Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Rule 5.24, 17129-17134 [2020-06291]
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Federal Register / Vol. 85, No. 59 / Thursday, March 26, 2020 / Notices
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–ISE–2020–11 and should be
submitted on or before April 16, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06385 Filed 3–25–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88437; File No. SR–CBOE–
2020–004]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Designation
of Longer Period for Commission
Action on Proposed Rule Change
Relating To Amend Chapter 7, Section
B of the Rules, Which Contains the
Exchange’s Compliance Rule
(‘‘Compliance Rule’’) Regarding the
National Market System Plan
Governing the Consolidated Audit Trail
(the ‘‘CAT NMS Plan’’ or ‘‘Plan’’), To Be
Consistent With Certain Proposed
Amendments to and Exemptions From
the CAT NMS Plan as Well as To
Facilitate the Retirement of Certain
Existing Regulatory Systems
lotter on DSKBCFDHB2PROD with NOTICES
March 20, 2020.
On January 17, 2020, Cboe Exchange,
Inc. (‘‘Cboe Options’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend the Exchange’s
compliance rule regarding the National
Market System Plan Governing the
Consolidated Audit Trail. The proposed
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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rule change was published for comment
in the Federal Register on February 5,
2020.3 The Commission has received no
comment letters on the proposed rule
change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is March 21, 2020.
The Commission is extending the 45day time period for Commission action
on the proposed rule change. The
Commission finds that it is appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, pursuant to Section
19(b)(2)(A)(ii)(I) of the Act 5 and for the
reasons stated above, the Commission
designates May 5, 2020, as the date by
which the Commission shall either
approve, disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–CBOE–2020–004).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06299 Filed 3–25–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88447; File No. SR–CBOE–
2020–023]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating To Amend Rule
5.24
March 20, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
3 See Securities Exchange Act Release No. 88105
(January 30, 2020), 85 FR 6600.
4 15 U.S.C. 78s(b)(2).
5 15 U.S.C. 78s(b)(2)(A)(ii)(I).
6 17 CFR 200.30–3(a)(31).
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(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 20,
2020, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 5.24. The text of the proposed rule
change is provided below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe Exchange, Inc.
*
*
*
*
*
Rule 5.24. Disaster Recovery
(a)–(d) No change.
(e) Loss of Trading Floor. If the
Exchange trading floor becomes
inoperable, the Exchange will continue
to operate in a screen-based only
environment using a floorless
configuration of the System that is
operational while the trading floor
facility is inoperable. The Exchange will
operate using this configuration only
until the Exchange’s trading floor
facility is operational. Open outcry
trading will not be available in the event
the trading floor becomes inoperable,
except in accordance with paragraph (2)
below and pursuant to Rule 5.26, as
applicable.
(1) Applicable Rules. In the event that
the trading floor becomes inoperable,
trading will be conducted pursuant to
all applicable System Rules, except that
open outcry Rules will not be in force,
including but not limited to the Rules
(or applicable portions of the Rules) in
Chapter 5, Section G, and as follows
(subparagraphs (A) through ([C]D) will
until May 15, 2020):
(A) No change.
(B) with respect to complex orders in
any exclusively listed index option
class:
(1) Notwithstanding Rule 5.4(b), the
minimum increment for bids and offers
on complex orders with any ratio equal
to or greater than one-to-twenty-five
(0.04) and equal to or less than twenty1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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five-to-one (25.00) is $0.01 or greater,
which may be determined by the
Exchange on a class-by-class basis, and
the legs may be executed in $0.01
increments; and
(2) notwithstanding the definition of
‘‘complex order’’ in Rule 1.1, for
purposes of Rule 5.33, the term
‘‘complex order’’ means a complex
order with any ratio equal to or greater
than one-to-twenty-five (0.04) and equal
to or less than twenty-five-to-one
(25.00); [and]
([3]C) the contract volume a MarketMaker trades electronically during a
time period in which the Exchange
operates in a screen-based only
environment will be excluded from
determination of whether a MarketMaker executes more than 20% of its
contract volume electronically in an
appointed class during any calendar
quarter, and thus is subject to the
continuous electronic quoting
obligation, as set forth in Rule 5.52(d)[.];
and
(D) a TPH may execute a ‘‘Related
Futures Cross’’ or ‘‘RFC’’ order, which is
comprised of an SPX or VIX option
combo order coupled with a contra-side
order or orders totaling an equal
number of option combo orders, which
is identified to the Exchange as being
part of an exchange of option contracts
for related futures positions. For
purposes of RFC orders:
(1) In order to execute an RFC order:
(a) Until the time when System
functionality described in subparagraph
(b) is available, a TPH may execute an
RFC order without exposure on the
Exchange by inputting the execution
into the Exchange’s Clearing Editor; and
(b) at the time when System
functionality is available, a TPH must
submit the RFC order to the System,
which may execute automatically on
entry without exposure.
(2) A TPH may execute an RFC order
pursuant to subparagraph (1) above
only if: (a) Each option leg executes at
a price that complies with Rule
5.33(f)(2), provided that no option leg
executes at the same price as a Priority
Customer Order in the Simple Book; (b)
each option leg executes at a price at or
between the NBBO for the applicable
series; and (c) the execution price is
better than the price of any complex
order resting in the COB, unless the RFC
order is a Priority Customer Order and
the resting complex order is a nonPriority Customer Order, in which case
the execution price may be the same as
or better than the price of the resting
complex order. Rule 5.9 (related to
exposure of orders on the Exchange)
does not apply to executions of RFC
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orders. The System cancels an RFC
order if it cannot execute.
(3) An RFC order may only be entered
in the standard increment applicable to
the class under Rule 5.4(b).
(4) For purposes of this subparagraph
(D), an SPX or VIX options combo order
is a two-legged order with one leg to
purchase (sell) SPX or VIX calls and
another leg to sell (purchase) the same
number of SPX or VIX, respectively,
puts with the same expiration date and
strike price.
(5) For purposes of this subparagraph
(D), an exchange of option contracts for
related futures positions is a transaction
entered into by market participants
seeking to swap option positions with
related futures positions with related
exposures.
(a) A related futures position is a
position in a futures contract with either
the same underlying as or a high degree
of price correlation to the underlying of
the option combo in the RFC order so
that execution of the option combos in
the RFC order would serve as an
appropriate hedge for the related future
positions.
