Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating To Adopt Rule 6.49B, Off-Floor RWA Transfers, 40460-40464 [2019-17383]
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Federal Register / Vol. 84, No. 157 / Wednesday, August 14, 2019 / Notices
All submissions should refer to File No.
SR–MIAX–2019–35. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
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Persons submitting comments are
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submissions should refer to File No.
SR–MIAX–2019–35, and should be
submitted on or before September 4,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–17388 Filed 8–13–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86603; File No. SR–CBOE–
2019–044]
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Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change Relating To
Adopt Rule 6.49B, Off-Floor RWA
Transfers
August 8, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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notice is hereby given that on August 6,
2019, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to adopt
Rule 6.49B. The text of the proposed
rule change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt Rule
6.49B to add an exception to the
prohibition in Rule 6.49(a) against offfloor position transfers. Rule 6.49(a)
generally requires transactions of option
contracts listed on the Exchange for a
premium in excess of $1.00 to be
effected on the floor of the Exchange or
on another exchange. Rule 6.49A(a)
specifies the current circumstances 3
3 The circumstances currently listed include: (1)
The dissolution of a joint account in which the
remaining Trading Permit Holder assumes the
positions of the joint account; (2) the dissolution of
a corporation or partnership in which a former
nominee of the corporation or partnership assumes
the positions; (3) positions transferred as part of a
Trading Permit Holder’s capital contribution to a
new joint account, partnership, or corporation; (4)
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under which Trading Permit Holders
may effect transfers of positions off the
trading floor, notwithstanding the
prohibition in Rule 6.49(a).4
Proposed Rule 6.49B is intended to
facilitate the reduction of risk-weighted
assets (‘‘RWA’’) attributable to open
options positions and make other
conforming changes. SEC Rule 15c3–1
(Net Capital Requirements for Brokers or
Dealers) (‘‘Net Capital Rules’’) requires
registered broker-dealers, unless
otherwise excepted, to maintain certain
specified minimum levels of capital.5
The Net Capital Rules are designed to
protect securities customers,
counterparties, and creditors by
requiring that broker-dealers have
sufficient liquid resources on hand, at
all times, to meet their financial
obligations. Notably, hedged positions,
including offsetting futures and options
contract positions, result in certain net
capital requirement reductions under
the Net Capital Rules.6
Subject to certain exceptions, Clearing
Trading Permit Holders (‘‘CTPHs’’) 7 are
subject to the Net Capital Rules.8
However, a subset of CTPHs are
subsidiaries of U.S. bank holding
companies, which, due to their
affiliations with their parent U.S.-bank
holding companies, must comply with
additional bank regulatory capital
requirements pursuant to rulemaking
required under the Dodd-Frank Wall
Street Reform and Consumer Protection
Act.9 Pursuant to this mandate, the
Board of Governors of the Federal
Reserve System, the Office of the
Comptroller of the Currency, and the
the donation of positions to a not-for-profit
corporation; (5) the transfer of positions to a minor
under the Uniform Gifts to Minor law; and (6) a
merger or acquisition where continuity of
ownership or management results.
4 See SR–CBOE–2019–035, which proposes to
amend Rule 6.49A and is currently pending with
the Securities and Exchange Commission (the
‘‘Commission’’). The Exchange notes the proposed
rule change in this rule filing was initially included
in SR–CBOE–2019–3035 [sic]; pursuant to
Amendment No. 1 to that rule filing, submitted on
August 6, 2019, the proposed rule change in this
filing was deleted. The Exchange proposes a
virtually identical change in this rule filing.
5 17 CFR 240.15c3–1.
6 In addition, the Net Capital Rules permit various
offsets under which a percentage of an option
position’s gain at any one valuation point is
allowed to offset another position’s loss at the same
valuation point (e.g. vertical spreads).
7 All CTPHs must also be clearing members of
The Options Clearing Corporation (‘‘OCC’’).
8 Assuming the Commission approves the
proposed rule change, in the event federal
regulators modify bank capital requirements in the
future, the Exchange will reevaluate the proposed
rule change at that time to determine whether any
corresponding changes to the proposed rule are
appropriate.
9 H.R. 4173 (amending section 3(a) of the
Securities Exchange Act of 1934 (the ‘‘Act’’) (15
U.S.C. 78c(a))).
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Federal Deposit Insurance Corporation
have approved a regulatory capital
framework for subsidiaries of U.S. bank
holding company clearing firms.10
Generally, these rules, among other
things, impose higher minimum capital
and higher asset risk weights than were
previously mandated for CTPHs that are
subsidiaries of U.S. bank holding
companies under the Net Capital Rules.
Furthermore, the new rules do not fully
permit deductions for hedged securities
or offsetting options positions.11 Rather,
capital charges under these standards
are, in large part, based on the aggregate
notional value of short positions
regardless of offsets. As a result, in
general, CTPHs that are subsidiaries of
U.S. bank holding companies must hold
substantially more bank regulatory
capital than would otherwise be
required under the Net Capital Rules.
The Exchange believes these higher
regulatory capital requirements may
impact liquidity in the listed options
market by limiting the amount of capital
CTPHs can allocate to their clients’
transactions. Specifically, the rules may
cause CTPHs to impose stricter position
limits on their client clearing members.
These stricter position limits may
impact the liquidity market participants
may provide, including liquidity
Market-Makers may provide in their
appointed classes. This impact may be
compounded when a CTPH has
multiple client accounts, each having
largely risk-neutral portfolio holdings.12
The Exchange believes that permitting
market participants to efficiently
transfer existing options positions
through an off-floor transfer process
may assist CTPHs and TPHs to address
bank regulatory capital requirements
and would likely have a beneficial effect
on continued liquidity in the options
10 12 CFR 50; 79 FR 61440 (Liquidity Coverage
Ratio: Liquidity Risk Measurement Standards).
