Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Rule 5.24, 18318-18323 [2020-06723]

Download as PDF 18318 Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION 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–2020–022 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. jbell on DSKJLSW7X2PROD with NOTICES All submissions should refer to File Number SR–CBOE–2020–022. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2020–022 and should be submitted on or before April 22, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.5 J. Matthew DeLesDernier, Assistant Secretary. [Release No. 34–88490; File No. SR–CBOE– 2020–026] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Rule 5.24 March 26, 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 26, 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 in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/CBOELegalRegulatory Home.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. [FR Doc. 2020–06737 Filed 3–31–20; 8:45 am] BILLING CODE 8011–01–P 1 15 5 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 19:42 Mar 31, 2020 2 17 Jkt 250001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00134 Fmt 4703 Sfmt 4703 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 nontrading rules of the Exchange would continue to apply. The Exchange recently proposed additional exceptions to Rules that would not apply during a time in which the trading floor in inoperable.5 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, the 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 See Securities Exchange Act Release Nos. 88386 (March 13, 2020), 85 FR 15823 (March 19, 2020) (SR–CBOE–2020–019); and 88447 (March 20, 2020) (SR–CBOE–2020–023). The rule changes adopted in that filing are effective until May 15, 2020, unless extended. See Rule 5.24(e)(1). E:\FR\FM\01APN1.SGM 01APN1 Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices Exchange facilitated compression forums on the trading floor at the end of each calendar week, month, and quarter in which Trading Permit Holders reduce open positions in series of SPX options in order to mitigate the effects of capital constraints on market participants and help ensure continued depth of liquidity in the SPX options market. Given the recent suspension of open outcry trading, the Exchange proposes to facilitate an electronic process that would permit TPHs to continue to efficiently reduce their open SPX positions and free up capital while the Exchange operates in an allelectronic environment, which is particularly important given current volatile market conditions. SEC Rule 15c3–1 (Net Capital Requirements for Brokers or Dealers) (‘‘Net Capital Rules’’) requires that every registered broker-dealer maintain certain specified minimum levels of capital.6 The Net Capital Rules are designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand, at all times, to meet their financial obligations. Notably, hedged positions, including offsetting futures and options contract positions, result in certain net capital requirement reductions under the Net Capital Rules.7 All Options Clearing Corporation (‘‘OCC’’) clearing members are subject to the Net Capital Rules. However, a subset of clearing members are subsidiaries of U.S. bank holding companies, which, due to their affiliations with their parent U.S. bank holding companies, must comply with additional bank regulatory capital requirements pursuant to rulemaking required under the Dodd– Frank Wall Street Reform and Consumer Protection Act.8 Pursuant to this mandate, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation approved a comprehensive regulatory capital framework for subsidiaries of U.S. bank holding company clearing firms.9 Generally, these rules imposed higher minimum capital requirements, more restrictive capital eligibility standards, and higher asset risk weights 6 17 CFR 240.15c3–1. addition, the Net Capital Rules permit various offsets under which a percentage of an option position’s gain at any one valuation point is allowed to offset another position’s loss at the same valuation point (e.g. vertical spreads). 8 H.R. 4173 (amending section 3(a) of the Securities Exchange Act of 1934 (the ‘‘Act’’) (15 U.S.C. 78c(a))). 9 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity Risk Measurement Standards). jbell on DSKJLSW7X2PROD with NOTICES 7 In VerDate Sep<11>2014 18:31 Mar 31, 2020 Jkt 250001 than were previously mandated for clearing members that are subsidiaries of U.S. bank holding companies under the Net Capital Rules. Furthermore, these rules do not permit deductions for hedged securities or offsetting options positions.10 Rather, capital charges under these standards are based on the aggregate notional value of short positions regardless of offsets. As a result, Clearing Trading Permit Holders (‘‘CTPHs’’) generally must hold substantially more bank regulatory capital than would otherwise be required under the Net Capital Rules.11 The impact of these regulatory capital rules are compounded in the SPX options market due to the large notional value of SPX contracts. The Exchange believes these regulatory capital requirements could impede efficient use of capital and undermine the critical liquidity role that Market-Makers play in the SPX options market by limiting the amount of capital CTPHs can allocate to clearing member transactions. Specifically, these rules may cause CTPHs to impose stricter position limits on their clearing members. These stricter position limits may impact the liquidity Market-Makers might supply in the SPX market,12 which impact may be heightened when markets are volatile, and this impact may be compounded when a CTPH has multiple Market-Maker client accounts, each having largely risk-neutral portfolio holdings.13 10 Many options strategies, including relatively simple strategies often used by retail customers and more sophisticated strategies used by marketmakers and institutions, are