(b) In an exchange of contracts for
related positions, one party(ies) must be
the buyer(s) of (or the holder(s) of the
long market exposure associated with)
the options positions and the seller(s) of
corresponding futures contracts and the
other party(ies) must be the seller(s) of
(or holder(s) of the short market
exposure associated with) the options
positions and the buyer(s) of the
corresponding futures contracts. The
quantity of the option contracts
executed as part of the RFC order must
correlate to the quantity represented by
the related futures position portion of
the exchange.
(6) An RFC order may be executed
only during Regular Trading Hours and
contemporaneously with the execution
of the related futures position portion of
the exchange.
(7) The transaction involving the
related futures position of the exchange
must comply with all applicable rules of
the designated contract market on
which the futures are listed for trading.
*
*
*
*
*
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.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 5.24 regarding the Exchange’s
business continuity and disaster
recovery plans. Rule 5.24 describes
which Trading Permit Holders (‘‘TPHs’’)
are required to connect to the
Exchange’s backup systems as well as
certain actions the Exchange may take
as part of its business continuity plans
so that it may maintain fair and orderly
markets if unusual circumstances
occurred that could impact the
Exchange’s ability to conduct business.
This includes what actions the
Exchange would take if its trading floor
became inoperable. Specifically, Rule
5.24(e) states if the Exchange trading
floor becomes inoperable, the Exchange
will continue to operate in a screenbased only environment using a
floorless configuration of the System
that is operational while the trading
floor facility is inoperable. The
Exchange would operate using that
configuration only until the Exchange’s
trading floor facility became
operational. Open outcry trading would
not be available in the event the trading
floor becomes inoperable.3 Rule
5.24(e)(1) also currently states in the
event that the trading floor becomes
inoperable, trading will be conducted
pursuant to all applicable System Rules,
except that open outcry Rules would not
be in force, including but not limited to
the Rules (or applicable portions) in
Chapter 5, Section G,4 and that all non3 Pursuant to Rule 5.26, the Exchange may enter
into a back-up trading arrangement with another
exchange, which could allow the Exchange to use
the facilities of a back-up exchange to conduct
trading of certain of its products. The Exchange
currently has no back-up trading arrangement in
place with another exchange.
4 Chapter 5, Section G of the Exchange’s rulebook
sets forth the rules and procedures for manual order
handling and open outcry trading on the Exchange.
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trading rules of the Exchange would
continue to apply.5 The Exchange
recently proposed additional exceptions
to Rules that would not apply during a
time in which the trading floor in
inoperable.6
As of March 16, 2020, the Exchange
suspended open outcry trading to help
prevent the spread of the novel
coronavirus and is currently operating
in an all-electronic configuration. While
the trading floor was open, floor brokers
executed crosses of option combos (i.e.,
synthetic futures) on the trading floor on
behalf of market participants who were
exchanging futures contracts for related
options positions. Market participants
enter into these exchanges in order to
swap related exposures. For instance, if
a market participant has positions in
VIX options but would prefer to hold a
corresponding position in VIX futures
(such as, for example, to reduce margin
or risk related to the option positions),
that market participant may swap its
VIX options positions with another
market participant(s)’s VIX futures
positions that have corresponding risk
exposure.7
A key element to these exchanges is
that both of the option and future
transactions must occur between the
same market participants. When a floor
broker represented the cross of the
option contracts on the trading floor in
accordance with applicable rules,8
while in-crowd market participants had
the opportunity to bid or offer to
participate on the trade, those
participants generally declined to
participate upon hearing that the cross
was part of an exchange of related
futures contracts. While not required by
the Rules, the Rules permit in-crowd
market participants to decline to accept
contracts that would otherwise be
allocated to them.9 The Exchange
understands these market participants
decline this allocation voluntarily, as
they are aware of the need for market
participants to execute these crosses
cleanly for the transfer of risk between
participants to be effective.10 These are
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5 Current
Rule 5.24(e)(1)(B)(3) was intended to be
Rule 5.24(e)(1)(C), and the proposed rule change
corrects that incorrect subparagraph lettering and
numbering.
6 See Securities Exchange Act Release No. 88386
(March 13, 2020), 85 FR 15823 (March 19, 2020).
The rule changes adopted in that filing are effective
until May 15, 2020, unless extended. See Rule
5.24(e)(1).
7 The transaction between the market participants
for the futures positions occurs in accordance with
the rules of the applicable designated contract
market that lists the futures. See, e.g., Cboe Futures
Exchange LLC Rule 414.
8 See Rules 5.85 and 5.87.
9 See Rule 5.85(a)(2)(C)(iv).
10 Additionally, many market-makers in the
crowd that decline their allocations in these crosses
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riskless exchanges that carry no profit or
loss for the market participants that are
party to the transactions, but rather are
intended to provide a seamless method
for market participants to reduce margin
and capital requirements while
maintaining the same risk exposure
within their portfolios.
In response to feedback the Exchange
has received from floor brokers and
their customers regarding the inability
to complete these crosses in the current
all-electronic environment and the
potential detrimental impact on those
market participants as well as the
market as a whole, the Exchange
proposes to provide functionality that
would permit TPHs to execute these
crosses electronically while the trading
floor is inoperable. Specifically, the
Exchange proposes to amend Rule
5.24(e)(1) to provide that in the event
that the trading floor becomes
inoperable, trading will be conducted
pursuant to all applicable System Rules,
except that open outcry Rules will not
be in force, including but not limited to
the Rules (or applicable portions of the
Rules) in Chapter 5, Section G,11 and a
Trading Permit Holder (‘‘TPH’’) may
execute a ‘‘Related Futures Cross’’ or
‘‘RFC’’ order, which is comprised of an
SPX or VIX option combo order coupled
with a contra-side order or orders
totaling an equal number of option
combo orders, which is identified to the
Exchange as being part of an exchange
of contracts for related futures positions.
For purposes of RFC orders:
• In order to execute an RFC order:
(a) Until the time when System
functionality described in paragraph (b)
is available, a TPH may execute an RFC
order without exposure on the Exchange
by inputting the execution into the
Exchange’s Clearing Editor; 12 and
(b) at the time when System
functionality is available, a TPH must
submit the RFC order to the System,
which may execute automatically on
entry without exposure.
The Exchange believes the
functionality described in paragraph (b)
will provide a seamless mechanism to
execute these crosses, as it will provide
for orders to be systematized and price
protections will be systematically
enforced. The Exchange needs a small
often similarly engage in these exchanges for
similar purposes, so may similarly benefit from the
ability to execute these clean crosses.