11 Many options strategies, including relatively
simple strategies often used by retail customers and
more sophisticated strategies used by brokerdealers, are risk-limited strategies or options spread
strategies that employ offsets or hedges to achieve
certain investment outcomes. Such strategies
typically involve the purchase and sale of multiple
options (and may be coupled with purchases or
sales of the underlying securities), executed
simultaneously as part of the same strategy. In
many cases, the potential market exposure of these
strategies is limited and defined. While regulatory
capital requirements have historically reflected the
risk-limited nature of carrying offsetting positions,
these positions may now be subject to higher
regulatory capital requirements.
12 A number of TPHs, including Market-Makers,
have informed the Exchange that the heightened
bank regulatory requirements could impact their
ability to provide consistent liquidity in the market
unless they are able to efficiently transfer their open
positions out of clearing accounts of U.S.-bank
affiliated clearing firms.
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market without adversely affecting
market quality.
Liquidity in the listed options market
is critically important. However, bank
capital regulations that govern bankaffiliated clearing firms are negatively
impacting the ability of Trading Permit
Holders, including Market-Makers, that
clear options transactions through bankaffiliated clearing firms to provide
liquidity. In order to mitigate the
potential negative effects of these
additional bank regulatory capital
requirements, the proposed rule change
provides market participants with an
efficient mechanism to transfer their
open options positions from one
clearing account to another clearing
account. The Exchange believes the
proposed rule change will increase
liquidity in the listed options market
and promote more efficient capital
deployment in light of bank regulatory
capital requirements.
The Exchange has previously adopted
Rules 6.56 and 6.57 to provide Trading
Permit Holders with tools to reduce
RWA attributable to their open positions
in S&P 500 options (‘‘SPX options’’).
However, the procedures in those rules
involve transactions that must occur on
the Exchange’s trading floor to close
open positions. Therefore, a market
participant must find a counterparty
and be willing to close positions to use
either of these tools. As a result, these
procedures are less efficient, less
flexible, and more burdensome means to
reduce RWA attributable to open
options positions than an off-floor
transfer of such positions. Additionally,
these tools are currently limited to SPX
options, due to the large notional size of
those options, which compounds the
negative impact of bank capital
requirements, and Rule 6.57 is limited
to Market-Makers (Rule 6.56 is available
to all Trading Permit Holders).
However, bank capital requirements
apply to positions in all listed options,
and may impact all client clearing
members of clearing firms affiliated
with U.S.-bank holding companies, and
clearing firms may request that MarketMakers and non-Market-Makers reduce
positions in listed options in addition to
SPX. There is currently no mechanism
firms may use to transfer positions
between clearing accounts without
having to effect a transaction with
another party and close a position.
Rule 6.49A(a), as noted above, permits
positions to be transferred off the floor
of the Exchange in specified limited
circumstances. If a Trading Permit
Holder wanted to transfer open
positions from a clearing account it has
with one a bank-affiliated clearing firm
to a clearing account it has with a non-
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bank-affiliated clearing firm, for
example, such a transfer would result in
no change in ownership. However, the
currently permissible off-floor position
transfers are non-routine, non-recurring
movements of positions, which do not
permit use of the off-floor transfer
procedure to be used repeatedly or
routinely in circumvention of the
normal auction market process. To
comply with clearing firms’ position
limits they may impose on market
participants’ because they need to limit
capital they may allocate for those
market participants’ transactions,
market participants may need to
regularly reduce open positions or limit
additional positions in their accounts
with such clearing firms’ to
accommodate bank capital
requirements. Rule 6.49A does not
permit regular transfers of positions
between accounts at different clearing
firms.
Proposed Rule 6.49B is intended to
provide market participants with an
additional tool they may use to address
the issues raised by bank capital
requirements for positions in all listed
options in an efficient manner that
provides market participants with
flexibility to do so in accordance with
their businesses and risk management
practices. Proposed Rule 6.49B provides
that notwithstanding Rule 6.49, existing
positions in options listed on the
Exchange of a Trading Permit Holder or
non-Trading Permit Holder (including
an affiliate of a Trading Permit Holder)
may be transferred on, from, or to the
books of a CTPH off the Exchange if the
transfer establishes a net reduction of
RWA attributable to those options
positions (an ‘‘RWA Transfer’’).
Proposed paragraph (a) adds examples
of two transfers that would be deemed
to establish a net reduction of RWA, and
thus qualify as a permissible RWA
Transfer:
• A transfer of options positions from
Clearing Corporation member A to
Clearing Corporation member B that net
(offset) with positions held at Clearing
Corporation member B, and thus closes
all or part of those positions (as
demonstrated in the example below); 13
and
• A transfer of options positions from
a bank-affiliated Clearing Corporation
member to a non-bank-affiliated
Clearing Corporation member.14
13 This transfer would establish a net reduction of
RWA attributable to the transferring Person,
because there would be fewer open positions and
thus fewer assets subject to Net Capital Rules.
14 This transfer would establish a net reduction of
RWA attributable to the transferring Person,
because the non-bank-affiliated Clearing
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These transfers will not result in a
change in ownership, as they must
occur between accounts of the same
Person.15 Rule 1.1 defines ‘‘Person’’ as
an individual, partnership (general or
limited), joint stock company,
corporation, limited liability company,
trust or unincorporated organization, or
any governmental entity or agency or
political subdivision thereof. In other
words, RWA transfers may only occur
between the same individual or legal
entity. These are merely transfers from
one clearing account to another, both of
which are attributable to the same
individual or legal entity. A market
participant effecting an RWA Transfer is
analogous to an individual transferring
funds from a checking account to a
savings account, or from an account at
one bank to an account at another
bank—the money still belongs to the
same person, who is just holding it in
a different account for personal
financial reasons.
For example, Market-Maker A clears
transactions on the Exchange into an
account it has with CTPH X, which is
affiliated with a U.S-bank holding
company. Market-Maker A opens a
clearing account with CTPH Y, which is
not affiliated with a U.S.-bank holding
company. CTPH X has informed MarketMaker A that its open positions may not
exceed a certain amount at the end of
a calendar month, or it will be subject
to restrictions on new positions it may
open the following month. On August
28, Market-Maker A reviews the open
positions in its CTPH X clearing account
and determines it must reduce its open
positions to satisfy CTPH X’s
requirements by the end of August. It
determines that transferring out 1000
short calls in class ABC will sufficiently
reduce the RWA capital requirements in
the account with CTPH X to avoid
additional position limits in September.
