Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Increase Position Limits for Options on Certain Exchange-Traded Funds (“ETFs”) and Indexes, 15003-15009 [2020-05236]
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Federal Register / Vol. 85, No. 51 / Monday, March 16, 2020 / Notices
Institution and settlement of injunctive
actions;
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proceedings;
Resolution of litigation claims; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting agenda items that
may consist of adjudicatory,
examination, litigation, or regulatory
matters.
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Dated: March 11, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–05502 Filed 3–12–20; 4:15 pm]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88350; File No. SR–CBOE–
2020–015]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Increase
Position Limits for Options on Certain
Exchange-Traded Funds (‘‘ETFs’’) and
Indexes
March 10, 2020.
lotter on DSKBCFDHB2PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
26, 2020, 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 increase
position limits for options on certain
exchange-traded funds (‘‘ETFs’’) and
indexes. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
BILLING CODE 8011–01–P
1 15
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
1. Purpose
Position limits are designed to
address potential manipulative schemes
and adverse market impacts
surrounding the use of options, such as
disrupting the market in the security
underlying the options. While position
limits should address and discourage
the potential for manipulative schemes
and adverse market impact, if such
limits are set too low, participation in
the options market may be discouraged.
The Exchange believes that position
limits must therefore be balanced
between mitigating concerns of any
potential manipulation and the cost of
inhibiting potential hedging activity that
could be used for legitimate economic
purposes.
The Exchange has observed an
ongoing increase in demand in options
on (1) the Standard and Poor’s
Depositary Receipts Trust (‘‘SPY’’),
iShares MSCI EAFE ETF (‘‘EFA’’),
iShares China Large-Cap ETF (‘‘FXI’’),
iShares iBoxx High Yield Corporate
Bond Fund (‘‘HYG’’), Financial Select
Sector SPDR Fund (‘‘XLF’’), Market
Vectors Oil Services ETF (‘‘OIH’’,
collectively, with the aforementioned
ETFs, the ‘‘Underlying ETFs’’), and (2)
the MSCI Emerging Markets Index
(‘‘MXEF’’) and the MSCI EAFE Index
(‘‘MXEA’’, collectively, with MXEF, the
‘‘Underlying Indexes’’) for both trading
and hedging purposes. Though the
demand for these options appears to
have increased, position limits for
options on the Underlying ETFs and
Indexes have remained the same. The
Exchange believes these unchanged
position limits may have impeded, and
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15003
may continue to impede, trading
activity and strategies of investors, such
as use of effective hedging vehicles or
income generating strategies (e.g., buywrite or put-write), and the ability of
Market-Makers to make liquid markets
with tighter spreads in these options
resulting in the transfer of volume to
over-the-counter (‘‘OTC’’) markets. OTC
transactions occur through bilateral
agreements, the terms of which are not
publicly disclosed to the marketplace.
As such, OTC transactions do not
contribute to the price discovery process
on a public exchange or other lit
markets. Therefore, the Exchange
believes that the proposed increases in
position limits for options on the
Underlying ETFs and Indexes may
enable liquidity providers to provide
additional liquidity to the Exchange and
other market participants to transfer
their liquidity demands from OTC
markets to the Exchange, as well as
other options exchange on which they
participate.3 As described in further
detail below, the Exchange believes that
the continuously increasing market
capitalization of the Underlying ETFs,
ETF component securities, and
component securities of the Underlying
Indexes, as well as the highly liquid
markets for those securities, reduces the
concerns for potential market
manipulation and/or disruption in the
underlying markets upon increasing
position limits, while the rising demand
for trading options on the Underlying
ETFs and Indexes for legitimate
economic purposes compels an increase
in position limits.
Proposed Position Limits for Options on
the Underlying ETFs
Position limits for options on ETFs
are determined pursuant to Rule 8.30,
and vary according to the number of
outstanding shares and the trading
volumes of the underlying stocks or
ETFs over the past six months. Pursuant
to Exchange Rule 8.30, the largest in
capitalization and the most frequently
traded stocks and ETFs have an option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and
smaller capitalization stocks and ETFs
have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.
Options on HYG, XLF, and OIH are
currently subject to the standard
position limit of 250,000 contracts as set
3 The Exchange understands that other options
exchanges intend to file similar proposed rule
changes with the Commission to increase position
limits under their rules for the same options.
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forth in Exchange Rule 8.30. Rule
8.30.07 sets forth separate position
limits for options on specific ETFs,
including SPY, FXI and EFA.
The Exchange proposes to amend
Rule 8.30.07 to double the position
limits and, as a result, exercise limits,
for options on each of HYG, XLF, OIH,
FXI, EFA and SPY.4 The table below
represents the current, and proposed,
position limits for options on the ETFs
subject to this proposal:
Current
position
limit
ETF
SPY ...................
EFA ...................
FXI ....................
HYG ..................
OIH ...................
XLF ...................
1,800,000
500,000
500,000
250,000
250,000
250,000
Proposed
position limit
3,600,000
1,000,000
1,000,000
500,000
500,000
500,000
The Exchange notes that the proposed
position limits for options on EFA and
FXI are consistent with existing position
limits for options on the iShares Russell
2000 ETF (‘‘IWM’’) and the iShares
MSCI Emerging Markets ETF (‘‘EEM’’),
while the proposed limits for options on
FXI, HYG, and OIH are consistent with
current position limits for options on
the iShares MSCI Brazil Capped ETF
(‘‘EWZ’’), iShares 20+ Year Treasury
Bond Fund ETF (‘‘TLT’’), and iShares
MSCI Japan ETF (‘‘EWJ’’). The Exchange
represents that the Underlying ETFs
qualify for either (1) the initial listing
criteria set forth in Exchange Rule
4.3.06(c) for ETFs holding non-U.S.
component securities, or (2) generic
listing standards for series of portfolio
depository receipts and index fund
shares based on international or global
indexes under which a comprehensive
surveillance agreement (‘‘CSA’’) is not
required, as well as the continued
listing criteria in Rule 4.4.5 In
compliance with its listing rules, the
Exchange also represents that non-U.S.
component securities that are not
subject to a comprehensive surveillance
agreement (‘‘CSA’’) do not, in the
aggregate, represent more than more
than 50% of the weight of any of the
Underlying ETFs.6
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4 By
virtue of 8.42.02, which is not being
amended by this filing, the exercise limits for HYG,
XLF, OIH, and SPY options would be similarly
increased.
5 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See Rule 4.3.06(c); Rule 4.4.08.
6 See Rule 4.3.06(c).
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market so as to benefit options
positions. The Securities and Exchange
Commission (the ‘‘Commission’’) has
The position limits and certain
recognized that these limits are
restrictions on position limits for
designed to minimize the potential for
options on broad-based indexes are
mini-manipulations and for corners or
determined pursuant to Rule 8.31. Like
squeezes of the underlying market, as
Rule 8.30.07, Rule 8.31 sets forth
well as serve to reduce the possibility
separate position limits for various,
for disruption of the options market
specific broad-based indexes and also
itself, especially in illiquid classes.9 The
provides a position limit of 25,000
Underlying ETFs as well as the ETF
contracts for options, restricted to no
components are highly liquid, and are
more than 15,000 near-term, on all other
based on a broad set of highly liquid
broad-based indexes not specifically
securities and other reference assets, as
listed under Rule 8.31. MXEF and
demonstrated through the trading
MXEA are currently grouped within this
statistics presented in this proposal.
category and, therefore, currently have
Indeed, the Commission recognized the
position limits of 25,000 contracts. The
liquidity of the securities comprising
Exchange proposes to amend Rule 8.31
the underlying interest of SPY and
to double the position limits, and, as a
permitted no position limits on SPY
result, the exercise limits, for MXEF and options from 2012 through 2018.10 Also,
MXEA, as well as eliminate the nearthe Commission has previously
term position limit restriction on such
approved no position limits for options
options. The table below represents the
on certain broad-based security
current, and proposed, position limits
indexes.11 Similarly, the component
for options on MXEA and MXEF:
securities of the Indexes are highly
liquid. The Commission has looked to
Proposed
Current position
the liquidity of securities comprising an
position
Index
limit/near-term
index in establishing position limits for
limit/near-term
position limit
position limit
cash-settled index options.
To support the proposed position
MXEF ....
25,000/15,000
50,000/None. limit increases, the Exchange
MXEA ....
25,000/15,000
50,000/None. considered both liquidity of the
Underlying ETFs and the component
The Exchange notes that these
securities of the Underlying ETFs and
proposed position limits for MXEA and
Indexes, as well as the availability of
MXEF equal the current position limits
economically equivalent products to the
for options on 20 other indexes, and
overlying options and their respective
notes that no near-term restrictions
position limits. For instance, some of
currently exist for options on 15 other
the Underlying ETFs are based upon
indexes.7 The Exchange represents that
broad-based indices that underlie cashthe Underlying Indexes qualify for the
settled options, and therefore the
initial and maintenance listing criteria
options on the Underlying ETFs are
set forth in Rules 4.10(h) and (i),
economically equivalent to the options
respectively, and that non-U.S.
on those indices, which have no
component securities that are not
position limits. Other Underlying ETFs
subject to comprehensive surveillance
are based upon broad-based indices that
agreements do not, in the aggregate,
underlie cash-settled options with
represent more than 25% of the weight
position limits reflecting notional values
of the MXEA Index or 27.5% of the
that are larger than current position
weight of the MXEF Index.8
limits for options on the ETF analogues.