11 Like the other exceptions recently added to this
provision, the proposed rule change would apply
until May 15, 2020. The Exchange will monitor
these transactions while the trading floor is
inoperable. If the trading floor is inoperable beyond
May 15, 2020, based on that review, the Exchange
may submit a separate rule filing to extend the
effectiveness of this rule.
12 See Rule 6.6.
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17131
amount of time to implement this
functionality, and the functionality in
paragraph (a) will provide an
intermediate method for TPHs to effect
these crosses while the Exchange
completes the necessary System work,
which it expects to occur the week of
March 23.
• A TPH may execute an RFC order
pursuant to the preceding bulleted
paragraph only if: (a) Each option leg
executes at a price that complies with
Rule 5.33(f)(2),13 provided that no
option leg executes at the same price as
a Priority Customer Order in the Simple
Book; (b) each option leg executes at a
price at or between the national best bid
or offer (‘‘NBBO’’) for the applicable
series; and (c) the execution price is
better than the price of any complex
order resting in the complex order book
(‘‘COB’’), unless the RFC order is a
Priority Customer Order and the resting
complex order is a non-Priority
Customer Order, in which case the
execution price may be the same as or
better than the price of the resting
complex order. Rule 5.9 (related to
exposure of orders on the Exchange)
does not apply to executions of RFC
orders. The System cancels an RFC
order if it cannot execute. This
provision provides that RFC orders must
execute in accordance with the same
priority principles that apply to all other
complex orders on the Exchange, which
protects Priority Customer orders in the
simple book and COB and prohibits
trades through prices available in the
book.
• An RFC order may only be entered
in the standard increment applicable to
the class under Rule 5.4(b). Therefore,
RFC orders may only be submitted in
the same increments as all other
complex orders.
• For purposes of proposed
subparagraph (D), an SPX or VIX
options combo order is a two-legged
order with one leg to purchase (sell)
SPX or VIX calls and another leg to sell
(purchase) the same number of SPX or
13 Rule 5.33(f)(2) requires complex orders, which
would include an RFC order, which by definition
contains two option legs, to execution only if the
execution price: At a net price: (i) That would cause
any component of the complex strategy to be
executed at a price of zero; (ii) worse than the
synthetic best bid or offer (‘‘SBBO’’) or equal to the
SBBO when there is a Priority Customer Order at
the SBBO, except all-or-none complex orders may
only execute at prices better than the SBBO; (iii)
that would cause any component of the complex
strategy to be executed at a price worse than the
individual component prices on the Simple Book;
(iv) worse than the price that would be available if
the complex order Legged into the Simple Book; or
(v) that would cause any component of the complex
strategy to be executed at a price ahead of a Priority
Customer Order on the Simple Book without
improving the BBO of at least one component of the
complex strategy.
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VIX, respectively, puts with the same
expiration date and strike price.
• For purposes of proposed
subparagraph (D), an exchange of
options contracts for related futures
positions is a transaction entered into by
market participants seeking to swap
option positions with related futures
positions with related exposures.
(a) A related futures position is a
position in a futures contract with either
the same underlying as or a high degree
of price correlation to the underlying of
the option combo in the RFC order so
that execution of the option combos in
the RFC order would serve as an
appropriate hedge for the related future
positions.
(b) In an exchange of contracts for
related positions, one party(ies) must be
the buyer(s) of (or the holder(s) of the
long market exposure associated with)
the options positions and the seller(s) of
corresponding futures contracts and the
other party(ies) must be the seller(s) of
(or holder(s) of the short market
exposure associated with) the options
positions and the buyer(s) of the
corresponding futures contracts.14 The
quantity of the option contracts
executed as part of the RFC order must
correlate to the quantity represented by
the related futures position portion of
the exchange.
• An RFC order may be executed only
during Regular Trading Hours and
contemporaneously with the execution
of the related futures position portion of
the exchange.
• The transaction involving the
related futures position of the exchange
must comply with all applicable rules of
the designated contract market on
which the futures are listed for trading.
The Exchange understands from
customers that the need to reduce risk
is prevalent in VIX and SPX based on
current market conditions, and have
corresponding futures that could make
these exchanges possible. For example,
Cboe Futures Exchange LLC (‘‘CFE’’)
permit these types of exchanges with
respect to VIX futures pursuant to CFE
Rule 414.15 The proposed rule will
require that the executing TPH identify
these crosses as related to an exchange
for related positions. As a result, the
Exchange’s Regulatory Division has put
in place a regulatory review plan that
14 As proposed, one side of the cross will consist
of one party, and the other side may consist of
multiple parties.
15 Currently, CME, which lists futures that
correspond to SPX options, does not offer similar
exchange opportunities. If CME implements a rule
to permit them, the proposed rule change will
permit TPHs to similar use RFC orders to swap
exposure with corresponding futures that transact
pursuant to CME’s rules.
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will permit it to ensure any RFC orders
that are executed are done in
conjunction with an exchange of
contract for related positions as required
by the proposed rule.
Allowing TPHs, and particularly
market-makers, to exchange synthetic
futures (long (short) call, short (long)
put—combos) for listed futures would
replicate functionality that was
previously available while Cboe was
operating with an open outcry
environment and would provide them
with needed relief from the effect of the
current exposure method (‘‘CEM’’) on
the options market. The Exchange
believes there are four reasons that make
the proposed rule change for VIX and
SPX products necessary and appropriate
to maintain fair and orderly markets.
First, existing margin models do not
fully recognize similar risks present in
VIX and SPX derivatives positions held
by the Exchange’s liquidity providing
community. This results in an
overestimation of risk causing Clearing
TPHs to require out-sized margin
deposits from their market-maker
clients, which restricts the liquidity
market-makers can provide to the
markets. Second, because the Clearing
TPHs carrying these positions are bankowned broker/dealers they are subject to
further bank regulatory capital
requirements pursuant to CEM, which
result in these additional punitive
capital requirements being passed on to
their market-maker clients.16 Third, as
noted above, the Exchange’s necessary
response to the novel coronavirus global
pandemic caused the Exchange to
suspend open outcry trading, which has
temporarily eliminated one method of
executing necessary position reducing
trades in VIX and SPX options on the
trading floor. Finally, the historic levels
of market volatility has made providing
liquidity in VIX and SPX options
immensely more challenging. The
execution of options trades through in
an electronic trading environment
independent of the underlying futures
hedge introduces additional risk to
these transactions, which further
reduces available liquidity a liquidity
provider may provide to the market.