Market-Maker A wants to retain the
positions in accordance with its risk
profile. Pursuant to the proposed rule
change, on August 31, Market-Maker A
transfers 1000 short calls in class ABC
to its clearing account with CTPH Y. As
a result, Market-Maker A can continue
to provide the same level of liquidity in
class ABC during September as it did in
previous months.
A Trading Permit Holder must give up
a CTPH for each transaction it effects on
the Exchange, which identifies the
CTPH through which the transaction
will clear.16 A Trading Permit Holder
may change the give up for a transaction
Corporation member would not be subject to Net
Capital Rules, as described above.
15 See proposed paragraph (e).
16 See Rule 6.21.
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within a specified period of time.17
Additionally, a Trading Permit Holder
may also change the CMTA 18 for a
specific transaction.19 The transfer of
positions from an account with one
clearing firm to the account of another
clearing firm pursuant to the proposed
rule change has a similar result as
changing a give up or CMTA, as it
results in a position that resulted from
a transaction moving from the account
of one clearing firm to another, just at
a different time and in a different
manner.20 In the above example, if
Market-Maker A had initially given up
CTPH Y rather than CTPH X on the
transactions that resulted in the 1000
long calls in class ABC, or had changed
the give-up or CMTA to CTPH Y
pursuant to Rules 6.21 or 6.67, the
ultimate result would have been the
same. There are a variety of reasons why
firms give up or CMTA transactions to
certain clearing firms (and not to nonbank affiliate clearing firms) at the time
of a transaction, and the proposed rule
change provides firms with a
mechanism to achieve the same result at
a later time.
Proposed paragraph (b) states RWA
Transfers may occur on a routine,
recurring basis. As noted in the example
above, clearing firms may impose
restrictions on the amount of open
positions. Permitting transfers on a
routine, recurring basis will provide
market participants with the flexibility
to comply with these restrictions when
necessary to avoid position limits on
future options activity. Additionally,
proposed paragraph (f) provides that no
prior written notice to the Exchange is
required for RWA Transfers. Because of
the potential routine basis on which
RWA Transfers may occur, and because
of the need for flexibility to comply
with the restrictions described above,
the Exchange believes it may interfere
with the ability of investors firms to
comply with any CTPH restrictions
describe above, and may be burdensome
to provide notice for these routine
transfers.
Proposed paragraph (c) states RWA
Transfers may result in the netting of
positions. Netting is generally
17 See
Rule 6.21(e).
Clearing Member Trade Assignment
(‘‘CMTA’’) process at the Options Clearing
Corporation (‘‘OCC’’) facilitates the transfer of
option trades/positions from one OCC clearing
member to another in an automated fashion.
Changing a CMTA for a specific transaction would
allocate the trade to a different OCC clearing
member than the one initially identified on the
trade.
19 See Rule 6.67(a).
20 The transferred positions will continue to be
subject to OCC rules, as they will continue to be
held in an account of an OCC member.
18 The
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prohibited for off-floor transfers.21
Netting occurs when long positions and
short positions in the same series
‘‘offset’’ against each other, leaving no
or a reduced position. For example, if
there were 100 long calls in one
account, and 100 short calls of the same
option series were added to that
account, the positions would offset,
leaving no open positions. Currently,
the Exchange permits off-floor transfers
on behalf of a Market-Maker account for
transactions in multiply listed options
series on different exchanges, but only
if the Market-Maker nominees are
trading for the same Trading Permit
Holder organization, and the options
transactions on the different options
exchanges clear into separate exchangespecific accounts because they cannot
easily clear into the same Market-Maker
account at OCC. In such instances, all
Market-Maker positions in the
exchange-specific accounts for the
multiply listed class would be
automatically transferred on their trade
date into one central Market-Maker
account (commonly referred to as a
‘‘universal account’’) at the Clearing
Corporation.22 Positions cleared into a
universal account would automatically
net against each other.
While RWA Transfers are not
occurring because of limitations related
to trading on different exchanges,
similar reasoning for the above
exception applies to why netting should
be permissible for the limited purpose
of reducing RWA. Firms may maintain
different clearing accounts for a variety
of reasons, such as the structure of their
businesses, the manner in which they
trade, their risk management
procedures, and for capital purposes. If
a Market-Maker clears all transactions
into a universal account, offsetting
positions would automatically net.
However, if a Market-Maker has
multiple accounts into which its
transactions cleared, they would not
automatically net. While there are times
when a firm may not want to close out
open positions to reduce RWA, there are
other times when a firm may determine
it is appropriate to close out positions
to accomplish a reduction in RWA.
In the example above, suppose after
making the RWA Transfer described
above, Market-Maker A effects a
transaction on September 25 that results
in 1000 long calls in class ABC, which
clears into its account with CTPH X. If
Market-Maker A had not effected its
RWA Transfer in August, the 1000 long
calls would have offset against the 1000
21 See Cboe Options Regulatory Circular RG03–62
(July 24, 2003).
22 Id.
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short calls, eliminating both positions
and thus any RWA capital requirements
associated with them. At the end of
August, Market-Maker A did not want to
close out the 1000 short calls when it
made its RWA Transfer. However, given
changed circumstances in September,
Market-Maker A has determined it no
longer wants to hold those positions.
The proposed rule change would permit
Market-Maker A to effect an RWA
Transfer of the 1000 short calls from its
account with CTPH Y to its account
with CTPH X (or vice versa), which
results in elimination of those positions
(and a reduction in RWA associated
with them). As noted above, such
netting would have occurred if MarketMaker A cleared the September
transaction directly into its account
with CTPH Y, or had not effected an
RWA Transfer in August. Netting
provides market participants with
appropriate flexibility to conduct their
businesses as they see fit while having
the ability to reduce RWA capital
requirements when necessary.
