Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Rule 6.49C, 50490-50495 [2019-20708]
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Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices
SECURITIES AND EXCHANGE
COMMISSION
rule change (File No. SR–NASDAQ–
2019–060).
[Release No 34–87012; File No. SR–
NASDAQ–2019–060]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Jill M. Peterson,
Assistant Secretary.
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Designation of Longer Period for
Commission Action on Proposed Rule
Change To Amend Rules 4120 and
4753
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September 19, 2019.
On July 18, 2019, The Nasdaq Stock
Market LLC (‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend Rules 4120 and 4753 to permit
the Exchange to declare a regulatory halt
in a security that traded in the over-thecounter market prior to its initial pricing
on the Exchange and to allow for the
initial pricing of such securities through
the IPO Cross. The proposed rule
change was published for comment in
the Federal Register on August 6, 2019.3
The Commission has received no
comments on the proposal.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is September 20, 2019.
The Commission is extending the 45day time period for Commission action
on the proposed rule change. The
Commission finds that it is appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, pursuant to Section
19(b)(2) of the Act,5 the Commission
designates November 4, 2019, as the
date by which the Commission shall
either approve or disapprove, or
institute proceedings to determine
whether to disapprove, the proposed
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 86537
(July 31, 2019), 84 FR 38321.
4 15 U.S.C. 78s(b)(2).
5 15 U.S.C. 78s(b)(2).
2 17
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[FR Doc. 2019–20699 Filed 9–24–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87013; File No. SR–CBOE–
2019–048]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Adopt Rule
6.49C
September 19, 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
September 6, 2019, Cboe Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘Cboe Options’’)
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.
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 6.49C. The text of the proposed
rule change is provided below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe Exchange, Inc.
*
*
*
*
*
Rule 6.49C. In-Kind Exchange of
Options Positions and ETF Shares
Notwithstanding the prohibition set
forth in Rule 6.49, positions in options
listed on the Exchange may be
transferred off the Exchange by a
Trading Permit Holder in connection
with transactions to purchase or redeem
creation units of ETF shares between an
authorized participant and the issuer of
such ETF shares, which transfer occurs
at a price related to the net asset value
of such ETF shares. For purposes of this
Rule:
5 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(31).
1 15 U.S.C. 78s(b)(1).
6 17
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(a) an ‘‘authorized participant’’ is an
entity that has a written agreement with
the issuer of ETF shares or one of its
service providers, which allows the
authorized participant to place orders
for the purchase and redemption of
creation units (i.e., specified numbers of
ETF shares); and
(b) an ‘‘issuer of ETF shares’’ is an
entity registered with the Commission as
an open-end management investment
company under the Investment
Company Act of 1940.
*
*
*
*
*
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
6.49C to add a new exception to the
Exchange’s general requirement that
transfers of options contracts listed on
the Exchange be effected on an
exchange, as set forth in Rule 6.49.3
Rule 6.49A specifies the circumstances
under which Trading Permit Holders
may currently effect transfers of
positions off the trading floor,
notwithstanding the prohibition in Rule
6.49.
Background
As discussed further below, the
ability to effect ‘‘in kind’’ transfers is a
key component of the operational
structure of an exchange-traded fund
3 Rule 6.49(a) (Transactions Off the Exchange)
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.
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(‘‘ETF’’). Currently, in general, ETFs can
effect in-kind transfers with respect to
equity securities and fixed-income
securities. The in-kind process is a
major benefit to ETF shareholders and,
in general, the means by which assets
may be added to or removed from ETFs.
In-kind transfers protect ETF
shareholders from the undesirable tax
effects of frequent ‘‘creations and
redemptions’’ (described below) and
improve the overall tax efficiency of the
products. However, currently, the
Exchange Rules do not allow ETFs to
effect in-kind transfers of options off of
the Exchange, resulting in tax
inefficiencies for ETFs that hold them.
As a result, the use of options by ETFs
is substantially limited.
Current Rule 6.49A(a) lists the
circumstances under which Trading
Permit Holders may transfer their
positions off of the Exchange. 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 Minors Act;
and (6) a merger or acquisition where
continuity of ownership or management
results.4
The Exchange proposes to add a new
circumstance under which off-floor
transfers of options positions would be
permitted to occur. Specifically, under
proposed Rule 6.49C, positions in
options listed on the Exchange would be
permitted to be transferred off the
Exchange by a Trading Permit Holder in
connection with transactions to
purchase or redeem ‘‘creation units’’ of
ETF shares between an ‘‘authorized
4 The Exchange notes that other options
exchanges have adopted rules that provide for offfloor transfers under similar circumstances. See,
e.g., Nasdaq OMX PHLX LLC Rule 1058(a); and
NYSE Arca, Inc. Rule 6.78–O(d)(1). The Exchange
recently proposed changes to Rule 6.49A, which
rule filing is currently pending with the Securities
and Exchange Commission (the ‘‘Commission’’).
See Securities Exchange Act Release No. 86400
(July 17, 2019), 84 FR 35438 (July 23, 2019) (SR–
CBOE–2019–035).
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participant’’ 5 and the issuer 6 of such
ETF shares,7 which transfer would
occur at the price used to calculate the
net asset value (‘‘NAV’’) of such ETF
shares. The NAV for ETF shares is
represented by the traded price for ETFs
holding options positions on days of
creation or redemption, and an options
pricing model on days in which
creations and redemptions do not occur.
This proposed new exception, although
limited in scope, would have a
significant impact in that it would help
protect ETF shareholders from
undesirable tax consequences and
facilitate tax-efficient operations. The
frequency with which ETFs and
authorized participants would rely on
the proposed exception would depend
upon such factors as the number of
ETFs holding options positions traded
on the Exchange, the market demand for
the shares of such ETFs, the redemption
activity of authorized participants, and
the investment strategies employed by
such ETFs.
As described in further detail below,
while ETFs do not sell and redeem
individual shares to and from investors,
they do sell large blocks of their shares
to, and redeem them from, authorized
participants in conjunction with what is
known as the ETF creation and
redemption process. Although currently
prohibited in light of Rule 6.49, under
the proposed exception, ETFs that hold
options listed on the Exchange would be
permitted to effect creation and
redemption transactions with
authorized participants on an ‘‘in-kind’’
basis, which is the process that may
generally be utilized by ETFs for other
asset types. This ability would allow
such ETFs to function as more taxefficient investment vehicles to the
benefit of investors that hold ETF
shares. In addition, it may also result in
5 The Exchange is proposing that, for purposes of
proposed Rule 6.49C, the term ‘‘authorized
participant’’ would be defined as an entity that has
a written agreement with the issuer of ETF shares
or one of its service providers, which allows the
authorized participant to place orders for the
purchase and redemption of creation units (i.e.,
specified numbers of ETF shares). While an
authorized participant may be a Trading Permit
Holder and directly effect transactions in options on
the Exchange, an authorized participant that is not
a Trading Permit Holder may effect transactions in
options on the Exchange through a Trading Permit
Holder on its behalf.