The Exchange believes the proposed
rule change to make available
functionality that will allow liquidity
providers to execute trades tied to the
underlying future (i.e. ‘‘delta-neutral’’)
in a substantially similar manner as they
were able to do on the trading floor will
considerably reduce the risk inherent in
16 See Letter from Cboe, New York Stock
Exchange, and Nasdaq, Inc., to the Honorable
Randal Quarles, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System,
March 18, 2020.
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trying to maintain a hedged portfolio.
The combination of these four factors is
negatively impacting the market-making
community, which is reducing liquidity
available in an extremely volatile
market, which is when the market needs
this liquidity the most. The Exchange
believes the proposed rule change will
temporarily reduce existing
inefficiencies that have resulted from
closure of the trading floor which will
free up liquidity providers’ much
needed capital, which will benefit the
entire market and all investors.
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.17 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 18 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) 19 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes the proposed
rule change 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. The
proposed rule change will temporarily
provide liquidity providers and other
market participants with the ability to
exchange SPX and VIX options
positions with corresponding futures
positions electronically in a
substantially similar manner as they
were able to do when the trading floor
was open. These exchange allow market
participants to reduce options positions
in their hedged portfolios while
maintain the same risk exposure, which
would reduce the necessary capital
associated with those positions and
17 15
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
19 Id.
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permit them to provide more liquidity
in the market. This additional liquidity
may result in tighter spreads and more
execution opportunities, which benefits
all investors, particularly in the current
volatile markets.
The Exchange believes that its
proposal is also consistent with the Act
in that it seeks to mitigate the
potentially negative effects of the bank
capital requirements on liquidity in the
VIX and SPX markets. As described
above, current regulatory capital
requirements could potentially impede
efficient use of capital and undermine
the critical liquidity role that MarketMakers and other liquidity providers
play in the SPX and VIX options market
by limiting the amount of capital
Clearing TPHs (‘‘CTPHs’’) allocate to
clearing member transactions.
Specifically, the rules may cause CTPHs
to impose stricter position limits on
their clearing members. In turn, this
could force Market-Makers to reduce the
size of their quotes and result in
reduced liquidity in the market. The
Exchange believes that permitting TPHs
to reduce options positions in SPX and
VIX options that will permit them to
maintain a hedged portfolio would
likely contribute to the availability of
liquidity in the SPX and VIX options
market and help ensure that these
markets retain their competitive
balance. The Exchange believes that the
proposed rule would serve to protect
investors by helping to ensure
consistent continued depth of liquidity,
particularly given current market
conditions when liquidity is needed the
most by investors.
The Exchange also believes the
proposed rule change is consistent with
the Act, because the proposed
procedure is consistent with
transactions that were otherwise
permitted on the trading floor. The
proposed rule would provide an
electronic mechanism to replicate a
process that was used on the trading
floor. The proposed rule change
imposes similar priority requirements to
those in open outcry, which will protect
Priority Customer orders and orders on
top of the book that comprise the BBO.
Additionally, the proposed rule change
requires RFCs to execute in the same
increments as all other complex orders.
While these orders were exposed on the
trading floor, the Exchange observed
that market participants generally
deferred their allocations to permit a
clean cross, as that is necessary for these
transactions to achieve their intended
effect. Because these orders were
generally not broken up on the trading
floor, and because the purpose of these
trades is unrelated to profits and losses
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17:20 Mar 25, 2020
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(making the price at which the
transaction is executed relatively
unimportant like competitive trades),
the Exchange believes it is appropriate
to not expose these orders in an
electronic setting. The Exchange
believes the proposed rule change,
which is limited to two classes the
Exchange believes are being
significantly impacted by the inability
to execute these crosses, and to option
orders that qualify as combos tied to
related futures positions, is narrowly
tailored for the specific purpose of
facilitating the ability of liquidity
providers to reduce positions requiring
significant capital as a result of current
bank regulatory capital requirements
and the current historic levels of market
volatility. The Exchange believes the
proposed rule change will protect
investors by helping to ensure
continued depth of liquidity in the SPX
and VIX options market.
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, RFC orders
will be available to all market
participants. As discussed above, while
the proposed rule change is directed at
market-makers, all market participants
may use these orders in the same
manner as long as all criteria of the
proposed rule are satisfied. The
Exchange does not believe the proposed
rule change will impose any burden on
intermarket competition, as it will apply
only to products currently listed on the
Exchange. Additionally, the proposed
order is intended to accommodate
riskless transactions for which parties
are not seeking price improvement, but
rather looking to swap risk exposure to
free up capital that will permit those
parties to continue to provide liquidity
to the market, and thus is not intended
to have a competitive impact.
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
The Exchange has filed the proposed
rule change pursuant to Section
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
17133
19(b)(3)(A)(iii) of the Act 20 and Rule
19b–4(f)(6) thereunder.21 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days from the date on which it
was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 22 and Rule 19b–4(f)(6)
thereunder.23
A proposed rule change filed under
Rule 19b–4(f)(6) 24 normally does not
become operative for 30 days after the
date of the filing. However, pursuant to
Rule 19b–4(f)(6)(iii),25 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposed rule change may become
operative immediately. Given current
market conditions that have created
historic levels of volatility, the
Exchange believes the proposed rule
change will help it maintain fair and
orderly markets by providing an
electronic avenue for market
participants, particularly liquidity
providers, to continue to provide
liquidity to the VIX and SPX markets.
Additionally, the Exchange understands
market participants generally engage in
these attempts to reduce their options
positions in connection with the thirdFriday of the month expirations, as well
as part of their monthly capital
calculations. The Exchange also
understands that in connection with
bank capital regulatory requirements,
CTPHs recalculate their leverage ratios
at the end of each calendar quarter,
which could result in their need to add
capital based on their clients’ positions
and further reduce availability liquidity.
Waiver of the operative delay would
permit TPHs to engage in these
transactions in connection with the
March 2020 expiration and expected
first quarter CTPH capital recalculation,
20 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
22 15 U.S.C. 78s(b)(3)(A).
23 17 CFR 240.19b–4(f)(6). Pursuant to Rule 19b–
4(f)(6)(iii) under the Act, the Exchange is required
to give the Commission written notice of its intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
24 17 CFR 240.19b–4(f)(6).
25 17 CFR 240.19b–4(f)(6)(iii).