As is true for all other off-floor
transfers permitted under Rule 6.49A,
RWA Transfers may not result in
preferential margin or haircut
treatment.23 Additionally, RWA
Transfers may only be effected for
options listed on the Exchange and will
be subject to applicable laws, rules, and
regulations, including rules of other
self-regulatory organizations (including
OCC).24
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.25 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 26 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
23 See
proposed paragraph (d); see also id.
proposed introductory paragraph and
proposed paragraph (g). Transfers of non-Exchange
listed options and other financial instruments are
not governed by proposed Rule 6.49B. Any RWA
transfers will be subject to all applicable
recordkeeping requirements applicable to TPHs and
CTPHs under the Securities Exchange Act of 1934,
and the rules and regulations thereunder (the
‘‘Act’’), such as Rule 17a-3 and 17a-4.
25 15 U.S.C. 78f(b).
26 15 U.S.C. 78f(b)(5).
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24 See
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securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 27 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, The Exchange believes
the proposed rule change to permit
RWA Transfers will remove
impediments to and perfect the
mechanism of a free and open market
and a national market system by
potentially mitigating the effects bank
capital requirements may have on
liquidity in the listed options market.
As described above, bank capital
requirements may impact capital
available for options market liquidity
providers, for example due to CTPHs’
imposition of stricter position limits on
firms that clear options transactions
with them. The Exchange believes
providing market participants with an
efficient process to reduce RWA capital
requirements attributable to open
positions in clearing accounts with U.S.
bank-affiliated clearing firms may
contribute to additional liquidity in the
listed options market, which, in general,
protects investors and the public
interest.
The proposed rule change, in
particular the proposed changes to
permit RWA transfers to occur on a
routine, recurring basis and result in
netting, also provides market
participants with sufficient flexibility to
reduce RWA capital requirements at
times necessary to comply with
requirements imposed on them by
clearing firms. This will permit market
participants respond to then-current
market conditions, including volatility
and increased volume, by reducing the
RWA capital requirements associated
with any new positions they may open
while those conditions exist. Given the
additional capital that may become
available to market participants as a
result of the RWA Transfers, market
participants will be able to continue to
provide liquidity to the market, even
during periods of increased volume and
volatility, which liquidity ultimately
benefits investors. It is not possible for
market participants to predict what
market conditions will exist at a specific
time, and when volatility will occur.
The proposed rule change to permit
routine, recurring RWA Transfers (and
to not provide prior written notice) will
provide market participants with the
27 Id.
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40463
ability to respond to these conditions
whenever they occur. Additionally,
since firms may be subject to
restrictions on positions imposed by
their clearing firms, permitting transfers
on a routine, recurring basis will
provide market participants with the
flexibility to comply with these
restrictions when necessary to avoid
position limits on future options
activity. In addition, with respect to
netting, as discussed above, firms may
maintain different clearing accounts for
a variety of reasons, such as the
structure of their businesses, the manner
in which they trade, their risk
management procedures, and for capital
purposes. Netting may otherwise occur
with respect to a firm’s positions if it
structured its clearing accounts
differently, such as by using a universal
account. Therefore, the proposed rule
change will permit netting while
allowing firms to continue to maintain
different clearing accounts in a manner
consistent with their businesses.
The Exchange recognizes the
numerous benefits of executing options
transactions occur on an exchanges,
including price transparency, potential
price improvement, and a clearing
guarantee. However, the Exchange
believes it is appropriate to permit RWA
Transfers to occur off the exchange, as
these benefits are inapplicable to RWA
Transfers. RWA Transfers have a narrow
scope and are intended to achieve a
limited, benefit purpose. RWA Transfers
are not intended to be a competitive
trading tool. There is no need for price
discovery or improvement, as the
purpose of the transfer is to reduce
RWA asset capital requirements
attributable to a market participants’
positions. Unlike trades on an exchange,
the price at which an RWA Transfers
occurs is immaterial—the resulting
reduction in RWA is the critical part of
the transfer. RWA Transfers will result
in no change in ownership, and thus
they do not constitute trades with a
counterparty (and thus eliminating the
need for a counterparty guarantee). The
transactions that resulted in the open
positions to be transferred as an RWA
Transfer were already guaranteed by an
OCC clearing member, and the positions
will continue to be subject to OCC rules,
as they will continue to be held in an
account with an OCC clearing member.
The narrow scope of the proposed rule
change and the limited, beneficial
purpose of RWA Transfers make
allowing RWA Transfers to occur off the
floor appropriate and important to
support the provision of liquidity in the
listed options market.
The proposed rule change does not
unfairly discriminate against market
E:\FR\FM\14AUN1.SGM
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Federal Register / Vol. 84, No. 157 / Wednesday, August 14, 2019 / Notices
participants, as all Trading Permit
Holders and non-Trading Permit
Holders with open positions in options
listed on the Exchange may use the
proposed off-floor transfer process to
reduce the RWA capital requirements of
CTPHs.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The purpose
of the proposed rule change to permit
RWA Transfers is to alleviate the
negative impact of bank capital
requirements on options market
liquidity providers. This process is not
intended to be a competitive trading
tool. The Exchange does not believe that
the proposed rule change will impose
any burden on intramarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
as use of the proposed process is
voluntary. All Trading Permit Holders
and non-Trading Permit Holders with
open positions in options listed on the
Exchange may use the proposed offfloor transfer process to reduce the RWA
capital requirements attributable to
those positions. The Exchange does not
believe that the proposed rule change
will impose any burden on intermarket
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. RWA Transfers
have a limited purpose, which is to
reduce RWA attributable to open
positions in listed options in order to
free up capital. Cboe Options believes
the proposed rule change may relieve
the burden on liquidity providers in the
options market by reducing the RWA
attributable to their open positions. As
a result, market participants may be able
to increase liquidity they provide to the
market, which liquidity benefits all
market participants.
jspears on DSK3GMQ082PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
VerDate Sep<11>2014
18:56 Aug 13, 2019
Jkt 247001
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
Number SR–CBOE–2019–044 and
should be submitted on or before
September 4, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Jill M. Peterson,
Assistant Secretary.
