe as of the dates
provided by Cboe and provided in its
proposed rule change to increase the
applicable positions limits: 21
2017 ADV
(option
contracts)
71,944
287,357
490,070
98,844
95,152
80,476
579,404
4,715
2,575,153
Shares
outstanding
(mil.)
78.6
797.4
253.1
1178.4
159.4
60.0
351.6
303.6
976.23
Fund market
cap.
($mil.)
$3,343.6
34,926.1
35,809.1
78,870.3
6,023.4
7,442.4
50,359.7
16,625.1
240,540.0
FINRA agrees as proposed by Cboe
that the liquidity in the underlying
ETFs, and the liquidity in the ETF
options support its request to increase
the position limits for the options
subject to the proposed rule change. As
to the underlying ETF shares, the
average daily trading volume across all
exchanges for the period of January 1 to
July 31, 2017 was: (i) FXI–15.08 million
shares; (ii) EEM–52.12 million shares;
(iii) IWM–27.46 million shares; (iv)
EFA–19.42 million shares; (v) EWZ–
17.08 million shares; (vi) TLT–8.53
million shares; (vii) QQQ– 26.25 million
shares; (vii) EWJ–6.06 million shares;
and (viii) SPY–64.63 million shares.
In proposing the increased position
limits, FINRA considered the
availability of economically equivalent
products and their respective position
limits. For instance, some of the ETFs
underlying options subject to this
proposal are based on broad-based
indices that underlie cash-settled
options that are economically
equivalent to the ETF options that are
the subject of this proposal and have no
position limits (NDX and SPX). Other
ETFs are based on broad-based indexes
that underlie cash-settled options with
position limits reflecting notional values
that are larger than the current position
limits for ETF analogues (EEM and
EFA). Where there was no approved
index analogue, FINRA believes, based
on the liquidity, breadth and depth of
the underlying market, that the index
referenced by the ETF would be
considered a broad-based index
(example FXI and EWJ).22 FINRA
believes that if certain position limits
are appropriate for the options overlying
the same index, or an analogue to the
basket of securities that the ETF tracks,
then those same economically
equivalent position limits should be
appropriate for the option overlying the
ETF. In addition, the market
capitalization of the underlying index or
reference asset is large enough to absorb
any price movements that may be
caused by an oversized trade. Also, the
issuer may look to the stocks comprising
the analogous underlying index or
reference asset when seeking to create
additional ETF shares which are part of
the creation/redemption process to
address supply and demand or to
mitigate the price movement of the price
of the ETF.
For example, the PowerShares QQQ
Trust or QQQ is an ETF that tracks the
Nasdaq 100 Index or NDX, which is an
index composed of 100 of the largest
non-financial securities listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).
Options on NDX are currently subject to
no position limits but share similar
trading characteristics as QQQ. Based
on QQQ’s share price of $154.5422 and
NDX’s index level of 6,339.14,
approximately 40 contracts of QQQ
equals one contract of NDX. Assume
that options on NDX are subject to the
standard position limit of 25,000
contracts for broad-based index options
under options exchange rules. Based on
the above comparison of notional
values, this would result in a position
limit equivalent to 1,000,000 contracts
for QQQ as NDX’s analogue. However,
options on NDX are not subject to
position limits and has an average daily
trading volume of 15,300 contracts.
Options on QQQ are currently subject to
a position limit of 900,000 contracts but
has a much higher average daily trading
volume of 579,404 contracts.
Furthermore, NDX currently has a
market capitalization of $17.2 trillion
and QQQ has a market capitalization of
12 See https://www.ishares.com/us/products/
239637/ishares-msci-emerging-markets-etf.
13 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
14 See https://www.ishares.com/us/products/
239623/.
15 See https://www.msci.com/eafe.
16 See https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
17 See https://www.ishares.com/us/products/
239454/.
18 See https://indexes.nasdaqomx.com/Index/
Overview/NDX.
19 See https://www.ishares.com/us/products/
239665/EWJ.
20 See https://us.spdrs.com/en/etf/spdr-sp-500etf-SPY.
21 See note 8.
22 FINRA Rule 2360(b)(3)(B) establishes position
limits for index options by incorporating by
reference the position limit established by the
options exchange on which the option trades.
Options exchanges establish rules for index options
based on the characteristic of the underlying index.
See, e.g., Cboe Rule 24.4 and MIAX Rule 1804.
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$50,359.7 million, and the component
securities of NDX, in aggregate, have
traded an average of 440 million shares
per day in 2017, both market
capitalizations being large enough to
absorb any price movement caused by a
large trade in the QQQ. The
Commission has also approved no
position limit for options on NDX,
although it has a much lower daily
trading volume than its analogue, the
QQQ. Therefore, FINRA believes it is
reasonable to increase the position limit
for options on QQQ from 900,000 to
1,800,000 contracts.
The SPDR® S&P 500® ETF Trust or
SPY seeks to provide investment results
that, before expenses, correspond
generally to the price and yield
performance of the S&P 500® Index or
SPX, which is an index composed of
500 large-cap U.S. companies. Options
on the SPX have no position limits and
share similar trading characteristics as
SPY. Based on SPY’s price of $263.15
and SPX’s index level of 2640.87,
approximately 10 contracts of SPY
equals one contract of SPX.23 Assume
that options on SPX are subject to the
standard position limit of 25,000
contracts for broad-based index options
under options exchange rules. Based on
the above comparison of notional
values, this would result in a position
limit equivalent to 250,000 contracts for
options on SPY as SPX’s analogue.
However, options on SPX are not
subject to position limits and has an
average daily trading volume of
1,101,185 contracts.24 Options on SPY
were recently changed to a position
limit of 1,800,000 contracts for
standardized options, but is currently
subject to a conventional option
position limit of 900,000 contracts but
has a much higher average daily trading
volume of 2,575,153 contracts.25
Furthermore, as of December 29, 2017,
SPX had a market capitalization of $23.9
trillion and SPY has a market
capitalization of $277.54 billion, large
enough to absorb any price movement
caused by a large trade in the SPY. The
Commission has also approved no
position limit for options on SPX,
although it has a much lower daily
trading volume than its analogue, the
SPY, for which the exchanges recently
changed the position limit to 1,800,000
contracts. Therefore, FINRA believes it
is reasonable to increase the position
limits for options on SPY from 900,000
to 1,800,000 contracts.
The iShares Russell 2000 ETF or
IWM, is an ETF that also tracks the
23 As
of March 29, 2018.
of July 31, 2017.
25 See note 7.
24 As
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Russell 2000 index or RUT, which is an
index composed of 2,000 small-cap
domestic companies in the Russell 2000
index. Options on RUT are currently
subject to no position limits but share
similar trading characteristics as IWM.
Based on IWM’s share price of $144.77
and RUT’s index level of 1,486.88,
approximately 10 contracts of IWM
equals one contract of RUT. Assume
that options on RUT are subject to the
standard position limit of 25,000
contracts for broad-based index options
under options exchange rules. Based on
the above comparison of notional
values, this would result in a position
limit equivalent to 250,000 contracts for
options on IWM as RUT’s analogue.
However, options on RUT are not
subject to position limits and has an
average daily trading volume of 66,200
contracts. Options on IWM are currently
subject to a position limit of 500,000
contracts but has a much higher average
daily trading volume of 490,070
contracts. The Commission has
approved no position limit for options
on RUT, although it has a much lower
average daily trading volume than its
analogue, the IWM. Furthermore, RUT
currently has a market capitalization of
$2.4 trillion and IWM has a market
capitalization of $35,809.1 million, and
the component securities of RUT, in
aggregate, have traded an average of 270
million shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in the
IWM. Therefore, FINRA believes it is
reasonable to increase the position limit
for options on IWM from 500,000 to
1,000,000 contracts.
EEM tracks the performance of the
MSCI Emerging Markets Index or MXEF,
which is composed of approximately
800 component securities from
emerging market countries from all over
the world. Below makes the same
notional value comparisons as made
above. Based on EEM’s share price of
$47.06 and MXEF’s index level of
1,136.45, approximately 24 contracts of
EEM equals one contract of MXEF.
Assume that options on MXEF are
subject to the standard position limit of
25,000 contracts for broad-based index
options under options exchange rules.
