Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, Regarding Off-Floor Position Transfers, 16981-16985 [2020-06188]
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Federal Register / Vol. 85, No. 58 / Wednesday, March 25, 2020 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and paragraph (f) of Rule
19b–4 12 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2020–021 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–2020–021. 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
11 15
12 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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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–2020–021 and
should be submitted on or before April
15, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06190 Filed 3–24–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88424; File No. SR–CBOE–
2019–035]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, Regarding
Off-Floor Position Transfers
March 19, 2020.
I. Introduction
On July 3, 2019, Cboe Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘Cboe Options’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend its rule relating to offfloor position transfers. The proposed
rule change was published for comment
in the Federal Register on July 23,
2019.3 On August 6, 2019, the Exchange
filed Amendment No. 1 to the proposed
rule change.4 On September 4, 2019, the
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 86400
(July 17, 2019), 84 FR 35438 (‘‘Notice’’).
4 In Amendment No. 1, the Exchange deleted
from the proposed rule change the proposal to
permit off-floor risk-weighted asset (‘‘RWA’’)
transfers. The Exchange subsequently refiled the
RWA transfer proposal as a separate proposed rule
change filing in SR–CBOE–2019–044. See Securities
Exchange Release No. 87107 (September 25, 2019),
1 15
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16981
Commission extended the time period
within which to either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the propose rule
change, to October 21, 2019.5 On
October 7, 2019, the Exchange filed
Amendment No. 2 to the proposed rule
change.6 The Commission received two
comment letters on the proposal.7
On October 21, 2019, the Commission
instituted proceedings to determine
whether to approve or disapprove the
proposed rule changes (‘‘OIP’’).8 The
Commission received a letter from the
Exchange addressing the previous
comments,9 as well as one additional
comment in response to the OIP and the
Cboe Response Letter.10 On January 14,
84 FR 52149 (October 1, 2019) (order approving
proposed rule change to adopt Cboe Rule 6.49B
regarding off-floor RWA transfers). When the
Exchange filed Amendment No. 1 to CBOE–2019–
035, it also submitted the text of the amendment as
a comment letter to the filing, which the
Commission made publicly available at https://
www.sec.gov/comments/sr-cboe-2019-035/
srcboe2019035-5917170-189047.pdf.
5 See Securities Exchange Act Release No. 86861
(September 4, 2019), 84 FR 47627 (September 10,
2019).
6 In Amendment No. 2, the Exchange updated
cross-references to Cboe rules throughout the
proposed rule change to reflect separate
amendments it made to its rulebook in connection
with the Exchange’s technology migration, which it
subsequently completed on October 7, 2019. When
the Exchange filed Amendment No. 2 to CBOE–
2019–035, it also submitted the text of the
amendment as a comment letter to the filing, which
the Commission made publicly available at https://
www.sec.gov/comments/sr-cboe-2019-035/
srcboe2019035-6258833-192955.pdf. In addition to
the cross-references updated in Amendment No. 2,
the Exchange relocated Rule 6.49A to Rule 6.7 in
its post-migration rulebook and made conforming
changes to its proposed rule change to reflect that
new rule number.
7 See Letter to Vanessa Countryman, Secretary,
Commission, dated September 24, 2019, from John
Kinahan, Chief Executive Officer, Group One
Trading, L.P., available at https://www.sec.gov/
comments/sr-cboe-2019-035/srcboe20190356193332-192497.pdf (‘‘Group One Letter’’) and
Letter to Brent J. Fields, Secretary, Commission,
dated August 19, 2019, from Gerald D. O’Connell,
Compliance Coordinator, Susquehanna
International Group, LLP, available at https://
www.sec.gov/comments/sr-cboe-2019-035/
srcboe2019035-5985436-190350.pdf (‘‘SIG August
2019 Letter’’).
8 See Securities Exchange Act Release No. 87374,
84 FR 57542 (October 25, 2019) (‘‘OIP’’).
9 See Letter to Vanessa Countryman, Secretary,
Commission, dated November 15, 2019, from Laura
G. Dickman, Vice President, Associate General
Counsel, Cboe Exchange, Inc., available at https://
www.sec.gov/comments/sr-cboe-2019-035/
srcboe2019035-6434377-198588.pdf (‘‘Cboe
Response Letter’’).
10 See Letter to Vanessa Countryman, Secretary,
Commission, dated December 12, 2019, from Gerald
D. O’Connell, Compliance Coordinator,
Susquehanna International Group, LLP, available at
https://www.sec.gov/comments/sr-cboe-2019-035/
srcboe2019035-6535880-200548.pdf (‘‘SIG
December 2019 Letter’’).
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Federal Register / Vol. 85, No. 58 / Wednesday, March 25, 2020 / Notices
2020, the Commission issued a notice of
designation of a longer period for
Commission action on proceedings to
determine whether to approve or
disapprove the proposed rule change.11
This order approves the proposed rule
change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
II. Description of the Proposed Rule
Change
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Cboe generally requires a Trading
Permit Holder (‘‘TPH’’) to effect
transactions in listed options on an
exchange.12 Notwithstanding that
provision, Cboe permits certain types of
transfers involving a TPH’s positions to
be effected off the Exchange (also
referred to as ‘‘off-floor’’ transfers).13
The Exchange now proposes to
delineate in Rule 6.7 (Off-Floor
Transfers of Positions) four additional
types of permitted off-floor transfers: (1)
Transfers to correct a bona fide error in
the recording of a transaction or the
transferring of a position to another
account, (2) transfers between accounts
where there is no change in ownership
provided the accounts are not in
separate aggregation units or otherwise
subject to information barrier or account
segregation requirements, (3)
consolidation of accounts where no
change in ownership is involved, and
(4) transfers through operation of law
from death, bankruptcy, or otherwise.14
In addition, the Exchange purports to
codify its prior guidance that off-floor
transfers cannot net against another
position and that no position transfer
may result in preferential margin or
haircut treatment.15 Further, the
Exchange purports to codify into Rule
6.7 its interpretation that the off-floor
transfer rule ‘‘is intended to facilitate
non-routine, non-recurring movements
of positions’’ and ‘‘is not to be used
repeatedly or routinely in
circumvention of the normal auction
market process.’’ 16
Finally, as discussed more fully in the
Notice,17 the Exchange proposes other
modifications to Rule 6.7, including
adding provisions that would provide
guidance as to the permitted transfer
price at which an off-floor transfer may
be effected, specify when written notice
would be required prior to effecting an
11 See
Securities Exchange Act Release No. 87959
(January 14, 2020), 85 FR 3448 (January 21, 2020).