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:
[FR Doc. 2019–17383 Filed 8–13–19; 8:45 am]
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2019–044 on the subject line.
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
SCAR Credits at Equity 7, Section
118(a)
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2019–044. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
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 July 25,
2019, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86609; File No. SR–
NASDAQ–2019–062]
August 8, 2019.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
SCAR credits at Equity 7, Section
118(a).
While these amendments are effective
upon filing, the Exchange has
designated the proposed amendments to
be operative on August 1, 2019. The text
of the proposed rule change is available
on the Exchange’s website at https://
nasdaq.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
28 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\14AUN1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 157 (Wednesday, August 14, 2019)]
[Notices]
[Pages 40460-40464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17383]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86603; File No. SR-CBOE-2019-044]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating To Adopt Rule 6.49B, Off-
Floor RWA Transfers
August 8, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 6, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to adopt Rule 6.49B. The text of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Rule 6.49B to add an exception to
the prohibition in Rule 6.49(a) against off-floor position transfers.
Rule 6.49(a) generally requires transactions of option contracts listed
on the Exchange for a premium in excess of $1.00 to be effected on the
floor of the Exchange or on another exchange. Rule 6.49A(a) specifies
the current circumstances \3\ under which Trading Permit Holders may
effect transfers of positions off the trading floor, notwithstanding
the prohibition in Rule 6.49(a).\4\
---------------------------------------------------------------------------
\3\ The circumstances currently listed include: (1) The
dissolution of a joint account in which the remaining Trading Permit
Holder assumes the positions of the joint account; (2) the
dissolution of a corporation or partnership in which a former
nominee of the corporation or partnership assumes the positions; (3)
positions transferred as part of a Trading Permit Holder's capital
contribution to a new joint account, partnership, or corporation;
(4) the donation of positions to a not-for-profit corporation; (5)
the transfer of positions to a minor under the Uniform Gifts to
Minor law; and (6) a merger or acquisition where continuity of
ownership or management results.
\4\ See SR-CBOE-2019-035, which proposes to amend Rule 6.49A and
is currently pending with the Securities and Exchange Commission
(the ``Commission''). The Exchange notes the proposed rule change in
this rule filing was initially included in SR-CBOE-2019-3035 [sic];
pursuant to Amendment No. 1 to that rule filing, submitted on August
6, 2019, the proposed rule change in this filing was deleted. The
Exchange proposes a virtually identical change in this rule filing.
---------------------------------------------------------------------------
Proposed Rule 6.49B is intended to facilitate the reduction of
risk-weighted assets (``RWA'') attributable to open options positions
and make other conforming changes. SEC Rule 15c3-1 (Net Capital
Requirements for Brokers or Dealers) (``Net Capital Rules'') requires
registered broker-dealers, unless otherwise excepted, to maintain
certain specified minimum levels of capital.\5\ The Net Capital Rules
are designed to protect securities customers, counterparties, and
creditors by requiring that broker-dealers have sufficient liquid
resources on hand, at all times, to meet their financial obligations.
Notably, hedged positions, including offsetting futures and options
contract positions, result in certain net capital requirement
reductions under the Net Capital Rules.\6\
---------------------------------------------------------------------------
\5\ 17 CFR 240.15c3-1.
\6\ In addition, the Net Capital Rules permit various offsets
under which a percentage of an option position's gain at any one
valuation point is allowed to offset another position's loss at the
same valuation point (e.g. vertical spreads).
---------------------------------------------------------------------------
Subject to certain exceptions, Clearing Trading Permit Holders
(``CTPHs'') \7\ are subject to the Net Capital Rules.\8\ However, a
subset of CTPHs are subsidiaries of U.S. bank holding companies, which,
due to their affiliations with their parent U.S.-bank holding
companies, must comply with additional bank regulatory capital
requirements pursuant to rulemaking required under the Dodd-Frank Wall
Street Reform and Consumer Protection Act.\9\ Pursuant to this mandate,
the Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, and the
[[Page 40461]]
Federal Deposit Insurance Corporation have approved a regulatory
capital framework for subsidiaries of U.S. bank holding company
clearing firms.\10\ Generally, these rules, among other things, impose
higher minimum capital and higher asset risk weights than were
previously mandated for CTPHs that are subsidiaries of U.S. bank
holding companies under the Net Capital Rules. Furthermore, the new
rules do not fully permit deductions for hedged securities or
offsetting options positions.\11\ Rather, capital charges under these
standards are, in large part, based on the aggregate notional value of
short positions regardless of offsets. As a result, in general, CTPHs
that are subsidiaries of U.S. bank holding companies must hold
substantially more bank regulatory capital than would otherwise be
required under the Net Capital Rules.
---------------------------------------------------------------------------
\7\ All CTPHs must also be clearing members of The Options
Clearing Corporation (``OCC'').
\8\ Assuming the Commission approves the proposed rule change,
in the event federal regulators modify bank capital requirements in
the future, the Exchange will reevaluate the proposed rule change at
that time to determine whether any corresponding changes to the
proposed rule are appropriate.
\9\ H.R. 4173 (amending section 3(a) of the Securities Exchange
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
\10\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards).
\11\ Many options strategies, including relatively simple
strategies often used by retail customers and more sophisticated
strategies used by broker-dealers, are risk-limited strategies or
options spread strategies that employ offsets or hedges to achieve
certain investment outcomes. Such strategies typically involve the
purchase and sale of multiple options (and may be coupled with
purchases or sales of the underlying securities), executed
simultaneously as part of the same strategy. In many cases, the
potential market exposure of these strategies is limited and
defined. While regulatory capital requirements have historically
reflected the risk-limited nature of carrying offsetting positions,
these positions may now be subject to higher regulatory capital
requirements.