Based on the above comparison of
notional values, this would result in a
position limit economically equivalent
to 604,000 contracts for options on EEM
as MXEF’s analogue. However, MXEF
has an average daily trading volume of
180 contracts. Options on EEM is
currently subject to a position limit of
500,000 contracts but has a much higher
average daily trading volume of 287,357
contracts. Furthermore, MXEF currently
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47669
has a market capitalization of $5.18
trillion and EEM has a market
capitalization of $34,926.1 million, and
the component securities of MXEF, in
aggregate, have traded an average of 33.6
billion shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in the
EEM. Therefore, based on the
comparison of average daily trading
volume, FINRA believes it is reasonable
to increase the position limit for options
on EEM from 500,000 to 1,000,000
contracts.
EFA tracks the performance of the
MSCI EAFE Index or MXEA, which has
over 900 component securities designed
to represent the performance of large
and mid-cap securities across 21
developed markets, including countries
in Europe, Australia and the Far East,
excluding the U.S. and Canada. Below
makes the same notional value
comparison as made above. Based on
EFA’s share price of $69.16 and MXEA’s
index level of 1,986.15, approximately
29 contracts of EFA equals one contract
of MXEA. Assume options on MXEA are
subject to the standard position limit of
25,000 contracts for broad-based index
options under options exchange rules.
Based on the above comparison of
notional values, this would result in a
position limit economically equivalent
to 721,000 contracts for EFA as MXEA’s
analogue. Furthermore, MXEA currently
has a market capitalization of $18.7
trillion and EFA has a market
capitalization of $78,870.3 million, and
the component securities of MXEA, in
aggregate, have traded an average of 4.6
billion shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in
EFA. However, MXEA has an average
daily trading volume of 270 contracts.
Options on EFA is currently subject to
a position limit of 250,000 contracts but
has a much higher average daily trading
volume of 98,844 contracts. Based on
the above comparisons, FINRA believes
it is reasonable to increase the position
limit for options on EFA from 250,000
to 500,000 contracts.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks. There is currently no index
analogue for FXI approved for options
trading. Options on FXI are currently
subject to a position limit of 250,000
contracts but has a much higher average
daily trading volume of 15.08 million
shares. However, the FTSE China 50
Index currently has a market
capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18
million, both large enough to absorb any
price movement caused by a large trade
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in FXI. The components of the FTSE
China 50 Index, in aggregate, have an
average daily trading volume of 2.3
billion shares. Based on the above
comparisons, FINRA believes it is
reasonable to increase the position limit
for options on FXI from 250,000 to
500,000 contracts.
EWZ tracks the performance of the
MSCI Brazil 25/50 Index, which is
composed of shares of large and midsize companies in Brazil. There is
currently no index analogue for EWZ
approved for options trading. Options
on EWZ are currently subject to a
position limit of 250,000 contracts but
the ETF has a much higher average daily
trading volume of 17.08 million shares.
However, the MSCI Brazil 25/50 Index
currently has a market capitalization of
$700 billion and EWZ has a market
capitalization of $6,023.4 million, both
large enough to absorb any price
movement caused by a large trade in
EWZ. The components of the MSCI
Brazil 25/50 Index, in aggregate, have an
average daily trading volume of 285
million shares. Based on the above
comparisons, FINRA believes it is
reasonable to increase the position limit
for options on EWZ from 250,000 to
500,000 contracts.
TLT tracks the performance of the ICE
U.S. Treasury 20+ Year Bond Index,
which is composed of long-term U.S.
Treasury bonds. There is currently no
index analogue for TLT approved for
options trading. However, the U.S.
Treasury market is one of the largest and
most liquid markets in the world, with
over $14 trillion outstanding and
turnover of approximately $500 billion
per day. TLT currently has a market
capitalization of $7,442.4 million, both
large enough to absorb any price
movement caused by a large trade in
TLT. Therefore, any potential for
manipulation will not increase solely
due to the increase in position limits as
set forth in this proposal. Based on the
above comparisons, FINRA believes it is
reasonable to increase the position limit
for options on TLT from 250,000 to
500,000 contracts.
EWJ tracks the MSCI Japan Index,
which tracks the performance of large
and mid-sized companies in Japan.
There is currently no index analogue for
EWJ approved for options trading.
However, the MSCI Japan Index has a
market capitalization of $3.5 trillion and
EWJ has a market capitalization of
$16,625.1 million, and the component
securities of the MSCI Japan Index, in
aggregate, have traded an average of 1.1
billion shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in
EWJ. Options on EWJ is currently
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subject to a position limit of 250,000
contracts and has an average daily
trading volume of 6.6 million shares.
Based on the above comparisons, FINRA
believes it is reasonable to increase the
position limit for options on EWJ from
250,000 to 500,000 contracts.
FINRA believes that increasing the
position limits for the conventional
options subject to the proposed rule
change would lead to a more liquid and
competitive market environment for
these options, which will benefit
customers interested in these products.
Surveillance and Reporting
Further, FINRA believes that the
increased position limits provisions are
appropriate in light of the existing
surveillance procedures and reporting
requirements at FINRA,26 the options
exchanges, and at the several clearing
firms, which are capable of properly
identifying unusual or illegal trading
activity. These procedures use daily
monitoring of market movements by
automated surveillance techniques to
identify unusual activity in both options
and underlying stocks.27
In addition, large stock holdings must
be disclosed to the Commission by way
of Schedules 13D or 13G.28 Options
positions are part of any reportable
positions and cannot legally be hidden.
Moreover, the previously noted Rule
2360(b)(5) requirement that members
must file reports with FINRA for any
customer that held aggregate large long
or short positions of any single class for
the previous day will continue to serve
as an important part of FINRA’s
surveillance efforts.
Finally, FINRA believes that the
current financial requirements imposed
by FINRA and by the Commission
adequately address financial
responsibility concerns that a member
or its customer will maintain an
inordinately large unhedged position in
any option with a higher position limit.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin or
capital that a member must maintain for
a large position. Under Rule
4210(f)(8)(A), FINRA also may impose a
higher margin requirement upon a
member when FINRA determines a
higher requirement is warranted. In
addition, the Commission’s net capital
rule 29 imposes a capital charge on
26 See Rule 2360(b)(5) for the options reporting
requirements.
27 These procedures have been effective for the
surveillance of options trading and will continue to
be employed.
28 17 CFR 240.13d–1.
29 17 CFR 240.15c3–1.
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members to the extent of any margin
deficiency resulting from the higher
margin requirement.
FINRA has filed the proposed rule
change for immediate effectiveness and
has requested that the SEC waive the
requirement that the proposed rule
change not become operative for 30 days
after the date of the filing, so FINRA can
implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,30 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed rule change promotes
consistent regulation by harmonizing
position limits with those of the other
self-regulatory organizations. FINRA
further believes that increasing the
position limit on conventional options
promotes consistent regulation by
harmonizing the position limit with its
standardized counterpart. In addition,
FINRA believes the proposed rule
change will be beneficial to large market
makers and institutions (which
generally have the greatest ability to
provide liquidity and depth in products
that may be subject to higher position
limits as has been the case with recently
approved increased position limits),31
as well as retail traders and public
customers, by providing them with a
more effective trading and hedging
vehicle. In addition, FINRA believes
that the structure of the options subject
to the proposed rule change and the
considerable liquidity of the market for
those options diminishes the
opportunity to manipulate these
products and disrupt the underlying
market that a lower position limit may
protect against.
Increased position limits for select
actively traded options, such as those
proposed herein, is not novel and has
been previously approved by the
Commission. For example, the
Commission has previously approved a
position limit of 1,800,000 contracts on
options on SPY.32 Additionally, the
Commission has approved similar
proposed rule changes by the options
exchanges to increase position and
exercise limits for options on highly
30 15
U.S.C. 78o–3(b)(6).
note 8.
32 See note 7.
31 See
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liquid, actively-traded ETFs,33
including a proposal to permanently
eliminate the position and exercise
limits for options overlaying the S&P
500 Index, S&P 100 Index, Dow Jones
Industrial Average, and Nasdaq 100
Index.34 In approving the permanent
elimination of position and exercise
limits, the Commission relied heavily
upon surveillance capabilities, and the
Commission expressed trust in the
enhanced surveillance and reporting
safeguards in order to detect and deter
possible manipulative behavior, which
might arise from eliminating position
and exercise limits.35 Furthermore, as
described more fully above, options on
other ETFs have the position limits
proposed herein, but their trading
volumes are significantly lower than the
ETFs subject to the proposed rule
change.