12 See Cboe Rule 5.12(a) (formerly Rule 6.49(a)).
13 See Cboe Rule 6.7(a) (formerly Rule 6.49A(a)).
14 See proposed Cboe Rule 6.7(a).
15 See proposed Cboe Rule 6.7(b). See also Cboe
Options Regulatory Circular RG03–62 (July 24,
2003).
16 See proposed Cboe Rule 6.7(g).
17 See Notice, supra note 3.
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off-floor transfer, and provide for
recordkeeping requirements.18
III. Discussion and Commission
Findings
After careful review of the proposal,
as modified by Amendment Nos. 1 and
2, and the comments received thereon,
the Commission finds that the proposed
rule change is consistent with the
requirements of the Act,19 and the rules
and regulations thereunder applicable to
a national securities exchange.20 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,21 which
requires, among other things, that the
rules of a national securities exchange
be designed 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 and
that the rules are not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange’s current rule
governing off-floor transfers permits
such transfers to occur under specified
limited circumstances. The Exchange’s
proposal, among other things, adds four
new scenarios in which off-floor
transfers will be permitted. According to
the Exchange, the proposed rule change
‘‘adopts no new restrictions on off-floor
position transfers, but in fact only
adopts narrowly defined, additional
circumstances under which such
transfers are permissible.’’ 22
One commenter said it ‘‘disagree[s]
with the basic premises relied upon by
the CBOE for the proposal’’ and believes
that Cboe failed to adequately justify the
proposal.23 Specifically, the commenter
said it objects to the Exchange’s
purported prohibition on transfers
involving ‘‘no material change of
beneficial ownership,’’ which the
commenter referred to as ‘‘no change
transfers,’’ and believes that the existing
Rule, as well as the proposed changes
thereto, are ‘‘overly restrictive’’ because
they limit off-floor ‘‘no change’’
transfers.24 While Cboe asserts that its
proposal is codifying within its rules its
longstanding policy on off-floor
proposed Cboe Rule 6.7(c), (d), and (e).
U.S.C. 78f.
20 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
21 15 U.S.C. 78f(b)(5).
22 See Cboe Response Letter, supra note 9, at 6.
23 See SIG December 2019 Letter, supra note 10,
at 1. See also SIG August 2019 Letter, supra note
7, at 7.
24 See SIG December 2019 Letter, supra note 10,
at 2; SIG August 2019 Letter, supra note 7, at 1.
transfers,25 the commenter challenges
that assertion and characterizes the
proposal as based on the ‘‘erroneous
current view by the CBOE that its
longstanding policy’’ was intended to
broadly prohibit off-floor transfers
where there is no material change in
beneficial ownership.26 The commenter
instead argues that Cboe’s longstanding
policy was historically intended to
require that transactions with ‘‘material
change of beneficial ownership’’ occur
on an exchange and ‘‘to direct no
change transfers to the off-floor transfer
process,’’ and disagrees with Cboe’s
assertion that its longstanding policy
was to ‘‘generally ensure all position
movements occur in the open
market.’’ 27 The commenter contends
that language in the 1995 filing that
adopted of Rule 6.7 (formerly Rule
6.49A) supports its position that the rule
‘‘was not meant to alter no change
transfers, as the open market
requirement did not apply to them in
the first place.’’ 28
Cboe disagrees with the commenter’s
characterization of its longstanding
policy and states that the commenter’s
concept of a ‘‘no change transfer’’ that
would be permitted to occur off-floor
without restriction ‘‘conflicts with the
long-standing policy and approach
reflected in the pending rule change
filing.’’ 29 In support of its position,
Cboe cites, among other things, to its
adoption in 1995 of Rule 6.7 (formerly
Rule 6.49A) as permitting only narrow
exceptions to the general requirement
under Rule 5.12 (formerly Rule 6.49)
that transactions be effected on an
exchange.30 Cboe states that ‘‘[t]o be
clear, it is not, and has not been, the
Exchange’s intent or interpretation of
Rule 6.7 (former Rule 6.49A) that offfloor position transfers may freely occur
when there is no change in ownership
(or beneficial ownership), particularly
in circumstances that result in netting,
favorable margin treatment, or repeating
or recurring transfers, or that result in
the avoidance of the normal auction
market process.’’ 31 Cboe further notes
that ‘‘[n]one of the exceptions currently
delineated in Rule 6.7 permit the type
of ‘no change’ transfer [the commenter]
18 See
19 15
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25 See
Cboe Response Letter, supra note 9, at 1.
SIG December 2019 Letter, supra note 10,
at 5, fn.15.
27 See SIG December 2019 Letter, supra note 10,
at 3, 5; see also SIG August 2019 Letter, supra note
7, at 7.
28 See SIG December 2019 Letter, supra note 10,
at 3.
29 See Cboe Response Letter, supra note 9, at 3.
30 See Cboe Response Letter, supra note 9, at 2–
3.
31 See Cboe Response Letter, supra note 9, at 3.
26 See
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believes is currently permissible.’’ 32
Instead, Cboe explains that the current
exceptions do not permit off-floor
transactions in situations involving
‘‘regular business practices, such as risk
management or hedging activities’’ but
instead allow them in ‘‘infrequent
occurrences that arise for legal purposes
(e.g., mergers, acquisitions,
bankruptcies) or other non-business
related events (e.g., donations to not-forprofit entities, gifts to minors).’’ 33 The
Exchange points out that according to
the commenter, a ‘‘‘no change’ transfer
may involve a change—just not a
material change—in beneficial
ownership, which implies different
entities (and thus different Persons) own
the accounts’’ and concludes that such
a definition of ‘‘no change transfer’’ is
not supported by the commenter’s
argument that this is analogous to a
statement comparing different accounts
of the same Person (or same entity).34
The Commission believes that the
Exchange has addressed the
commenter’s concerns concerning the
scope of Rule 6.7 (formerly Rule 6.49A)
and Rule 5.12 (formerly Rule 6.49).
While the commenter asserts that the
Exchange ‘‘has always generally
permitted no change position
movements to be transferred offfloor,’’ 35 the Exchange contradicts that
assertion as an ‘‘unsupported
presumption’’ and, in support of its
position, cites language to the contrary
in its 1995 filing adopting Rule 6.7
(formerly 6.49A).36 The Commission
believes that the Exchange has
presented sufficient information in
support of what it considers to be its
longstanding policy generally
prohibiting off-exchange transfers
subject to limited exceptions.
Other aspects of the Exchange’s
proposal expand the list of permitted
off-floor transactions and purport to
codify certain preexisting Exchange
interpretations concerning the nature
and extent of permitted off-floor
transfers. In particular, the Exchange
proposes to add into the Rule provisions
specifying that off-floor transfers may
not (1) net against another position or
result in preferential margin or haircut
treatment (‘‘netting restriction’’) or (2)
be used to facilitate non-routine, nonrecurring movements of positions
(‘‘frequency restriction’’).37
32 See
Cboe Response Letter, supra note 9, at 4.