6 The Exchange is proposing that, for purposes of
proposed 6.49C, any issuer of ETF shares would be
registered with the Commission as an open-end
management investment company under the
Investment Company Act of 1940 (the ‘‘1940 Act’’).
7 An ETF share is a share or other security traded
on a national securities exchange and defined as an
NMS stock, as set forth in Rule 5.3, Interpretation
and Policy .06, which includes open-end
management investment companies registered with
the Commission. See Rule 1.1.
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transaction cost savings for the ETFs,
which may be passed along to investors.
While the Exchange recognizes that,
in general, the execution of options
transactions on exchanges provides
certain benefits, such as price discovery
and transparency, based on the
circumstances under which proposed
Rule 6.49C would apply, the Exchange
does not believe that such benefits
would be compromised. In this regard,
as discussed more fully below, the
Exchange notes that in conjunction with
the creation and redemption process,
positions would be transferred at a price
related to the NAV of ETF shares. In
addition, although options positions
would be transferred off of the
Exchange, they would not be closed or
‘‘traded.’’ Rather, they would reside in
a different clearing account until closed
in a trade on the Exchange or until they
expire. Further, as discussed below,
proposed Rule 6.49C would be clearly
delineated and limited in scope, given
that the proposed exception would
apply only to transfers of options
effected in connection with the creation
and redemption process.
The ETF Creation and Redemption
Process 8
Due to their ability to effect in-kind
transfers with authorized participants in
conjunction with the creation and
redemption process described below,
ETFs have the potential to be
significantly more tax-efficient than
other pooled investment products, such
as mutual funds. ETFs issue shares that
may be purchased or sold during the
day in the secondary market at marketdetermined prices. Similar to other
types of investment companies, ETFs
invest their assets in accordance with
their investment objectives and
investment strategies, and ETF shares
represent interests in an ETF’s
underlying assets. ETFs are, in certain
respects, similar to mutual funds in that
they continuously offer their shares for
sale. In contrast to mutual funds,
however, ETFs do not sell or redeem
individual shares. Rather, through the
creation and redemption process
referenced above, authorized
participants that have contractual
arrangements with an ETF and/or its
service provider (e.g., its distributor)
8 The following summary of the ETF creation and
redemption process is based largely on portions of
the discussion set forth in Investment Company Act
Release No. 33140 (June 28, 2018), 83 FR 37332
(July 31, 2018) (the ‘‘Proposed ETF Rule Release’’)
in which the Commission proposed a new rule
under the 1940 Act that would permit ETFs
registered as open-end management investment
companies that satisfy certain conditions to operate
without the need to obtain an exemptive order. The
proposed rule is currently pending.
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purchase and redeem shares directly
from that ETF in large aggregations
known as ‘‘creation units.’’ In general
terms, to purchase a creation unit of
ETF shares from an ETF, in return for
depositing a ‘‘basket’’ of securities and/
or other assets identified by the ETF on
a particular day, the authorized
participant will receive a creation unit
of ETF shares. The basket deposited by
the authorized participant is generally
expected to be representative of the
ETF’s portfolio 9 and, when combined
with a cash balancing amount (i.e.,
generally an amount of cash intended to
account for any difference between the
value of the basket and the NAV of a
creation unit), if any, will be equal in
value to the aggregate NAV of the shares
of the ETF comprising the creation unit.
After purchasing a creation unit, an
authorized participant may then hold
individual shares of the ETF and/or sell
them in secondary market transactions.
Investors may purchase individual ETF
shares in the secondary market. In
connection with effecting redemptions,
the creation process described above is
reversed. More specifically, the
authorized participant will redeem a
creation unit of ETF shares to the ETF
in return for a basket of securities and/
or other assets (along with any cash
balancing amount).
The ETF creation and redemption
process, coupled with the secondary
market trading of ETF shares, facilitates
arbitrage opportunities that are intended
to help keep the market price of ETF
shares at or close to the NAV per share
of the ETF. Authorized participants play
an important role because of their
ability, in general terms, to add ETF
shares to, or remove them from, the
market. In this regard, if shares of an
ETF are trading at a discount (i.e., below
NAV per share), an authorized
participant may purchase ETF shares in
the secondary market, accumulate
enough shares for a creation unit and
then redeem them from the ETF in
exchange for the ETF’s more valuable
redemption basket. Accordingly, the
authorized participant will profit
because it paid less for the ETF shares
than it received for the underlying
assets. The reduction in the supply of
ETF shares available on the secondary
market, together with the sale of the
ETF’s basket assets, may cause the price
9 Under certain circumstances, however, and
subject to the provisions of its exemptive relief from
various provisions of the 1940 Act obtained from
the Commission, an ETF may substitute cash and/
or other instruments in lieu of some or all of the
ETF’s portfolio holdings. For example, currently,
because there is no applicable exception from Rule
6.49(a), positions in options traded on the Exchange
would be generally substituted with cash.
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of ETF shares to increase, the price of
the basket assets to decrease, or both,
thereby causing the market price of the
ETF shares and the value of the ETF’s
holdings to move closer together. In
contrast, if the ETF shares are trading at
a premium (i.e., above NAV per share),
the transactions are reversed (and the
authorized participant would deliver
the creation basket in exchange for ETF
shares), resulting in an increase in the
supply of ETF shares which may also
help to keep the price of the shares of
an ETF close to the value of its holdings.
In comparison to other pooled
investment vehicles, one of the
significant benefits associated with an
ETF’s in-kind redemption feature is tax
efficiency. In this regard, by effecting
redemptions on an in-kind basis (i.e.,
delivering certain assets from the ETF’s
portfolio instead of cash), there is no
need for the ETF to sell assets and
potentially realize capital gains that
would be distributed to shareholders.
As indicated above, however, because
there is currently no applicable
exception from Rule 6.49(a), ETFs that
invest in options traded on the
Exchange are generally required to
substitute cash in lieu of such options
when effecting redemption transactions
with authorized participants. Because
they must sell the options to obtain the
requisite cash, such ETFs (and,
therefore, investors that hold shares of
those ETFs) are not able to benefit from
the tax efficiencies afforded by in-kind
transactions.
An additional benefit associated with
the in-kind feature is the potential for
transaction cost savings. In this regard,
by transacting on an in-kind basis, ETFs
may avoid certain transaction costs they
would otherwise incur in connection
with purchases and sales of securities
and other assets. Again, however,
without an exception to Rule 6.49(a),
this benefit is not available to ETFs with
respect to their options holdings.
redemption process and recognizes that
the prevalence and popularity of ETFs
have increased greatly since the
adoption of Rule 6.49A. Currently, ETFs
serve both as popular investment
vehicles and trading tools 11 and, as
discussed above, the creation and
redemption process, along with the
arbitrage opportunities that accompany
it, are key ETF features. Accordingly,
the Exchange believes that providing an
additional, narrow exception to the
prohibition of off-exchange transfers of
option positions to make it possible for
ETFs that invest in options to effect
creations and redemptions on an inkind basis is justified.