21 17
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which could permit continued liquidity
and a fair and orderly market. As
discussed above, the proposed rule
change would apply temporarily, and
only to two exclusively listed index
option classes, during the time the
trading floor is unavailable for open
outcry trading. Waiver of the operative
delay would allow the proposed
changes, which are designed to help
maintain fair and orderly markets, to be
in effect immediately. For these reasons,
the Commission believes that waiver of
the 30-day operative delay is consistent
with the protection of investors and the
public interest. Accordingly, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.26
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:
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–023, and
should be submitted on or before April
16, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06291 Filed 3–25–20; 8:45 am]
BILLING CODE 8011–01–P
lotter on DSKBCFDHB2PROD with NOTICES
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–2020–023 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
2020.
• 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–2020–023. 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
26 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
VerDate Sep<11>2014
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Sunshine Act Meeting; Cancellation
FEDERAL REGISTER CITATION OF PREVIOUS
ANNOUNCEMENT: 85 FR 16177, March 20,
PREVIOUSLY ANNOUNCED TIME AND DATE OF
THE MEETING: Tuesday, March 24, 2020
at 1:30 p.m.
The Closed
Meeting scheduled for Tuesday, March
24, 2020 at 1:30 p.m., has been
cancelled.
CHANGES IN THE MEETING:
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 24, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–06489 Filed 3–24–20; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88457; File No. SR–GEMX–
2020–07]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Related to the Removal of
Obsolete Listing Rules
March 23, 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 March 10,
2020, Nasdaq GEMX, LLC (‘‘GEMX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Rules at Options 2, Options Market
Participants; Options 3, Section 2, Units
of Trading and Meaning of Premium
Quotes and Orders; Options 3, Section
3, Minimum Trading Increments; and
Options 3, Section 15, Simple Order
Risk Protections. Additionally, the
Exchange proposes to add new sections
at General 9 and Options 4B and reserve
those sections.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqgemx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
27 17
PO 00000
CFR 200.30–3(a)(12), (59).
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2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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[Federal Register Volume 85, Number 59 (Thursday, March 26, 2020)]
[Notices]
[Pages 17129-17134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06291]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88447; File No. SR-CBOE-2020-023]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Rule 5.24
March 20, 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 March 20, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 5.24. The text of the proposed rule change is provided
below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 5.24. Disaster Recovery
(a)-(d) No change.
(e) Loss of Trading Floor. If the Exchange trading floor becomes
inoperable, the Exchange will continue to operate in a screen-based
only environment using a floorless configuration of the System that is
operational while the trading floor facility is inoperable. The
Exchange will operate using this configuration only until the
Exchange's trading floor facility is operational. Open outcry trading
will not be available in the event the trading floor becomes
inoperable, except in accordance with paragraph (2) below and pursuant
to Rule 5.26, as applicable.
(1) Applicable Rules. In the event that the trading floor becomes
inoperable, trading will be conducted pursuant to all applicable System
Rules, except that open outcry Rules will not be in force, including
but not limited to the Rules (or applicable portions of the Rules) in
Chapter 5, Section G, and as follows (subparagraphs (A) through ([C]D)
will until May 15, 2020):
(A) No change.
(B) with respect to complex orders in any exclusively listed index
option class:
(1) Notwithstanding Rule 5.4(b), the minimum increment for bids and
offers on complex orders with any ratio equal to or greater than one-
to-twenty-five (0.04) and equal to or less than twenty-
[[Page 17130]]
five-to-one (25.00) is $0.01 or greater, which may be determined by the
Exchange on a class-by-class basis, and the legs may be executed in
$0.01 increments; and
(2) notwithstanding the definition of ``complex order'' in Rule
1.1, for purposes of Rule 5.33, the term ``complex order'' means a
complex order with any ratio equal to or greater than one-to-twenty-
five (0.04) and equal to or less than twenty-five-to-one (25.00); [and]
([3]C) the contract volume a Market-Maker trades electronically
during a time period in which the Exchange operates in a screen-based
only environment will be excluded from determination of whether a
Market-Maker executes more than 20% of its contract volume
electronically in an appointed class during any calendar quarter, and
thus is subject to the continuous electronic quoting obligation, as set
forth in Rule 5.52(d)[.]; and
(D) a TPH may execute a ``Related Futures Cross'' or ``RFC'' order,
which is comprised of an SPX or VIX option combo order coupled with a
contra-side order or orders totaling an equal number of option combo
orders, which is identified to the Exchange as being part of an
exchange of option contracts for related futures positions. For
purposes of RFC orders:
(1) In order to execute an RFC order:
(a) Until the time when System functionality described in
subparagraph (b) is available, a TPH may execute an RFC order without
exposure on the Exchange by inputting the execution into the Exchange's
Clearing Editor; and
(b) at the time when System functionality is available, a TPH must
submit the RFC order to the System, which may execute automatically on
entry without exposure.
(2) A TPH may execute an RFC order pursuant to subparagraph (1)
above only if: (a) Each option leg executes at a price that complies
with Rule 5.33(f)(2), provided that no option leg executes at the same
price as a Priority Customer Order in the Simple Book; (b) each option
leg executes at a price at or between the NBBO for the applicable
series; and (c) the execution price is better than the price of any
complex order resting in the COB, unless the RFC order is a Priority
Customer Order and the resting complex order is a non-Priority Customer
Order, in which case the execution price may be the same as or better
than the price of the resting complex order. Rule 5.9 (related to
exposure of orders on the Exchange) does not apply to executions of RFC
orders. The System cancels an RFC order if it cannot execute.
(3) An RFC order may only be entered in the standard increment
applicable to the class under Rule 5.4(b).
(4) For purposes of this subparagraph (D), an SPX or VIX options
combo order is a two-legged order with one leg to purchase (sell) SPX
or VIX calls and another leg to sell (purchase) the same number of SPX
or VIX, respectively, puts with the same expiration date and strike
price.
(5) For purposes of this subparagraph (D), an exchange of option
contracts for related futures positions is a transaction entered into
by market participants seeking to swap option positions with related
futures positions with related exposures.
(a) A related futures position is a position in a futures contract
with either the same underlying as or a high degree of price
correlation to the underlying of the option combo in the RFC order so
that execution of the option combos in the RFC order would serve as an
appropriate hedge for the related future positions.
