Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule Titled “Off-Exchange RWA Transfers” at BX Options 6, Section 6, 72007-72010 [2019-28025]
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Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Notices
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
offices 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–IEX–2019–15, and should
be submitted on or before January 21,
2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.86
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–28024 Filed 12–27–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87817; File No. SR–BX–
2019–042]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt a New Rule
Titled ‘‘Off-Exchange RWA Transfers’’
at BX Options 6, Section 6
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December 20, 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 December
17, 2019, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘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.
86 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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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a
new rule titled ‘‘Off-Exchange RWA
Transfers’’ at BX Options 6, Section 6.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqbx.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
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 a
new rule titled, ‘‘Off-Exchange RWA
Transfers’’ at BX Options 6, Section 6.
This proposal is substantially the same
as Cboe Exchange, Inc. (‘‘Cboe’’) Rule
6.8.3
Proposed Options 6, Section 6 is
intended to facilitate the reduction of
risk-weighted assets (‘‘RWA’’)
attributable to open options positions.
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.4 The Net
Capital Rules are designed to protect
securities customers, counterparties,
and creditors by requiring that brokerdealers 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.5
3 See Securities Exchange Act Release No. 87374
(October 21, 2019), 84 FR 57542 (October 25, 2019)
(SR–Cboe–2019–044).
4 17 CFR 240.15c3–1.
5 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
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72007
Subject to certain exceptions, Clearing
Participants 6 are subject to the Net
Capital Rules.7 However, a subset of
Clearing Participants 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 DoddFrank Wall Street Reform and Consumer
Protection Act.8 Pursuant to this
mandate, the Board of Governors of the
Federal Reserve System, the Office of
the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation
have approved a regulatory capital
framework for subsidiaries of U.S. bank
holding company clearing firms.9
Generally, these rules, among other
things, impose higher minimum capital
and higher asset risk weights than were
previously mandated for Clearing
Participants 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.10 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, Clearing Participants
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 is concerned with the
ability of Market Makers to provide
liquidity in their appointed classes. The
Exchange believes that permitting
market participants to efficiently
transfer existing options positions
through an off-exchange transfer process
allowed to offset another position’s loss at the same
valuation point (e.g. vertical spreads).
6 The term Clearing Participant is defined within
Options 1, Section 1(a)(16). All Clearing
Participants must also be clearing members of The
Options Clearing Corporation (‘‘OCC’’).
7 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.
8 H.R. 4173 (amending section 3(a) of the
Securities Exchange Act of 1934 (the ‘‘Act’’) (15
U.S.C. 78c(a))).
9 12 CFR 50; 79 FR 61440 (Liquidity Coverage
Ratio: Liquidity Risk Measurement Standards).
10 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.
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would likely have a beneficial effect on
continued liquidity in the options
market without adversely affecting
market quality. Liquidity in the listed
options market is critically important.
The Exchange believes that 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 and
thereby increase liquidity in the listed
options market. BX currently has no
mechanism that firms may use to
transfer positions between clearing
accounts without having to effect a
transaction with another party and close
a position.
The proposed rule provides that
existing positions in options listed on
the Exchange of a Participant or nonParticipant (including an affiliate of a
Participant) may be transferred on, from,
or to the books of a Clearing Participant
off the Exchange if the transfer
establishes a net reduction of RWA
attributable to those options positions
(an ‘‘RWA Transfer’’). Proposed
paragraph (a)(1) 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 11 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);12
and
• A transfer of options positions from
a bank-affiliated Clearing Corporation
member to a non-bank-affiliated
Clearing Corporation member.13
These transfers will not result in a
change in ownership, as they must
occur between accounts of the same
Person.
‘‘Person’’ is defined within proposed
Options 6, Section 6(a) 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
11 The term Clearing Corporation is defined
within Options 1, Section 1(a)(15).
12 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.
13 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.
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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 Clearing Participant
X, which is affiliated with a U.S-bank
holding company. Market Maker A
opens a clearing account with Clearing
Participant Y, which is not affiliated
with a U.S.-bank holding company.
Clearing Participant 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 Clearing
Participant X clearing account and
determines it must reduce its open
positions to satisfy Clearing Participant
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 Clearing Participant 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
Clearing Participant 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 Participant must give up a Clearing
Participant for each transaction it effects
on the Exchange, which identifies the
Clearing Participant through which the
transaction will clear.14 A Participant
may change the give up for a transaction
within a specified period of time.15
Additionally, a Participant may also
change the Clearing Participant 16 for a
specific transaction. The transfer of
14 See
Options 6B, Section 2.
Options 6, Section 1.
16 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.