The Exchange submits that the
proposed exception is clearly delineated
and limited in scope and not intended
to facilitate ‘‘trading’’ options off of the
Exchange in order to circumvent the
current prohibition of Rule 6.49. In this
regard, the proposed exception would
be available solely in the context of
transfers of options positions effected in
connection with transactions to
purchase or redeem creation units of
ETF shares between ETFs and
authorized participants.12 As a result of
this process, such transfers would occur
at a price related to the NAV of the
applicable ETF shares (as discussed
above), which removes the need for
price discovery on an Exchange for
pricing these transfers. Moreover, as
described above, ETFs and authorized
participants are not seeking to effect the
opening or closing of new options
positions in connection with the
creation and redemption process.
Rather, the options positions would
reside in a different clearing account
until closed in a trade on the Exchange
or until they expire.
The proposed transfers, while
occurring between two different parties,
will occur off the Exchange and will not
be considered transactions (as is the
case for current off-floor transfers
Discussion
The Exchange notes that the
Commission approved Rule 6.49A in
1995 because the Exchange recognized,
and the Commission agreed, that under
certain circumstances, off-floor transfers
were justified.10 The Exchange believes
that it is appropriate to permit off-floor
transfers of options positions in
connection with the creation and
11 As noted in the Proposed ETF Rule Release,
during the first quarter of 2018, trading in U.S.listed ETFs comprised approximately 18.75% of
U.S. equity trading by share volume and 28.2% of
U.S. equity trading by dollar volume (based on
trade and quote data from the New York Stock
Exchange and Trade Reporting Facility data from
the Financial Industry Regulatory Authority, Inc.
(FINRA)). See the Proposed ETF Rule Release at 83
FR 37334.
12 See supra note 3. The term ‘‘authorized
participant’’ is specific and narrowly defined. As
noted in the Proposed ETF Rule Release, the
requirement that only authorized participants of an
ETF may purchase creation units from (or sell
creation units to) an ETF ‘‘is designed to preserve
an orderly creation unit issuance and redemption
process between ETFs and authorized participants.’’
Furthermore, an ‘‘orderly creation unit issuance and
redemption process is of central importance to the
arbitrage mechanism.’’ See Proposed ETF Rule
Release at 83 FR 37348.
10 See Exchange Act Release No. 36647
(December 28, 1995), 61 FR 566 (January 8, 1996)
(Order Approving and Notice of Filing and Order
Granting Accelerated Approval of Amendments No.
1 and 2 to a Proposed Rule Change Relating to the
Transfer of Positions on the Floor of the Exchange
in Cases of Dissolution and other Situations) (File
No. SR–CBOE–95–36).
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permitted by Rule 6.49A).13 While the
prices of options transactions effected
on the Exchange are disseminated to
OPRA, back-office transfers of options
positions in clearing accounts held at
The Options Clearing Corporation
(‘‘OCC’’) (in accordance with OCC
Rules) 14 are not disseminated to OPRA
or otherwise publicly available, as they
are considered position transfers, rather
than executions.15 The Exchange
believes that price transparency is
important in the options market.
However, the Exchange expects any
transfers pursuant to the proposed rule
will constitute a minimal percentage of
average daily volume of options.
Additionally, as noted above, the NAV
for the transfers will generally be based
on the disseminated closing price for an
option series on the day of a creation or
redemption, and thus the price
(although not the time or quantity of the
transfer) at which these transfers will
generally be effected will be publicly
available. Further, the Exchange
generally expects creations or
redemptions to include corresponding
transactions by the authorized
participant that will occur on an
exchange and be reported to OPRA.16
Therefore, the Exchange expects that
any impact the proposed rule change
could have on price transparency in the
options market would be de minimis.
Other than the transfers covered by
the proposed exception, transactions
involving options, whether held by an
ETF or an authorized participant, would
be fully subject to Rule 6.49 (except as
provided by any other applicable
exceptions) and all other applicable
13 For this reason, the Exchange notes that Rule
6.51(c) does not require reporting of off-floor
transfers effected pursuant to Rule 6.49A, or that
would be effected pursuant to proposed Rule 6.49C.
14 OCC has informed the Exchange that it has the
operational capabilities to effect the proposed
position transfers. All transfers pursuant to
proposed Rule 6.49C would be required to comply
with OCC rules. See Rule 4.2 (which requires all
TPHs that are members of OCC to comply with
OCC’s Rules).
15 For example, any transfers effected pursuant to
the current exemptions to Rule 6.49 contained in
Rule 6.49A are not disseminated to OPRA.
16 The Exchange notes that for in-kind creations,
an authorized participant will acquire the necessary
options positions in an on-exchange transaction
that will be reported to OPRA. For in-kind
redemptions, the Exchange generally expects that
an authorized participant will acquire both the
shares necessary to effect the redemption and an
options position to offset the position that it will
receive as proceeds for the redemption. Such an
options position would likely be acquired in an onexchange transaction that would be reported to
OPRA. Such transactions are generally identical to
the way that creations and redemptions work for
equities and fixed income transactions—while the
transfer between the authorized participant and the
fund is not necessarily reported, there are generally
corresponding transactions that would be reported,
providing transparency into the transactions.
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trading Rules.17 Accordingly, the
Exchange does not believe that the
proposed new exception would
compromise price discovery or
transparency.
Further, the Exchange believes that
providing an additional exception to
make it possible for ETFs that invest in
options to effect creations and
redemptions on an in-kind basis is
justified because, while the proposed
exception would be limited in scope,
the benefits that may flow to ETFs that
hold options and their investors may be
significant. Specifically, the Exchange
expects such ETFs and their investors
would benefit from increased tax
efficiencies and potential transaction
cost savings. By making such ETFs more
attractive to both current and
prospective investors, the proposed rule
change would enable them to compete
more effectively with other ETFs that,
due to their particular portfolio
holdings, may effect in-kind creations
and redemptions without restriction.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.18 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 19 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.
The Exchange believes that permitting
off-floor transfers in connection with the
in-kind ETF creation and redemption
process promotes just and equitable
principles of trade and helps remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, as it
would permit ETFs that invest in
options traded on the Exchange to
17 As indicated above, the operation of the
arbitrage mechanism accompanying the creation
and redemption process generally contemplates
ongoing interactions between authorized
participants and the market in transactions
involving both ETF shares and the assets
comprising an ETF’s creation/redemption basket.
18 15 U.S.C. 78f(b).
19 15 U.S.C. 78f(b)(5).
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50493
utilize the in-kind creation and
redemption process that is available for
ETFs that invest in equities and fixedincome securities. This process
represents a significant feature of the
ETF structure generally, with
advantages that distinguish ETFs from
other types of pooled investment
vehicles. In light of the associated tax
efficiencies and potential transaction
cost savings, the Exchange believes the
ability to utilize an in-kind process
would make such ETFs more attractive
to both current and prospective
investors and enable them to compete
more effectively with other ETFs that,
based on their portfolio holdings, may
effect in-kind creations and redemptions
without restriction. In addition, the
Exchange believes that because it would
permit ETFs that invest in options
traded on the Exchange to benefit from
tax efficiencies and potential transaction
cost savings afforded by the in-kind
creation and redemption process, which
benefits the Exchange expects would
generally be passed along to investors
that hold ETF shares, the proposed rule
change would protect investors and the
public interest.