Cboe Response Letter, supra note 9, at 4.
34 See Cboe Response Letter, supra note 9, at 9.
35 See SIG December 2019 Letter, supra note 10,
at 5.
36 See Cboe Response Letter, supra note 9, at 4
and 1–2.
37 See proposed Cboe Rule 6.7(b) and (g). While
the amended Rule will continue to allow the
33 See
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Commenters seek clarification on
certain of these aspects of the proposal.
First, commenters ask which types of
transfers would constitute ‘‘routine,
recurring’’ transfers.38 For example, one
commenter asks whether more than one
transfer per day would be considered
‘‘recurring.’’ 39 In response, the
Exchange states that ‘‘[w]hat constitutes
non-routine and non-recurring will be
based on facts and circumstances’’ and
notes that ‘‘[t]he term ‘routine’ generally
refers to regular or habitual actions
taken as part of an established
procedure’’ and ‘‘[t]he term recurring
general means something that happens
repeatedly.’’ 40 The Exchange further
explains that ‘‘it is important that the
transfer could occur only in connection
with one of the specific events/episodes
listed in Rule 6.7’’ and that if a ‘‘transfer
is prescribed by a Person’s procedures
to occur at specified times in intervals
(such as hourly, daily, weekly, or
monthly), the Exchange would view that
to be routine and recurring and
potentially be a violation of the
proposed Rule requirement.’’ 41 The
Commission believes that the Exchange
has addressed the commenter’s question
and has articulated a reasonably and
fairly implied interpretation of how the
frequency restriction would apply based
on its plain meaning.
In addition, one commenter argues
that the proposal is ambiguous in its
description of what constitutes a
separate account with respect to
proposed Rule 6.7(a)(2).42 Proposed
Rule 6.7(a)(2) allows for off-floor
transfers involving ‘‘the transfer of
positions from one account to another
account where no change in ownership
is involved (i.e., accounts of the same
Person (as defined in Rule 1.1)),
provided the accounts are not in
separate aggregation units or otherwise
subject to information barrier or account
segregation requirements.’’ In response,
the Exchange asserts that ‘‘the phrases
‘information barriers’ and ‘aggregation
units’ are widely understood throughout
the financial industry.’’ 43 The Exchange
Exchange to grant an exemption from Cboe Rule
5.12 to allow additional types of off-floor transfers,
the revised rule text makes it clear that such
exemptions may only be granted on rare occasions
when necessary or appropriate for the maintenance
of a fair and orderly market and the protection of
investors and where the exemption is in the public
interest, including due to unusual or extraordinary
circumstances.
38 See Group One Letter, supra note 7, at 2; SIG
August 2019 Letter, supra note 7, at 6.
39 See Group One Letter, supra note 7, at 2.
40 See Cboe Response Letter, supra note 9, at 10.
41 See Cboe Response Letter, supra note 9, at 10.
42 See SIG December 2019 Letter, supra note 10,
at 2; SIG August 2019 Letter, supra note 7, at 3.
43 See Cboe Response Letter, supra note 9, at 13.
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16983
explains the purpose behind this
restriction as follows:
Ultimately, these are methods used by
Persons to separate accounts for different
business (e.g., to separate a market-maker
trading unit from a proprietary trading unit)
or regulatory purposes (e.g., Regulation
SHO). If accounts are subject to such
separation for any such purpose, the
Exchange believes it is reasonable to not
permit off-floor position transfers between
such accounts that are otherwise required to
be kept separate, as such transfers could be
seen as ‘breaching the wall’ put in place by
that separation.44
The Commission believes that the
Exchange has addressed the
commenter’s concern and has
articulated a fair basis for the restriction,
and that such restriction is consistent
with the requirements of the Act, and
the rules and regulations thereunder.
Further, both commenters generally
object to the prohibitions on netting and
routine-use, and say that those
prohibitions restrict their ability to
perform risk-reducing off-floor
transfers.45 For example, one
commenter believes the rule’s
prohibition on repeated or routine use is
too restrictive, as it is ‘‘unaware of any
normal auction market process that
would allow for a single market
participant to transact with itself in
order to move a position across two
accounts maintained by that same
market participant.’’ 46 This commenter
argues that ‘‘[i]n a no-change transfer,
there is no buyer and there is no seller,’’
as the positions are already owned and
ownership is not changing; therefore nochange transfers should be available ‘‘as
frequently as necessary.’’ 47 In response,
Cboe ‘‘reiterates that Rule 5.12 prohibits
all off-floor positions transfers, unless
specifically permitted by an
exception.’’ 48 The Exchange further
explains that:
[w]hile [the commenter] references
accounts of the ‘‘same market participant,’’ it
also references a ‘‘no change transfer’’ which,
again, could result in a position transfer
between accounts of different entities (and
thus different market participants) with the
same beneficial owner. The Exchange
believes accounts of different Persons, even
with the same beneficial owner, could be
44 See
Cboe Response Letter, supra note 9, at 13.
Group One Letter, supra note 7, at 2; SIG
December 2019 Letter, supra note 10, at 3, 8; SIG
August 2019 Letter, supra note 7, at 6, 8.
46 See Group One Letter, supra note 7, at 1.
47 See Group One Letter, supra note 7, at 2. See
also SIG December 2019 Letter, supra note 10, at
9 (noting that pursuant to Rule 5.12, no member
‘‘acting as principal or agent may effect transactions
. . . ’’ and arguing that ‘‘[n]o change transfers do
not reflect one’s intent to buy from and sell to
oneself, but simply to move what one already holds
on one’s books and records for risk management.’’).
48 Cboe Response Letter, supra note 9, at 11.
45 See
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used to circumvent the normal auction
process if, for example, those accounts were
being used for different trading businesses.
Therefore, the Exchange limited the proposed
exception to transfers between accounts of
the same Person.49
In short, Cboe believes that the
commenters seek an interpretation that
is beyond the scope of the proposed rule
change.50
Similarly, one commenter argues that
to the extent that the proposal overly
restricts off-floor transfers of positions
that could otherwise be netted for risk
management purposes, the result is to
potentially harm some market makers
and needlessly inflate open interest.51
The commenter suggests that the
proposal may force market makers who
wish to avoid the appearance of wash
sales to undertake expensive
alternatives like carrying positions until
expiration or paying the spread to trade
out of a position.52 According to the
commenter, market makers often
assume unwanted positions from
customer facilitations and some market
makers that do not use a ‘‘universal
account’’ nevertheless may find posttrade opportunities to hedge or close
positions, which could be more
efficiently accomplished through an offfloor transfer.53 The commenter states
that the inability to use off-floor
transfers to reduce risk could raise a
market maker’s expenses and result in
wider quotes by impacted market
makers that ultimately could harm
investors.54
In response, the Exchange notes that
is proposal ‘‘adopts no new restrictions
on off-floor position transfers, but in fact
only adopts narrowly defined,
additional circumstances under which
such transfers are permissible’’ and it
‘‘disputes the characterization of the
Proposal as creating restrictions and
curtailing flexibility.’’ 55 Further, the
Exchange points to other procedures
that ‘‘support and encourage MarketMaker liquidity and foster tighter
quotes,’’ such as the ‘‘universal
49 Cboe
Response Letter, supra note 9, at 11.