For indexes that are tracked by an
Composition and Growth Analysis for
Underlying ETF but on which there are
Underlying ETFs and Indexes
no options listed, the Exchange believes,
As stated above, position (and
based on the liquidity, depth and
exercise) limits are intended to prevent
breadth of the underlying market of the
the establishment of options positions
components of the indexes, that each of
that can be used or might create
the indexes referenced by the applicable
incentives to manipulate the underlying
Proposed Position Limits for Options on
the Underlying Indexes
7 See
Rule 8.31(a). The Exchange notes that there
are no position limits (including no near-term
restrictions) for Cboe S&P 500 a.m./PM Basis, Cboe
S&P 500 Three-Month Realized Variance, Cboe S&P
500 Three-Month Realized Volatility and on the
BXM (1/10th value), DJX, OEX, XEO, NDX, RUT,
VIX, VXN, VXD, VXST, S&P 500 Dividend Index,
and SPX classes, and while there are position limits
for the Dow Jones Equity REIT Index, it is not
subject to any near-term restrictions.
8 See Rule 4.10(h)(7).
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9 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22,
2012)(SR–NYSEAmex–2012–29).
10 See Securities Exchange Act Release No. 67937
(September 27, 2012), 77 FR 60489 (October 3,
2012) (SR–CBOE–2012–091), which implemented a
pilot program that ran through 2017, during which
there were no potion limits for options on SPY. See
also Securities Exchange Act Release No. 83415
(June 12, 2018), 83 FR 28274 (June 18, 2018) (SR–
CBOE–2018–042).
11 See supra note 5.
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ETFs would be considered a broadbased index under the Exchange’s
Rules. Moreover, regarding the
Underlying Indexes, the Exchange
believes that the deep, liquid markets
for and market capitalization of the
component securities underlying such
indexes support the proposed position
limit increases for the options on those
indexes. Additionally, if in some cases
certain position limits are appropriate
for the options overlying comparable
indexes or basket of securities that the
Underlying ETFs track, or are
appropriate for those ETFs that track the
Underlying Indexes, then those
economically equivalent position limits
should be appropriate for the options
Product
ADV 12
(ETF shares)
ADV
(option contracts)
Shares
outstanding
(ETFs) 13
Fund market cap
(USD)
SPY ............................................
FXI ..............................................
EFA ............................................
HYG ...........................................
XLF .............................................
OIH .............................................
70.3 million ............
26.1 million ............
25.1 million .............
20.0 million ............
48.8 million ............
8.9 million ...............
2.8 million ...............
196,600 ..................
156,000 ..................
193,700 ..................
102,100 ..................
32,500 ....................
968.7 million ...........
106.8 million ..........
928.2 million ...........
216.6 million ...........
793.6 million ...........
58.3 million ............
312.9 billion ...........
4.8 billion ................
64.9 billion .............
19.1 billion .............
24.6 billion .............
770.8 million ...........
The Exchange has also collected
similar trading statistics regarding
Total market
cap of ETF
Components 14
29.3 trillion.
28.0 trillion.
19.3 trillion.
906.4 billion. 15
3.8 trillion.
167 billion.
options on and the component
securities of the Underlying Indexes:
ADV
(option contracts)
Product
MXEF ...............................................................................
MXEA ...............................................................................
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overlying the Underlying ETFs or
Indexes.
The Exchange has collected the
following trading statistics regarding
shares of and options on the Underlying
ETFs, as well as the component
securities or components underlying the
referenced index (as applicable):
1,055
594
Number of
component
securities
(indexes)
Index Market cap
(USD)
(trillion)
1,404
917
6.2
14.9
Full Market Cap
of component
securities
(trillion)
18.0
19.3
The Exchange believes that, overall,
the liquidity in the shares of the
Underlying ETFs and in the component
securities of the Underlying ETFs and
Indexes, and in their overlying options,
as well as the large market
capitalizations and structure of each of
the Underlying ETFs and Indexes,
support the proposal to increase the
position limits for each option class.
Given the robust liquidity and
capitalization in the Underlying ETFs
and in the component securities of the
Underlying ETFs and Indexes the
Exchange does not anticipate that the
proposed increase in position limits
would create significant price
movements. Also, the Exchange believes
the market capitalization of the
underlying component securities of the
applicable index or reference asset are
large enough to adequately absorb
potential price movements that may be
caused by large trades.
Specifically, the Exchange notes that
SPY tracks the performance of the S&P
500 Index, which is an index of
diversified large cap U.S. companies.16
It is composed of 505 selected stocks
spanning over approximately 24
separate industry groups. The S&P 500
is one of the most commonly followed
equity indices, and is widely considered
to be the best indicator of stock market
performance as a whole. SPY is one of
the most actively traded ETFs, and,
since 2017,17 its ADV has increased
from approximately 64.6 million shares
to 70.3 million shares by the end of
2019. Similarly, its ADV in options
contracts has increased from 2.6 million
to 2.8 million through 2019.18 As noted,
the demand for options trading on SPY
has continued to increase, however, the
position limits have remained the same,
which the Exchange believes may have
impacted growth in SPY option volume
from 2017 through 2019. The Exchange
also notes that SPY shares are more
liquid than PowerShares QQQ Trust
(‘‘QQQ’’) shares, which is also currently
subject to a position limit of 1,800,000
contracts.19 Specifically, SPY currently
experiences over twice the ADV in
shares and over four times the ADV in
options than that of QQQ.20
EFA tracks the performance of MSCI
EAFE Index, which is comprised of over
900 large and mid-cap securities across
21 developed markets, including
countries in Europe, Australia and the
Far East, excluding the U.S. and
12 Average daily volume (ADV) data for ETF
shares and options contracts, as well as for options
on the Underlying Indexes presented below, are for
all of 2019. Additionally, reference to ADV in ETF
shares, ETF options, and index options herein this
proposal are for all of 2019, unless otherwise
indicated
13 Shares Outstanding and Fund Market
Capitalization Data were sourced from Bloomberg
on January 2, 2020.
14 Total Market Capitalization of the ETF
Components was sourced from Bloomberg on
January 3, 2020.
15 Total Market Capitalization of HYG was
sourced from IHS Markit, which sends daily
constituent information to the Exchange.
16 See SPDR S&P 500 ETF Trust, available at
https://www.ssga.com/us/en/individual/etfs/funds/
spdr-sp-500-etf-trust-spy (January 21, 2020).
17 See Securities Exchange Release No. 81483
(August 25, 2017), 82 FR 41457 (August 31, 2017)
(Notice of Filing of a Proposed Rule Change To
Amend Interpretation and Policy .07 of Exchange
Rule 4.11, Position Limits, To Increase the Position
Limits for Options on Certain ETFs) (SR–CBOE–
2017–057). The Exchange notes that the statistics
for comparisons to 2017 data throughout this
proposal have been drawn from SR–CBOE–2017–
057.
18 See Securities Exchange Act Release No. 83415
(June 12, 2018), 83 FR 28274 (June 18, 2018) (Notice
of Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend the Position Limit for SPY
Options) (SR–CBOE–2018–042).
19 The Exchange notes that it also updates the
PowerShares QQQ Trust symbol in Rule 8.30(a)
from QQQQ to QQQ as this accurately reflects the
current ticker symbol for PowerShares QQQ, which
was officially changed from QQQQ to QQQ by
Invesco PowerShares Capital Management LLC in
2011. See Morningstar, PowerShares Changes
Ticker Symbol of Tech-Heavy QQQ ETF, available
at morningstar.com/articles/374713/powershareschanges-ticker-symbol-of-tech-heavy-qqq-etf (March
23, 2011).
20 The 2019 AVD for QQQ shares is 30.2 million
and for options on QQQ is 670,200.
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Canada.21 The Exchange notes that from
2017 through 2019, ADV has grown
significantly in shares of EFA and in
options on EFA, from approximately
19.4 million shares in 2017 to 25.1
million through 2019, and from
approximately 98,800 options contract
in 2017 to 155,900 through 2019. The
Exchange notes that options are
available on the MXEA, the analogue
index (also subject to a proposed
position limit increase described in
detail below), which is currently subject
to a position limit of 25,000 contracts
(50,000 as proposed). Utilizing the
notional value comparison of EFA’s
share price of $69.44 and MXEA’s index
level of 2036.94, approximately 29 EFA
option contracts equal one MXEA
option contract. Based on the above
comparison of notional values, a
position limit for EFA options that
would be economically equivalent to
that of MXEA options equates to
725,000 contracts (currently) and
1,450,000 (for the proposed 50,000
contracts position limit increase for
MXEA options). Also, MXEA index
options have an ADV of 594 options
contracts, in which equate to an ADV of
17,226 EFA option contracts (as that is
29 times the size of 594). EFA options,
which are more actively traded and held
than MXEA options, are currently
subject to a position limit of 500,000
options contracts despite their much
higher ADV of approximately 156,700
options contracts.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks.22 FXI shares and options have
also experienced increased liquidity
since 2017, as ADV has grown from
approximately 15.1 million shares in
2017 to 26.1 million through 2019, as
well as approximately 71,900 options
contracts in 2017 to 196,600 through
2019. Although there are currently no
options on the FTSE China 50 Index
listed for trading,23 the components of
the FTSE China 50 Index, which can be
used to create a basket of stocks that
equate to the FXI ETF, currently have a
market capitalization of approximately
$28 trillion and FXI has a market
capitalization of $4.8 billion (as
indicated above), which the Exchange
believes are both large enough to absorb
21 See iShares MSCI EAFE ETF, available at
https://www.ishares.com/us/products/239623/
ishares-msci-eafe-etf (February 10, 2020).