Furthermore, the proposed position
limits would continue to address
potential manipulative activity while
allowing for potential hedging activity
for appropriate economic purposes. The
creation and redemption process for
these ETFs also lessens the potential for
manipulative activity. When an ETF
company wants to create more ETF
shares, it looks to an Authorized
Participant, which is a market maker or
other large financial institution, to
acquire the securities the ETF is to hold.
For instance, IWM is designed to track
the performance of the Russell 2000
Index. The Authorized Participant will
purchase all the Russell 2000
constituent securities in the exact same
weight as the index, then deliver those
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33 See
Securities Exchange Act Release No. 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012)
(Order Approving File No. SR–CBOE–2012–66);
Securities Exchange Act Release No. 68478
(December 19, 2012), 77 FR 76132 (December 26,
2012) (Notice of Filing and Immediate Effectiveness
of File No. SR–BOX–2012–23); Securities Exchange
Act Release No. 68398 (December 11, 2012), 77 FR
74700 (December 17, 2012) (Notice of Filing and
Immediate Effectiveness of File No. SR–ISE–2012–
93); Securities Exchange Act Release No. 68293
(November 27, 2012), 77 FR 71644 (December 3,
2012) (Notice of Filing and Immediate Effectiveness
of File No. SR–Phlx–2012–132); Securities
Exchange Act Release No. 68358 (December 5,
2012), 77 FR 73708 (December 11, 2012) (Notice of
Filing and Immediate Effectiveness of File No. SR–
NYSE MKT–2012–71); Securities Exchange Act
Release No. 68359 (December 5, 2012), 77 FR 73716
(December 11, 2012) (Notice of Filing and
Immediate Effectiveness of File No. SR–NYSE
Arca–2012–132) and Securities Exchange Act
Release No. 69457 (April 25, 2013), 78 FR 25502
(May 1, 2013) (Notice of Filing and Immediate
Effectiveness of File No. SR–MIAX–2013–17).
34 See Securities Exchange Act Release No. 44994
(October 26, 2001), 66 FR 55722 (November 2, 2001)
(Order Approving File No. SR–CBOE–2001–22) and
Securities Exchange Act Release No. 52650 (October
21, 2005), 70 FR 62147 (October 28, 2005) (Order
Approving File No. SR–CBOE–2005–41) (‘‘NDX
Approval’’).
35 See NDX Approval at 62149.
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shares to the ETF provider. In exchange,
the ETF provider gives the Authorized
Participant a block of equally valued
ETF shares, on a one-for-one fair value
basis. The price is based on the net asset
value, not the market value at which the
ETF is trading. The creation of new ETF
units can be conducted all trading day
and is not subject to position limits.
This process can also work in reverse
where the ETF company seeks to
decrease the number of shares that are
available to trade. The creation and
redemption process, therefore, creates a
direct link to the underlying
components of the ETF, and serves to
mitigate potential price impact of the
ETF shares that might otherwise result
from increased position limits.
The ETF creation and redemption
process keeps ETF share prices trading
in line with the ETF’s underlying net
asset value. Because an ETF trades like
a stock, its price will fluctuate during
the trading day, due to simple supply
and demand. If demand to buy an ETF
is high, for instance, the ETF’s share
price might rise above the value of its
underlying securities. When this
happens, an Authorized Participant can
arbitrage this difference by buying the
underlying shares that compose the ETF
and then selling the ETF shares on the
open market. This drives the ETF’s
share price back toward fair value.
Likewise, if the ETF starts trading at a
discount to the securities it holds, the
Authorized Participant can buy shares
of the ETF and redeem them for the
underlying securities. Buying
undervalued ETF shares drives the price
of the ETF back toward fair value. This
arbitrage process helps to keep an ETF’s
price in line with the value of its
underlying portfolio.
Lastly, the Commission expressed the
belief that removing position and
exercise limits may bring additional
depth and liquidity without increasing
concerns regarding intermarket
manipulation or disruption of the
options or the underlying securities.36
FINRA’s existing surveillance and
reporting safeguards are designed to
deter and detect possible manipulative
behavior, which might arise from
eliminating position and exercise limits.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Economic Impact Analysis
FINRA has undertaken an economic
impact assessment, as set forth below, to
analyze the potential economic impacts,
including anticipated costs, benefits,
and distributional and competitive
effects transfers of wealth, relative to the
current baseline, and the alternatives
FINRA considered in assessing how to
best meet its regulatory objectives.
Regulatory Objective
FINRA is proposing to amend Rule
2360 to harmonize FINRA’s position
limits for conventional options with the
position limit for standardized
options.37
Economic Baseline
Per FINRA Rule 2360(b)(30)(A)(iii)
conventional equity options are subject
to a basic position limit of 25,000
contracts or higher for conventional
option contracts on securities that
underlie exchange-traded options
qualifying for a higher tier as
determined by option exchange rules.
The existing position limits for
conventional options on ETFs are:
900,000 contracts for SPY or QQQ,
500,000 contracts for IWM or EEM, and
250,000 contracts for FXI, EFA, EWZ,
TLT, or EWJ. Option exchanges have
recently increased (or in the case of SPY
decreased from the pilot program)
position limit options on several ETFs
such as SPY, IWM, QQQ, EEM, FXI,
EFA, EWZ, TLT, and EWJ.
Economic Impact
Benefits
As noted above, the proposed rule
change would amend Rule 2360 to
harmonize FINRA’s position limits for
conventional options with the position
limit for standardized options.38 For
investors that short conventional equity
options or buy them long, there is likely
to be a natural size for an executed order
that minimizes fixed and variable
transaction costs, including but not
limited to the bid-ask spread, price
impact, and transaction fees. If the
existing position limits for conventional
equity options on select ETFs constrains
the order size such that fixed and
variable transaction costs are higher
than optimal, then investors may benefit
if the new position limit is no less than
the natural size. In such an event, the
cost to hedge an ETF would decline,
thereby making it less costly to manage
downside risk.
In addition, if the existing position
limits serve as a constraint, then an
37 See
36 See
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38 See
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increase in the position limit for
conventional options on select ETFs
would permit investors to more easily
find a counterparty. If the number of
counterparties increases, then the cost
of hedging should decline as the halfspread narrows, thereby making it less
expensive to manage downside risk.
The extent of the constraint imposed
by the current limit on conventional
options is related to the ability of an
investor to achieve similar economic
exposure through other means. If there
are other securities, such as an option
on a closely related index, that exist and
provide similar economic exposure less
expensively, then the value of lessening
the position limit on conventional
options on ETFs is lower. Members may
rely on information and data feeds from
the Options Clearing Corporation to
assist in their monitoring position
limits. Because position limits on the
standardized and conventional side
have traditionally been consistent,
members have relied on this feed for
both standardized and conventional
options. If the position limits between
standardized and conventional options
are conformed, then the cost from
monitoring position limits should
decline for member firms.
Cost
The proposed rule change may
impose limited operational cost on
member firms that trade conventional
options on ETFs, as these same firms
would need to revise position limits that
are used in trading systems. However,
the proposed rule change should not
impose additional costs, because it is
difficult to disrupt or manipulate the
underlying market, create an incentive
to disrupt or manipulate the underlying
market for the purpose of profiting from
the options position, or disrupt or
manipulate the options market for
conventional options on ETFs affected
by this proposed rule. ETFs that
underlie options subject to the proposed
rule change are highly liquid, and are
based on a broad set of highly liquid
securities, which makes the market
difficult to manipulate or disrupt. In
fact, options on certain broad-based
security indexes have no position limits.
Furthermore, the creation and
redemption process for these ETFs
reduces the potential for disruptive or
manipulative activity. New ETF units
may be created at any time during the
trading day and are not subject to
position limits. Consequently, there is a
direct link between the underlying
components of the ETF and the ETF,
which keeps ETF share prices trading in
line with the ETF’s underlying net asset
value.