---------------------------------------------------------------------------
The Exchange believes these higher regulatory capital requirements
may impact liquidity in the listed options market by limiting the
amount of capital CTPHs can allocate to their clients' transactions.
Specifically, the rules may cause CTPHs to impose stricter position
limits on their client clearing members. These stricter position limits
may impact the liquidity market participants may provide, including
liquidity Market-Makers may provide in their appointed classes. This
impact may be compounded when a CTPH has multiple client accounts, each
having largely risk-neutral portfolio holdings.\12\ The Exchange
believes that permitting market participants to efficiently transfer
existing options positions through an off-floor transfer process may
assist CTPHs and TPHs to address bank regulatory capital requirements
and would likely have a beneficial effect on continued liquidity in the
options market without adversely affecting market quality.
---------------------------------------------------------------------------
\12\ A number of TPHs, including Market-Makers, have informed
the Exchange that the heightened bank regulatory requirements could
impact their ability to provide consistent liquidity in the market
unless they are able to efficiently transfer their open positions
out of clearing accounts of U.S.-bank affiliated clearing firms.
---------------------------------------------------------------------------
Liquidity in the listed options market is critically important.
However, bank capital regulations that govern bank-affiliated clearing
firms are negatively impacting the ability of Trading Permit Holders,
including Market-Makers, that clear options transactions through bank-
affiliated clearing firms to provide liquidity. In order to mitigate
the potential negative effects of these additional bank regulatory
capital requirements, the proposed rule change provides market
participants with an efficient mechanism to transfer their open options
positions from one clearing account to another clearing account. The
Exchange believes the proposed rule change will increase liquidity in
the listed options market and promote more efficient capital deployment
in light of bank regulatory capital requirements.
The Exchange has previously adopted Rules 6.56 and 6.57 to provide
Trading Permit Holders with tools to reduce RWA attributable to their
open positions in S&P 500 options (``SPX options''). However, the
procedures in those rules involve transactions that must occur on the
Exchange's trading floor to close open positions. Therefore, a market
participant must find a counterparty and be willing to close positions
to use either of these tools. As a result, these procedures are less
efficient, less flexible, and more burdensome means to reduce RWA
attributable to open options positions than an off-floor transfer of
such positions. Additionally, these tools are currently limited to SPX
options, due to the large notional size of those options, which
compounds the negative impact of bank capital requirements, and Rule
6.57 is limited to Market-Makers (Rule 6.56 is available to all Trading
Permit Holders). However, bank capital requirements apply to positions
in all listed options, and may impact all client clearing members of
clearing firms affiliated with U.S.-bank holding companies, and
clearing firms may request that Market-Makers and non-Market-Makers
reduce positions in listed options in addition to SPX. There is
currently no mechanism firms may use to transfer positions between
clearing accounts without having to effect a transaction with another
party and close a position.
Rule 6.49A(a), as noted above, permits positions to be transferred
off the floor of the Exchange in specified limited circumstances. If a
Trading Permit Holder wanted to transfer open positions from a clearing
account it has with one a bank-affiliated clearing firm to a clearing
account it has with a non-bank-affiliated clearing firm, for example,
such a transfer would result in no change in ownership. However, the
currently permissible off-floor position transfers are non-routine,
non-recurring movements of positions, which do not permit use of the
off-floor transfer procedure to be used repeatedly or routinely in
circumvention of the normal auction market process. To comply with
clearing firms' position limits they may impose on market participants'
because they need to limit capital they may allocate for those market
participants' transactions, market participants may need to regularly
reduce open positions or limit additional positions in their accounts
with such clearing firms' to accommodate bank capital requirements.
Rule 6.49A does not permit regular transfers of positions between
accounts at different clearing firms.
Proposed Rule 6.49B is intended to provide market participants with
an additional tool they may use to address the issues raised by bank
capital requirements for positions in all listed options in an
efficient manner that provides market participants with flexibility to
do so in accordance with their businesses and risk management
practices. Proposed Rule 6.49B provides that notwithstanding Rule 6.49,
existing positions in options listed on the Exchange of a Trading
Permit Holder or non-Trading Permit Holder (including an affiliate of a
Trading Permit Holder) may be transferred on, from, or to the books of
a CTPH off the Exchange if the transfer establishes a net reduction of
RWA attributable to those options positions (an ``RWA Transfer'').
Proposed paragraph (a) adds examples of two transfers that would be
deemed to establish a net reduction of RWA, and thus qualify as a
permissible RWA Transfer:
A transfer of options positions from Clearing Corporation
member A to Clearing Corporation member B that net (offset) with
positions held at Clearing Corporation member B, and thus closes all or
part of those positions (as demonstrated in the example below); \13\
and
---------------------------------------------------------------------------
\13\ This transfer would establish a net reduction of RWA
attributable to the transferring Person, because there would be
fewer open positions and thus fewer assets subject to Net Capital
Rules.
---------------------------------------------------------------------------
A transfer of options positions from a bank-affiliated
Clearing Corporation member to a non-bank-affiliated Clearing
Corporation member.\14\
---------------------------------------------------------------------------
\14\ This transfer would establish a net reduction of RWA
attributable to the transferring Person, because the non-bank-
affiliated Clearing Corporation member would not be subject to Net
Capital Rules, as described above.
---------------------------------------------------------------------------
[[Page 40462]]
These transfers will not result in a change in ownership, as they
must occur between accounts of the same Person.\15\ Rule 1.1 defines
``Person'' as an individual, partnership (general or limited), joint
stock company, corporation, limited liability company, trust or
unincorporated organization, or any governmental entity or agency or
political subdivision thereof. In other words, RWA transfers may only
occur between the same individual or legal entity. These are merely
transfers from one clearing account to another, both of which are
attributable to the same individual or legal entity. A market
participant effecting an RWA Transfer is analogous to an individual
transferring funds from a checking account to a savings account, or
from an account at one bank to an account at another bank--the money
still belongs to the same person, who is just holding it in a different
account for personal financial reasons.
---------------------------------------------------------------------------
\15\ See proposed paragraph (e).