Moreover, the Exchange submits that
the proposed exception is clearly
delineated and limited in scope and not
intended to facilitate ‘‘trading’’ options
off the Exchange in order to circumvent
the current prohibition of Rule 6.49.
Other than the transfers covered by the
proposed exception, transactions
involving options, whether held by an
ETF or an authorized participant, would
be fully subject to Rule 6.49 (except as
provided by any other applicable
exceptions) and all other applicable
trading Rules. Additionally, the
transfers covered by the proposed
exception would occur at a price related
to the NAV of the applicable ETF
shares, which removes the need for
price discovery on an Exchange.
Accordingly, the Exchange does not
believe that the proposed rule change
would compromise price discovery or
transparency.
When Congress charged the
Commission with supervising the
development of a ‘‘national market
system’’ for securities, Congress stated
its intent that the ‘‘national market
system evolve through the interplay of
competitive forces as unnecessary
regulatory restrictions are removed.20
Consistent with this purpose, Congress
and the Commission have repeatedly
stated their preference for competition,
rather than regulatory intervention to
determine products and services in the
20 See H.R. Rep. No. 94–229, at 92 (1975) (Conf.
Rep.).
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securities markets.21 This consistent
and considered judgment of Congress
and the Commission is correct,
particularly in light of evidence of
robust competition among exchanges.
The fact that an exchange proposed
something new is a reason to be
receptive, not skeptical — innovation is
the life-blood of a vibrant competitive
market — and that is particularly so
given the continued internalization of
the securities markets, as exchanges
continue to implement new products
and services to compete not only in the
United States but throughout the world.
Exchanges continuously adopt new and
different products and trading services
in response to industry demands in
order to attract order flow and liquidity
to increase their trading volume. This
competition has led to a growth in
investment choices, which ultimately
benefits the marketplace and the public.
Currently, the Exchange Rules do not
allow ETFs to effect in-kind transfers of
options off of the Exchange, resulting in
tax inefficiencies for ETFs that hold
them. As a result, the use of options by
ETFs is substantially limited. While the
proposed exception would be limited in
scope, the Exchange believes the
benefits that may flow to ETFs that hold
options and their investors may be
significant. Specifically, the Exchange
expects that such ETFs and their
investors could benefit from increased
tax efficiencies and potential transaction
cost savings. By making such ETFs more
attractive to both current and
prospective investors, the proposed rule
change would enable them to compete
more effectively with other ETFs that,
due to their particular portfolio
holdings, may effect in-kind creations
and redemptions without restriction.
This may lead to further development of
ETFs that invest in options, thereby
fostering competition and resulting in
additional choices for investors, which
21 See S. Rep. No. 94–75, 94th Cong., 1st Sess. 8
(1975) (‘‘The objective [in enacting the 1975
amendments to the Exchange Act] would be to
enhance competition and to allow economic forces,
interacting within a fair regulatory field, to arrive
at appropriate variations in practices and
services.’’); Order Approving Proposed Rule Change
Relating to NYSE Arca Data, Securities Exchange
Act Release No. 59039 (December 2, 2008), 73 FR
74770 (December 9, 2008) (‘‘The Exchange Act and
its legislative history strongly support the
Commission’s reliance on competition, whenever
possible, in meeting its regulatory responsibilities
for overseeing the [self-regulatory organizations]
and the national market system. Indeed,
competition among multiple markets and market
participants trading the same products is the
hallmark of the national market system.’’); and
Regulation NMS, 70 FR at 37499 (observing that
NMS regulation ‘‘has been remarkably successful in
promoting market competition in [the] forms that
are most important to investors and listed
companies’’).
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ultimately benefits the marketplace and
the public.
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
Exchange does not believe 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. Utilizing the
proposed exception would be voluntary,
and the exception is not intended as a
competitive trading tool. As an
alternative to the normal auction
process, the proposed rule change
would provide market participants with
an efficient and effective means to
transfer positions under the specified
circumstances. The proposed exception
would enable all ETFs that hold options
to enjoy the benefits of in-kind creations
and redemptions already available to
other ETFs (and to pass these benefits
along to investors). The proposed rule
change would apply in the same manner
to all entities that meet the definition of
‘‘authorized participant.’’
The Exchange does not believe 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.
As indicated above, it is intended to
provide an additional clearly delineated
and limited exception to the
requirement that options positions be
transferred on the floor of an exchange.
Further, the Exchange believes the
proposed rule change will eliminate a
significant competitive disadvantage for
ETFs that invest in options. Finally, as
indicated above, in light of the
significant benefits provided (e.g., tax
efficiencies and potential transaction
cost savings), the proposed exception
may lead to further development of
ETFs that invest in options, thereby
fostering competition and resulting in
additional choices for investors, which
ultimately benefits the marketplace and
the public. Other options exchanges in
their discretion may pursue the
adoption of similar exceptions.
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 written comments on the
proposed rule change.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
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 rule-comments@
sec.gov. Please include File Number SR–
CBOE–2019–048 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–2019–048. 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
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Federal Register / Vol. 84, No. 186 / Wednesday, September 25, 2019 / Notices
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–2019–048, and
should be submitted on or before
October 16, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–20708 Filed 9–24–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87030; File No. SR–
NASDAQ–2019–077]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend the
Order Routing Rule in NOM Chapter VI,
Section 11
September 19, 2019.
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
September 12, 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 and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
jbell on DSK3GLQ082PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend The
Nasdaq Options Market LLC Rules at
Chapter VI, Section 11, titled ‘‘Order
Routing’’.
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.
22 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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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 amend
NOM Chapter VI, Section 11, titled
‘‘Order Routing’’ to conform the rule
text of NOM’s Chapter VI, Section 11,
where applicable, to Nasdaq Phlx LLC
(‘‘Phlx’’) Rule 1093 and Nasdaq BX, Inc.
(‘‘BX’’) Chapter VI, Section 11 where the
routing behavior is identical. Phlx and
BX recently amended their routing
rules.3 The Exchange notes that the
proposed amendments to NOM Chapter
VI, Section 11 reflect the current
operation of the System. The Exchange
proposes to provide additional scenarios
and outcomes when routing on NOM.
The Exchange proposes to provide
rule text within proposed NOM Chapter
VI, Section 11(a) 4 similar to Phlx Rule
1093(a) and BX Chapter VI, Section
11(a). Phlx offers FIND and SRCH
routing strategies, NOM and BX offer
SEEK and SRCH routing strategies.5
Some other differences among the three
3 See Securities Exchange Act Release Nos. 85655
(April 16, 2019), 77 FR 16709 (April 22, 2019) (SR–
Phlx–2019–06); and 86060 (June 6, 2019), 84 FR
27374 (June 12, 2019) (SR–BX–2019–017).