Cboe Response Letter, supra note 9, at 9.
51 See SIG December 2019 Letter, supra note 10,
at 3; SIG August 2019 Letter, supra note 7, at 8. In
addition, the commenter stated that the prohibition
on netting stemmed from concerns from floor
brokers ‘‘troubled by apparent changes in publicly
disseminated open interest (from off-floor
transferring) without the opportunity to trade in
those instances.’’ See SIG December 2019 Letter,
supra note 10, at 10.
52 See SIG December 2019 Letter, supra note 10,
at 3, 10; SIG August 2019 Letter, supra note 7, at
3–4, 6.
53 See SIG December 2019 Letter, supra note 10,
at 8–9.
54 See SIG December 2019 Letter, supra note 10,
at 9; SIG August 2019 Letter, supra note 7, at 4.
55 Cboe Response Letter, supra note 9, at 6.
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50 See
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account’’ through which ‘‘positions in
Market-Maker subaccounts registered
across multiple options exchanges
automatically transfer into a single
universal account and net against other
positions in the universal account.’’ 56
Accordingly, the Exchange asserts that
‘‘there is in fact a cost-efficient method
available for Market-Makers to offset
positions, and thus not create this
perceived harm on investors.’’ 57 The
Exchange further asserts that:
The Commenters have not provided any
reasoning as to why the proposed exceptions
will create new burdens that do not exist
today; they merely wish the Exchange would
expand the exceptions to address issues that
the Proposal is not intended to address. The
Exchange notes again that if the Commission
disapproves the Proposal, Commenters
would continue to be prohibited from
effecting the ‘‘no change’’ transfers they
support.58
The Commission believes that the
Exchange has addressed the
commenters’ concerns. Accepting the
Exchange’s position that its proposal is
not designed to materially change the
existing intended scope of its off-floor
transfer rule, the Commission finds that
the Exchange has articulated a
reasonable explanation for its proposal
and that commenters are seeking
material changes to the underlying rule
itself that are beyond the scope of its
more narrowly-tailored proposal. The
current and proposed exceptions that
allow certain off-floor transfers are
based on specified, limited legal
situations or one-time events, not
regular business practices such as risk
management or hedging activities. As
the Exchange notes, other alternatives,
including universal accounts, exist and
may be utilized to avoid the potential
harms envisioned by one commenter,
such as excessive risk, wash sales, and
overstating open interest. The
Commission believes that the proposed
provisions, including the netting
restriction and frequency restriction, are
designed to perfect the mechanism of a
free and open market and a national
market system, and, in general, to
protect investors and the public interest,
by assuring that off-floor transfers are
conducted in a manner consistent with
the Exchange’s rules. In addition, the
Commission believes that the
requirement for the parties to provide
written notice to the Exchange and
maintain detailed records of each
transfer will ensure that the Exchange is
made aware of off-floor transfers and is
56 Cboe
Response Letter, supra note 9, at 7.
Response Letter, supra note 9, at 7.
58 Cboe Response Letter, supra note 9, at 9.
57 Cboe
PO 00000
Frm 00060
Fmt 4703
Sfmt 4703
able to review them for compliance with
applicable rules.
IV. Solicitation of Comments on
Amendment Nos. 1 and 2 to the
Proposed Rule Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment Nos. 1 and 2 are consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2019–035 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2019–035. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2019–035 and
should be submitted on or before April
15, 2020.
E:\FR\FM\25MRN1.SGM
25MRN1
Federal Register / Vol. 85, No. 58 / Wednesday, March 25, 2020 / Notices
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment Nos. 1 and 2
SECURITIES AND EXCHANGE
COMMISSION
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment Nos. 1 and 2 in the Federal
Register. As discussed above, in
Amendment No. 1, the Exchange
deleted from the proposed rule change
its proposal to permit RWA transfers.59
The Commission notes that the
Exchange subsequently refiled the RWA
transfer proposal as a separate proposed
rule change filing in SR–CBOE–2019–
044.60 Additionally, in Amendment No.
2 the Exchange revised the proposal to
update cross-references to Cboe rules
throughout the proposed rules to reflect
separate amendments it made to its
rulebook in connection with the
Exchange’s technology migration;
relocated the proposed Rule 6.49A to
Rule 6.7; and made conforming changes
to its proposed rule change to reflect the
new rule number.61 The Commission
believes that Amendment Nos. 1 and 2
make technical amendments to the
proposed rule changes and do not raise
any novel regulatory issues.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,62 to approve the proposed
rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
[Release No. 34–88427; File No. SR–LTSE–
2020–07]
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,63 that the
proposed rule change (SR–CBOE–2019–
035), as modified by Amendment No. 1
and 2, be, and hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06188 Filed 3–24–20; 8:45 am]
khammond on DSKJM1Z7X2PROD with NOTICES
BILLING CODE 8011–01–P
59 See
Amendment No. 1, supra note 4.
Amendment No. 1, supra note 4.
61 See Amendment No. 2, supra note 6.
62 15 U.S.C. 78s(b)(2).
63 15 U.S.C. 78s(b)(2).
64 17 CFR 200.30–3(a)(12).
60 See
VerDate Sep<11>2014
16:18 Mar 24, 2020
Jkt 250001
Self-Regulatory Organizations; LongTerm Stock Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change Amending
Rule 11.280 Concerning the
Resumption of Trading Following a
Level 3 Market-Wide Circuit Breaker
Halt
March 19, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 19,
2020, Long-Term Stock Exchange
(‘‘LTSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. 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
LTSE proposes a rule change to
amend Rule 11.280 concerning the
resumption of trading following a Level
3 market-wide circuit breaker halt.
The text of the proposed rule change
is available at the Exchange’s website at
https://longtermstockexchange.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
1 15
2
PO 00000
U.S.C. 78s(b)(1).
17 CFR 240.19b–4.
Frm 00061
Fmt 4703
Sfmt 4703
16985
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 11.280 concerning the resumption
of trading following a Level 3 marketwide circuit breaker halt. The Exchange
is proposing this rule change in
conjunction with other national
securities exchanges and the Financial
Industry Regulatory Authority
(‘‘FINRA’’).