---------------------------------------------------------------------------
For example, Market-Maker A clears transactions on the Exchange
into an account it has with CTPH X, which is affiliated with a U.S-bank
holding company. Market-Maker A opens a clearing account with CTPH Y,
which is not affiliated with a U.S.-bank holding company. CTPH X has
informed Market-Maker A that its open positions may not exceed a
certain amount at the end of a calendar month, or it will be subject to
restrictions on new positions it may open the following month. On
August 28, Market-Maker A reviews the open positions in its CTPH X
clearing account and determines it must reduce its open positions to
satisfy CTPH X's requirements by the end of August. It determines that
transferring out 1000 short calls in class ABC will sufficiently reduce
the RWA capital requirements in the account with CTPH X to avoid
additional position limits in September. Market-Maker A wants to retain
the positions in accordance with its risk profile. Pursuant to the
proposed rule change, on August 31, Market-Maker A transfers 1000 short
calls in class ABC to its clearing account with CTPH Y. As a result,
Market-Maker A can continue to provide the same level of liquidity in
class ABC during September as it did in previous months.
A Trading Permit Holder must give up a CTPH for each transaction it
effects on the Exchange, which identifies the CTPH through which the
transaction will clear.\16\ A Trading Permit Holder may change the give
up for a transaction within a specified period of time.\17\
Additionally, a Trading Permit Holder may also change the CMTA \18\ for
a specific transaction.\19\ The transfer of positions from an account
with one clearing firm to the account of another clearing firm pursuant
to the proposed rule change has a similar result as changing a give up
or CMTA, as it results in a position that resulted from a transaction
moving from the account of one clearing firm to another, just at a
different time and in a different manner.\20\ In the above example, if
Market-Maker A had initially given up CTPH Y rather than CTPH X on the
transactions that resulted in the 1000 long calls in class ABC, or had
changed the give-up or CMTA to CTPH Y pursuant to Rules 6.21 or 6.67,
the ultimate result would have been the same. There are a variety of
reasons why firms give up or CMTA transactions to certain clearing
firms (and not to non-bank affiliate clearing firms) at the time of a
transaction, and the proposed rule change provides firms with a
mechanism to achieve the same result at a later time.
---------------------------------------------------------------------------
\16\ See Rule 6.21.
\17\ See Rule 6.21(e).
\18\ The Clearing Member Trade Assignment (``CMTA'') process at
the Options Clearing Corporation (``OCC'') facilitates the transfer
of option trades/positions from one OCC clearing member to another
in an automated fashion. Changing a CMTA for a specific transaction
would allocate the trade to a different OCC clearing member than the
one initially identified on the trade.
\19\ See Rule 6.67(a).
\20\ The transferred positions will continue to be subject to
OCC rules, as they will continue to be held in an account of an OCC
member.
---------------------------------------------------------------------------
Proposed paragraph (b) states RWA Transfers may occur on a routine,
recurring basis. As noted in the example above, clearing firms may
impose restrictions on the amount of open positions. Permitting
transfers on a routine, recurring basis will provide market
participants with the flexibility to comply with these restrictions
when necessary to avoid position limits on future options activity.
Additionally, proposed paragraph (f) provides that no prior written
notice to the Exchange is required for RWA Transfers. Because of the
potential routine basis on which RWA Transfers may occur, and because
of the need for flexibility to comply with the restrictions described
above, the Exchange believes it may interfere with the ability of
investors firms to comply with any CTPH restrictions describe above,
and may be burdensome to provide notice for these routine transfers.
Proposed paragraph (c) states RWA Transfers may result in the
netting of positions. Netting is generally prohibited for off-floor
transfers.\21\ Netting occurs when long positions and short positions
in the same series ``offset'' against each other, leaving no or a
reduced position. For example, if there were 100 long calls in one
account, and 100 short calls of the same option series were added to
that account, the positions would offset, leaving no open positions.
Currently, the Exchange permits off-floor transfers on behalf of a
Market-Maker account for transactions in multiply listed options series
on different exchanges, but only if the Market-Maker nominees are
trading for the same Trading Permit Holder organization, and the
options transactions on the different options exchanges clear into
separate exchange-specific accounts because they cannot easily clear
into the same Market-Maker account at OCC. In such instances, all
Market-Maker positions in the exchange-specific accounts for the
multiply listed class would be automatically transferred on their trade
date into one central Market-Maker account (commonly referred to as a
``universal account'') at the Clearing Corporation.\22\ Positions
cleared into a universal account would automatically net against each
other.
---------------------------------------------------------------------------
\21\ See Cboe Options Regulatory Circular RG03-62 (July 24,
2003).
\22\ Id.
---------------------------------------------------------------------------
While RWA Transfers are not occurring because of limitations
related to trading on different exchanges, similar reasoning for the
above exception applies to why netting should be permissible for the
limited purpose of reducing RWA. Firms may maintain different clearing
accounts for a variety of reasons, such as the structure of their
businesses, the manner in which they trade, their risk management
procedures, and for capital purposes. If a Market-Maker clears all
transactions into a universal account, offsetting positions would
automatically net. However, if a Market-Maker has multiple accounts
into which its transactions cleared, they would not automatically net.
While there are times when a firm may not want to close out open
positions to reduce RWA, there are other times when a firm may
determine it is appropriate to close out positions to accomplish a
reduction in RWA.
In the example above, suppose after making the RWA Transfer
described above, Market-Maker A effects a transaction on September 25
that results in 1000 long calls in class ABC, which clears into its
account with CTPH X. If Market-Maker A had not effected its RWA
Transfer in August, the 1000 long calls would have offset against the
1000
[[Page 40463]]
short calls, eliminating both positions and thus any RWA capital
requirements associated with them. At the end of August, Market-Maker A
did not want to close out the 1000 short calls when it made its RWA
Transfer. However, given changed circumstances in September, Market-
Maker A has determined it no longer wants to hold those positions. The
proposed rule change would permit Market-Maker A to effect an RWA
Transfer of the 1000 short calls from its account with CTPH Y to its
account with CTPH X (or vice versa), which results in elimination of
those positions (and a reduction in RWA associated with them). As noted
above, such netting would have occurred if Market-Maker A cleared the
September transaction directly into its account with CTPH Y, or had not
effected an RWA Transfer in August. Netting provides market
participants with appropriate flexibility to conduct their businesses
as they see fit while having the ability to reduce RWA capital
requirements when necessary.