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Alternatives
IV. Solicitation of Comments
No further alternatives are under
consideration.
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:
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 39 and Rule 19b–4(f)(6) 40
thereunder.
FINRA has asked the Commission to
waive the 30-day operative delay so that
FINRA may immediately harmonize
position limits with those of other selfregulatory organizations to ensure
consistent regulation. For this reason,
the Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission hereby waives the
operative delay and designates the
proposal operative upon filing.41
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
39 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
FINRA has satisfied this requirement.
41 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
40 17
PO 00000
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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–
FINRA–2018–034 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–FINRA–2018–034. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of FINRA. 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–FINRA–
2018–034, and should be submitted on
or before October 11, 2018.
42 17
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–20435 Filed 9–19–18; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #15690 and #15691;
ALASKA Disaster Number AK–00039]
Presidential Declaration of a Major
Disaster for Public Assistance Only for
the State of ALASKA
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a Notice of the
Presidential declaration of a major
disaster for Public Assistance Only for
the State of ALASKA (FEMA—4391—
DR), dated 09/05/2018.
Incident: Flooding.
Incident Period: 05/11/2018 through
05/13/2018.
DATES: Issued on 09/05/2018.
Physical Loan Application Deadline
Date: 11/05/2018.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/05/2019.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
09/05/2018, Private Non-Profit
organizations that provide essential
services of a governmental nature may
file disaster loan applications at the
address listed above or other locally
announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties: Matanuska-Susitna
Borough.
SUMMARY:
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The Interest Rates are:
For Physical Damage:
Non-Profit Organizations with
Credit Available Elsewhere ...
Non-Profit Organizations without Credit Available Elsewhere .....................................
VerDate Sep<11>2014
18:01 Sep 19, 2018
Advisory Committee Act (5 U.S.C.,
Appendix 2), SBA announces the
For Economic Injury:
meeting of the AFMAC. The AFMAC is
Non-Profit Organizations withtasked with providing recommendation
out Credit Available Elseand advice regarding the Agency’s
where .....................................
2.500 financial management, including the
financial reporting process, systems of
The number assigned to this disaster
internal controls, and audit process and
for physical damage is 156906 and for
process for monitoring compliance with
economic injury is 156910.
relevant law and regulations.
(Catalog of Federal Domestic Assistance
The purpose of the meeting is to
Number 59008)
discuss the SBA’s Financial Reporting,
Audit Findings Remediation, Ongoing
James Rivera,
OIG Audits including the Information
Associate Administrator for Disaster
Technology Audit, FMFIA Assurance/
Assistance.
A–123 Internal Control Program, Credit
[FR Doc. 2018–20407 Filed 9–19–18; 8:45 am]
Modeling, Performance Management,
BILLING CODE 8025–01–P
Acquisition Division Update, Improper
Payments and current initiatives.
SMALL BUSINESS ADMINISTRATION
Timothy Gribben,
Percent
Audit and Financial Management
Advisory Committee (AFMAC)
Chief Financial Officer and Associate
Administrator, Office of Performance
Management and Chief Financial Officer.
U.S. Small Business
Administration.
ACTION: Notice of open Federal Advisory
committee meeting.
[FR Doc. 2018–20493 Filed 9–19–18; 8:45 am]
AGENCY:
The SBA is issuing this notice
to announce the location, date, time and
agenda for the next meeting of the Audit
and Financial Management Advisory
Committee (AFMAC). The meeting will
be open to the public.
DATES: The meeting will be held on
Wednesday, October 31, 2018, starting
at 2:00 p.m. until approximately 4:00
p.m. Eastern time.
ADDRESSES: The meeting will be held at
the U.S. Small Business Administration,
409 3rd Street SW, Office of
Performance Management and Chief
Financial Officer Conference Room, 6th
Floor, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: The
meeting is open to the public; however
advance notice of attendance is
requested. Anyone wishing to attend
and/or make a presentation to the
AFMAC must contact Tim Gribben by
fax or email, in order to be placed on the
agenda. Tim Gribben, Chief Financial
Officer, 409 3rd Street SW, 6th Floor,
Washington, DC 20416, phone (202)
205–6449; fax: (202) 481–0546; email:
timothy.gribben@sba.gov.
Additionally, if you need
accommodations because of a disability
or require additional information, please
contact Donna Wood at (202) 619–1608;
email Donna.Wood@sba.gov; SBA Office
Percent
of Performance Management & Chief
Financial Officer, 409 3rd Street SW,
Washington, DC 20416. For more
information, please visit www.sba.gov/
2.500
about-sba/sba-performance.
SUPPLEMENTARY INFORMATION: Pursuant
2.500 to section 10(a)(2) of the Federal
Jkt 244001
47673
SUMMARY:
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
BILLING CODE 8025–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #15688 and #15689;
MINNESOTA Disaster Number MN–00063]
Presidential Declaration of a Major
Disaster for Public Assistance Only for
the State of Minnesota
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a Notice of the
Presidential declaration of a major
disaster for Public Assistance Only for
the State of Minnesota (FEMA–4390–
DR), dated 09/05/2018.
Incident: Severe Storms, Tornadoes,
Straight-line Winds, and Flooding.
Incident Period: 06/15/2018 through
07/11/2018.
DATES: Issued on 09/05/2018.
Physical Loan Application Deadline
Date: 11/05/2018.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/05/2019.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
09/05/2018, Private Non-Profit
organizations that provide essential
SUMMARY:
E:\FR\FM\20SEN1.SGM
20SEN1
]]>Agencies
[Federal Register Volume 83, Number 183 (Thursday, September 20, 2018)]
[Notices]
[Pages 47666-47673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20435]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84127; File No. SR-FINRA-2018-034]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Rule 2360 (Options) To Increase Position
Limits on Options on Certain Exchange-Traded Funds
September 14, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 31, 2018, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as constituting a ``non-controversial'' rule
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which
renders the proposal effective upon receipt of this filing by the
Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 2360 (Options) to increase
the position limit for conventional options on the following exchange-
traded funds (``ETF''): The Standard and Poor's Depositary Receipts
Trust (``SPY''), iShares Russell 2000 ETF (``IWM''), PowerShares QQQ
Trust (``QQQ''), iShares MSCI Emerging Markets ETF (``EEM''), iShares
China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares
MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury Bond Fund
ETF (``TLT''), and iShares MSCI Japan ETF (``EWJ'').
Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
2360. Options
(a) No Change.
(b) Requirements
(1) through (2) No Change.
(3) Position Limits
(A) Stock Options--
(i) through (ii) No Change.
(iii) Conventional Equity Options
a. For purposes of this paragraph (b), standardized equity option
contracts of the put class and call class on the same side of the
market overlying the same security shall not be aggregated with
conventional equity option contracts or FLEX Equity Option contracts
overlying the same security on the same side of the market.
Conventional equity option contracts of the put class and call class on
the same side of the market overlying the same security shall be
subject to a position limit of:
1. through 5. No Change.
6. for selected conventional options on exchange-traded funds
(``ETF''), the position limits are listed in the chart below:
----------------------------------------------------------------------------------------------------------------
Security underlying option Position limit
----------------------------------------------------------------------------------------------------------------
The DIAMONDS Trust (DIA)..................... 300,000 contracts.
The Standard and Poor's Depositary Receipts [900,000]1,800,000 contracts.
Trust (SPY).
The iShares Russell 2000 [Index Fund]ETF [500,000]1,000,000 contracts.
(IWM).
The PowerShares QQQ Trust (QQQ[Q])........... [900,000]1,800,000 contracts.
The iShares MSCI Emerging Markets [Index [500,000]1,000,000 contracts.
Fund]ETF (EEM).
iShares China Large-Cap ETF (FXI)............ 500,000 contracts.
iShares MSCI EAFE ETF (EFA).................. 500,000 contracts.
iShares MSCI Brazil Capped ETF (EWZ)......... 500,000 contracts.
iShares 20+ Year Treasury Bond Fund ETF (TLT) 500,000 contracts.
iShares MSCI Japan ETF (EWJ)................. 500,000 contracts.
----------------------------------------------------------------------------------------------------------------
[[Page 47667]]
b. No Change.
(B) through (D) No Change.
(4) through (24) No Change.