22 See iShares China Large-Cap ETF, available at
https://www.ishares.com/us/products/239536/
ishares-china-largecap-etf (February 10, 2020).
23 The Exchange is authorized to list options on
the FTSE China 50 Index pursuant to Rule 4.12(l).
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potential price movements caused by a
large trade in FXI.
XLF invests in a wide array of
financial service firms with diversified
business lines ranging from investment
management to commercial and
investment banking. It generally
corresponds to the price and yield
performance of publicly traded equity
securities of companies in the SPDR
Financial Select Sector Index.24 XLF
experiences ADV in shares and in
options that is significantly greater that
the ADV in shares and options for EWZ
(26.7 million shares and 186,500 option
contracts), TLT (9.6 million shares and
95,200 options contracts), and EWJ (7.2
million shares and 5,700 options
contracts), each of which already have
a position limit of 500,000 contracts—
the proposed position limit for XLF
options. Although there are no options
listed on the SPDR Financial Select
Sector Index listed for trading, the
components of the index, which can be
used to create a basket of stocks that
equate to the XLF ETF, currently have
a market capitalization of $3.8 trillion
(indicated above). Additionally, XLF
has a market capitalization of $24.6
billion. The Exchange believes that both
of these are large enough to absorb
potential price movements caused by a
large trade in XLF.
OIH seeks to replicate the price and
yield performance of the MVIS U.S.
Listed Oil Services 25 (‘‘MVOIHTR’’)
Index, which tracks the overall
performance of U.S.-listed companies
involved in oil services to the upstream
oil sector, including oil equipment, oil
services, or oil drilling.25 The Exchange
notes that the ADV in OIH shares and
options on OIH is greater than the ADV
in EWJ shares (7.2 million shares) and
options on EWJ (5,700 options
contracts), which is currently subject to
a position limit of 500,000 options
contracts—the proposed limit for
options on OIH. Like that of XLF and
FXI above, there is currently no index
option analogue for OIH approved for
options trading, however, the
components of the MVOIHTR Index,
which can be used to create the OIH
ETF, currently have a market
capitalization of $167 billion and OIH
currently has a market capitalization of
$770.8 million—sufficient to absorb
price movements as a result of
potentially oversized trades. Moreover,
OIH is used to hedge the oil market,
which includes approximately $200
24 See Select Sector SPDR ETFs, XLF, available at
https://www.sectorspdr.com/sectorspdr/sector/xlf
(January 15, 2020).
25 See VanEck Vectors Oil Services ETF, available
at https://www.vaneck.com/etf/equity/oih/overview/
(January 15, 2020).
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billion of open interest in U.S. futures
as of January 2020, thus, potentially
necessitating substantial hedging
capacity.
Finally, HYG attempts to track the
investment results of Markit iBoxx USD
Liquid High Yield Index, which is
composed of U.S. dollar-denominated,
high-yield corporate bonds and is one of
the most widely used high-yield bond
ETFs.26 HYG experiences significantly
higher ADV in shares and options than
both TLT (9.6 million shares and 95,200
options contracts), and EWJ (7.2 million
shares and 5,700 options contracts),
which are currently subject to a position
limit of 500,000 options contracts—the
proposed limit for options on HYG.
While HYG does not have an index
option analogue listed for trading, the
Exchange believes that its market
capitalization of $19.1 billion, and of
$906.4 billion in component securities,
is adequate to absorb a potential price
movement that may be caused by large
trades in HYG.
Also, as demonstrated by the table
above, the components of the
Underlying Indexes similarly
experience relatively high liquidity and
market capitalization. As stated above,
MXEA consists of large and mid-cap
components across 21 developed
countries. The market capitalization of
the MXEA components (separately and
in the aggregate) has increased
significantly since the initial listing of
MXEA options on the Exchange in
2016—from approximately $11.4 trillion
to $14.9 trillion in the aggregate by the
end of 2019, and from approximately
$12.3 billion in 2016 to $16.3 billion on
average per component by the end of
2019. The Exchange also notes that the
average market capitalization of the
component securities unadjusted for
inclusion in MXEA is currently around
$20 billion.
The MXEF is an equity index
designed to capture large and mid-cap
representation across 26 emerging
market countries, also covering
approximately 85% of the free floatadjusted market capitalization in each
country.27 The market capitalization of
the components of MXEF in the
aggregate has also grown significantly
since the initial listing of MXEF options
on the Exchange in 2016—from
approximately $3.2 trillion in 2016 to
$6.2 trillion by the end of 2019.
26 See iShares iBoxx $ High Yield Corporate Bond
ETF, available at https://www.ishares.com/us/
products/239565/ishares-iboxx-high-yieldcorporate-bond-etf (January 15, 2020).
27 See MSCI Emerging Markets Index fact sheet
(dated December 31, 2019), available at: https://
www.msci.com/documents/10199/c0db0a48-01f24ba9-ad01-226fd5678111.
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Additionally, the average market
capitalization per constituent has risen
from approximately $3.8 billion in 2016
to approximately $4.4 billion in 2019.
Like MXEA, the Exchange notes that the
average market capitalization of the
component securities unadjusted for
inclusion in the index is approximately
$12.9 billion. The Exchange also notes
that MXEF has experienced a
continuous rise in the overall number of
its component securities, which has
recently climbed to 1,401 component
securities in 2019 compared to 834 in
2016 when initially listed.
The Exchange further notes that the
ETFs that track MXEF (EEM) and MXEA
(EFA, described in detail above) are
currently subject to significantly larger
notionally adjusted position limits—
1,000,000 contracts (as proposed for
EFA)—yet these products are essentially
comprised of and impacted by the same
underlying component securities. In
addition to this, the Underlying Indexes
are designed to change over time as
various regions and entities emerge and
mature, and, as a result of the growth of
the markets represented, the Underlying
Indexes have each experienced
continued expansion. As a result, the
Exchange has observed increasing
demand for trading in options and other
derivatives on the Underlying Indexes,
which the Exchange believes
necessitates the proposed position limit
increases and elimination of near-term
position limit restrictions. In light of the
continued expansion and increased
demand for options on MXEF and
MXEA, the Exchange believes that
implementing the same overall limits by
eliminating near-term limits would
mitigate any potential impact on using
options effectively for portfolio
hedging—particularly because options
on MEXF and MXEA offer investors the
opportunity to manage global equity
exposure, mitigate portfolio risk, and
generate additional options premium
income.28 Further, the Exchange
believes that the expanded limits and
the elimination of near-term limit
restrictions are necessary to help its
options market to compete against the
futures markets. Futures positions that
are deemed bona fide hedging
transactions are exempt from position
limit rules under the Commodity
Exchange Act and its implementing
regulations.29 Thus, institutions may
offset much larger equity positions
using index futures products than by
28 See e.g. Cboe Global Markets, MSCI Index
Options, Manage Global Equity Exposure, available
at https://www.cboe.com/products/stock-indexoptions-spx-rut-msci-ftse/cboe-options-on-msciindexes (February 24, 2020).
29 See 7 U.S.C. 6a(3); 17 CFR 1.3(z) and 1.47.
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using index options. Therefore, the
Exchange believes that increasing the
position limits and eliminating nearterm restrictions for options on the
Underlying Indexes will help the
Exchange maintain competitive equality
with the future markets.
Creation and Redemption for ETFs
The Exchange believes that the
creation and redemption process for
ETFs will lessen the potential for
manipulative activity with options on
the Underlying ETFs. When an ETF
provider wants to create more shares, it
looks to an Authorized Participant
(generally a market maker or other large
financial institution) to acquire the
securities the ETF is to hold. For
instance, when an ETF is designed to
track the performance of an index, the
Authorized Participant can purchase all
the constituent securities in the exact
same weight as the index, then deliver
those shares to the ETF provider. In
exchange, the ETF provider gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. The price is based
on the net asset value, not the market
value at which the ETF is trading. The
creation of new ETF units can be
conducted during an entire trading day,
and is not subject to position limits.
This process works in reverse where the
ETF provider seeks to decrease the
number of shares that are available to
trade. The creation and redemption
process, therefore, creates a direct link
to the underlying components of the
ETF, and serves to mitigate potential
price impact of the ETF shares that
might otherwise result from increased
position limits for the ETF options.