4 Proposed NOM Chapter VI, Section 11(a) would
provide, ‘‘NOM offers two routing strategies, SEEK
and SRCH. Each of these routing strategies will be
explained in more detail below. An order may in
the alternative be marked Do Not Route or ‘‘DNR’’.
The Exchange notes that for purposes of this rule
the System will route SEEK and SRCH Orders with
no other contingencies. The System checks the
Order Book for available contracts for potential
execution against the SEEK or SRCH orders. After
the System checks the Order Book for available
contracts, orders are sent to other available market
centers for potential execution. For purposes of this
rule, a Route Timer shall not exceed one second
and shall begin at the time orders are accepted into
the System, and the System will consider whether
an order can be routed at the conclusion of each
Route Timer. For purposes of this rule, NOM’s
opening process is governed by Chapter VI, Section
8 and includes an opening after a trading halt
(‘‘Opening Process’’).’’
5 NOM and BX do not have a FIND routing
strategy similar to Phlx.
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
50495
markets include: (1) Phlx’s All-or-None 6
Order type differs from NOM; 7 (2)
unlike Phlx and BX, NOM does not have
an exposure notification; 8 (3) unlike
Phlx and BX where Immediate or Cancel
Orders will not route, NOM Immediate
or Cancel (‘‘IOC’’) Orders are considered
for routing and will cancel if not
executed on NOM or an away market 9
and (4) NOM defines a Public Customer
at Chapter I, Section 1(a)(49) similar to
BX, while Phlx defines Public Customer
within Rule 1093(a).10
Further, the Exchange is amending
NOM Chapter VI, Section 11 to add
more clarity to the current Rule. The
proposed changes will be discussed
below in greater detail. The Exchange
notes that the amendments to NOM
Chapter VI, Section 11 reflect the
current operation of the System.
The Exchange proposes to capitalize
the term ‘‘system’’ as that term is
defined within Chapter VI, Section 1(a)
throughout the rule.
Chapter VI, Section 11(a)
Current NOM Chapter VI, Section
(a)(1)(C) language concerning the Route
Timer is being relocated into proposed
NOM Chapter VI, Section 11(a). The
SEEK and SRCH routing functions
describe the manner in which the Order
Book is checked, this sentence is not
necessary in this introductory
paragraph.
The Exchange proposes a new second
paragraph at NOM Chapter VI, Section
6 See Phlx Rule 1078. Phlx’s All-or-None Order is
non-displayed. This order type could cause Phlx’s
Order Book to differ from the displayed PBBO.
NOM has no such non-displayed order type.
7 See NOM Chapter VI, Section 1(e)(10). ‘‘All-ornone’’ shall mean a market or limit order which is
to be executed in its entirety or not at all. All-orNone Orders are treated as having a time-in-force
designation of Immediate or Cancel. All-or-None
Orders received prior to the opening cross or after
market close will be rejected.
8 Both Phlx and BX offer an exposure notification
during the Route Timer. This notification alerts
options participants that interest is available and
currently subject to a Route Timer. The notification
provides information on price, size, and side of
interest that is available for execution.
9 See NOM Chapter VI, Section 1(g)(2).
‘‘Immediate Or Cancel’’ or ‘‘IOC’’ shall mean for
orders so designated, that if after entry into the
System a marketable order (or unexecuted portion
thereof) becomes non-marketable, the order (or
unexecuted portion thereof) shall be canceled and
returned to the entering participant. IOC Orders
shall be available for entry from the time prior to
market open specified by the Exchange on its
website until market close and for potential
execution from 9:30 a.m. until market close. IOC
Orders entered between the time specified by the
Exchange on its website and 9:30 a.m. Eastern Time
will be held within the System until 9:30 a.m. at
which time the System shall determine whether
such orders are marketable.
10 BX and NOM Rules at Chapter 1, Section
1(a)(49) provide, ‘‘The term ‘‘Public Customer’’
means a person that is not a broker or dealer in
securities.’’
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]]>Agencies
[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50490-50495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20708]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87013; File No. SR-CBOE-2019-048]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Rule 6.49C
September 19, 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 September 6, 2019, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') 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.
---------------------------------------------------------------------------
\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 6.49C. The text of the proposed rule change is provided
below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 6.49C. In-Kind Exchange of Options Positions and ETF Shares
Notwithstanding the prohibition set forth in Rule 6.49, positions
in options listed on the Exchange may be transferred off the Exchange
by a Trading Permit Holder in connection with transactions to purchase
or redeem creation units of ETF shares between an authorized
participant and the issuer of such ETF shares, which transfer occurs at
a price related to the net asset value of such ETF shares. For purposes
of this Rule:
(a) an ``authorized participant'' is an entity that has a written
agreement with the issuer of ETF shares or one of its service
providers, which allows the authorized participant to place orders for
the purchase and redemption of creation units (i.e., specified numbers
of ETF shares); and
(b) an ``issuer of ETF shares'' is an entity registered with the
Commission as an open-end management investment company under the
Investment Company Act of 1940.
* * * * *
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 6.49C to add a new exception to
the Exchange's general requirement that transfers of options contracts
listed on the Exchange be effected on an exchange, as set forth in Rule
6.49.\3\ Rule 6.49A specifies the circumstances under which Trading
Permit Holders may currently effect transfers of positions off the
trading floor, notwithstanding the prohibition in Rule 6.49.
---------------------------------------------------------------------------
\3\ Rule 6.49(a) (Transactions Off the Exchange) 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.
---------------------------------------------------------------------------
Background
As discussed further below, the ability to effect ``in kind''
transfers is a key component of the operational structure of an
exchange-traded fund
[[Page 50491]]
(``ETF''). Currently, in general, ETFs can effect in-kind transfers
with respect to equity securities and fixed-income securities. The in-
kind process is a major benefit to ETF shareholders and, in general,
the means by which assets may be added to or removed from ETFs. In-kind
transfers protect ETF shareholders from the undesirable tax effects of
frequent ``creations and redemptions'' (described below) and improve
the overall tax efficiency of the products. However, currently, the
Exchange Rules do not allow ETFs to effect in-kind transfers of options
off of the Exchange, resulting in tax inefficiencies for ETFs that hold
them. As a result, the use of options by ETFs is substantially limited.
Current Rule 6.49A(a) lists the circumstances under which Trading
Permit Holders may transfer their positions off of the Exchange. 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 Minors Act; and (6) a merger or acquisition where
continuity of ownership or management results.\4\
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\4\ The Exchange notes that other options exchanges have adopted
rules that provide for off-floor transfers under similar
circumstances. See, e.g., Nasdaq OMX PHLX LLC Rule 1058(a); and NYSE
Arca, Inc. Rule 6.78-O(d)(1). The Exchange recently proposed changes
to Rule 6.49A, which rule filing is currently pending with the
Securities and Exchange Commission (the ``Commission''). See
Securities Exchange Act Release No. 86400 (July 17, 2019), 84 FR
35438 (July 23, 2019) (SR-CBOE-2019-035).