As is true for all other off-floor transfers permitted under Rule
6.49A, RWA Transfers may not result in preferential margin or haircut
treatment.\23\ Additionally, RWA Transfers may only be effected for
options listed on the Exchange and will be subject to applicable laws,
rules, and regulations, including rules of other self-regulatory
organizations (including OCC).\24\
---------------------------------------------------------------------------
\23\ See proposed paragraph (d); see also id.
\24\ See proposed introductory paragraph and proposed paragraph
(g). Transfers of non-Exchange listed options and other financial
instruments are not governed by proposed Rule 6.49B. Any RWA
transfers will be subject to all applicable recordkeeping
requirements applicable to TPHs and CTPHs under the Securities
Exchange Act of 1934, and the rules and regulations thereunder (the
``Act''), such as Rule 17a-3 and 17a-4.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\25\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \26\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \27\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ Id.
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In particular, The Exchange believes the proposed rule change to
permit RWA Transfers will remove impediments to and perfect the
mechanism of a free and open market and a national market system by
potentially mitigating the effects bank capital requirements may have
on liquidity in the listed options market. As described above, bank
capital requirements may impact capital available for options market
liquidity providers, for example due to CTPHs' imposition of stricter
position limits on firms that clear options transactions with them. The
Exchange believes providing market participants with an efficient
process to reduce RWA capital requirements attributable to open
positions in clearing accounts with U.S. bank-affiliated clearing firms
may contribute to additional liquidity in the listed options market,
which, in general, protects investors and the public interest.
The proposed rule change, in particular the proposed changes to
permit RWA transfers to occur on a routine, recurring basis and result
in netting, also provides market participants with sufficient
flexibility to reduce RWA capital requirements at times necessary to
comply with requirements imposed on them by clearing firms. This will
permit market participants respond to then-current market conditions,
including volatility and increased volume, by reducing the RWA capital
requirements associated with any new positions they may open while
those conditions exist. Given the additional capital that may become
available to market participants as a result of the RWA Transfers,
market participants will be able to continue to provide liquidity to
the market, even during periods of increased volume and volatility,
which liquidity ultimately benefits investors. It is not possible for
market participants to predict what market conditions will exist at a
specific time, and when volatility will occur. The proposed rule change
to permit routine, recurring RWA Transfers (and to not provide prior
written notice) will provide market participants with the ability to
respond to these conditions whenever they occur. Additionally, since
firms may be subject to restrictions on positions imposed by their
clearing firms, permitting transfers on a routine, recurring basis will
provide market participants with the flexibility to comply with these
restrictions when necessary to avoid position limits on future options
activity. In addition, with respect to netting, as discussed above,
firms may maintain different clearing accounts for a variety of
reasons, such as the structure of their businesses, the manner in which
they trade, their risk management procedures, and for capital purposes.
Netting may otherwise occur with respect to a firm's positions if it
structured its clearing accounts differently, such as by using a
universal account. Therefore, the proposed rule change will permit
netting while allowing firms to continue to maintain different clearing
accounts in a manner consistent with their businesses.
The Exchange recognizes the numerous benefits of executing options
transactions occur on an exchanges, including price transparency,
potential price improvement, and a clearing guarantee. However, the
Exchange believes it is appropriate to permit RWA Transfers to occur
off the exchange, as these benefits are inapplicable to RWA Transfers.
RWA Transfers have a narrow scope and are intended to achieve a
limited, benefit purpose. RWA Transfers are not intended to be a
competitive trading tool. There is no need for price discovery or
improvement, as the purpose of the transfer is to reduce RWA asset
capital requirements attributable to a market participants' positions.
Unlike trades on an exchange, the price at which an RWA Transfers
occurs is immaterial--the resulting reduction in RWA is the critical
part of the transfer. RWA Transfers will result in no change in
ownership, and thus they do not constitute trades with a counterparty
(and thus eliminating the need for a counterparty guarantee). The
transactions that resulted in the open positions to be transferred as
an RWA Transfer were already guaranteed by an OCC clearing member, and
the positions will continue to be subject to OCC rules, as they will
continue to be held in an account with an OCC clearing member. The
narrow scope of the proposed rule change and the limited, beneficial
purpose of RWA Transfers make allowing RWA Transfers to occur off the
floor appropriate and important to support the provision of liquidity
in the listed options market.
The proposed rule change does not unfairly discriminate against
market
[[Page 40464]]
participants, as all Trading Permit Holders and non-Trading Permit
Holders with open positions in options listed on the Exchange may use
the proposed off-floor transfer process to reduce the RWA capital
requirements of CTPHs.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The purpose of the proposed
rule change to permit RWA Transfers is to alleviate the negative impact
of bank capital requirements on options market liquidity providers.
This process is not intended to be a competitive trading tool. The
Exchange does not believe that the proposed rule change will impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act, as use of the proposed
process is voluntary. All Trading Permit Holders and non-Trading Permit
Holders with open positions in options listed on the Exchange may use
the proposed off-floor transfer process to reduce the RWA capital
requirements attributable to those positions. The Exchange does not
believe that the proposed rule change will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act. RWA Transfers have a limited
purpose, which is to reduce RWA attributable to open positions in
listed options in order to free up capital. Cboe Options believes the
proposed rule change may relieve the burden on liquidity providers in
the options market by reducing the RWA attributable to their open
positions. As a result, market participants may be able to increase
liquidity they provide to the market, which liquidity benefits all
market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-044 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2019-044. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-044 and should be submitted on
or before September 4, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-17383 Filed 8-13-19; 8:45 am]
BILLING CODE 8011-01-P