The Exchange understands that the
ETF creation and redemption process
seeks to keep an ETF’s share price
trading in line with the ETF’s
underlying net asset value. Because an
ETF trades like a stock, its share price
will fluctuate during the trading day,
due to simple supply and demand. If
demand to buy an ETF is high, for
instance, the ETF’s share price might
rise above the value of its underlying
securities. When this happens, the
Authorized Participant believes the ETF
may now be overpriced, so it may buy
shares of the component securities and
then sell ETF shares in the open market
(i.e. creations). This may drive the ETF’s
share price back toward the underlying
net asset value. Likewise, if the ETF
share price starts trading at a discount
to the securities it holds, the Authorized
Participant can buy shares of the ETF
and redeem them for the underlying
securities (i.e. redemptions). Buying
undervalued ETF shares may drive the
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15007
share price of the ETF back toward fair
value. This arbitrage process helps to
keep an ETF’s share price in line with
the value of its underlying portfolio.
Surveillance and Reporting
Requirements
The Exchange believes that increasing
the position limits for the options on the
Underlying ETFs and Indexes would
lead to a more liquid and competitive
market environment for these options,
which will benefit customers interested
in trading these products. The reporting
requirement for the options on the
Underlying ETFs and Indexes would
remain unchanged. Thus, the Exchange
would still require that each Trading
Permit Holder (‘‘TPH’’) or TPH
organization that maintains positions in
the options on the same side of the
market, for its own account or for the
account of a customer, report certain
information to the Exchange. This
information would include, but would
not be limited to, the options’ positions,
whether such positions are hedged and,
if so, a description of the hedge(s).
Market-Makers 30 (including Designated
Primary Market-Makers (‘‘DPMs’’)) 31
would continue to be exempt from this
reporting requirement, however, the
Exchange may access Market-Maker
position information.32 Moreover, the
Exchange’s requirement that TPHs file
reports with the Exchange for any
customer who held aggregate large long
or short positions on the same side of
the market of 200 or more options
contracts of any single class for the
previous day will remain at this level
for the options subject to this proposal
and will continue to serve as an
important part of the Exchange’s
surveillance efforts.33
The Exchange believes that the
existing surveillance procedures and
30 A Market-Maker ‘‘Trading Permit Holder
registered with the Exchange pursuant to Rule 3.52
for the purpose of making markets in option
contracts traded on the Exchange and that has the
rights and responsibilities set forth in Chapter 5,
Section D of the Rules.’’ See Rule 1.1.
31 A Designated Primary Market-Maker ‘‘is TPH
organization that is approved by the Exchange to
function in allocated securities as a Market-Maker
(as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise
provided under the rules of the Exchange.’’ See
Rule 1.1.
32 The Options Clearing Corporation (‘‘OCC’’)
through the Large option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for TPH compliance with position
reporting requirements by collecting data from each
TPH or TPH organization, consolidating the
information, and ultimately providing detailed
listings of each TPH’s report to the Exchange, as
well as Financial Industry Regulatory Authority,
Inc. (‘‘FINRA’’), acting as its agent pursuant to a
regulatory services agreement (‘‘RSA’’).
33 See Rule 8.43 for reporting requirements.
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reporting requirements at the Exchange
and other SROs are capable of properly
identifying disruptive and/or
manipulative trading activity. The
Exchange also represents that it has
adequate surveillances in place to detect
potential manipulation, as well as
reviews in place to identify potential
changes in composition of the
Underlying ETFs and Indexes and
continued compliance with the
Exchange’s listing standards. These
procedures utilize daily monitoring of
market activity via automated
surveillance techniques to identify
unusual activity in both options and the
underlyings, as applicable.34 The
Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,35 which are used to report
ownership of stock which exceeds 5%
of a company’s total stock issue and
may assist in providing information in
monitoring for any potential
manipulative schemes.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
the options on the Underlying ETFs and
Indexes. Current margin and risk-based
haircut methodologies serve to limit the
size of positions maintained by any one
account by increasing the margin and/
or capital that a TPH must maintain for
a large position held by itself or by its
customer.36 In addition, Rule 15c3–137
imposes a capital charge on TPHs to the
extent of any margin deficiency
resulting from the higher margin
requirement.
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2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.38 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5)39 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
34 The Exchange believes these procedures have
been effective for the surveillance of trading the
options subject to this proposal, and will continue
to employ them.
35 17 CFR 240.13d–1.
36 See Rule 10.3 for a description of margin
requirements.
37 17 CFR 240.15c3–1.
38 15 U.S.C. 78f(b).
39 15 U.S.C. 78f(b)(5).
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and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 40 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed increase in position limits for
options on the Underlying ETFs and
Indexes will remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors and the public interest,
because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. The proposed
increases will allow market participants
to more fully implement hedging
strategies in related derivative products
and to further use options to achieve
investment strategies (e.g., there are
Exchange-Traded Products (‘‘ETPs’’)
that use options on the Underlying ETFs
or Indexes as part of their investment
strategy, and the applicable position
limits as they stand today may inhibit
these ETPs in achieving their
investment objectives, to the detriment
of investors). Also, increasing the
applicable position limits may allow
Market-Makers to provide the markets
for these options with more liquidity in
amounts commensurate with increased
consumer demand in such markets. The
proposed position limit increases may
also encourage other liquidity providers
to shift liquidity, as well as encourage
consumers to shift demand, from over
the counter markets onto the Exchange,
which will enhance the process of price
discovery conducted on the Exchange
through increased order flow.
In addition, the Exchange believes
that the structure of the Underlying
ETFs and Indexes, the considerable
market capitalization of the funds,
underlying component securities, and/
or indexed component securities, and
the liquidity of the markets for the
applicable options and underlying
component securities will mitigate
concerns regarding potential
manipulation of the products and/or
disruption of the underlying markets
upon increasing the relevant position
limits. As a general principle, increases
40 Id.
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in market capitalizations, active trading
volume, and deep liquidity of securities
do not lead to manipulation and/or
disruption. This general principle
applies to the [sic] Given the recently
observed increased levels of market
capitalization, trading volume, and
liquidity in shares of the Underlying
ETFs, and the components of the
Underlying ETFs and Indexes (as
described above), the Exchange does not
believe that the options markets or
underlying markets would become
susceptible to manipulation and/or
disruption as a result of the proposed
position limit increases. Indeed, the
Commission has previously expressed
the belief that removing position and
exercise limits may bring additional
depth and liquidity to the options
markets without increasing concerns
regarding intermarket manipulation or
disruption of the options or the
underlying securities.41
Further, the Exchange notes that the
proposed rule change to increase
position limits for select actively traded
options, is not novel and has been
previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for options on SPY.42
Additionally, the Commission has
approved similar proposed rule changes
by the Exchange to increase position
limits for options on highly liquid,
actively traded ETFs,43 and has
approved similar proposals to eliminate
position limits (including near-term
restrictions) for options overlaying SPX,
S&P 100 Index (‘‘OEX’’), European-style
S&P 100 Index (‘‘XEO’’), Dow Jones
Industrial Average (‘‘DJI’’), and Nasdaq
100 Index (‘‘NDX’’), and Russell 2000
Index (‘‘RUT’’), among others.44 In
approving the permanent elimination of
position (and exercise limits) for such
options, the Commission relied heavily
upon the Exchange’s surveillance
capabilities, expressing trust in the
enhanced surveillances and reporting
safeguards that the Exchange took in
order to detect and deter possible
manipulative behavior which might
arise from eliminating position and
41 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
42 See supra notes 7 and 8.
43 See supra note 16; see also Securities Exchange
Act Release No. 68086 (October 23, 2012), 77 FR
65600 (October 29, 2012)(SR–CBOE–2012–066).
44 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001)(SR–CBOE–2001–22); 4556 (July 16, 2001),
66 FR 38046 (July 20, 2001) (SR–CBOE–2001–39);
52650 (October 21, 2005), 70 FR 62147 (October 28,
2005)(SR–CBOE–2005–41); 56350 (September 4,
2007), 72 FR 51878 (September 11, 2001)(SR–
CBOE–2007–79); see also supra note 5.
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exercise limits. Furthermore, the
Exchange again notes that that the
proposed position limits for options on
EFA and FXI are consistent with
existing position limits for options on
IWM and EEM, the proposed limits for
options on XLF, HYG, and OIH are
consistent with current position limits
for options on EWZ, TLT, and EWJ, and
the proposed position limits for MXEA
and MXEF are equal to the current
position limits for options on 20 other
indexes, and the proposed elimination
of near-term restrictions currently exists
for options on other indexes.45
The Exchange’s surveillance and
reporting safeguards continue to be
designed to deter and detect possible
manipulative behavior that might arise
from increasing or eliminating position
and exercise limits in certain classes.
The Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged position in
the options on the Underlying ETFs and
Indexes, further promoting just and
equitable principles of trading, the
maintenance of a fair and orderly
market, and the protection of investors.
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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 because the
increased position limits (and exercise
limits) will be available to all market
participants and apply to each in the
same manner. The Exchange believes
that the proposed rule change will
provide additional opportunities for
market participants to more efficiently
achieve their investment and trading
objectives of market participants.
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 Act. On the contrary,
the Exchange believes the proposal
promotes competition because it may
attract additional order flow from the
OTC market to exchanges, which would
in turn compete amongst each other for
those orders.46 The Exchange believes
45 See
supra note 5.