---------------------------------------------------------------------------
The Exchange proposes to add a new circumstance under which off-
floor transfers of options positions would be permitted to occur.
Specifically, under proposed Rule 6.49C, positions in options listed on
the Exchange would be permitted to be transferred off the Exchange by a
Trading Permit Holder in connection with transactions to purchase or
redeem ``creation units'' of ETF shares between an ``authorized
participant'' \5\ and the issuer \6\ of such ETF shares,\7\ which
transfer would occur at the price used to calculate the net asset value
(``NAV'') of such ETF shares. The NAV for ETF shares is represented by
the traded price for ETFs holding options positions on days of creation
or redemption, and an options pricing model on days in which creations
and redemptions do not occur. This proposed new exception, although
limited in scope, would have a significant impact in that it would help
protect ETF shareholders from undesirable tax consequences and
facilitate tax-efficient operations. The frequency with which ETFs and
authorized participants would rely on the proposed exception would
depend upon such factors as the number of ETFs holding options
positions traded on the Exchange, the market demand for the shares of
such ETFs, the redemption activity of authorized participants, and the
investment strategies employed by such ETFs.
---------------------------------------------------------------------------
\5\ The Exchange is proposing that, for purposes of proposed
Rule 6.49C, the term ``authorized participant'' would be defined as
an entity that has a written agreement with the issuer of ETF shares
or one of its service providers, which allows the authorized
participant to place orders for the purchase and redemption of
creation units (i.e., specified numbers of ETF shares). While an
authorized participant may be a Trading Permit Holder and directly
effect transactions in options on the Exchange, an authorized
participant that is not a Trading Permit Holder may effect
transactions in options on the Exchange through a Trading Permit
Holder on its behalf.
\6\ The Exchange is proposing that, for purposes of proposed
6.49C, any issuer of ETF shares would be registered with the
Commission as an open-end management investment company under the
Investment Company Act of 1940 (the ``1940 Act'').
\7\ An ETF share is a share or other security traded on a
national securities exchange and defined as an NMS stock, as set
forth in Rule 5.3, Interpretation and Policy .06, which includes
open-end management investment companies registered with the
Commission. See Rule 1.1.
---------------------------------------------------------------------------
As described in further detail below, while ETFs do not sell and
redeem individual shares to and from investors, they do sell large
blocks of their shares to, and redeem them from, authorized
participants in conjunction with what is known as the ETF creation and
redemption process. Although currently prohibited in light of Rule
6.49, under the proposed exception, ETFs that hold options listed on
the Exchange would be permitted to effect creation and redemption
transactions with authorized participants on an ``in-kind'' basis,
which is the process that may generally be utilized by ETFs for other
asset types. This ability would allow such ETFs to function as more
tax-efficient investment vehicles to the benefit of investors that hold
ETF shares. In addition, it may also result in transaction cost savings
for the ETFs, which may be passed along to investors.
While the Exchange recognizes that, in general, the execution of
options transactions on exchanges provides certain benefits, such as
price discovery and transparency, based on the circumstances under
which proposed Rule 6.49C would apply, the Exchange does not believe
that such benefits would be compromised. In this regard, as discussed
more fully below, the Exchange notes that in conjunction with the
creation and redemption process, positions would be transferred at a
price related to the NAV of ETF shares. In addition, although options
positions would be transferred off of the Exchange, they would not be
closed or ``traded.'' Rather, they would reside in a different clearing
account until closed in a trade on the Exchange or until they expire.
Further, as discussed below, proposed Rule 6.49C would be clearly
delineated and limited in scope, given that the proposed exception
would apply only to transfers of options effected in connection with
the creation and redemption process.
The ETF Creation and Redemption Process \8\
---------------------------------------------------------------------------
\8\ The following summary of the ETF creation and redemption
process is based largely on portions of the discussion set forth in
Investment Company Act Release No. 33140 (June 28, 2018), 83 FR
37332 (July 31, 2018) (the ``Proposed ETF Rule Release'') in which
the Commission proposed a new rule under the 1940 Act that would
permit ETFs registered as open-end management investment companies
that satisfy certain conditions to operate without the need to
obtain an exemptive order. The proposed rule is currently pending.
---------------------------------------------------------------------------
Due to their ability to effect in-kind transfers with authorized
participants in conjunction with the creation and redemption process
described below, ETFs have the potential to be significantly more tax-
efficient than other pooled investment products, such as mutual funds.
ETFs issue shares that may be purchased or sold during the day in the
secondary market at market-determined prices. Similar to other types of
investment companies, ETFs invest their assets in accordance with their
investment objectives and investment strategies, and ETF shares
represent interests in an ETF's underlying assets. ETFs are, in certain
respects, similar to mutual funds in that they continuously offer their
shares for sale. In contrast to mutual funds, however, ETFs do not sell
or redeem individual shares. Rather, through the creation and
redemption process referenced above, authorized participants that have
contractual arrangements with an ETF and/or its service provider (e.g.,
its distributor)
[[Page 50492]]
purchase and redeem shares directly from that ETF in large aggregations
known as ``creation units.'' In general terms, to purchase a creation
unit of ETF shares from an ETF, in return for depositing a ``basket''
of securities and/or other assets identified by the ETF on a particular
day, the authorized participant will receive a creation unit of ETF
shares. The basket deposited by the authorized participant is generally
expected to be representative of the ETF's portfolio \9\ and, when
combined with a cash balancing amount (i.e., generally an amount of
cash intended to account for any difference between the value of the
basket and the NAV of a creation unit), if any, will be equal in value
to the aggregate NAV of the shares of the ETF comprising the creation
unit. After purchasing a creation unit, an authorized participant may
then hold individual shares of the ETF and/or sell them in secondary
market transactions. Investors may purchase individual ETF shares in
the secondary market. In connection with effecting redemptions, the
creation process described above is reversed. More specifically, the
authorized participant will redeem a creation unit of ETF shares to the
ETF in return for a basket of securities and/or other assets (along
with any cash balancing amount).
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\9\ Under certain circumstances, however, and subject to the
provisions of its exemptive relief from various provisions of the
1940 Act obtained from the Commission, an ETF may substitute cash
and/or other instruments in lieu of some or all of the ETF's
portfolio holdings. For example, currently, because there is no
applicable exception from Rule 6.49(a), positions in options traded
on the Exchange would be generally substituted with cash.