risk-limited strategies or options spread strategies that employ offsets or hedges to achieve certain investment outcomes. Such strategies typically involve the purchase and sale of multiple options (and may be coupled with purchases or sales of the underlying assets), executed simultaneously as part of the same strategy. In many cases, the potential market exposure of these strategies is limited and defined. Whereas regulatory capital requirements have historically reflected the risk-limited nature of carrying offsetting positions, these positions may now be subject to large regulatory capital requirements. Various factors, including administration costs; transaction fees; and limited market demand or counterparty interest, however, discourage market participants from closing these positions even though many market participants likely would prefer to close the positions rather than carry them to expiration. 11 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. 12 The Exchange notes Market-Makers participate on approximately 98% of SPX option trades on the Exchange. 13 Several TPHs have indicated to the Exchange that these rules could hamper their ability to provide consistent liquidity in the current SPX market, and have inquired about the ability engage in compression trading prior to the end of the current quarter. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 18319 The Exchange believes that permitting TPHs to reduce open interest in offsetting SPX options positions in open outcry compression forums has had a beneficial effect on the bank regulatory capital requirements of CTPHs’ parent companies without adversely affecting the quality of the SPX options market. Accordingly, while the Exchange operates in an all-electronic environment, the Exchange proposes to adopt a similar process to occur electronically to encourage the compression of open interest in SPX. The Exchange believes lack of a method to reduce open interest in SPX options in an all-electronic environment may reduce liquidity in the market, which recently has experienced historic levels of volatility and is when the market needs this liquidity the most. Without an electronic compression forum, TPHs seeking to reduce open interest in SPX options for regulatory capital purposes could trade out of positions as they would trade any open positions. However, the Exchange understands that wide-scale reduction of open interest in SPX options in such a manner is burdensome. First, the range of positions held by different TPHs in SPX varies greatly. In some cases, a TPH may hold positions in thousands of series of SPX. The Exchange believes providing a forum for TPHs to periodically reduce open interest in SPX options would likely contribute additional liquidity and continued competitiveness to the SPX market. In addition, the Exchange believes that the proposed rule change will promote more efficient capital deployment in light of the regulatory capital requirements rules and help ensure continued depth of liquidity in the SPX options market during continued market volatility. The proposed rule change adopts Rule 5.24(e)(1)(E) to permit electronic compression trades during times when the trading floor is inoperable.14 The proposed electronic compression forum will function in a substantially similar manner as the open outcry compression forum functions pursuant to Rule 5.88. In general, the process would permit TPHs to submit lists of open positions to the Exchange that they wish to close against opposing (long/short) positions of other TPHs, which the Exchange would then aggregate into a single list 14 Like the other exceptions recently added to Rule 5.24(e)(1), 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. E:\FR\FM\01APN1.SGM 01APN1 18320 Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES that would allow TPHs to more easily identify those positions with counterparty interest on the Exchange. Unlike open outcry compression forums, for which Rule 5.88 specifies the times at which TPHs may submit these lists, the Exchange will determine when electronic compression forums may occur.15 The Exchange will provide TPHs with reasonable, sufficient notice of the timing of electronic compression forums, and the associated times at which lists must be submitted. While the Exchange intends to offer electronic compression forums in connection with the upcoming end-of-quarter, the Exchange believes flexibility regarding when to offer electronic compression forums will permit it to react to market conditions and facilitate TPHs’ reduction of SPX open interest in response to volatility as necessary. As is the case with open outcry compression forums, all TPHs (or their CTPHs on their behalf) may submit position lists for participation in electronic compression forums, and receive lists of positions submitted to the Exchange. Additionally, a TPH may request to have its name withheld from the list the Exchange makes available to the TPHs that submit a position list, and the list will not indicate which TPHs hold which positions. TPHs that do not want to be listed as having contributed compression-list positions may inform the Exchange and will not be included in the listed TPHs. The Exchange believes this process to identify TPHs that seek to close compression-list positions in advance of a compression forum will increase opportunities for TPHs to ultimately close compressionlist positions during a compression forum while, at the same time, providing the opportunity for anonymity. Proposed Rule 5.24(e)(1)(E)(ii) provides that in addition to the information set forth in Rule 5.88(a)(4) with respect to multi-leg positions, the Exchange will, for informational purposes, electronically distribute series positions within a strike range determined by the Exchange to each Trading Permit Holder that submitted compression-list positions to the Exchange.16 The Exchange believes this additional information will provide the 15 See proposed Rule 5.24(e)(1)(E)(i). Pursuant to Rule 1.5, the Exchange will announce the times when TPHs may submit these position lists. 