46 Additionally, several other options exchange
have the same position limits as the Exchange, as
they incorporate by reference to the Exchange’s
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market participants would benefit from
being able to trade options with
increased position limits in an exchange
environment in several ways, including
but not limited to the following: (1)
enhanced efficiency in initiating and
closing out position; (2) increased
market transparency; and (3) heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor. The
Exchange understands that other
options exchanges intend to file similar
proposed rule changes with the
Commission to increase position limits
on options on the Underlying ETFs.
This may further contribute to fair
competition among exchanges for
multiply listed options.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
15009
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–2020–015. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–015, and
should be submitted on or before April
6, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–05236 Filed 3–13–20; 8:45 am]
BILLING CODE 8011–01–P
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–2020–015 on the subject line.
position limits, and as a result the position limits
for options on the Underlying ETFs and Indexes
will increase at those exchanges. For example,
Nasdaq Options position limits are determined by
the position limits established by the Exchange. See
Nasdaq Stock Market LLC Rules, Options 9, Sec. 13
(Position Limits).
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DEPARTMENT OF STATE
[Public Notice:11041]
Bureau of Political-Military Affairs,
Directorate of Defense Trade Controls:
Notifications to the Congress of
Proposed Commercial Export Licenses
Department of State.
Notice.
AGENCY:
ACTION:
47 17
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Agencies
[Federal Register Volume 85, Number 51 (Monday, March 16, 2020)]
[Notices]
[Pages 15003-15009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05236]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88350; File No. SR-CBOE-2020-015]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Increase Position Limits for
Options on Certain Exchange-Traded Funds (``ETFs'') and Indexes
March 10, 2020.
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 February 26, 2020, 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
increase position limits for options on certain exchange-traded funds
(``ETFs'') and indexes. The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
The Exchange has observed an ongoing increase in demand in options
on (1) the Standard and Poor's Depositary Receipts Trust (``SPY''),
iShares MSCI EAFE ETF (``EFA''), iShares China Large-Cap ETF (``FXI''),
iShares iBoxx High Yield Corporate Bond Fund (``HYG''), Financial
Select Sector SPDR Fund (``XLF''), Market Vectors Oil Services ETF
(``OIH'', collectively, with the aforementioned ETFs, the ``Underlying
ETFs''), and (2) the MSCI Emerging Markets Index (``MXEF'') and the
MSCI EAFE Index (``MXEA'', collectively, with MXEF, the ``Underlying
Indexes'') for both trading and hedging purposes. Though the demand for
these options appears to have increased, position limits for options on
the Underlying ETFs and Indexes have remained the same. The Exchange
believes these unchanged position limits may have impeded, and may
continue to impede, trading activity and strategies of investors, such
as use of effective hedging vehicles or income generating strategies
(e.g., buy-write or put-write), and the ability of Market-Makers to
make liquid markets with tighter spreads in these options resulting in
the transfer of volume to over-the-counter (``OTC'') markets. OTC
transactions occur through bilateral agreements, the terms of which are
not publicly disclosed to the marketplace. As such, OTC transactions do
not contribute to the price discovery process on a public exchange or
other lit markets. Therefore, the Exchange believes that the proposed
increases in position limits for options on the Underlying ETFs and
Indexes may enable liquidity providers to provide additional liquidity
to the Exchange and other market participants to transfer their
liquidity demands from OTC markets to the Exchange, as well as other
options exchange on which they participate.\3\ As described in further
detail below, the Exchange believes that the continuously increasing
market capitalization of the Underlying ETFs, ETF component securities,
and component securities of the Underlying Indexes, as well as the
highly liquid markets for those securities, reduces the concerns for
potential market manipulation and/or disruption in the underlying
markets upon increasing position limits, while the rising demand for
trading options on the Underlying ETFs and Indexes for legitimate
economic purposes compels an increase in position limits.
---------------------------------------------------------------------------
\3\ The Exchange understands that other options exchanges intend
to file similar proposed rule changes with the Commission to
increase position limits under their rules for the same options.
---------------------------------------------------------------------------
Proposed Position Limits for Options on the Underlying ETFs
Position limits for options on ETFs are determined pursuant to Rule
8.30, and vary according to the number of outstanding shares and the
trading volumes of the underlying stocks or ETFs over the past six
months. Pursuant to Exchange Rule 8.30, the largest in capitalization
and the most frequently traded stocks and ETFs have an option position
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market; and smaller
capitalization stocks and ETFs have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on HYG,
XLF, and OIH are currently subject to the standard position limit of
250,000 contracts as set
[[Page 15004]]
forth in Exchange Rule 8.30. Rule 8.30.07 sets forth separate position
limits for options on specific ETFs, including SPY, FXI and EFA.
The Exchange proposes to amend Rule 8.30.07 to double the position
limits and, as a result, exercise limits, for options on each of HYG,
XLF, OIH, FXI, EFA and SPY.\4\ The table below represents the current,
and proposed, position limits for options on the ETFs subject to this
proposal:
---------------------------------------------------------------------------
\4\ By virtue of 8.42.02, which is not being amended by this
filing, the exercise limits for HYG, XLF, OIH, and SPY options would
be similarly increased.
------------------------------------------------------------------------
Current Proposed
ETF position position
limit limit
------------------------------------------------------------------------
SPY........................................... 1,800,000 3,600,000
EFA........................................... 500,000 1,000,000
FXI........................................... 500,000 1,000,000
HYG........................................... 250,000 500,000
OIH........................................... 250,000 500,000
XLF........................................... 250,000 500,000
------------------------------------------------------------------------
The Exchange notes that the proposed position limits for options on
EFA and FXI are consistent with existing position limits for options on
the iShares Russell 2000 ETF (``IWM'') and the iShares MSCI Emerging
Markets ETF (``EEM''), while the proposed limits for options on FXI,
HYG, and OIH are consistent with current position limits for options on
the iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury
Bond Fund ETF (``TLT''), and iShares MSCI Japan ETF (``EWJ''). The
Exchange represents that the Underlying ETFs qualify for either (1) the
initial listing criteria set forth in Exchange Rule 4.3.06(c) for ETFs
holding non-U.S. component securities, or (2) generic listing standards
for series of portfolio depository receipts and index fund shares based
on international or global indexes under which a comprehensive
surveillance agreement (``CSA'') is not required, as well as the
continued listing criteria in Rule 4.4.\5\ In compliance with its
listing rules, the Exchange also represents that non-U.S. component
securities that are not subject to a comprehensive surveillance
agreement (``CSA'') do not, in the aggregate, represent more than more
than 50% of the weight of any of the Underlying ETFs.\6\
---------------------------------------------------------------------------
\5\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Rule 4.3.06(c); Rule 4.4.08.
\6\ See Rule 4.3.06(c).
---------------------------------------------------------------------------
Proposed Position Limits for Options on the Underlying Indexes
The position limits and certain restrictions on position limits for
options on broad-based indexes are determined pursuant to Rule 8.31.
Like Rule 8.30.07, Rule 8.31 sets forth separate position limits for
various, specific broad-based indexes and also provides a position
limit of 25,000 contracts for options, restricted to no more than
15,000 near-term, on all other broad-based indexes not specifically
listed under Rule 8.31. MXEF and MXEA are currently grouped within this
category and, therefore, currently have position limits of 25,000
contracts. The Exchange proposes to amend Rule 8.31 to double the
position limits, and, as a result, the exercise limits, for MXEF and
MXEA, as well as eliminate the near-term position limit restriction on
such options. The table below represents the current, and proposed,
position limits for options on MXEA and MXEF:
------------------------------------------------------------------------
Current Proposed
position limit/ position limit/
Index near-term near-term
position limit position limit
------------------------------------------------------------------------
MXEF.................................. 25,000/15,000 50,000/None.
MXEA.................................. 25,000/15,000 50,000/None.
------------------------------------------------------------------------
The Exchange notes that these proposed position limits for MXEA and
MXEF equal the current position limits for options on 20 other indexes,
and notes that no near-term restrictions currently exist for options on
15 other indexes.\7\ The Exchange represents that the Underlying
Indexes qualify for the initial and maintenance listing criteria set
forth in Rules 4.10(h) and (i), respectively, and that non-U.S.
component securities that are not subject to comprehensive surveillance
agreements do not, in the aggregate, represent more than 25% of the
weight of the MXEA Index or 27.5% of the weight of the MXEF Index.\8\
---------------------------------------------------------------------------
\7\ See Rule 8.31(a). The Exchange notes that there are no
position limits (including no near-term restrictions) for Cboe S&P
500 a.m./PM Basis, Cboe S&P 500 Three-Month Realized Variance, Cboe
S&P 500 Three-Month Realized Volatility and on the BXM (1/10th
value), DJX, OEX, XEO, NDX, RUT, VIX, VXN, VXD, VXST, S&P 500
Dividend Index, and SPX classes, and while there are position limits
for the Dow Jones Equity REIT Index, it is not subject to any near-
term restrictions.
\8\ See Rule 4.10(h)(7).