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The ETF creation and redemption process, coupled with the secondary
market trading of ETF shares, facilitates arbitrage opportunities that
are intended to help keep the market price of ETF shares at or close to
the NAV per share of the ETF. Authorized participants play an important
role because of their ability, in general terms, to add ETF shares to,
or remove them from, the market. In this regard, if shares of an ETF
are trading at a discount (i.e., below NAV per share), an authorized
participant may purchase ETF shares in the secondary market, accumulate
enough shares for a creation unit and then redeem them from the ETF in
exchange for the ETF's more valuable redemption basket. Accordingly,
the authorized participant will profit because it paid less for the ETF
shares than it received for the underlying assets. The reduction in the
supply of ETF shares available on the secondary market, together with
the sale of the ETF's basket assets, may cause the price of ETF shares
to increase, the price of the basket assets to decrease, or both,
thereby causing the market price of the ETF shares and the value of the
ETF's holdings to move closer together. In contrast, if the ETF shares
are trading at a premium (i.e., above NAV per share), the transactions
are reversed (and the authorized participant would deliver the creation
basket in exchange for ETF shares), resulting in an increase in the
supply of ETF shares which may also help to keep the price of the
shares of an ETF close to the value of its holdings.
In comparison to other pooled investment vehicles, one of the
significant benefits associated with an ETF's in-kind redemption
feature is tax efficiency. In this regard, by effecting redemptions on
an in-kind basis (i.e., delivering certain assets from the ETF's
portfolio instead of cash), there is no need for the ETF to sell assets
and potentially realize capital gains that would be distributed to
shareholders. As indicated above, however, because there is currently
no applicable exception from Rule 6.49(a), ETFs that invest in options
traded on the Exchange are generally required to substitute cash in
lieu of such options when effecting redemption transactions with
authorized participants. Because they must sell the options to obtain
the requisite cash, such ETFs (and, therefore, investors that hold
shares of those ETFs) are not able to benefit from the tax efficiencies
afforded by in-kind transactions.
An additional benefit associated with the in-kind feature is the
potential for transaction cost savings. In this regard, by transacting
on an in-kind basis, ETFs may avoid certain transaction costs they
would otherwise incur in connection with purchases and sales of
securities and other assets. Again, however, without an exception to
Rule 6.49(a), this benefit is not available to ETFs with respect to
their options holdings.
Discussion
The Exchange notes that the Commission approved Rule 6.49A in 1995
because the Exchange recognized, and the Commission agreed, that under
certain circumstances, off-floor transfers were justified.\10\ The
Exchange believes that it is appropriate to permit off-floor transfers
of options positions in connection with the creation and redemption
process and recognizes that the prevalence and popularity of ETFs have
increased greatly since the adoption of Rule 6.49A. Currently, ETFs
serve both as popular investment vehicles and trading tools \11\ and,
as discussed above, the creation and redemption process, along with the
arbitrage opportunities that accompany it, are key ETF features.
Accordingly, the Exchange believes that providing an additional, narrow
exception to the prohibition of off-exchange transfers of option
positions to make it possible for ETFs that invest in options to effect
creations and redemptions on an in-kind basis is justified.
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\10\ See Exchange Act Release No. 36647 (December 28, 1995), 61
FR 566 (January 8, 1996) (Order Approving and Notice of Filing and
Order Granting Accelerated Approval of Amendments No. 1 and 2 to a
Proposed Rule Change Relating to the Transfer of Positions on the
Floor of the Exchange in Cases of Dissolution and other Situations)
(File No. SR-CBOE-95-36).
\11\ As noted in the Proposed ETF Rule Release, during the first
quarter of 2018, trading in U.S.-listed ETFs comprised approximately
18.75% of U.S. equity trading by share volume and 28.2% of U.S.
equity trading by dollar volume (based on trade and quote data from
the New York Stock Exchange and Trade Reporting Facility data from
the Financial Industry Regulatory Authority, Inc. (FINRA)). See the
Proposed ETF Rule Release at 83 FR 37334.
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The Exchange submits that the proposed exception is clearly
delineated and limited in scope and not intended to facilitate
``trading'' options off of the Exchange in order to circumvent the
current prohibition of Rule 6.49. In this regard, the proposed
exception would be available solely in the context of transfers of
options positions effected in connection with transactions to purchase
or redeem creation units of ETF shares between ETFs and authorized
participants.\12\ As a result of this process, such transfers would
occur at a price related to the NAV of the applicable ETF shares (as
discussed above), which removes the need for price discovery on an
Exchange for pricing these transfers. Moreover, as described above,
ETFs and authorized participants are not seeking to effect the opening
or closing of new options positions in connection with the creation and
redemption process. Rather, the options positions would reside in a
different clearing account until closed in a trade on the Exchange or
until they expire.
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\12\ See supra note 3. The term ``authorized participant'' is
specific and narrowly defined. As noted in the Proposed ETF Rule
Release, the requirement that only authorized participants of an ETF
may purchase creation units from (or sell creation units to) an ETF
``is designed to preserve an orderly creation unit issuance and
redemption process between ETFs and authorized participants.''
Furthermore, an ``orderly creation unit issuance and redemption
process is of central importance to the arbitrage mechanism.'' See
Proposed ETF Rule Release at 83 FR 37348.
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The proposed transfers, while occurring between two different
parties, will occur off the Exchange and will not be considered
transactions (as is the case for current off-floor transfers
[[Page 50493]]
permitted by Rule 6.49A).\13\ While the prices of options transactions
effected on the Exchange are disseminated to OPRA, back-office
transfers of options positions in clearing accounts held at The Options
Clearing Corporation (``OCC'') (in accordance with OCC Rules) \14\ are
not disseminated to OPRA or otherwise publicly available, as they are
considered position transfers, rather than executions.\15\ The Exchange
believes that price transparency is important in the options market.
However, the Exchange expects any transfers pursuant to the proposed
rule will constitute a minimal percentage of average daily volume of
options. Additionally, as noted above, the NAV for the transfers will
generally be based on the disseminated closing price for an option
series on the day of a creation or redemption, and thus the price
(although not the time or quantity of the transfer) at which these
transfers will generally be effected will be publicly available.
Further, the Exchange generally expects creations or redemptions to
include corresponding transactions by the authorized participant that
will occur on an exchange and be reported to OPRA.\16\ Therefore, the
Exchange expects that any impact the proposed rule change could have on
price transparency in the options market would be de minimis.
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\13\ For this reason, the Exchange notes that Rule 6.51(c) does
not require reporting of off-floor transfers effected pursuant to
Rule 6.49A, or that would be effected pursuant to proposed Rule
6.49C.
\14\ OCC has informed the Exchange that it has the operational
capabilities to effect the proposed position transfers. All
transfers pursuant to proposed Rule 6.49C would be required to
comply with OCC rules. See Rule 4.2 (which requires all TPHs that
are members of OCC to comply with OCC's Rules).
\15\ For example, any transfers effected pursuant to the current
exemptions to Rule 6.49 contained in Rule 6.49A are not disseminated
to OPRA.
\16\ The Exchange notes that for in-kind creations, an
authorized participant will acquire the necessary options positions
in an on-exchange transaction that will be reported to OPRA. For in-
kind redemptions, the Exchange generally expects that an authorized
participant will acquire both the shares necessary to effect the
redemption and an options position to offset the position that it
will receive as proceeds for the redemption. Such an options
position would likely be acquired in an on-exchange transaction that
would be reported to OPRA. Such transactions are generally identical
to the way that creations and redemptions work for equities and
fixed income transactions--while the transfer between the authorized
participant and the fund is not necessarily reported, there are
generally corresponding transactions that would be reported,
providing transparency into the transactions.