15 See
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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.17 In the above example, if
Market Maker A had initially given up
Clearing Participant Y rather than
Clearing Participant X on the
transactions that resulted in the 1000
long calls in class ABC, or had changed
the give-up or CMTA to Clearing
Participant Y pursuant to Options 6,
Section 1 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.
Proposed paragraph (a)(2) 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 (a)(6) 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 Clearing Participant
restrictions describe above, and may be
burdensome to provide notice for these
routine transfers.
Proposed paragraph (a)(3) states RWA
Transfers may result in the netting of
positions. 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-exchange
transfers on behalf of a Market Maker
account for transactions in multiply
listed options series on different
17 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.
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exchanges, but only if the Market Maker
nominees are trading for the same
Participant, 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. 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 Clearing
Participant X. If Market Maker A had
not effected its RWA Transfer in August,
the 1000 long calls would have offset
against the 1000 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 Clearing Participant Y to
its account with Clearing Participant X
(or vice versa), which results in
elimination of those positions (and a
reduction in RWA associated with
them). As noted above, such netting
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would have occurred if Market Maker A
cleared the September transaction
directly into its account with Clearing
Participant 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.
RWA Transfers may not result in
preferential margin or haircut
treatment.18 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).19
Finally, the Exchange notes it is
reserving Sections 5 and 7 of Options 6
for consistency in rule numbering with
Nasdaq affiliated markets.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,20 in general, and furthers the
objectives of Section 6(b)(5) of the Act,21
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 22 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange’s proposal is substantially
the same as Cboe Rule 6.8
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
providing liquidity in the listed options
market. 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.
18 See
proposed paragraph (a)(4).
proposed introductory paragraph and
proposed paragraph (a)(7). Transfers of nonExchange listed options and other financial
instruments are not governed by this proposed rule.
Any RWA transfers will be subject to all applicable
recordkeeping requirements applicable to
Participants and Clearing Participants under the
Securities Exchange Act of 1934, and the rules and
regulations thereunder (the ‘‘Act’’), such as Rule
17a–3 and 17a–4.
20 15 U.S.C. 78f(b).
21 15 U.S.C. 78f(b)(5).
22 Id.
19 See
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72009
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 to 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. 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
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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
participants, as all Participants and nonParticipants with open positions in
options listed on the Exchange may use
the proposed off-exchange transfer
process to reduce the RWA capital
requirements of Clearing Participants.
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 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. 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 intra-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act, as use of the
proposed process is voluntary. All
Participants and non-Participants with
open positions in options listed on the
Exchange may use the proposed offexchange 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
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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. The Exchange 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
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 23 and
subparagraph (f)(6) of Rule 19b–4
thereunder.24
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
23 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
24 17
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2019–042 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–BX–2019–042. 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–BX–2019–042 and should
be submitted on or before January 21,
2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–28025 Filed 12–27–19; 8:45 am]
BILLING CODE 8011–01–P
25 17
E:\FR\FM\30DEN1.SGM
CFR 200.30–3(a)(12).
30DEN1
]]>Agencies
[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Notices]
[Pages 72007-72010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28025]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87817; File No. SR-BX-2019-042]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule
Titled ``Off-Exchange RWA Transfers'' at BX Options 6, Section 6
December 20, 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 December 17, 2019, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt a new rule titled ``Off-Exchange RWA
Transfers'' at BX Options 6, Section 6.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqbx.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 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 a new rule titled, ``Off-Exchange
RWA Transfers'' at BX Options 6, Section 6. This proposal is
substantially the same as Cboe Exchange, Inc. (``Cboe'') Rule 6.8.\3\
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\3\ See Securities Exchange Act Release No. 87374 (October 21,
2019), 84 FR 57542 (October 25, 2019) (SR-Cboe-2019-044).
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Proposed Options 6, Section 6 is intended to facilitate the
reduction of risk-weighted assets (``RWA'') attributable to open
options positions. 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.\4\ 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.\5\
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\4\ 17 CFR 240.15c3-1.
\5\ 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).
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Subject to certain exceptions, Clearing Participants \6\ are
subject to the Net Capital Rules.\7\ However, a subset of Clearing
Participants 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.\8\ Pursuant to this mandate,
the Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation have approved a regulatory capital framework for
subsidiaries of U.S. bank holding company clearing firms.\9\ Generally,
these rules, among other things, impose higher minimum capital and
higher asset risk weights than were previously mandated for Clearing
Participants 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.\10\
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, Clearing Participants 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.
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\6\ The term Clearing Participant is defined within Options 1,
Section 1(a)(16). All Clearing Participants must also be clearing
members of The Options Clearing Corporation (``OCC'').
\7\ 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.
\8\ H.R. 4173 (amending section 3(a) of the Securities Exchange
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
\9\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards).