Rule 11.280 provides a methodology
for determining when to halt trading in
all stocks due to extraordinary market
volatility (i.e., market-wide circuit
breakers). The market-wide circuit
breaker under Rule 11.280 provides an
important, automatic mechanism that is
invoked to promote stability and
investor confidence during a period of
significant stress when securities
markets experience extreme broad-based
declines. All U.S. equity exchanges and
FINRA adopted uniform rules on a pilot
basis relating to market-wide circuit
breakers (‘‘MWCB’’) in 2012 (‘‘MWCB
Rules’’), which are designed to slow the
effects of extreme price movement
through coordinated trading halts across
securities markets when severe price
declines reach levels that may exhaust
market liquidity.3 Market-wide circuit
breakers provide for trading halts in all
equities and options markets during a
severe market decline as measured by a
single-day decline in the S&P 500 Index.
Pursuant to Rule 11.280, a marketwide trading halt will be triggered if the
S&P 500 Index declines in price by
specified percentages from the prior
day’s closing price of that index.
Currently, the triggers are set at three
circuit breaker thresholds: 7% (Level 1),
13% (Level 2), and 20% (Level 3). A
market decline that triggers a Level 1 or
Level 2 halt after 9:30 a.m. ET and
before 3:25 p.m. ET would halt marketwide trading for 15 minutes, while a
similar market decline at or after 3:25
p.m. ET would not halt market-wide
trading. A market decline that triggers a
Level 3 halt at any time during the
trading day would halt market-wide
trading until the primary listing market
opens the next trading day.
3 See Securities Exchange Act Release No. 67090
(May 31, 2012), 77 FR 33531 (June 6, 2012) (SR–
BATS–2011–038; SR–BYX–2011–025; SR–BX–
2011–068; SR–CBOE–2011–087; SR–C2–2011–024;
SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX–
2011–30; SR–FINRA–2011–054; SR–ISE–2011–61;
SR–NASDAQ–2011–131; SR–NSX–2011–11; SR–
NYSE–2011–48; SR–NYSEAmex–2011–73; SR–
NYSEArca–2011–68; SR-Phlx–2011–129) (‘‘MWCB
Approval Order’’).
E:\FR\FM\25MRN1.SGM
25MRN1
]]>Agencies
[Federal Register Volume 85, Number 58 (Wednesday, March 25, 2020)]
[Notices]
[Pages 16981-16985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06188]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88424; File No. SR-CBOE-2019-035]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and
2, Regarding Off-Floor Position Transfers
March 19, 2020.
I. Introduction
On July 3, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its rule relating to off-floor position
transfers. The proposed rule change was published for comment in the
Federal Register on July 23, 2019.\3\ On August 6, 2019, the Exchange
filed Amendment No. 1 to the proposed rule change.\4\ On September 4,
2019, the Commission extended the time period within which to either
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the propose rule change, to October 21, 2019.\5\ On October 7, 2019,
the Exchange filed Amendment No. 2 to the proposed rule change.\6\ The
Commission received two comment letters on the proposal.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86400 (July 17,
2019), 84 FR 35438 (``Notice'').
\4\ In Amendment No. 1, the Exchange deleted from the proposed
rule change the proposal to permit off-floor risk-weighted asset
(``RWA'') transfers. The Exchange subsequently refiled the RWA
transfer proposal as a separate proposed rule change filing in SR-
CBOE-2019-044. See Securities Exchange Release No. 87107 (September
25, 2019), 84 FR 52149 (October 1, 2019) (order approving proposed
rule change to adopt Cboe Rule 6.49B regarding off-floor RWA
transfers). When the Exchange filed Amendment No. 1 to CBOE-2019-
035, it also submitted the text of the amendment as a comment letter
to the filing, which the Commission made publicly available at
https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-5917170-189047.pdf.
\5\ See Securities Exchange Act Release No. 86861 (September 4,
2019), 84 FR 47627 (September 10, 2019).
\6\ In Amendment No. 2, the Exchange updated cross-references to
Cboe rules throughout the proposed rule change to reflect separate
amendments it made to its rulebook in connection with the Exchange's
technology migration, which it subsequently completed on October 7,
2019. When the Exchange filed Amendment No. 2 to CBOE-2019-035, it
also submitted the text of the amendment as a comment letter to the
filing, which the Commission made publicly available at https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6258833-192955.pdf. In addition to the cross-references updated in Amendment
No. 2, the Exchange relocated Rule 6.49A to Rule 6.7 in its post-
migration rulebook and made conforming changes to its proposed rule
change to reflect that new rule number.
\7\ See Letter to Vanessa Countryman, Secretary, Commission,
dated September 24, 2019, from John Kinahan, Chief Executive
Officer, Group One Trading, L.P., available at https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6193332-192497.pdf (``Group
One Letter'') and Letter to Brent J. Fields, Secretary, Commission,
dated August 19, 2019, from Gerald D. O'Connell, Compliance
Coordinator, Susquehanna International Group, LLP, available at
https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-5985436-190350.pdf (``SIG August 2019 Letter'').
---------------------------------------------------------------------------
On October 21, 2019, the Commission instituted proceedings to
determine whether to approve or disapprove the proposed rule changes
(``OIP'').\8\ The Commission received a letter from the Exchange
addressing the previous comments,\9\ as well as one additional comment
in response to the OIP and the Cboe Response Letter.\10\ On January 14,
[[Page 16982]]
2020, the Commission issued a notice of designation of a longer period
for Commission action on proceedings to determine whether to approve or
disapprove the proposed rule change.\11\ This order approves the
proposed rule change, as modified by Amendment Nos. 1 and 2, on an
accelerated basis.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 87374, 84 FR 57542
(October 25, 2019) (``OIP'').
\9\ See Letter to Vanessa Countryman, Secretary, Commission,
dated November 15, 2019, from Laura G. Dickman, Vice President,
Associate General Counsel, Cboe Exchange, Inc., available at https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6434377-198588.pdf (``Cboe Response Letter'').
\10\ See Letter to Vanessa Countryman, Secretary, Commission,
dated December 12, 2019, from Gerald D. O'Connell, Compliance
Coordinator, Susquehanna International Group, LLP, available at
https://www.sec.gov/comments/sr-cboe-2019-035/srcboe2019035-6535880-200548.pdf (``SIG December 2019 Letter'').