16 For purposes of proposed Rule 5.24(e)(1)(E), the term ‘‘multi-leg position file’’ as used in Rule 5.88 will be replaced with ‘‘position file.’’ The position file will include the information set forth in Rule 5.88(a)(4) for both multi-leg positions and series positions within that Exchange-determined strike range. VerDate Sep<11>2014 18:31 Mar 31, 2020 Jkt 250001 Exchange with sufficient information to create larger packages of positions that may be compressed while operating in an all-electronic environment. Proposed Rule 5.24(e)(1)(E)(iii) describes how trades may be executed in electronic compression forums. Specifically, the proposed rule change provides that in lieu of Rule 5.88(a)(6) (which provides that trades executed in an open outcry compression forum occur in accordance with regular open outcry trading rules, subject to certain exceptions), a Trading Permit Holder may submit an order in SPX option contracts coupled with a contra-side order or orders totaling an equal number of option contracts, which will execute automatically on entry without exposure. For purposes of proposed subparagraph (iii): • A Trading Permit Holder must identify these orders as being part of an electronic compression forum. This is currently required in open outcry compression forums.17 • A Trading Permit Holder may execute a simple order as part of an electronic compression forum only if the execution price: (1) Is not at the same price as a Priority Customer order resting in the Book; and (2) is at or between the national best bid or offer (‘‘NBBO’’). Rule 5.9 (related to exposure of orders on the Exchange) does not apply to executions of SPX orders submitted into electronic compression forums. This provision provides that orders submitted into electronic compression forums must execute in accordance with the same priority principles that apply to all other simple orders on the Exchange, which protects Priority Customer orders in the simple book and prohibits trades through prices available in the book. • A Trading Permit Holder may execute a complex order as part of an electronic compression forum only if: (1) Each option leg executes at a price that complies with Rule 5.33(f)(2),18 provided that no option leg executes at 17 See Rule 5.88 5.33(f)(2) requires complex orders to execute only if the execution price: at a net price: (1) That would cause any component of the complex strategy to be executed at a price of zero; (2) 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-ornone complex orders may only execute at prices better than the SBBO; (3) 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; (4) worse than the price that would be available if the complex order Legged into the Simple Book; or (5) 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. 18 Rule PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 the same price as a Priority Customer Order in the Simple Book; (2) each option leg executes at a price at or between the NBBO for the applicable series; and (3) the execution price is better than the price of any complex order resting in the COB, unless the submitted complex 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 SPX orders submitted into electronic compression forums. This provision provides that orders submitted into an electronic compression forum 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. • The System cancels an order submitted for execution in an electronic compression forum if it cannot execute. Therefore, if an order cannot execute in accordance with the execution price and priority requirements in the prior two bulleted paragraphs, it will be cancelled. • Orders may only be submitted for execution in an electronic compression forum only if entered in the standard increment applicable to SPX options pursuant to Rule 5.4. Unlike in open outcry compression forums, in which closing transactions may be executed in pennies, the proposed rule change will require standard increments in order to take advantage of the proposed unexposed execution. • Only closing orders may be executed in electronic compression forums. While open outcry compression forums contemplate that opening orders are permissible in certain circumstances, those orders are generally permitted by responded in the trading crowd. As orders submitted into an electronic compression forum will be done so without exposure, there will be no responses. The primary purpose of compression forum is to permit the closing of open SPX interest, the Exchange believes restricting electronic compression forums is appropriate. The Exchange understands from customers, and SPX Market-Makers in particular, that there is significant need to reduce open interest based on current market conditions. These market participants regularly avail themselves of open outcry compression forums, in which they use the information provided in the Exchange-provided E:\FR\FM\01APN1.SGM 01APN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices position lists to identify potential counterparties that similarly need to close SPX open interest. In accordance with standard open outcry trading rules, a floor broker would represent a cross of orders representing this interest to the trading crowd. While other in-crowd market participants have the opportunity to respond and participate in the transaction, generally the orders represented in the cross execute cleanly against each other. The proposed rule will require that the executing TPH identify these crosses as being submitted as part of an electronic compression forum. As a result, the Exchange’s Regulatory Division intends to put in place a regulatory review plan that will permit it to ensure any SPX orders that are executed pursuant to the proposed rule change are done in accordance with the proposed rule. Providing TPHs, and Market-Makers in