(c) No Change.
Supplementary Material:----
.01 through .03 No Change.
* * * * *
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA Rule 2360(b)(3)(A) imposes a position limit on the number of
equity options contracts in each class on the same side of the market
that can be held or written by a member, a person associated with a
member, or a customer or a group of customers acting in concert.
Position limits are intended to prevent the establishment of options
positions that can be used to manipulate or disrupt the underlying
market or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position. In addition,
position limits serve to reduce the potential for disruption of the
options market itself, especially in illiquid options classes.\4\ This
consideration has been balanced by the concern that the limits ``not be
established at levels that are so low as to discourage participation in
the options market by institutions and other investors with substantial
hedging needs or to prevent specialists and market makers from
adequately meeting their obligations to maintain a fair and orderly
market.'' \5\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (Order Approving
File No. SR-CBOE-98-23) (citing H.R. No. IFC-3, 96th Cong., 1st
Sess. at 189-91 (Comm. Print 1978)).
\5\ Id. at 4913.
---------------------------------------------------------------------------
Rule 2360(b)(3)(A)(i) does not independently establish a position
limit for standardized equity options. Rather, the position limit
established by the rules of an options exchange for a particular equity
option is the applicable position limit for purposes of Rule 2360.\6\
Rule 2360(b)(3)(A)(iii) provides that conventional equity options are
subject to a basic position limit of 25,000 contracts or a higher tier
for conventional option contracts on securities that underlie exchange-
traded options qualifying for such higher tier as determined by the
rules of the options exchanges. In addition, FINRA lists position
limits for options on securities that have higher position limits--
currently, only the ETFs listed in Rule 2360(b)(3)(A)(iii)a.6.--that
also generally mirror the options exchange position limits.\7\ At this
time, FINRA proposes to conform to the options exchanges' recent
amendments that increased (or in the case of SPY decreased from the
pilot program) the position limit options on the following ETFs: SPY,
IWM, QQQ, EEM, FXI, EFA, EWZ, TLT and EWJ.\8\
---------------------------------------------------------------------------
\6\ See e.g., CBOE Rule 4.11; ISE Rule 412; NASDAQ PHLX Rule
1001; NYSE American Rule 904; NYSE Arca Rule 6.8; MIAX Rule 307; BOX
Rule 3120 and IM-3120-2; Nasdaq Chapter III, Section 7; BX Chapter
III, Section 7; and BZX Rule 18.7.
\7\ The options exchanges have recently revised the position
limit on SPY options to 1,800,000 contracts after expiration of a
pilot program on July 12, 2018 that eliminated position limits on
SPY options. FINRA retained its position for conventional options on
SPY at 900,000 contracts. The proposed rule change proposes to
increase the position limit on SPY to 1,800,000 consistent with the
options exchanges updating the position limit on SPY to 1,800,000
contracts. See Securities Exchange Act Release No. 83349 (May 30,
2018), 83 FR 26123 (June 5, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR-MIAX-2018-11). See also Securities
Exchange Act Release No. 83412 (June 12, 2018), 83 FR 28298 (June
18, 2018) (Notice of Filing and Immediate Effectiveness of File No.
SR-PHLX-2018-44); Securities Exchange Act Release No. 83414 (June
12, 2018), 83 FR 28296 (June 18, 2018) (Notice of Filing and
Immediate Effectiveness of File No. SR-BOX-2018-22); Securities
Exchange Act Release No. 83415 (June 12, 2018), 83 FR 28274 (June
18, 2018) (Notice of Filing and Immediate Effectiveness of File No.
SR-CBOE-2018-042); Securities Exchange Act Release No. 83413 (June
12, 2018), 83 FR 28277 (June 18, 2018) (Notice of Filing and
Immediate Effectiveness of File No. SR-NYSEArca-2018-44); and
Securities Exchange Act Release No. 83417 (June 12, 2018), 83 FR
28279 (June 18, 2018) (Notice of Filing and Immediate Effectiveness
of File No. SR-NYSEAMER-2018-26).
\8\ See note 7 for discussion regarding position limits for
options on SPY. See also Securities Exchange Act Release No. 82770
(February 23, 2018), 83 FR 8907 (March 1, 2018) (Order Granting
Accelerated Approval of File No. SR-CBOE-2017-057). See also
Securities Exchange Act Release No. 82931 (March 22, 2018), 83 FR
13323 (March 28, 2018) (Notice of Filing and Immediate Effectiveness
of File No. SR-MIAX-2018-10); Securities Exchange Act Release No.
82930 (March 22, 2018), 83 FR 13330 (March 28, 2018) (Notice of
Filing and Immediate Effectiveness of File No. SR-BOX-2018-10);
Securities Exchange Act Release No. 82932 (March 22, 2018), 83 FR
13316 (March 28, 2018) (Notice of Filing and Immediate Effectiveness
of File No. SR-PHLX-2018-24); Securities Exchange Act Release No.
83066 (April 19, 2018), 83 FR 18099 (April 25, 2018) (Notice of
Filing and Immediate Effectiveness of File No. SR-NYSEArca-2018-23)
and Securities Exchange Act Release No. 83065 (April 19, 2018), 83
FR 18093 (April 25, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR-NYSEAMER-2018-14).
---------------------------------------------------------------------------
The proposed rule change would amend the table provided in Rule
2360(b)(3)(A)(iii)a.6. as follows:
The position limits for options on SPY would be increased
from 900,000 contracts to 1,800,000 contracts;
The position limit for options on IWM would be increased
from 500,000 contracts to 1,000,000 contracts;
The position limit for options on QQQ would be increased
from 900,000 contracts to 1,800,000 contracts; and
The position limit for options on EEM would be increased
from 500,000 contracts to 1,000,000 contracts.
In addition, the proposed rule change would add to the table
provided in Rule 2360(b)(3)(A)(iii)a.6. as follows, with the effect of
each ETF being increased from the current position limit of 250,000
contracts:
The position limit for options on FXI would be increased
to 500,000 contracts;
The position limit for options on EFA would be increased
to 500,000 contracts;
The position limit for options on EWZ would be increased
to 500,000 contracts;
The position limit for options on TLT would be increased
to 500,000 contracts; and
The position limit for options on EWJ would be increased
to 500,000 contracts.\9\
---------------------------------------------------------------------------
\9\ The proposed rule filing would also make certain wording
changes to the listing of the names of the ETFs and change in two
places ``Index Fund'' to ``ETF''. The proposed rule filing would
also revise the symbol of The PowerShares QQQ Trust to ``QQQ.''
---------------------------------------------------------------------------
In support of the proposed rule change, as noted by Cboe, position
limits are determined by the option exchange's requirements according
to the number of outstanding shares and the trading volume of the
underlying ETF over the past six months.\10\ The ETFs that underlie
options subject to the proposed rule change are highly liquid, and are
based on a broad set of highly liquid securities and other reference
assets. The above listed ETFs are listed on various national securities
exchanges and meet their listing standards.
---------------------------------------------------------------------------
\10\ See for example, Cboe Rule 4.11 Interpretations and
Policies: .02.
---------------------------------------------------------------------------
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks.\11\ EEM tracks the
performance of
[[Page 47668]]
the MSCI Emerging Markets Index, which is composed of approximately 800
component securities from emerging market countries from all over the
world.\12\ IWM tracks the performance of the Russell 2000 Index, which
is composed of 2,000 small-cap domestic stocks.\13\ EFA tracks the
performance of MSCI EAFE Index, which has over 900 component
securities.\14\ The MSCI EAFE Index is designed to represent the
performance of large and mid-cap securities across 21 developed
markets, including countries in Europe, Australia and the Far East,
excluding the U.S. and Canada.\15\ EWZ tracks the performance of the
MSCI Brazil 25/50 Index, which is composed of shares of large and mid-
size companies in Brazil.\16\ TLT tracks the performance of ICE U.S.
Treasury 20+ Year Bond Index, which is composed of long-term U.S.