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Other than the transfers covered by the proposed exception,
transactions involving options, whether held by an ETF or an authorized
participant, would be fully subject to Rule 6.49 (except as provided by
any other applicable exceptions) and all other applicable trading
Rules.\17\ Accordingly, the Exchange does not believe that the proposed
new exception would compromise price discovery or transparency.
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\17\ As indicated above, the operation of the arbitrage
mechanism accompanying the creation and redemption process generally
contemplates ongoing interactions between authorized participants
and the market in transactions involving both ETF shares and the
assets comprising an ETF's creation/redemption basket.
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Further, the Exchange believes that providing an additional
exception to make it possible for ETFs that invest in options to effect
creations and redemptions on an in-kind basis is justified because,
while the proposed exception would be limited in scope, the benefits
that may flow to ETFs that hold options and their investors may be
significant. Specifically, the Exchange expects such ETFs and their
investors would benefit from increased tax efficiencies and potential
transaction cost savings. By making such ETFs more attractive to both
current and prospective investors, the proposed rule change would
enable them to compete more effectively with other ETFs that, due to
their particular portfolio holdings, may effect in-kind creations and
redemptions without restriction.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\18\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \19\ 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.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that permitting off-floor transfers in
connection with the in-kind ETF creation and redemption process
promotes just and equitable principles of trade and helps remove
impediments to and perfect the mechanism of a free and open market and
a national market system, as it would permit ETFs that invest in
options traded on the Exchange to utilize the in-kind creation and
redemption process that is available for ETFs that invest in equities
and fixed-income securities. This process represents a significant
feature of the ETF structure generally, with advantages that
distinguish ETFs from other types of pooled investment vehicles. In
light of the associated tax efficiencies and potential transaction cost
savings, the Exchange believes the ability to utilize an in-kind
process would make such ETFs more attractive to both current and
prospective investors and enable them to compete more effectively with
other ETFs that, based on their portfolio holdings, may effect in-kind
creations and redemptions without restriction. In addition, the
Exchange believes that because it would permit ETFs that invest in
options traded on the Exchange to benefit from tax efficiencies and
potential transaction cost savings afforded by the in-kind creation and
redemption process, which benefits the Exchange expects would generally
be passed along to investors that hold ETF shares, the proposed rule
change would protect investors and the public interest.
Moreover, the Exchange submits that the proposed exception is
clearly delineated and limited in scope and not intended to facilitate
``trading'' options off the Exchange in order to circumvent the current
prohibition of Rule 6.49. Other than the transfers covered by the
proposed exception, transactions involving options, whether held by an
ETF or an authorized participant, would be fully subject to Rule 6.49
(except as provided by any other applicable exceptions) and all other
applicable trading Rules. Additionally, the transfers covered by the
proposed exception would occur at a price related to the NAV of the
applicable ETF shares, which removes the need for price discovery on an
Exchange. Accordingly, the Exchange does not believe that the proposed
rule change would compromise price discovery or transparency.
When Congress charged the Commission with supervising the
development of a ``national market system'' for securities, Congress
stated its intent that the ``national market system evolve through the
interplay of competitive forces as unnecessary regulatory restrictions
are removed.\20\ Consistent with this purpose, Congress and the
Commission have repeatedly stated their preference for competition,
rather than regulatory intervention to determine products and services
in the
[[Page 50494]]
securities markets.\21\ This consistent and considered judgment of
Congress and the Commission is correct, particularly in light of
evidence of robust competition among exchanges. The fact that an
exchange proposed something new is a reason to be receptive, not
skeptical -- innovation is the life-blood of a vibrant competitive
market -- and that is particularly so given the continued
internalization of the securities markets, as exchanges continue to
implement new products and services to compete not only in the United
States but throughout the world. Exchanges continuously adopt new and
different products and trading services in response to industry demands
in order to attract order flow and liquidity to increase their trading
volume. This competition has led to a growth in investment choices,
which ultimately benefits the marketplace and the public.
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\20\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
\21\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975)
(``The objective [in enacting the 1975 amendments to the Exchange
Act] would be to enhance competition and to allow economic forces,
interacting within a fair regulatory field, to arrive at appropriate
variations in practices and services.''); Order Approving Proposed
Rule Change Relating to NYSE Arca Data, Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008)
(``The Exchange Act and its legislative history strongly support the
Commission's reliance on competition, whenever possible, in meeting
its regulatory responsibilities for overseeing the [self-regulatory
organizations] and the national market system. Indeed, competition
among multiple markets and market participants trading the same
products is the hallmark of the national market system.''); and
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has
been remarkably successful in promoting market competition in [the]
forms that are most important to investors and listed companies'').
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Currently, the Exchange Rules do not allow ETFs to effect in-kind
transfers of options off of the Exchange, resulting in tax
inefficiencies for ETFs that hold them. As a result, the use of options
by ETFs is substantially limited. While the proposed exception would be
limited in scope, the Exchange believes the benefits that may flow to
ETFs that hold options and their investors may be significant.
Specifically, the Exchange expects that such ETFs and their investors
could benefit from increased tax efficiencies and potential transaction
cost savings. By making such ETFs more attractive to both current and
prospective investors, the proposed rule change would enable them to
compete more effectively with other ETFs that, due to their particular
portfolio holdings, may effect in-kind creations and redemptions
without restriction. This may lead to further development of ETFs that
invest in options, thereby fostering competition and resulting in
additional choices for investors, which ultimately benefits the
marketplace and the public.
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 Exchange does not
believe 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. Utilizing the proposed exception would be
voluntary, and the exception is not intended as a competitive trading
tool. As an alternative to the normal auction process, the proposed
rule change would provide market participants with an efficient and
effective means to transfer positions under the specified
circumstances. The proposed exception would enable all ETFs that hold
options to enjoy the benefits of in-kind creations and redemptions
already available to other ETFs (and to pass these benefits along to
investors). The proposed rule change would apply in the same manner to
all entities that meet the definition of ``authorized participant.''
The Exchange does not believe 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. As indicated
above, it is intended to provide an additional clearly delineated and
limited exception to the requirement that options positions be
transferred on the floor of an exchange. Further, the Exchange believes
the proposed rule change will eliminate a significant competitive
disadvantage for ETFs that invest in options. Finally, as indicated
above, in light of the significant benefits provided (e.g., tax
efficiencies and potential transaction cost savings), the proposed
exception may lead to further development of ETFs that invest in
options, thereby fostering competition and resulting in additional
choices for investors, which ultimately benefits the marketplace and
the public. Other options exchanges in their discretion may pursue the
adoption of similar exceptions.
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 written 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-2019-048 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-2019-048. 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
[[Page 50495]]
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-2019-048, and should be
submitted on or before October 16, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20708 Filed 9-24-19; 8:45 am]
BILLING CODE 8011-01-P