\10\ 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.
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The Exchange is concerned with the ability of Market Makers to
provide liquidity in their appointed classes. The Exchange believes
that permitting market participants to efficiently transfer existing
options positions through an off-exchange transfer process
[[Page 72008]]
would likely have a beneficial effect on continued liquidity in the
options market without adversely affecting market quality. Liquidity in
the listed options market is critically important. The Exchange
believes that 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 and thereby
increase liquidity in the listed options market. BX currently has no
mechanism that firms may use to transfer positions between clearing
accounts without having to effect a transaction with another party and
close a position.
The proposed rule provides that existing positions in options
listed on the Exchange of a Participant or non-Participant (including
an affiliate of a Participant) may be transferred on, from, or to the
books of a Clearing Participant off the Exchange if the transfer
establishes a net reduction of RWA attributable to those options
positions (an ``RWA Transfer''). Proposed paragraph (a)(1) 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
\11\ 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);\12\ and
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\11\ The term Clearing Corporation is defined within Options 1,
Section 1(a)(15).
\12\ 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.
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A transfer of options positions from a bank-affiliated
Clearing Corporation member to a non-bank-affiliated Clearing
Corporation member.\13\
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\13\ 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.
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These transfers will not result in a change in ownership, as they
must occur between accounts of the same Person.
``Person'' is defined within proposed Options 6, Section 6(a) 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 Clearing Participant X, which is affiliated
with a U.S-bank holding company. Market Maker A opens a clearing
account with Clearing Participant Y, which is not affiliated with a
U.S.-bank holding company. Clearing Participant 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 Clearing Participant X clearing
account and determines it must reduce its open positions to satisfy
Clearing Participant 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
Clearing Participant 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 Clearing Participant 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 Participant must give up a Clearing Participant for each
transaction it effects on the Exchange, which identifies the Clearing
Participant through which the transaction will clear.\14\ A Participant
may change the give up for a transaction within a specified period of
time.\15\ Additionally, a Participant may also change the Clearing
Participant \16\ for a specific transaction. 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.\17\ In the above example, if Market Maker A had initially given
up Clearing Participant Y rather than Clearing Participant X on the
transactions that resulted in the 1000 long calls in class ABC, or had
changed the give-up or CMTA to Clearing Participant Y pursuant to
Options 6, Section 1 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.
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\14\ See Options 6B, Section 2.
\15\ See Options 6, Section 1.
\16\ 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.
\17\ 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.
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Proposed paragraph (a)(2) 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 (a)(6) 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 Clearing Participant restrictions
describe above, and may be burdensome to provide notice for these
routine transfers.
Proposed paragraph (a)(3) states RWA Transfers may result in the
netting of positions. 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-exchange transfers on behalf of a
Market Maker account for transactions in multiply listed options series
on different
[[Page 72009]]
exchanges, but only if the Market Maker nominees are trading for the
same Participant, 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.
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 Clearing Participant X. If Market Maker A had not effected
its RWA Transfer in August, the 1000 long calls would have offset
against the 1000 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
Clearing Participant Y to its account with Clearing Participant 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 Clearing Participant 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.
RWA Transfers may not result in preferential margin or haircut
treatment.\18\ 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).\19\
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\18\ See proposed paragraph (a)(4).
\19\ See proposed introductory paragraph and proposed paragraph
(a)(7). Transfers of non-Exchange listed options and other financial
instruments are not governed by this proposed rule. Any RWA
transfers will be subject to all applicable recordkeeping
requirements applicable to Participants and Clearing Participants
under the Securities Exchange Act of 1934, and the rules and
regulations thereunder (the ``Act''), such as Rule 17a-3 and 17a-4.
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Finally, the Exchange notes it is reserving Sections 5 and 7 of
Options 6 for consistency in rule numbering with Nasdaq affiliated
markets.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\20\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\21\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. Additionally, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \22\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The Exchange's proposal is
substantially the same as Cboe Rule 6.8
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ 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
providing liquidity in the listed options market. 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 to 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. 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
[[Page 72010]]
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 participants, as all Participants and non-Participants with open
positions in options listed on the Exchange may use the proposed off-
exchange transfer process to reduce the RWA capital requirements of
Clearing Participants.
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 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. 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 intra-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as use of the proposed process is voluntary. All
Participants and non-Participants with open positions in options listed
on the Exchange may use the proposed off-exchange 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. The Exchange
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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \23\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\24\
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\23\ 15 U.S.C. 78s(b)(3)(A)(iii).
\24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2019-042 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-BX-2019-042. 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-BX-2019-042 and should be submitted on
or before January 21, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-28025 Filed 12-27-19; 8:45 am]
BILLING CODE 8011-01-P