\11\ See Securities Exchange Act Release No. 87959 (January 14,
2020), 85 FR 3448 (January 21, 2020).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
Cboe generally requires a Trading Permit Holder (``TPH'') to effect
transactions in listed options on an exchange.\12\ Notwithstanding that
provision, Cboe permits certain types of transfers involving a TPH's
positions to be effected off the Exchange (also referred to as ``off-
floor'' transfers).\13\ The Exchange now proposes to delineate in Rule
6.7 (Off-Floor Transfers of Positions) four additional types of
permitted off-floor transfers: (1) Transfers to correct a bona fide
error in the recording of a transaction or the transferring of a
position to another account, (2) transfers between accounts where there
is no change in ownership provided the accounts are not in separate
aggregation units or otherwise subject to information barrier or
account segregation requirements, (3) consolidation of accounts where
no change in ownership is involved, and (4) transfers through operation
of law from death, bankruptcy, or otherwise.\14\
---------------------------------------------------------------------------
\12\ See Cboe Rule 5.12(a) (formerly Rule 6.49(a)).
\13\ See Cboe Rule 6.7(a) (formerly Rule 6.49A(a)).
\14\ See proposed Cboe Rule 6.7(a).
---------------------------------------------------------------------------
In addition, the Exchange purports to codify its prior guidance
that off-floor transfers cannot net against another position and that
no position transfer may result in preferential margin or haircut
treatment.\15\ Further, the Exchange purports to codify into Rule 6.7
its interpretation that the off-floor transfer rule ``is intended to
facilitate non-routine, non-recurring movements of positions'' and ``is
not to be used repeatedly or routinely in circumvention of the normal
auction market process.'' \16\
---------------------------------------------------------------------------
\15\ See proposed Cboe Rule 6.7(b). See also Cboe Options
Regulatory Circular RG03-62 (July 24, 2003).
\16\ See proposed Cboe Rule 6.7(g).
---------------------------------------------------------------------------
Finally, as discussed more fully in the Notice,\17\ the Exchange
proposes other modifications to Rule 6.7, including adding provisions
that would provide guidance as to the permitted transfer price at which
an off-floor transfer may be effected, specify when written notice
would be required prior to effecting an off-floor transfer, and provide
for recordkeeping requirements.\18\
---------------------------------------------------------------------------
\17\ See Notice, supra note 3.
\18\ See proposed Cboe Rule 6.7(c), (d), and (e).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposal, as modified by Amendment Nos.
1 and 2, and the comments received thereon, the Commission finds that
the proposed rule change is consistent with the requirements of the
Act,\19\ and the rules and regulations thereunder applicable to a
national securities exchange.\20\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\21\ which requires, among other things, that the rules of a
national securities exchange be designed 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
and that the rules are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f.
\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange's current rule governing off-floor transfers permits
such transfers to occur under specified limited circumstances. The
Exchange's proposal, among other things, adds four new scenarios in
which off-floor transfers will be permitted. According to the Exchange,
the proposed rule change ``adopts no new restrictions on off-floor
position transfers, but in fact only adopts narrowly defined,
additional circumstances under which such transfers are permissible.''
\22\
---------------------------------------------------------------------------
\22\ See Cboe Response Letter, supra note 9, at 6.
---------------------------------------------------------------------------
One commenter said it ``disagree[s] with the basic premises relied
upon by the CBOE for the proposal'' and believes that Cboe failed to
adequately justify the proposal.\23\ Specifically, the commenter said
it objects to the Exchange's purported prohibition on transfers
involving ``no material change of beneficial ownership,'' which the
commenter referred to as ``no change transfers,'' and believes that the
existing Rule, as well as the proposed changes thereto, are ``overly
restrictive'' because they limit off-floor ``no change'' transfers.\24\
While Cboe asserts that its proposal is codifying within its rules its
longstanding policy on off-floor transfers,\25\ the commenter
challenges that assertion and characterizes the proposal as based on
the ``erroneous current view by the CBOE that its longstanding policy''
was intended to broadly prohibit off-floor transfers where there is no
material change in beneficial ownership.\26\ The commenter instead
argues that Cboe's longstanding policy was historically intended to
require that transactions with ``material change of beneficial
ownership'' occur on an exchange and ``to direct no change transfers to
the off-floor transfer process,'' and disagrees with Cboe's assertion
that its longstanding policy was to ``generally ensure all position
movements occur in the open market.'' \27\ The commenter contends that
language in the 1995 filing that adopted of Rule 6.7 (formerly Rule
6.49A) supports its position that the rule ``was not meant to alter no
change transfers, as the open market requirement did not apply to them
in the first place.'' \28\
---------------------------------------------------------------------------
\23\ See SIG December 2019 Letter, supra note 10, at 1. See also
SIG August 2019 Letter, supra note 7, at 7.
\24\ See SIG December 2019 Letter, supra note 10, at 2; SIG
August 2019 Letter, supra note 7, at 1.
\25\ See Cboe Response Letter, supra note 9, at 1.
\26\ See SIG December 2019 Letter, supra note 10, at 5, fn.15.
\27\ See SIG December 2019 Letter, supra note 10, at 3, 5; see
also SIG August 2019 Letter, supra note 7, at 7.
\28\ See SIG December 2019 Letter, supra note 10, at 3.
---------------------------------------------------------------------------
Cboe disagrees with the commenter's characterization of its
longstanding policy and states that the commenter's concept of a ``no
change transfer'' that would be permitted to occur off-floor without
restriction ``conflicts with the long-standing policy and approach
reflected in the pending rule change filing.'' \29\ In support of its
position, Cboe cites, among other things, to its adoption in 1995 of
Rule 6.7 (formerly Rule 6.49A) as permitting only narrow exceptions to
the general requirement under Rule 5.12 (formerly Rule 6.49) that
transactions be effected on an exchange.\30\ Cboe states that ``[t]o be
clear, it is not, and has not been, the Exchange's intent or
interpretation of Rule 6.7 (former Rule 6.49A) that off-floor position
transfers may freely occur when there is no change in ownership (or
beneficial ownership), particularly in circumstances that result in
netting, favorable margin treatment, or repeating or recurring
transfers, or that result in the avoidance of the normal auction market
process.'' \31\ Cboe further notes that ``[n]one of the exceptions
currently delineated in Rule 6.7 permit the type of `no change'
transfer [the commenter]
[[Page 16983]]
believes is currently permissible.'' \32\ Instead, Cboe explains that
the current exceptions do not permit off-floor transactions in
situations involving ``regular business practices, such as risk
management or hedging activities'' but instead allow them in
``infrequent occurrences that arise for legal purposes (e.g., mergers,
acquisitions, bankruptcies) or other non-business related events (e.g.,
donations to not-for-profit entities, gifts to minors).'' \33\ The
Exchange points out that according to the commenter, a ```no change'
transfer may involve a change--just not a material change--in
beneficial ownership, which implies different entities (and thus
different Persons) own the accounts'' and concludes that such a
definition of ``no change transfer'' is not supported by the
commenter's argument that this is analogous to a statement comparing
different accounts of the same Person (or same entity).\34\
---------------------------------------------------------------------------
\29\ See Cboe Response Letter, supra note 9, at 3.