(b) In an exchange of contracts for related positions, one
party(ies) must be the buyer(s) of (or the holder(s) of the long market
exposure associated with) the options positions and the seller(s) of
corresponding futures contracts and the other party(ies) must be the
seller(s) of (or holder(s) of the short market exposure associated
with) the options positions and the buyer(s) of the corresponding
futures contracts. The quantity of the option contracts executed as
part of the RFC order must correlate to the quantity represented by the
related futures position portion of the exchange.
(6) An RFC order may be executed only during Regular Trading Hours
and contemporaneously with the execution of the related futures
position portion of the exchange.
(7) The transaction involving the related futures position of the
exchange must comply with all applicable rules of the designated
contract market on which the futures are listed for trading.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 5.24 regarding the Exchange's
business continuity and disaster recovery plans. Rule 5.24 describes
which Trading Permit Holders (``TPHs'') are required to connect to the
Exchange's backup systems as well as certain actions the Exchange may
take as part of its business continuity plans so that it may maintain
fair and orderly markets if unusual circumstances occurred that could
impact the Exchange's ability to conduct business. This includes what
actions the Exchange would take if its trading floor became inoperable.
Specifically, Rule 5.24(e) states if the Exchange trading floor becomes
inoperable, the Exchange will continue to operate in a screen-based
only environment using a floorless configuration of the System that is
operational while the trading floor facility is inoperable. The
Exchange would operate using that configuration only until the
Exchange's trading floor facility became operational. Open outcry
trading would not be available in the event the trading floor becomes
inoperable.\3\ Rule 5.24(e)(1) also currently states in the event that
the trading floor becomes inoperable, trading will be conducted
pursuant to all applicable System Rules, except that open outcry Rules
would not be in force, including but not limited to the Rules (or
applicable portions) in Chapter 5, Section G,\4\ and that all non-
[[Page 17131]]
trading rules of the Exchange would continue to apply.\5\ The Exchange
recently proposed additional exceptions to Rules that would not apply
during a time in which the trading floor in inoperable.\6\
---------------------------------------------------------------------------
\3\ Pursuant to Rule 5.26, the Exchange may enter into a back-up
trading arrangement with another exchange, which could allow the
Exchange to use the facilities of a back-up exchange to conduct
trading of certain of its products. The Exchange currently has no
back-up trading arrangement in place with another exchange.
\4\ Chapter 5, Section G of the Exchange's rulebook sets forth
the rules and procedures for manual order handling and open outcry
trading on the Exchange.
\5\ Current Rule 5.24(e)(1)(B)(3) was intended to be Rule
5.24(e)(1)(C), and the proposed rule change corrects that incorrect
subparagraph lettering and numbering.
\6\ See Securities Exchange Act Release No. 88386 (March 13,
2020), 85 FR 15823 (March 19, 2020). The rule changes adopted in
that filing are effective until May 15, 2020, unless extended. See
Rule 5.24(e)(1).
---------------------------------------------------------------------------
As of March 16, 2020, the Exchange suspended open outcry trading to
help prevent the spread of the novel coronavirus and is currently
operating in an all-electronic configuration. While the trading floor
was open, floor brokers executed crosses of option combos (i.e.,
synthetic futures) on the trading floor on behalf of market
participants who were exchanging futures contracts for related options
positions. Market participants enter into these exchanges in order to
swap related exposures. For instance, if a market participant has
positions in VIX options but would prefer to hold a corresponding
position in VIX futures (such as, for example, to reduce margin or risk
related to the option positions), that market participant may swap its
VIX options positions with another market participant(s)'s VIX futures
positions that have corresponding risk exposure.\7\
---------------------------------------------------------------------------
\7\ The transaction between the market participants for the
futures positions occurs in accordance with the rules of the
applicable designated contract market that lists the futures. See,
e.g., Cboe Futures Exchange LLC Rule 414.
---------------------------------------------------------------------------
A key element to these exchanges is that both of the option and
future transactions must occur between the same market participants.
When a floor broker represented the cross of the option contracts on
the trading floor in accordance with applicable rules,\8\ while in-
crowd market participants had the opportunity to bid or offer to
participate on the trade, those participants generally declined to
participate upon hearing that the cross was part of an exchange of
related futures contracts. While not required by the Rules, the Rules
permit in-crowd market participants to decline to accept contracts that
would otherwise be allocated to them.\9\ The Exchange understands these
market participants decline this allocation voluntarily, as they are
aware of the need for market participants to execute these crosses
cleanly for the transfer of risk between participants to be
effective.\10\ These are riskless exchanges that carry no profit or
loss for the market participants that are party to the transactions,
but rather are intended to provide a seamless method for market
participants to reduce margin and capital requirements while
maintaining the same risk exposure within their portfolios.
---------------------------------------------------------------------------
\8\ See Rules 5.85 and 5.87.
\9\ See Rule 5.85(a)(2)(C)(iv).
\10\ Additionally, many market-makers in the crowd that decline
their allocations in these crosses often similarly engage in these
exchanges for similar purposes, so may similarly benefit from the
ability to execute these clean crosses.
---------------------------------------------------------------------------
In response to feedback the Exchange has received from floor
brokers and their customers regarding the inability to complete these
crosses in the current all-electronic environment and the potential
detrimental impact on those market participants as well as the market
as a whole, the Exchange proposes to provide functionality that would
permit TPHs to execute these crosses electronically while the trading
floor is inoperable. Specifically, the Exchange proposes to amend Rule
5.24(e)(1) to provide that in the event that the trading floor becomes
inoperable, trading will be conducted pursuant to all applicable System
Rules, except that open outcry Rules will not be in force, including
but not limited to the Rules (or applicable portions of the Rules) in
Chapter 5, Section G,\11\ and a Trading Permit Holder (``TPH'') may
execute a ``Related Futures Cross'' or ``RFC'' order, which is
comprised of an SPX or VIX option combo order coupled with a contra-
side order or orders totaling an equal number of option combo orders,
which is identified to the Exchange as being part of an exchange of
contracts for related futures positions.
---------------------------------------------------------------------------
\11\ Like the other exceptions recently added to this provision,
the proposed rule change would apply until May 15, 2020. The
Exchange will monitor these transactions while the trading floor is
inoperable. If the trading floor is inoperable beyond May 15, 2020,
based on that review, the Exchange may submit a separate rule filing
to extend the effectiveness of this rule.