---------------------------------------------------------------------------
Composition and Growth Analysis for Underlying ETFs and Indexes
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used or
might create incentives to manipulate the underlying market so as to
benefit options positions. The Securities and Exchange Commission (the
``Commission'') has recognized that these limits are designed to
minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market, as well as serve to reduce the
possibility for disruption of the options market itself, especially in
illiquid classes.\9\ The Underlying ETFs as well as the ETF components
are highly liquid, and are based on a broad set of highly liquid
securities and other reference assets, as demonstrated through the
trading statistics presented in this proposal. Indeed, the Commission
recognized the liquidity of the securities comprising the underlying
interest of SPY and permitted no position limits on SPY options from
2012 through 2018.\10\ Also, the Commission has previously approved no
position limits for options on certain broad-based security
indexes.\11\ Similarly, the component securities of the Indexes are
highly liquid. The Commission has looked to the liquidity of securities
comprising an index in establishing position limits for cash-settled
index options.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012)(SR-NYSEAmex-2012-29).
\10\ See Securities Exchange Act Release No. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091), which
implemented a pilot program that ran through 2017, during which
there were no potion limits for options on SPY. See also Securities
Exchange Act Release No. 83415 (June 12, 2018), 83 FR 28274 (June
18, 2018) (SR-CBOE-2018-042).
\11\ See supra note 5.
---------------------------------------------------------------------------
To support the proposed position limit increases, the Exchange
considered both liquidity of the Underlying ETFs and the component
securities of the Underlying ETFs and Indexes, as well as the
availability of economically equivalent products to the overlying
options and their respective position limits. For instance, some of the
Underlying ETFs are based upon broad-based indices that underlie cash-
settled options, and therefore the options on the Underlying ETFs are
economically equivalent to the options on those indices, which have no
position limits. Other Underlying ETFs are based upon broad-based
indices that underlie cash-settled options with position limits
reflecting notional values that are larger than current position limits
for options on the ETF analogues. For indexes that are tracked by an
Underlying ETF but on which there are no options listed, the Exchange
believes, based on the liquidity, depth and breadth of the underlying
market of the components of the indexes, that each of the indexes
referenced by the applicable
[[Page 15005]]
ETFs would be considered a broad-based index under the Exchange's
Rules. Moreover, regarding the Underlying Indexes, the Exchange
believes that the deep, liquid markets for and market capitalization of
the component securities underlying such indexes support the proposed
position limit increases for the options on those indexes.
Additionally, if in some cases certain position limits are appropriate
for the options overlying comparable indexes or basket of securities
that the Underlying ETFs track, or are appropriate for those ETFs that
track the Underlying Indexes, then those economically equivalent
position limits should be appropriate for the options overlying the
Underlying ETFs or Indexes.
The Exchange has collected the following trading statistics
regarding shares of and options on the Underlying ETFs, as well as the
component securities or components underlying the referenced index (as
applicable):
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding (ETFs) Total market cap of ETF
Product ADV \12\ (ETF shares) ADV (option contracts) \13\ Fund market cap (USD) Components \14\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SPY............................... 70.3 million.................. 2.8 million................... 968.7 million................. 312.9 billion................ 29.3 trillion.
FXI............................... 26.1 million.................. 196,600....................... 106.8 million................. 4.8 billion.................. 28.0 trillion.
EFA............................... 25.1 million.................. 156,000....................... 928.2 million................. 64.9 billion................. 19.3 trillion.
HYG............................... 20.0 million.................. 193,700....................... 216.6 million................. 19.1 billion................. 906.4 billion. \15\
XLF............................... 48.8 million.................. 102,100....................... 793.6 million................. 24.6 billion................. 3.8 trillion.
OIH............................... 8.9 million................... 32,500........................ 58.3 million.................. 770.8 million................ 167 billion.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange has also collected similar trading statistics
regarding options on and the component securities of the Underlying
Indexes:
---------------------------------------------------------------------------
\12\ Average daily volume (ADV) data for ETF shares and options
contracts, as well as for options on the Underlying Indexes
presented below, are for all of 2019. Additionally, reference to ADV
in ETF shares, ETF options, and index options herein this proposal
are for all of 2019, unless otherwise indicated
\13\ Shares Outstanding and Fund Market Capitalization Data were
sourced from Bloomberg on January 2, 2020.
\14\ Total Market Capitalization of the ETF Components was
sourced from Bloomberg on January 3, 2020.
\15\ Total Market Capitalization of HYG was sourced from IHS
Markit, which sends daily constituent information to the Exchange.
----------------------------------------------------------------------------------------------------------------
Number of Full Market Cap
ADV (option component Index Market cap of component
Product contracts) securities (USD) (trillion) securities
(indexes) (trillion)
----------------------------------------------------------------------------------------------------------------
MXEF............................ 1,055 1,404 6.2 18.0
MXEA............................ 594 917 14.9 19.3
----------------------------------------------------------------------------------------------------------------
The Exchange believes that, overall, the liquidity in the shares of
the Underlying ETFs and in the component securities of the Underlying
ETFs and Indexes, and in their overlying options, as well as the large
market capitalizations and structure of each of the Underlying ETFs and
Indexes, support the proposal to increase the position limits for each
option class. Given the robust liquidity and capitalization in the
Underlying ETFs and in the component securities of the Underlying ETFs
and Indexes the Exchange does not anticipate that the proposed increase
in position limits would create significant price movements. Also, the
Exchange believes the market capitalization of the underlying component
securities of the applicable index or reference asset are large enough
to adequately absorb potential price movements that may be caused by
large trades.
Specifically, the Exchange notes that SPY tracks the performance of
the S&P 500 Index, which is an index of diversified large cap U.S.
companies.\16\ It is composed of 505 selected stocks spanning over
approximately 24 separate industry groups. The S&P 500 is one of the
most commonly followed equity indices, and is widely considered to be
the best indicator of stock market performance as a whole. SPY is one
of the most actively traded ETFs, and, since 2017,\17\ its ADV has
increased from approximately 64.6 million shares to 70.3 million shares
by the end of 2019. Similarly, its ADV in options contracts has
increased from 2.6 million to 2.8 million through 2019.\18\ As noted,
the demand for options trading on SPY has continued to increase,
however, the position limits have remained the same, which the Exchange
believes may have impacted growth in SPY option volume from 2017
through 2019. The Exchange also notes that SPY shares are more liquid
than PowerShares QQQ Trust (``QQQ'') shares, which is also currently
subject to a position limit of 1,800,000 contracts.\19\ Specifically,
SPY currently experiences over twice the ADV in shares and over four
times the ADV in options than that of QQQ.\20\
---------------------------------------------------------------------------
\16\ See SPDR S&P 500 ETF Trust, available at https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy
(January 21, 2020).
\17\ See Securities Exchange Release No. 81483 (August 25,
2017), 82 FR 41457 (August 31, 2017) (Notice of Filing of a Proposed
Rule Change To Amend Interpretation and Policy .07 of Exchange Rule
4.11, Position Limits, To Increase the Position Limits for Options
on Certain ETFs) (SR-CBOE-2017-057). The Exchange notes that the
statistics for comparisons to 2017 data throughout this proposal
have been drawn from SR-CBOE-2017-057.
\18\ See Securities Exchange Act Release No. 83415 (June 12,
2018), 83 FR 28274 (June 18, 2018) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend the Position Limit
for SPY Options) (SR-CBOE-2018-042).
\19\ The Exchange notes that it also updates the PowerShares QQQ
Trust symbol in Rule 8.30(a) from QQQQ to QQQ as this accurately
reflects the current ticker symbol for PowerShares QQQ, which was
officially changed from QQQQ to QQQ by Invesco PowerShares Capital
Management LLC in 2011. See Morningstar, PowerShares Changes Ticker
Symbol of Tech-Heavy QQQ ETF, available at morningstar.com/articles/374713/powershares-changes-ticker-symbol-of-tech-heavy-qqq-etf
(March 23, 2011).
\20\ The 2019 AVD for QQQ shares is 30.2 million and for options
on QQQ is 670,200.
---------------------------------------------------------------------------
EFA tracks the performance of MSCI EAFE Index, which is comprised
of over 900 large and mid-cap securities across 21 developed markets,
including countries in Europe, Australia and the Far East, excluding
the U.S. and
[[Page 15006]]
Canada.\21\ The Exchange notes that from 2017 through 2019, ADV has
grown significantly in shares of EFA and in options on EFA, from
approximately 19.4 million shares in 2017 to 25.1 million through 2019,
and from approximately 98,800 options contract in 2017 to 155,900
through 2019. The Exchange notes that options are available on the
MXEA, the analogue index (also subject to a proposed position limit
increase described in detail below), which is currently subject to a
position limit of 25,000 contracts (50,000 as proposed). Utilizing the
notional value comparison of EFA's share price of $69.44 and MXEA's
index level of 2036.94, approximately 29 EFA option contracts equal one
MXEA option contract. Based on the above comparison of notional values,
a position limit for EFA options that would be economically equivalent
to that of MXEA options equates to 725,000 contracts (currently) and
1,450,000 (for the proposed 50,000 contracts position limit increase
for MXEA options). Also, MXEA index options have an ADV of 594 options
contracts, in which equate to an ADV of 17,226 EFA option contracts (as
that is 29 times the size of 594). EFA options, which are more actively
traded and held than MXEA options, are currently subject to a position
limit of 500,000 options contracts despite their much higher ADV of
approximately 156,700 options contracts.
---------------------------------------------------------------------------
\21\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February
10, 2020).