Treasury bonds.\17\ QQQ tracks the performance of the Nasdaq-100 Index,
which is composed of 100 of the largest domestic and international non-
financial companies listed on the Nasdaq Stock Market LLC
(``Nasdaq'').\18\ EWJ tracks the MSCI Japan Index, which tracks the
performance of large and mid-sized companies in Japan.\19\ SPY tracks
the performance of the S&P 500[supreg] Index, which is an index of
diversified large cap U.S. companies.\20\
---------------------------------------------------------------------------
\11\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\12\ See https://www.ishares.com/us/products/239637/ishares-msci-emerging-markets-etf.
\13\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\14\ See https://www.ishares.com/us/products/239623/.
\15\ See https://www.msci.com/eafe.
\16\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\17\ See https://www.ishares.com/us/products/239454/.
\18\ See https://indexes.nasdaqomx.com/Index/Overview/NDX.
\19\ See https://www.ishares.com/us/products/239665/EWJ.
\20\ See https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY.
---------------------------------------------------------------------------
In support of this proposal, all trading and other statistics,
except SPY which were compiled by FINRA, have been compiled by Cboe as
of the dates provided by Cboe and provided in its proposed rule change
to increase the applicable positions limits: \21\
---------------------------------------------------------------------------
\21\ See note 8.
----------------------------------------------------------------------------------------------------------------
2017 ADV Shares
ETF 2017 ADV (option outstanding Fund market
(mil. shares) contracts) (mil.) cap. ($mil.)
----------------------------------------------------------------------------------------------------------------
FXI............................................. 15.08 71,944 78.6 $3,343.6
EEM............................................. 52.12 287,357 797.4 34,926.1
IWM............................................. 27.46 490,070 253.1 35,809.1
EFA............................................. 19.42 98,844 1178.4 78,870.3
EWZ............................................. 17.08 95,152 159.4 6,023.4
TLT............................................. 8.53 80,476 60.0 7,442.4
QQQ............................................. 26.25 579,404 351.6 50,359.7
EWJ............................................. 6.06 4,715 303.6 16,625.1
SPY............................................. 64.63 2,575,153 976.23 240,540.0
----------------------------------------------------------------------------------------------------------------
FINRA agrees as proposed by Cboe that the liquidity in the
underlying ETFs, and the liquidity in the ETF options support its
request to increase the position limits for the options subject to the
proposed rule change. As to the underlying ETF shares, the average
daily trading volume across all exchanges for the period of January 1
to July 31, 2017 was: (i) FXI-15.08 million shares; (ii) EEM-52.12
million shares; (iii) IWM-27.46 million shares; (iv) EFA-19.42 million
shares; (v) EWZ-17.08 million shares; (vi) TLT-8.53 million shares;
(vii) QQQ- 26.25 million shares; (vii) EWJ-6.06 million shares; and
(viii) SPY-64.63 million shares.
In proposing the increased position limits, FINRA considered the
availability of economically equivalent products and their respective
position limits. For instance, some of the ETFs underlying options
subject to this proposal are based on broad-based indices that underlie
cash-settled options that are economically equivalent to the ETF
options that are the subject of this proposal and have no position
limits (NDX and SPX). Other ETFs are based on broad-based indexes that
underlie cash-settled options with position limits reflecting notional
values that are larger than the current position limits for ETF
analogues (EEM and EFA). Where there was no approved index analogue,
FINRA believes, based on the liquidity, breadth and depth of the
underlying market, that the index referenced by the ETF would be
considered a broad-based index (example FXI and EWJ).\22\ FINRA
believes that if certain position limits are appropriate for the
options overlying the same index, or an analogue to the basket of
securities that the ETF tracks, then those same economically equivalent
position limits should be appropriate for the option overlying the ETF.
In addition, the market capitalization of the underlying index or
reference asset is large enough to absorb any price movements that may
be caused by an oversized trade. Also, the issuer may look to the
stocks comprising the analogous underlying index or reference asset
when seeking to create additional ETF shares which are part of the
creation/redemption process to address supply and demand or to mitigate
the price movement of the price of the ETF.
---------------------------------------------------------------------------
\22\ FINRA Rule 2360(b)(3)(B) establishes position limits for
index options by incorporating by reference the position limit
established by the options exchange on which the option trades.
Options exchanges establish rules for index options based on the
characteristic of the underlying index. See, e.g., Cboe Rule 24.4
and MIAX Rule 1804.
---------------------------------------------------------------------------
For example, the PowerShares QQQ Trust or QQQ is an ETF that tracks
the Nasdaq 100 Index or NDX, which is an index composed of 100 of the
largest non-financial securities listed on the Nasdaq Stock Market LLC
(``Nasdaq''). Options on NDX are currently subject to no position
limits but share similar trading characteristics as QQQ. Based on QQQ's
share price of $154.5422 and NDX's index level of 6,339.14,
approximately 40 contracts of QQQ equals one contract of NDX. Assume
that options on NDX are subject to the standard position limit of
25,000 contracts for broad-based index options under options exchange
rules. Based on the above comparison of notional values, this would
result in a position limit equivalent to 1,000,000 contracts for QQQ as
NDX's analogue. However, options on NDX are not subject to position
limits and has an average daily trading volume of 15,300 contracts.
Options on QQQ are currently subject to a position limit of 900,000
contracts but has a much higher average daily trading volume of 579,404
contracts. Furthermore, NDX currently has a market capitalization of
$17.2 trillion and QQQ has a market capitalization of
[[Page 47669]]
$50,359.7 million, and the component securities of NDX, in aggregate,
have traded an average of 440 million shares per day in 2017, both
market capitalizations being large enough to absorb any price movement
caused by a large trade in the QQQ. The Commission has also approved no
position limit for options on NDX, although it has a much lower daily
trading volume than its analogue, the QQQ. Therefore, FINRA believes it
is reasonable to increase the position limit for options on QQQ from
900,000 to 1,800,000 contracts.
The SPDR[supreg] S&P 500[supreg] ETF Trust or SPY seeks to provide
investment results that, before expenses, correspond generally to the
price and yield performance of the S&P 500[supreg] Index or SPX, which
is an index composed of 500 large-cap U.S. companies. Options on the
SPX have no position limits and share similar trading characteristics
as SPY. Based on SPY's price of $263.15 and SPX's index level of
2640.87, approximately 10 contracts of SPY equals one contract of
SPX.\23\ Assume that options on SPX are subject to the standard
position limit of 25,000 contracts for broad-based index options under
options exchange rules. Based on the above comparison of notional
values, this would result in a position limit equivalent to 250,000
contracts for options on SPY as SPX's analogue. However, options on SPX
are not subject to position limits and has an average daily trading
volume of 1,101,185 contracts.\24\ Options on SPY were recently changed
to a position limit of 1,800,000 contracts for standardized options,
but is currently subject to a conventional option position limit of
900,000 contracts but has a much higher average daily trading volume of
2,575,153 contracts.\25\ Furthermore, as of December 29, 2017, SPX had
a market capitalization of $23.9 trillion and SPY has a market
capitalization of $277.54 billion, large enough to absorb any price
movement caused by a large trade in the SPY. The Commission has also
approved no position limit for options on SPX, although it has a much
lower daily trading volume than its analogue, the SPY, for which the
exchanges recently changed the position limit to 1,800,000 contracts.
Therefore, FINRA believes it is reasonable to increase the position
limits for options on SPY from 900,000 to 1,800,000 contracts.
---------------------------------------------------------------------------
\23\ As of March 29, 2018.
\24\ As of July 31, 2017.
\25\ See note 7.
---------------------------------------------------------------------------
The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the
Russell 2000 index or RUT, which is an index composed of 2,000 small-
cap domestic companies in the Russell 2000 index. Options on RUT are
currently subject to no position limits but share similar trading
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's
index level of 1,486.88, approximately 10 contracts of IWM equals one
contract of RUT. Assume that options on RUT are subject to the standard
position limit of 25,000 contracts for broad-based index options under
options exchange rules. Based on the above comparison of notional
values, this would result in a position limit equivalent to 250,000
contracts for options on IWM as RUT's analogue. However, options on RUT
are not subject to position limits and has an average daily trading
volume of 66,200 contracts. Options on IWM are currently subject to a
position limit of 500,000 contracts but has a much higher average daily
trading volume of 490,070 contracts. The Commission has approved no
position limit for options on RUT, although it has a much lower average
daily trading volume than its analogue, the IWM. Furthermore, RUT
currently has a market capitalization of $2.4 trillion and IWM has a
market capitalization of $35,809.1 million, and the component
securities of RUT, in aggregate, have traded an average of 270 million
shares per day in 2017, both large enough to absorb any price movement
caused by a large trade in the IWM. Therefore, FINRA believes it is
reasonable to increase the position limit for options on IWM from
500,000 to 1,000,000 contracts.
EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities from
emerging market countries from all over the world. Below makes the same
notional value comparisons as made above. Based on EEM's share price of
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts
of EEM equals one contract of MXEF. Assume that options on MXEF are
subject to the standard position limit of 25,000 contracts for broad-
based index options under options exchange rules. Based on the above
comparison of notional values, this would result in a position limit
economically equivalent to 604,000 contracts for options on EEM as
MXEF's analogue. However, MXEF has an average daily trading volume of
180 contracts. Options on EEM is currently subject to a position limit
of 500,000 contracts but has a much higher average daily trading volume
of 287,357 contracts. Furthermore, MXEF currently has a market
capitalization of $5.18 trillion and EEM has a market capitalization of
$34,926.1 million, and the component securities of MXEF, in aggregate,
have traded an average of 33.6 billion shares per day in 2017, both
large enough to absorb any price movement caused by a large trade in
the EEM. Therefore, based on the comparison of average daily trading
volume, FINRA believes it is reasonable to increase the position limit
for options on EEM from 500,000 to 1,000,000 contracts.
EFA tracks the performance of the MSCI EAFE Index or MXEA, which
has over 900 component securities designed to represent the performance
of large and mid-cap securities across 21 developed markets, including
countries in Europe, Australia and the Far East, excluding the U.S. and
Canada. Below makes the same notional value comparison as made above.
Based on EFA's share price of $69.16 and MXEA's index level of
1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. Assume options on MXEA are subject to the standard position limit
of 25,000 contracts for broad-based index options under options
exchange rules. Based on the above comparison of notional values, this
would result in a position limit economically equivalent to 721,000
contracts for EFA as MXEA's analogue. Furthermore, MXEA currently has a
market capitalization of $18.7 trillion and EFA has a market
capitalization of $78,870.3 million, and the component securities of
MXEA, in aggregate, have traded an average of 4.6 billion shares per
day in 2017, both large enough to absorb any price movement caused by a
large trade in EFA. However, MXEA has an average daily trading volume
of 270 contracts. Options on EFA is currently subject to a position
limit of 250,000 contracts but has a much higher average daily trading
volume of 98,844 contracts. Based on the above comparisons, FINRA
believes it is reasonable to increase the position limit for options on
EFA from 250,000 to 500,000 contracts.
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. Options on FXI are
currently subject to a position limit of 250,000 contracts but has a
much higher average daily trading volume of 15.08 million shares.
However, the FTSE China 50 Index currently has a market capitalization
of $1.7 trillion and FXI has a market capitalization of $2,623.18
million, both large enough to absorb any price movement caused by a
large trade
[[Page 47670]]
in FXI. The components of the FTSE China 50 Index, in aggregate, have
an average daily trading volume of 2.3 billion shares. Based on the
above comparisons, FINRA believes it is reasonable to increase the
position limit for options on FXI from 250,000 to 500,000 contracts.
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
Options on EWZ are currently subject to a position limit of 250,000
contracts but the ETF has a much higher average daily trading volume of
17.08 million shares. However, the MSCI Brazil 25/50 Index currently
has a market capitalization of $700 billion and EWZ has a market
capitalization of $6,023.4 million, both large enough to absorb any
price movement caused by a large trade in EWZ. The components of the
MSCI Brazil 25/50 Index, in aggregate, have an average daily trading
volume of 285 million shares. Based on the above comparisons, FINRA
believes it is reasonable to increase the position limit for options on
EWZ from 250,000 to 500,000 contracts.
TLT tracks the performance of the ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement caused by a large trade in TLT. Therefore, any potential
for manipulation will not increase solely due to the increase in
position limits as set forth in this proposal. Based on the above
comparisons, FINRA believes it is reasonable to increase the position
limit for options on TLT from 250,000 to 500,000 contracts.
EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for EWJ approved for options trading. However, the MSCI Japan
Index has a market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement caused by a large trade in EWJ. Options on EWJ is currently
subject to a position limit of 250,000 contracts and has an average
daily trading volume of 6.6 million shares. Based on the above
comparisons, FINRA believes it is reasonable to increase the position
limit for options on EWJ from 250,000 to 500,000 contracts.
FINRA believes that increasing the position limits for the
conventional options subject to the proposed rule change would lead to
a more liquid and competitive market environment for these options,
which will benefit customers interested in these products.
Surveillance and Reporting
Further, FINRA believes that the increased position limits
provisions are appropriate in light of the existing surveillance
procedures and reporting requirements at FINRA,\26\ the options
exchanges, and at the several clearing firms, which are capable of
properly identifying unusual or illegal trading activity. These
procedures use daily monitoring of market movements by automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\27\
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\26\ See Rule 2360(b)(5) for the options reporting requirements.
\27\ These procedures have been effective for the surveillance
of options trading and will continue to be employed.
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In addition, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\28\ Options positions are
part of any reportable positions and cannot legally be hidden.
Moreover, the previously noted Rule 2360(b)(5) requirement that members
must file reports with FINRA for any customer that held aggregate large
long or short positions of any single class for the previous day will
continue to serve as an important part of FINRA's surveillance efforts.
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\28\ 17 CFR 240.13d-1.
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Finally, FINRA believes that the current financial requirements
imposed by FINRA and by the Commission adequately address financial
responsibility concerns that a member or its customer will maintain an
inordinately large unhedged position in any option with a higher
position limit. Current margin and risk-based haircut methodologies
serve to limit the size of positions maintained by any one account by
increasing the margin or capital that a member must maintain for a
large position. Under Rule 4210(f)(8)(A), FINRA also may impose a
higher margin requirement upon a member when FINRA determines a higher
requirement is warranted. In addition, the Commission's net capital
rule \29\ imposes a capital charge on members to the extent of any
margin deficiency resulting from the higher margin requirement.
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\29\ 17 CFR 240.15c3-1.
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FINRA has filed the proposed rule change for immediate
effectiveness and has requested that the SEC waive the requirement that
the proposed rule change not become operative for 30 days after the
date of the filing, so FINRA can implement the proposed rule change
immediately.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\30\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change promotes
consistent regulation by harmonizing position limits with those of the
other self-regulatory organizations. FINRA further believes that
increasing the position limit on conventional options promotes
consistent regulation by harmonizing the position limit with its
standardized counterpart. In addition, FINRA believes the proposed rule
change will be beneficial to large market makers and institutions
(which generally have the greatest ability to provide liquidity and
depth in products that may be subject to higher position limits as has
been the case with recently approved increased position limits),\31\ as
well as retail traders and public customers, by providing them with a
more effective trading and hedging vehicle. In addition, FINRA believes
that the structure of the options subject to the proposed rule change
and the considerable liquidity of the market for those options
diminishes the opportunity to manipulate these products and disrupt the
underlying market that a lower position limit may protect against.
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\30\ 15 U.S.C. 78o-3(b)(6).
\31\ See note 8.
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Increased position limits for select actively traded options, such
as those proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved
a position limit of 1,800,000 contracts on options on SPY.\32\
Additionally, the Commission has approved similar proposed rule changes
by the options exchanges to increase position and exercise limits for
options on highly
[[Page 47671]]
liquid, actively-traded ETFs,\33\ including a proposal to permanently
eliminate the position and exercise limits for options overlaying the
S&P 500 Index, S&P 100 Index, Dow Jones Industrial Average, and Nasdaq
100 Index.\34\ In approving the permanent elimination of position and
exercise limits, the Commission relied heavily upon surveillance
capabilities, and the Commission expressed trust in the enhanced
surveillance and reporting safeguards in order to detect and deter
possible manipulative behavior, which might arise from eliminating
position and exercise limits.\35\ Furthermore, as described more fully
above, options on other ETFs have the position limits proposed herein,
but their trading volumes are significantly lower than the ETFs subject
to the proposed rule change.
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\32\ See note 7.