---------------------------------------------------------------------------
For purposes of RFC orders:
In order to execute an RFC order:
(a) Until the time when System functionality described in paragraph
(b) is available, a TPH may execute an RFC order without exposure on
the Exchange by inputting the execution into the Exchange's Clearing
Editor; \12\ and
---------------------------------------------------------------------------
\12\ See Rule 6.6.
---------------------------------------------------------------------------
(b) at the time when System functionality is available, a TPH must
submit the RFC order to the System, which may execute automatically on
entry without exposure.
The Exchange believes the functionality described in paragraph (b)
will provide a seamless mechanism to execute these crosses, as it will
provide for orders to be systematized and price protections will be
systematically enforced. The Exchange needs a small amount of time to
implement this functionality, and the functionality in paragraph (a)
will provide an intermediate method for TPHs to effect these crosses
while the Exchange completes the necessary System work, which it
expects to occur the week of March 23.
A TPH may execute an RFC order pursuant to the preceding
bulleted paragraph only if: (a) Each option leg executes at a price
that complies with Rule 5.33(f)(2),\13\ provided that no option leg
executes at the same price as a Priority Customer Order in the Simple
Book; (b) each option leg executes at a price at or between the
national best bid or offer (``NBBO'') for the applicable series; and
(c) the execution price is better than the price of any complex order
resting in the complex order book (``COB''), unless the RFC order is a
Priority Customer Order and the resting complex order is a non-Priority
Customer Order, in which case the execution price may be the same as or
better than the price of the resting complex order. Rule 5.9 (related
to exposure of orders on the Exchange) does not apply to executions of
RFC orders. The System cancels an RFC order if it cannot execute. This
provision provides that RFC orders must execute in accordance with the
same priority principles that apply to all other complex orders on the
Exchange, which protects Priority Customer orders in the simple book
and COB and prohibits trades through prices available in the book.
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\13\ Rule 5.33(f)(2) requires complex orders, which would
include an RFC order, which by definition contains two option legs,
to execution only if the execution price: At a net price: (i) That
would cause any component of the complex strategy to be executed at
a price of zero; (ii) worse than the synthetic best bid or offer
(``SBBO'') or equal to the SBBO when there is a Priority Customer
Order at the SBBO, except all-or-none complex orders may only
execute at prices better than the SBBO; (iii) that would cause any
component of the complex strategy to be executed at a price worse
than the individual component prices on the Simple Book; (iv) worse
than the price that would be available if the complex order Legged
into the Simple Book; or (v) that would cause any component of the
complex strategy to be executed at a price ahead of a Priority
Customer Order on the Simple Book without improving the BBO of at
least one component of the complex strategy.
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An RFC order may only be entered in the standard increment
applicable to the class under Rule 5.4(b). Therefore, RFC orders may
only be submitted in the same increments as all other complex orders.
For purposes of proposed subparagraph (D), an SPX or VIX
options combo order is a two-legged order with one leg to purchase
(sell) SPX or VIX calls and another leg to sell (purchase) the same
number of SPX or
[[Page 17132]]
VIX, respectively, puts with the same expiration date and strike price.
For purposes of proposed subparagraph (D), an exchange of
options contracts for related futures positions is a transaction
entered into by market participants seeking to swap option positions
with related futures positions with related exposures.
(a) A related futures position is a position in a futures contract
with either the same underlying as or a high degree of price
correlation to the underlying of the option combo in the RFC order so
that execution of the option combos in the RFC order would serve as an
appropriate hedge for the related future positions.
(b) In an exchange of contracts for related positions, one
party(ies) must be the buyer(s) of (or the holder(s) of the long market
exposure associated with) the options positions and the seller(s) of
corresponding futures contracts and the other party(ies) must be the
seller(s) of (or holder(s) of the short market exposure associated
with) the options positions and the buyer(s) of the corresponding
futures contracts.\14\ The quantity of the option contracts executed as
part of the RFC order must correlate to the quantity represented by the
related futures position portion of the exchange.
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\14\ As proposed, one side of the cross will consist of one
party, and the other side may consist of multiple parties.
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An RFC order may be executed only during Regular Trading
Hours and contemporaneously with the execution of the related futures
position portion of the exchange.
The transaction involving the related futures position of
the exchange must comply with all applicable rules of the designated
contract market on which the futures are listed for trading.
The Exchange understands from customers that the need to reduce
risk is prevalent in VIX and SPX based on current market conditions,
and have corresponding futures that could make these exchanges
possible. For example, Cboe Futures Exchange LLC (``CFE'') permit these
types of exchanges with respect to VIX futures pursuant to CFE Rule
414.\15\ The proposed rule will require that the executing TPH identify
these crosses as related to an exchange for related positions. As a
result, the Exchange's Regulatory Division has put in place a
regulatory review plan that will permit it to ensure any RFC orders
that are executed are done in conjunction with an exchange of contract
for related positions as required by the proposed rule.
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\15\ Currently, CME, which lists futures that correspond to SPX
options, does not offer similar exchange opportunities. If CME
implements a rule to permit them, the proposed rule change will
permit TPHs to similar use RFC orders to swap exposure with
corresponding futures that transact pursuant to CME's rules.
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Allowing TPHs, and particularly market-makers, to exchange
synthetic futures (long (short) call, short (long) put--combos) for
listed futures would replicate functionality that was previously
available while Cboe was operating with an open outcry environment and
would provide them with needed relief from the effect of the current
exposure method (``CEM'') on the options market. The Exchange believes
there are four reasons that make the proposed rule change for VIX and
SPX products necessary and appropriate to maintain fair and orderly
markets.
First, existing margin models do not fully recognize similar risks
present in VIX and SPX derivatives positions held by the Exchange's
liquidity providing community. This results in an overestimation of
risk causing Clearing TPHs to require out-sized margin deposits from
their market-maker clients, which restricts the liquidity market-makers
can provide to the markets. Second, because the Clearing TPHs carrying
these positions are bank-owned broker/dealers they are subject to
further bank regulatory capital requirements pursuant to CEM, which
result in these additional punitive capital requirements being passed
on to their market-maker clients.\16\ Third, as noted above, the
Exchange's necessary response to the novel coronavirus global pandemic
caused the Exchange to suspend open outcry trading, which has
temporarily eliminated one method of executing necessary position
reducing trades in VIX and SPX options on the trading floor. Finally,
the historic levels of market volatility has made providing liquidity
in VIX and SPX options immensely more challenging. The execution of
options trades through in an electronic trading environment independent
of the underlying futures hedge introduces additional risk to these
transactions, which further reduces available liquidity a liquidity
provider may provide to the market.