---------------------------------------------------------------------------
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks.\22\ FXI shares and options
have also experienced increased liquidity since 2017, as ADV has grown
from approximately 15.1 million shares in 2017 to 26.1 million through
2019, as well as approximately 71,900 options contracts in 2017 to
196,600 through 2019. Although there are currently no options on the
FTSE China 50 Index listed for trading,\23\ the components of the FTSE
China 50 Index, which can be used to create a basket of stocks that
equate to the FXI ETF, currently have a market capitalization of
approximately $28 trillion and FXI has a market capitalization of $4.8
billion (as indicated above), which the Exchange believes are both
large enough to absorb potential price movements caused by a large
trade in FXI.
---------------------------------------------------------------------------
\22\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf
(February 10, 2020).
\23\ The Exchange is authorized to list options on the FTSE
China 50 Index pursuant to Rule 4.12(l).
---------------------------------------------------------------------------
XLF invests in a wide array of financial service firms with
diversified business lines ranging from investment management to
commercial and investment banking. It generally corresponds to the
price and yield performance of publicly traded equity securities of
companies in the SPDR Financial Select Sector Index.\24\ XLF
experiences ADV in shares and in options that is significantly greater
that the ADV in shares and options for EWZ (26.7 million shares and
186,500 option contracts), TLT (9.6 million shares and 95,200 options
contracts), and EWJ (7.2 million shares and 5,700 options contracts),
each of which already have a position limit of 500,000 contracts--the
proposed position limit for XLF options. Although there are no options
listed on the SPDR Financial Select Sector Index listed for trading,
the components of the index, which can be used to create a basket of
stocks that equate to the XLF ETF, currently have a market
capitalization of $3.8 trillion (indicated above). Additionally, XLF
has a market capitalization of $24.6 billion. The Exchange believes
that both of these are large enough to absorb potential price movements
caused by a large trade in XLF.
---------------------------------------------------------------------------
\24\ See Select Sector SPDR ETFs, XLF, available at https://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
---------------------------------------------------------------------------
OIH seeks to replicate the price and yield performance of the MVIS
U.S. Listed Oil Services 25 (``MVOIHTR'') Index, which tracks the
overall performance of U.S.-listed companies involved in oil services
to the upstream oil sector, including oil equipment, oil services, or
oil drilling.\25\ The Exchange notes that the ADV in OIH shares and
options on OIH is greater than the ADV in EWJ shares (7.2 million
shares) and options on EWJ (5,700 options contracts), which is
currently subject to a position limit of 500,000 options contracts--the
proposed limit for options on OIH. Like that of XLF and FXI above,
there is currently no index option analogue for OIH approved for
options trading, however, the components of the MVOIHTR Index, which
can be used to create the OIH ETF, currently have a market
capitalization of $167 billion and OIH currently has a market
capitalization of $770.8 million--sufficient to absorb price movements
as a result of potentially oversized trades. Moreover, OIH is used to
hedge the oil market, which includes approximately $200 billion of open
interest in U.S. futures as of January 2020, thus, potentially
necessitating substantial hedging capacity.
---------------------------------------------------------------------------
\25\ See VanEck Vectors Oil Services ETF, available at https://www.vaneck.com/etf/equity/oih/overview/ (January 15, 2020).
---------------------------------------------------------------------------
Finally, HYG attempts to track the investment results of Markit
iBoxx USD Liquid High Yield Index, which is composed of U.S. dollar-
denominated, high-yield corporate bonds and is one of the most widely
used high-yield bond ETFs.\26\ HYG experiences significantly higher ADV
in shares and options than both TLT (9.6 million shares and 95,200
options contracts), and EWJ (7.2 million shares and 5,700 options
contracts), which are currently subject to a position limit of 500,000
options contracts--the proposed limit for options on HYG. While HYG
does not have an index option analogue listed for trading, the Exchange
believes that its market capitalization of $19.1 billion, and of $906.4
billion in component securities, is adequate to absorb a potential
price movement that may be caused by large trades in HYG.
---------------------------------------------------------------------------
\26\ See iShares iBoxx $ High Yield Corporate Bond ETF,
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporate-bond-etf (January 15, 2020).
---------------------------------------------------------------------------
Also, as demonstrated by the table above, the components of the
Underlying Indexes similarly experience relatively high liquidity and
market capitalization. As stated above, MXEA consists of large and mid-
cap components across 21 developed countries. The market capitalization
of the MXEA components (separately and in the aggregate) has increased
significantly since the initial listing of MXEA options on the Exchange
in 2016--from approximately $11.4 trillion to $14.9 trillion in the
aggregate by the end of 2019, and from approximately $12.3 billion in
2016 to $16.3 billion on average per component by the end of 2019. The
Exchange also notes that the average market capitalization of the
component securities unadjusted for inclusion in MXEA is currently
around $20 billion.
The MXEF is an equity index designed to capture large and mid-cap
representation across 26 emerging market countries, also covering
approximately 85% of the free float-adjusted market capitalization in
each country.\27\ The market capitalization of the components of MXEF
in the aggregate has also grown significantly since the initial listing
of MXEF options on the Exchange in 2016--from approximately $3.2
trillion in 2016 to $6.2 trillion by the end of 2019.
[[Page 15007]]
Additionally, the average market capitalization per constituent has
risen from approximately $3.8 billion in 2016 to approximately $4.4
billion in 2019. Like MXEA, the Exchange notes that the average market
capitalization of the component securities unadjusted for inclusion in
the index is approximately $12.9 billion. The Exchange also notes that
MXEF has experienced a continuous rise in the overall number of its
component securities, which has recently climbed to 1,401 component
securities in 2019 compared to 834 in 2016 when initially listed.
---------------------------------------------------------------------------
\27\ See MSCI Emerging Markets Index fact sheet (dated December
31, 2019), available at: https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111.
---------------------------------------------------------------------------
The Exchange further notes that the ETFs that track MXEF (EEM) and
MXEA (EFA, described in detail above) are currently subject to
significantly larger notionally adjusted position limits--1,000,000
contracts (as proposed for EFA)--yet these products are essentially
comprised of and impacted by the same underlying component securities.
In addition to this, the Underlying Indexes are designed to change over
time as various regions and entities emerge and mature, and, as a
result of the growth of the markets represented, the Underlying Indexes
have each experienced continued expansion. As a result, the Exchange
has observed increasing demand for trading in options and other
derivatives on the Underlying Indexes, which the Exchange believes
necessitates the proposed position limit increases and elimination of
near-term position limit restrictions. In light of the continued
expansion and increased demand for options on MXEF and MXEA, the
Exchange believes that implementing the same overall limits by
eliminating near-term limits would mitigate any potential impact on
using options effectively for portfolio hedging--particularly because
options on MEXF and MXEA offer investors the opportunity to manage
global equity exposure, mitigate portfolio risk, and generate
additional options premium income.\28\ Further, the Exchange believes
that the expanded limits and the elimination of near-term limit
restrictions are necessary to help its options market to compete
against the futures markets. Futures positions that are deemed bona
fide hedging transactions are exempt from position limit rules under
the Commodity Exchange Act and its implementing regulations.\29\ Thus,
institutions may offset much larger equity positions using index
futures products than by using index options. Therefore, the Exchange
believes that increasing the position limits and eliminating near-term
restrictions for options on the Underlying Indexes will help the
Exchange maintain competitive equality with the future markets.
---------------------------------------------------------------------------
\28\ See e.g. Cboe Global Markets, MSCI Index Options, Manage
Global Equity Exposure, available at https://www.cboe.com/products/stock-index-options-spx-rut-msci-ftse/cboe-options-on-msci-indexes
(February 24, 2020).
\29\ See 7 U.S.C. 6a(3); 17 CFR 1.3(z) and 1.47.
---------------------------------------------------------------------------
Creation and Redemption for ETFs
The Exchange believes that the creation and redemption process for
ETFs will lessen the potential for manipulative activity with options
on the Underlying ETFs. When an ETF provider wants to create more
shares, it looks to an Authorized Participant (generally a market maker
or other large financial institution) to acquire the securities the ETF
is to hold. For instance, when an ETF is designed to track the
performance of an index, the Authorized Participant can purchase all
the constituent securities in the exact same weight as the index, then
deliver those shares to the ETF provider. In exchange, the ETF provider
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. The price is based on the net asset
value, not the market value at which the ETF is trading. The creation
of new ETF units can be conducted during an entire trading day, and is
not subject to position limits. This process works in reverse where the
ETF provider seeks to decrease the number of shares that are available
to trade. The creation and redemption process, therefore, creates a
direct link to the underlying components of the ETF, and serves to
mitigate potential price impact of the ETF shares that might otherwise
result from increased position limits for the ETF options.