\30\ See Cboe Response Letter, supra note 9, at 2-3.
\31\ See Cboe Response Letter, supra note 9, at 3.
\32\ See Cboe Response Letter, supra note 9, at 4.
\33\ See Cboe Response Letter, supra note 9, at 4.
\34\ See Cboe Response Letter, supra note 9, at 9.
---------------------------------------------------------------------------
The Commission believes that the Exchange has addressed the
commenter's concerns concerning the scope of Rule 6.7 (formerly Rule
6.49A) and Rule 5.12 (formerly Rule 6.49). While the commenter asserts
that the Exchange ``has always generally permitted no change position
movements to be transferred off-floor,'' \35\ the Exchange contradicts
that assertion as an ``unsupported presumption'' and, in support of its
position, cites language to the contrary in its 1995 filing adopting
Rule 6.7 (formerly 6.49A).\36\ The Commission believes that the
Exchange has presented sufficient information in support of what it
considers to be its longstanding policy generally prohibiting off-
exchange transfers subject to limited exceptions.
---------------------------------------------------------------------------
\35\ See SIG December 2019 Letter, supra note 10, at 5.
\36\ See Cboe Response Letter, supra note 9, at 4 and 1-2.
---------------------------------------------------------------------------
Other aspects of the Exchange's proposal expand the list of
permitted off-floor transactions and purport to codify certain
preexisting Exchange interpretations concerning the nature and extent
of permitted off-floor transfers. In particular, the Exchange proposes
to add into the Rule provisions specifying that off-floor transfers may
not (1) net against another position or result in preferential margin
or haircut treatment (``netting restriction'') or (2) be used to
facilitate non-routine, non-recurring movements of positions
(``frequency restriction'').\37\
---------------------------------------------------------------------------
\37\ See proposed Cboe Rule 6.7(b) and (g). While the amended
Rule will continue to allow the Exchange to grant an exemption from
Cboe Rule 5.12 to allow additional types of off-floor transfers, the
revised rule text makes it clear that such exemptions may only be
granted on rare occasions when necessary or appropriate for the
maintenance of a fair and orderly market and the protection of
investors and where the exemption is in the public interest,
including due to unusual or extraordinary circumstances.
---------------------------------------------------------------------------
Commenters seek clarification on certain of these aspects of the
proposal. First, commenters ask which types of transfers would
constitute ``routine, recurring'' transfers.\38\ For example, one
commenter asks whether more than one transfer per day would be
considered ``recurring.'' \39\ In response, the Exchange states that
``[w]hat constitutes non-routine and non-recurring will be based on
facts and circumstances'' and notes that ``[t]he term `routine'
generally refers to regular or habitual actions taken as part of an
established procedure'' and ``[t]he term recurring general means
something that happens repeatedly.'' \40\ The Exchange further explains
that ``it is important that the transfer could occur only in connection
with one of the specific events/episodes listed in Rule 6.7'' and that
if a ``transfer is prescribed by a Person's procedures to occur at
specified times in intervals (such as hourly, daily, weekly, or
monthly), the Exchange would view that to be routine and recurring and
potentially be a violation of the proposed Rule requirement.'' \41\ The
Commission believes that the Exchange has addressed the commenter's
question and has articulated a reasonably and fairly implied
interpretation of how the frequency restriction would apply based on
its plain meaning.
---------------------------------------------------------------------------
\38\ See Group One Letter, supra note 7, at 2; SIG August 2019
Letter, supra note 7, at 6.
\39\ See Group One Letter, supra note 7, at 2.
\40\ See Cboe Response Letter, supra note 9, at 10.
\41\ See Cboe Response Letter, supra note 9, at 10.
---------------------------------------------------------------------------
In addition, one commenter argues that the proposal is ambiguous in
its description of what constitutes a separate account with respect to
proposed Rule 6.7(a)(2).\42\ Proposed Rule 6.7(a)(2) allows for off-
floor transfers involving ``the transfer of positions from one account
to another account where no change in ownership is involved (i.e.,
accounts of the same Person (as defined in Rule 1.1)), provided the
accounts are not in separate aggregation units or otherwise subject to
information barrier or account segregation requirements.'' In response,
the Exchange asserts that ``the phrases `information barriers' and
`aggregation units' are widely understood throughout the financial
industry.'' \43\ The Exchange explains the purpose behind this
restriction as follows:
---------------------------------------------------------------------------
\42\ See SIG December 2019 Letter, supra note 10, at 2; SIG
August 2019 Letter, supra note 7, at 3.
\43\ See Cboe Response Letter, supra note 9, at 13.
Ultimately, these are methods used by Persons to separate
accounts for different business (e.g., to separate a market-maker
trading unit from a proprietary trading unit) or regulatory purposes
(e.g., Regulation SHO). If accounts are subject to such separation
for any such purpose, the Exchange believes it is reasonable to not
permit off-floor position transfers between such accounts that are
otherwise required to be kept separate, as such transfers could be
seen as `breaching the wall' put in place by that separation.\44\
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\44\ See Cboe Response Letter, supra note 9, at 13.
The Commission believes that the Exchange has addressed the
commenter's concern and has articulated a fair basis for the
restriction, and that such restriction is consistent with the
requirements of the Act, and the rules and regulations thereunder.
Further, both commenters generally object to the prohibitions on
netting and routine-use, and say that those prohibitions restrict their
ability to perform risk-reducing off-floor transfers.\45\ For example,
one commenter believes the rule's prohibition on repeated or routine
use is too restrictive, as it is ``unaware of any normal auction market
process that would allow for a single market participant to transact
with itself in order to move a position across two accounts maintained
by that same market participant.'' \46\ This commenter argues that
``[i]n a no-change transfer, there is no buyer and there is no
seller,'' as the positions are already owned and ownership is not
changing; therefore no-change transfers should be available ``as
frequently as necessary.'' \47\ In response, Cboe ``reiterates that
Rule 5.12 prohibits all off-floor positions transfers, unless
specifically permitted by an exception.'' \48\ The Exchange further
explains that:
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\45\ See Group One Letter, supra note 7, at 2; SIG December 2019
Letter, supra note 10, at 3, 8; SIG August 2019 Letter, supra note
7, at 6, 8.
\46\ See Group One Letter, supra note 7, at 1.