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\16\ See Letter from Cboe, New York Stock Exchange, and Nasdaq,
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of
the Board of Governors of the Federal Reserve System, March 18,
2020.
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The Exchange believes the proposed rule change to make available
functionality that will allow liquidity providers to execute trades
tied to the underlying future (i.e. ``delta-neutral'') in a
substantially similar manner as they were able to do on the trading
floor will considerably reduce the risk inherent in trying to maintain
a hedged portfolio. The combination of these four factors is negatively
impacting the market-making community, which is reducing liquidity
available in an extremely volatile market, which is when the market
needs this liquidity the most. The Exchange believes the proposed rule
change will temporarily reduce existing inefficiencies that have
resulted from closure of the trading floor which will free up liquidity
providers' much needed capital, which will benefit the entire market
and all investors.
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.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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The Exchange believes the proposed rule change 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. The proposed rule change will temporarily provide
liquidity providers and other market participants with the ability to
exchange SPX and VIX options positions with corresponding futures
positions electronically in a substantially similar manner as they were
able to do when the trading floor was open. These exchange allow market
participants to reduce options positions in their hedged portfolios
while maintain the same risk exposure, which would reduce the necessary
capital associated with those positions and
[[Page 17133]]
permit them to provide more liquidity in the market. This additional
liquidity may result in tighter spreads and more execution
opportunities, which benefits all investors, particularly in the
current volatile markets.
The Exchange believes that its proposal is also consistent with the
Act in that it seeks to mitigate the potentially negative effects of
the bank capital requirements on liquidity in the VIX and SPX markets.
As described above, current regulatory capital requirements could
potentially impede efficient use of capital and undermine the critical
liquidity role that Market-Makers and other liquidity providers play in
the SPX and VIX options market by limiting the amount of capital
Clearing TPHs (``CTPHs'') allocate to clearing member transactions.
Specifically, the rules may cause CTPHs to impose stricter position
limits on their clearing members. In turn, this could force Market-
Makers to reduce the size of their quotes and result in reduced
liquidity in the market. The Exchange believes that permitting TPHs to
reduce options positions in SPX and VIX options that will permit them
to maintain a hedged portfolio would likely contribute to the
availability of liquidity in the SPX and VIX options market and help
ensure that these markets retain their competitive balance. The
Exchange believes that the proposed rule would serve to protect
investors by helping to ensure consistent continued depth of liquidity,
particularly given current market conditions when liquidity is needed
the most by investors.
The Exchange also believes the proposed rule change is consistent
with the Act, because the proposed procedure is consistent with
transactions that were otherwise permitted on the trading floor. The
proposed rule would provide an electronic mechanism to replicate a
process that was used on the trading floor. The proposed rule change
imposes similar priority requirements to those in open outcry, which
will protect Priority Customer orders and orders on top of the book
that comprise the BBO. Additionally, the proposed rule change requires
RFCs to execute in the same increments as all other complex orders.
While these orders were exposed on the trading floor, the Exchange
observed that market participants generally deferred their allocations
to permit a clean cross, as that is necessary for these transactions to
achieve their intended effect. Because these orders were generally not
broken up on the trading floor, and because the purpose of these trades
is unrelated to profits and losses (making the price at which the
transaction is executed relatively unimportant like competitive
trades), the Exchange believes it is appropriate to not expose these
orders in an electronic setting. The Exchange believes the proposed
rule change, which is limited to two classes the Exchange believes are
being significantly impacted by the inability to execute these crosses,
and to option orders that qualify as combos tied to related futures
positions, is narrowly tailored for the specific purpose of
facilitating the ability of liquidity providers to reduce positions
requiring significant capital as a result of current bank regulatory
capital requirements and the current historic levels of market
volatility. The Exchange believes the proposed rule change will protect
investors by helping to ensure continued depth of liquidity in the SPX
and VIX options market.
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, RFC orders will be available to all market participants.
As discussed above, while the proposed rule change is directed at
market-makers, all market participants may use these orders in the same
manner as long as all criteria of the proposed rule are satisfied. The
Exchange does not believe the proposed rule change will impose any
burden on intermarket competition, as it will apply only to products
currently listed on the Exchange. Additionally, the proposed order is
intended to accommodate riskless transactions for which parties are not
seeking price improvement, but rather looking to swap risk exposure to
free up capital that will permit those parties to continue to provide
liquidity to the market, and thus is not intended to have a competitive
impact.
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6) thereunder.\23\
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\20\ 15 U.S.C. 78s(b)(3)(A)(iii).
\21\ 17 CFR 240.19b-4(f)(6).
\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii)
under the Act, the Exchange is required to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \24\ normally
does not become operative for 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\25\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative immediately. Given current market
conditions that have created historic levels of volatility, the
Exchange believes the proposed rule change will help it maintain fair
and orderly markets by providing an electronic avenue for market
participants, particularly liquidity providers, to continue to provide
liquidity to the VIX and SPX markets. Additionally, the Exchange
understands market participants generally engage in these attempts to
reduce their options positions in connection with the third-Friday of
the month expirations, as well as part of their monthly capital
calculations. The Exchange also understands that in connection with
bank capital regulatory requirements, CTPHs recalculate their leverage
ratios at the end of each calendar quarter, which could result in their
need to add capital based on their clients' positions and further
reduce availability liquidity. Waiver of the operative delay would
permit TPHs to engage in these transactions in connection with the
March 2020 expiration and expected first quarter CTPH capital
recalculation,
[[Page 17134]]
which could permit continued liquidity and a fair and orderly market.
As discussed above, the proposed rule change would apply temporarily,
and only to two exclusively listed index option classes, during the
time the trading floor is unavailable for open outcry trading. Waiver
of the operative delay would allow the proposed changes, which are
designed to help maintain fair and orderly markets, to be in effect
immediately. For these reasons, the Commission believes that waiver of
the 30-day operative delay is consistent with the protection of
investors and the public interest. Accordingly, the Commission hereby
waives the 30-day operative delay and designates the proposal operative
upon filing.\26\
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\24\ 17 CFR 240.19b-4(f)(6).
\25\ 17 CFR 240.19b-4(f)(6)(iii).
\26\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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-2020-023 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-2020-023. 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 offices of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-023, and should be submitted
on or before April 16, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06291 Filed 3-25-20; 8:45 am]
BILLING CODE 8011-01-P