The Exchange understands that the ETF creation and redemption
process seeks to keep an ETF's share price trading in line with the
ETF's underlying net asset value. Because an ETF trades like a stock,
its share price will fluctuate during the trading day, due to simple
supply and demand. If demand to buy an ETF is high, for instance, the
ETF's share price might rise above the value of its underlying
securities. When this happens, the Authorized Participant believes the
ETF may now be overpriced, so it may buy shares of the component
securities and then sell ETF shares in the open market (i.e.
creations). This may drive the ETF's share price back toward the
underlying net asset value. Likewise, if the ETF share price starts
trading at a discount to the securities it holds, the Authorized
Participant can buy shares of the ETF and redeem them for the
underlying securities (i.e. redemptions). Buying undervalued ETF shares
may drive the share price of the ETF back toward fair value. This
arbitrage process helps to keep an ETF's share price in line with the
value of its underlying portfolio.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits for the
options on the Underlying ETFs and Indexes would lead to a more liquid
and competitive market environment for these options, which will
benefit customers interested in trading these products. The reporting
requirement for the options on the Underlying ETFs and Indexes would
remain unchanged. Thus, the Exchange would still require that each
Trading Permit Holder (``TPH'') or TPH organization that maintains
positions in the options on the same side of the market, for its own
account or for the account of a customer, report certain information to
the Exchange. This information would include, but would not be limited
to, the options' positions, whether such positions are hedged and, if
so, a description of the hedge(s). Market-Makers \30\ (including
Designated Primary Market-Makers (``DPMs'')) \31\ would continue to be
exempt from this reporting requirement, however, the Exchange may
access Market-Maker position information.\32\ Moreover, the Exchange's
requirement that TPHs file reports with the Exchange for any customer
who held aggregate large long or short positions on the same side of
the market of 200 or more options contracts of any single class for the
previous day will remain at this level for the options subject to this
proposal and will continue to serve as an important part of the
Exchange's surveillance efforts.\33\
---------------------------------------------------------------------------
\30\ A Market-Maker ``Trading Permit Holder registered with the
Exchange pursuant to Rule 3.52 for the purpose of making markets in
option contracts traded on the Exchange and that has the rights and
responsibilities set forth in Chapter 5, Section D of the Rules.''
See Rule 1.1.
\31\ A Designated Primary Market-Maker ``is TPH organization
that is approved by the Exchange to function in allocated securities
as a Market-Maker (as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise provided under the rules
of the Exchange.'' See Rule 1.1.
\32\ The Options Clearing Corporation (``OCC'') through the
Large option Position Reporting (``LOPR'') system acts as a
centralized service provider for TPH compliance with position
reporting requirements by collecting data from each TPH or TPH
organization, consolidating the information, and ultimately
providing detailed listings of each TPH's report to the Exchange, as
well as Financial Industry Regulatory Authority, Inc. (``FINRA''),
acting as its agent pursuant to a regulatory services agreement
(``RSA'').
\33\ See Rule 8.43 for reporting requirements.
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The Exchange believes that the existing surveillance procedures and
[[Page 15008]]
reporting requirements at the Exchange and other SROs are capable of
properly identifying disruptive and/or manipulative trading activity.
The Exchange also represents that it has adequate surveillances in
place to detect potential manipulation, as well as reviews in place to
identify potential changes in composition of the Underlying ETFs and
Indexes and continued compliance with the Exchange's listing standards.
These procedures utilize daily monitoring of market activity via
automated surveillance techniques to identify unusual activity in both
options and the underlyings, as applicable.\34\ The Exchange also notes
that large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\35\ which are used to report ownership of stock
which exceeds 5% of a company's total stock issue and may assist in
providing information in monitoring for any potential manipulative
schemes.
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\34\ The Exchange believes these procedures have been effective
for the surveillance of trading the options subject to this
proposal, and will continue to employ them.
\35\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in the options
on the Underlying ETFs and Indexes. Current margin and risk-based
haircut methodologies serve to limit the size of positions maintained
by any one account by increasing the margin and/or capital that a TPH
must maintain for a large position held by itself or by its
customer.\36\ In addition, Rule 15c3-1\37\ imposes a capital charge on
TPHs to the extent of any margin deficiency resulting from the higher
margin requirement.
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\36\ See Rule 10.3 for a description of margin requirements.
\37\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\38\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5)\39\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \40\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\38\ 15 U.S.C. 78f(b).
\39\ 15 U.S.C. 78f(b)(5).
\40\ Id.
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The Exchange believes that the proposed increase in position limits
for options on the Underlying ETFs and Indexes will remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest, because it will provide market participants with the ability
to more effectively execute their trading and hedging activities. The
proposed increases will allow market participants to more fully
implement hedging strategies in related derivative products and to
further use options to achieve investment strategies (e.g., there are
Exchange-Traded Products (``ETPs'') that use options on the Underlying
ETFs or Indexes as part of their investment strategy, and the
applicable position limits as they stand today may inhibit these ETPs
in achieving their investment objectives, to the detriment of
investors). Also, increasing the applicable position limits may allow
Market-Makers to provide the markets for these options with more
liquidity in amounts commensurate with increased consumer demand in
such markets. The proposed position limit increases may also encourage
other liquidity providers to shift liquidity, as well as encourage
consumers to shift demand, from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETFs and Indexes, the considerable market capitalization of
the funds, underlying component securities, and/or indexed component
securities, and the liquidity of the markets for the applicable options
and underlying component securities will mitigate concerns regarding
potential manipulation of the products and/or disruption of the
underlying markets upon increasing the relevant position limits. As a
general principle, increases in market capitalizations, active trading
volume, and deep liquidity of securities do not lead to manipulation
and/or disruption. This general principle applies to the [sic] Given
the recently observed increased levels of market capitalization,
trading volume, and liquidity in shares of the Underlying ETFs, and the
components of the Underlying ETFs and Indexes (as described above), the
Exchange does not believe that the options markets or underlying
markets would become susceptible to manipulation and/or disruption as a
result of the proposed position limit increases. Indeed, the Commission
has previously expressed the belief that removing position and exercise
limits may bring additional depth and liquidity to the options markets
without increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.\41\
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\41\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
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Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options, is not
novel and has been previously approved by the Commission. For example,
the Commission has previously approved, on a pilot basis, eliminating
position limits for options on SPY.\42\ Additionally, the Commission
has approved similar proposed rule changes by the Exchange to increase
position limits for options on highly liquid, actively traded ETFs,\43\
and has approved similar proposals to eliminate position limits
(including near-term restrictions) for options overlaying SPX, S&P 100
Index (``OEX''), European-style S&P 100 Index (``XEO''), Dow Jones
Industrial Average (``DJI''), and Nasdaq 100 Index (``NDX''), and
Russell 2000 Index (``RUT''), among others.\44\ In approving the
permanent elimination of position (and exercise limits) for such
options, the Commission relied heavily upon the Exchange's surveillance
capabilities, expressing trust in the enhanced surveillances and
reporting safeguards that the Exchange took in order to detect and
deter possible manipulative behavior which might arise from eliminating
position and
[[Page 15009]]
exercise limits. Furthermore, the Exchange again notes that that the
proposed position limits for options on EFA and FXI are consistent with
existing position limits for options on IWM and EEM, the proposed
limits for options on XLF, HYG, and OIH are consistent with current
position limits for options on EWZ, TLT, and EWJ, and the proposed
position limits for MXEA and MXEF are equal to the current position
limits for options on 20 other indexes, and the proposed elimination of
near-term restrictions currently exists for options on other
indexes.\45\
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\42\ See supra notes 7 and 8.
\43\ See supra note 16; see also Securities Exchange Act Release
No. 68086 (October 23, 2012), 77 FR 65600 (October 29, 2012)(SR-
CBOE-2012-066).
\44\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001)(SR-CBOE-2001-22); 4556 (July
16, 2001), 66 FR 38046 (July 20, 2001) (SR-CBOE-2001-39); 52650
(October 21, 2005), 70 FR 62147 (October 28, 2005)(SR-CBOE-2005-41);
56350 (September 4, 2007), 72 FR 51878 (September 11, 2001)(SR-CBOE-
2007-79); see also supra note 5.
\45\ See supra note 5.
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The Exchange's surveillance and reporting safeguards continue to be
designed to deter and detect possible manipulative behavior that might
arise from increasing or eliminating position and exercise limits in
certain classes. The Exchange believes that the current financial
requirements imposed by the Exchange and by the Commission adequately
address concerns regarding potentially large, unhedged position in the
options on the Underlying ETFs and Indexes, further promoting just and
equitable principles of trading, the maintenance of a fair and orderly
market, and the protection of investors.
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 because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives of market
participants.
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 Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders.\46\ The Exchange
believes market participants would benefit from being able to trade
options with increased position limits in an exchange environment in
several ways, including but not limited to the following: (1) enhanced
efficiency in initiating and closing out position; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of OCC as issuer and guarantor. The Exchange understands that
other options exchanges intend to file similar proposed rule changes
with the Commission to increase position limits on options on the
Underlying ETFs. This may further contribute to fair competition among
exchanges for multiply listed options.
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\46\ Additionally, several other options exchange have the same
position limits as the Exchange, as they incorporate by reference to
the Exchange's position limits, and as a result the position limits
for options on the Underlying ETFs and Indexes will increase at
those exchanges. For example, Nasdaq Options position limits are
determined by the position limits established by the Exchange. See
Nasdaq Stock Market LLC Rules, Options 9, Sec. 13 (Position Limits).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2020-015 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-2020-015. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-015, and should be submitted
on or before April 6, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-05236 Filed 3-13-20; 8:45 am]
BILLING CODE 8011-01-P