\47\ See Group One Letter, supra note 7, at 2. See also SIG
December 2019 Letter, supra note 10, at 9 (noting that pursuant to
Rule 5.12, no member ``acting as principal or agent may effect
transactions . . . '' and arguing that ``[n]o change transfers do
not reflect one's intent to buy from and sell to oneself, but simply
to move what one already holds on one's books and records for risk
management.'').
\48\ Cboe Response Letter, supra note 9, at 11.
[w]hile [the commenter] references accounts of the ``same market
participant,'' it also references a ``no change transfer'' which,
again, could result in a position transfer between accounts of
different entities (and thus different market participants) with the
same beneficial owner. The Exchange believes accounts of different
Persons, even with the same beneficial owner, could be
[[Page 16984]]
used to circumvent the normal auction process if, for example, those
accounts were being used for different trading businesses.
Therefore, the Exchange limited the proposed exception to transfers
between accounts of the same Person.\49\
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\49\ Cboe Response Letter, supra note 9, at 11.
In short, Cboe believes that the commenters seek an interpretation that
is beyond the scope of the proposed rule change.\50\
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\50\ See Cboe Response Letter, supra note 9, at 9.
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Similarly, one commenter argues that to the extent that the
proposal overly restricts off-floor transfers of positions that could
otherwise be netted for risk management purposes, the result is to
potentially harm some market makers and needlessly inflate open
interest.\51\ The commenter suggests that the proposal may force market
makers who wish to avoid the appearance of wash sales to undertake
expensive alternatives like carrying positions until expiration or
paying the spread to trade out of a position.\52\ According to the
commenter, market makers often assume unwanted positions from customer
facilitations and some market makers that do not use a ``universal
account'' nevertheless may find post-trade opportunities to hedge or
close positions, which could be more efficiently accomplished through
an off-floor transfer.\53\ The commenter states that the inability to
use off-floor transfers to reduce risk could raise a market maker's
expenses and result in wider quotes by impacted market makers that
ultimately could harm investors.\54\
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\51\ See SIG December 2019 Letter, supra note 10, at 3; SIG
August 2019 Letter, supra note 7, at 8. In addition, the commenter
stated that the prohibition on netting stemmed from concerns from
floor brokers ``troubled by apparent changes in publicly
disseminated open interest (from off-floor transferring) without the
opportunity to trade in those instances.'' See SIG December 2019
Letter, supra note 10, at 10.
\52\ See SIG December 2019 Letter, supra note 10, at 3, 10; SIG
August 2019 Letter, supra note 7, at 3-4, 6.
\53\ See SIG December 2019 Letter, supra note 10, at 8-9.
\54\ See SIG December 2019 Letter, supra note 10, at 9; SIG
August 2019 Letter, supra note 7, at 4.
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In response, the Exchange notes that is proposal ``adopts no new
restrictions on off-floor position transfers, but in fact only adopts
narrowly defined, additional circumstances under which such transfers
are permissible'' and it ``disputes the characterization of the
Proposal as creating restrictions and curtailing flexibility.'' \55\
Further, the Exchange points to other procedures that ``support and
encourage Market-Maker liquidity and foster tighter quotes,'' such as
the ``universal account'' through which ``positions in Market-Maker
subaccounts registered across multiple options exchanges automatically
transfer into a single universal account and net against other
positions in the universal account.'' \56\ Accordingly, the Exchange
asserts that ``there is in fact a cost-efficient method available for
Market-Makers to offset positions, and thus not create this perceived
harm on investors.'' \57\ The Exchange further asserts that:
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\55\ Cboe Response Letter, supra note 9, at 6.
\56\ Cboe Response Letter, supra note 9, at 7.
\57\ Cboe Response Letter, supra note 9, at 7.
The Commenters have not provided any reasoning as to why the
proposed exceptions will create new burdens that do not exist today;
they merely wish the Exchange would expand the exceptions to address
issues that the Proposal is not intended to address. The Exchange
notes again that if the Commission disapproves the Proposal,
Commenters would continue to be prohibited from effecting the ``no
change'' transfers they support.\58\
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\58\ Cboe Response Letter, supra note 9, at 9.
The Commission believes that the Exchange has addressed the
commenters' concerns. Accepting the Exchange's position that its
proposal is not designed to materially change the existing intended
scope of its off-floor transfer rule, the Commission finds that the
Exchange has articulated a reasonable explanation for its proposal and
that commenters are seeking material changes to the underlying rule
itself that are beyond the scope of its more narrowly-tailored
proposal. The current and proposed exceptions that allow certain off-
floor transfers are based on specified, limited legal situations or
one-time events, not regular business practices such as risk management
or hedging activities. As the Exchange notes, other alternatives,
including universal accounts, exist and may be utilized to avoid the
potential harms envisioned by one commenter, such as excessive risk,
wash sales, and overstating open interest. The Commission believes that
the proposed provisions, including the netting restriction and
frequency restriction, are designed to perfect the mechanism of a free
and open market and a national market system, and, in general, to
protect investors and the public interest, by assuring that off-floor
transfers are conducted in a manner consistent with the Exchange's
rules. In addition, the Commission believes that the requirement for
the parties to provide written notice to the Exchange and maintain
detailed records of each transfer will ensure that the Exchange is made
aware of off-floor transfers and is able to review them for compliance
with applicable rules.
IV. Solicitation of Comments on Amendment Nos. 1 and 2 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 1 and 2 are consistent with
the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2019-035. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-035 and should be submitted on
or before April 15, 2020.
[[Page 16985]]
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
Nos. 1 and 2 in the Federal Register. As discussed above, in Amendment
No. 1, the Exchange deleted from the proposed rule change its proposal
to permit RWA transfers.\59\ The Commission notes that the Exchange
subsequently refiled the RWA transfer proposal as a separate proposed
rule change filing in SR-CBOE-2019-044.\60\ Additionally, in Amendment
No. 2 the Exchange revised the proposal to update cross-references to
Cboe rules throughout the proposed rules to reflect separate amendments
it made to its rulebook in connection with the Exchange's technology
migration; relocated the proposed Rule 6.49A to Rule 6.7; and made
conforming changes to its proposed rule change to reflect the new rule
number.\61\ The Commission believes that Amendment Nos. 1 and 2 make
technical amendments to the proposed rule changes and do not raise any
novel regulatory issues. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\62\ to approve the proposed
rule change, as modified by Amendment Nos. 1 and 2, on an accelerated
basis.
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\59\ See Amendment No. 1, supra note 4.
\60\ See Amendment No. 1, supra note 4.
\61\ See Amendment No. 2, supra note 6.
\62\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\63\ that the proposed rule change (SR-CBOE-2019-035), as modified
by Amendment No. 1 and 2, be, and hereby is, approved on an accelerated
basis.
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\63\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06188 Filed 3-24-20; 8:45 am]
BILLING CODE 8011-01-P