\33\ See Securities Exchange Act Release No. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (Order Approving File No. SR-
CBOE-2012-66); Securities Exchange Act Release No. 68478 (December
19, 2012), 77 FR 76132 (December 26, 2012) (Notice of Filing and
Immediate Effectiveness of File No. SR-BOX-2012-23); Securities
Exchange Act Release No. 68398 (December 11, 2012), 77 FR 74700
(December 17, 2012) (Notice of Filing and Immediate Effectiveness of
File No. SR-ISE-2012-93); Securities Exchange Act Release No. 68293
(November 27, 2012), 77 FR 71644 (December 3, 2012) (Notice of
Filing and Immediate Effectiveness of File No. SR-Phlx-2012-132);
Securities Exchange Act Release No. 68358 (December 5, 2012), 77 FR
73708 (December 11, 2012) (Notice of Filing and Immediate
Effectiveness of File No. SR-NYSE MKT-2012-71); Securities Exchange
Act Release No. 68359 (December 5, 2012), 77 FR 73716 (December 11,
2012) (Notice of Filing and Immediate Effectiveness of File No. SR-
NYSE Arca-2012-132) and Securities Exchange Act Release No. 69457
(April 25, 2013), 78 FR 25502 (May 1, 2013) (Notice of Filing and
Immediate Effectiveness of File No. SR-MIAX-2013-17).
\34\ See Securities Exchange Act Release No. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (Order Approving File No. SR-
CBOE-2001-22) and Securities Exchange Act Release No. 52650 (October
21, 2005), 70 FR 62147 (October 28, 2005) (Order Approving File No.
SR-CBOE-2005-41) (``NDX Approval'').
\35\ See NDX Approval at 62149.
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Furthermore, the proposed position limits would continue to address
potential manipulative activity while allowing for potential hedging
activity for appropriate economic purposes. The creation and redemption
process for these ETFs also lessens the potential for manipulative
activity. When an ETF company wants to create more ETF shares, it looks
to an Authorized Participant, which is a market maker or other large
financial institution, to acquire the securities the ETF is to hold.
For instance, IWM is designed to track the performance of the Russell
2000 Index. The Authorized Participant will purchase all the Russell
2000 constituent securities in the exact same weight as the index, then
deliver those shares to the ETF provider. In exchange, the ETF provider
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. The price is based on the net asset
value, not the market value at which the ETF is trading. The creation
of new ETF units can be conducted all trading day and is not subject to
position limits. This process can also work in reverse where the ETF
company seeks to decrease the number of shares that are available to
trade. The creation and redemption process, therefore, creates a direct
link to the underlying components of the ETF, and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits.
The ETF creation and redemption process keeps ETF share prices
trading in line with the ETF's underlying net asset value. Because an
ETF trades like a stock, its price will fluctuate during the trading
day, due to simple supply and demand. If demand to buy an ETF is high,
for instance, the ETF's share price might rise above the value of its
underlying securities. When this happens, an Authorized Participant can
arbitrage this difference by buying the underlying shares that compose
the ETF and then selling the ETF shares on the open market. This drives
the ETF's share price back toward fair value. Likewise, if the ETF
starts trading at a discount to the securities it holds, the Authorized
Participant can buy shares of the ETF and redeem them for the
underlying securities. Buying undervalued ETF shares drives the price
of the ETF back toward fair value. This arbitrage process helps to keep
an ETF's price in line with the value of its underlying portfolio.
Lastly, the Commission expressed the belief that removing position
and exercise limits may bring additional depth and liquidity without
increasing concerns regarding intermarket manipulation or disruption of
the options or the underlying securities.\36\ FINRA's existing
surveillance and reporting safeguards are designed to deter and detect
possible manipulative behavior, which might arise from eliminating
position and exercise limits.
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\36\ See NDX Approval at 62149.
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Analysis
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the potential economic impacts, including anticipated
costs, benefits, and distributional and competitive effects transfers
of wealth, relative to the current baseline, and the alternatives FINRA
considered in assessing how to best meet its regulatory objectives.
Regulatory Objective
FINRA is proposing to amend Rule 2360 to harmonize FINRA's position
limits for conventional options with the position limit for
standardized options.\37\
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\37\ See note 8.
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Economic Baseline
Per FINRA Rule 2360(b)(30)(A)(iii) conventional equity options are
subject to a basic position limit of 25,000 contracts or higher for
conventional option contracts on securities that underlie exchange-
traded options qualifying for a higher tier as determined by option
exchange rules. The existing position limits for conventional options
on ETFs are: 900,000 contracts for SPY or QQQ, 500,000 contracts for
IWM or EEM, and 250,000 contracts for FXI, EFA, EWZ, TLT, or EWJ.
Option exchanges have recently increased (or in the case of SPY
decreased from the pilot program) position limit options on several
ETFs such as SPY, IWM, QQQ, EEM, FXI, EFA, EWZ, TLT, and EWJ.
Economic Impact
Benefits
As noted above, the proposed rule change would amend Rule 2360 to
harmonize FINRA's position limits for conventional options with the
position limit for standardized options.\38\ For investors that short
conventional equity options or buy them long, there is likely to be a
natural size for an executed order that minimizes fixed and variable
transaction costs, including but not limited to the bid-ask spread,
price impact, and transaction fees. If the existing position limits for
conventional equity options on select ETFs constrains the order size
such that fixed and variable transaction costs are higher than optimal,
then investors may benefit if the new position limit is no less than
the natural size. In such an event, the cost to hedge an ETF would
decline, thereby making it less costly to manage downside risk.
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\38\ See note 8.
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In addition, if the existing position limits serve as a constraint,
then an
[[Page 47672]]
increase in the position limit for conventional options on select ETFs
would permit investors to more easily find a counterparty. If the
number of counterparties increases, then the cost of hedging should
decline as the half-spread narrows, thereby making it less expensive to
manage downside risk.
The extent of the constraint imposed by the current limit on
conventional options is related to the ability of an investor to
achieve similar economic exposure through other means. If there are
other securities, such as an option on a closely related index, that
exist and provide similar economic exposure less expensively, then the
value of lessening the position limit on conventional options on ETFs
is lower. Members may rely on information and data feeds from the
Options Clearing Corporation to assist in their monitoring position
limits. Because position limits on the standardized and conventional
side have traditionally been consistent, members have relied on this
feed for both standardized and conventional options. If the position
limits between standardized and conventional options are conformed,
then the cost from monitoring position limits should decline for member
firms.
Cost
The proposed rule change may impose limited operational cost on
member firms that trade conventional options on ETFs, as these same
firms would need to revise position limits that are used in trading
systems. However, the proposed rule change should not impose additional
costs, because it is difficult to disrupt or manipulate the underlying
market, create an incentive to disrupt or manipulate the underlying
market for the purpose of profiting from the options position, or
disrupt or manipulate the options market for conventional options on
ETFs affected by this proposed rule. ETFs that underlie options subject
to the proposed rule change are highly liquid, and are based on a broad
set of highly liquid securities, which makes the market difficult to
manipulate or disrupt. In fact, options on certain broad-based security
indexes have no position limits. Furthermore, the creation and
redemption process for these ETFs reduces the potential for disruptive
or manipulative activity. New ETF units may be created at any time
during the trading day and are not subject to position limits.
Consequently, there is a direct link between the underlying components
of the ETF and the ETF, which keeps ETF share prices trading in line
with the ETF's underlying net asset value.
Alternatives
No further alternatives are under consideration.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \39\ and Rule 19b-
4(f)(6) \40\ thereunder.
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\39\ 15 U.S.C. 78s(b)(3)(A).
\40\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and the text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. FINRA has satisfied this requirement.
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FINRA has asked the Commission to waive the 30-day operative delay
so that FINRA may immediately harmonize position limits with those of
other self-regulatory organizations to ensure consistent regulation.
For this reason, the Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest. Therefore, the Commission hereby waives the operative
delay and designates the proposal operative upon filing.\41\
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\41\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2018-034 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-FINRA-2018-034. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of FINRA. 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-FINRA-2018-034, and should be submitted
on or before October 11, 2018.
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\42\ 17 CFR 200.30-3(a)(12).
[[Page 47673]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-20435 Filed 9-19-18; 8:45 am]
BILLING CODE 8011-01-P