particular, with an electronic compression forum 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. As noted above, because some CTPHs carrying these are bank-owned broker/ dealers, those CTPHs 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.19 Additionally, 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 the primary method used by market participants to execute necessary position-reducing trades in SPX options on the trading floor. Finally, the historic levels of market volatility has made providing liquidity in SPX options immensely more challenging. The execution of options trades through electronic trading to close this open SPX interest, as noted above, may be inefficient and ineffective. The Exchange believes the proposed rule change to make available functionality that will allow liquidity providers to execute trades to reduce SPX open interest in a substantially similar manner as they were able to do on the trading floor. These closing transactions will help reduce any potential negative impact on the market19 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. VerDate Sep<11>2014 18:31 Mar 31, 2020 Jkt 250001 making community that may result from Net Capital Rules, which could reduce liquidity available in an extremely volatile market 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 the Exchange expects will free up liquidity providers’ much needed capital, which will benefit the entire market and all investors. Generally, in SPX options (and other classes), the Exchange lists series with narrower strike intervals that are closer to the at-the-money value, and with wider strike intervals that are further from the at-the-money value. The Exchange’s internal listing procedures are intended to balance the need to list sufficient strikes to provide market participants with flexibility to manage their risk with Market-Makers’ quoting obligations. The Exchange understands from Market-Makers that the need to quote in a significant number of series may contribute in part to their challenges in providing liquidity to the market. The Exchange represents it will review its internal listing procedures for SPX options and develop a plan to modify these procedures in an effort to reduce the number of listed strikes in a manner that may permit Market-Makers to further reduce SPX open interest (and thus free up capital to continue to provide liquidity).20 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.21 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 22 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. 20 While SPX options are listed for trading exclusively on Cboe Options, it competes with other listed options, such as options on the SPDR S&P 500 exchange-traded fund. 21 15 U.S.C. 78f(b). 22 15 U.S.C. 78f(b)(5). PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 18321 Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 23 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, 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 reduce open interest in SPX options electronically in a substantially similar manner as they were able to do when the trading floor was open. The proposed flexibility with respect to when the Exchange will facilitate electronic compression forums will permit the Exchange to react to market conditions and facilitate TPHs’ reduction of SPX open interest in response to volatility as necessary. Electronic compression forums will allow market participants to reduce options positions in order to reduce the necessary capital associated with those positions and 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 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 options market by limiting the amount of capital 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 options will permit to contribute to the availability of liquidity in the SPX 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, 23 Id. E:\FR\FM\01APN1.SGM 01APN1 18322 Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES 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 orders submitted into electronic compression forums to execute in the same increments as all other orders in an electronic environment. 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), but rather to reduce open interest, 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 one class the Exchange believes is being significantly impacted by the inability to execute these crosses (and the one class in which open outcry compression forums occurred), 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 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, as electronic compression forums will be available to all market participants with SPX open VerDate Sep<11>2014 18:31 Mar 31, 2020 Jkt 250001 interest. As discussed above, while the proposed rule change is directed at market-makers, all market participants may participate in these forums 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 SPX options, which are currently listed for trading only on the Exchange. Additionally, open outcry compression forums were limited to SPX options. In addition, the proposed rule change is intended to reduce open interest are not seeking price improvement, but rather looking to reduce open interest 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 24 and Rule 19b–4(f)(6) thereunder.25 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 26 and Rule 19b–4(f)(6) thereunder.27 A proposed rule change filed under Rule 19b–4(f)(6) 28 normally does not become operative for 30 days after the date of the filing. However, pursuant to 24 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 26 15 U.S.C. 78s(b)(3)(A). 27 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. 28 17 CFR 240.19b–4(f)(6). 25 17 PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 Rule 19b–4(f)(6)(iii),29 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 SPX markets. The Exchange states its belief that market participants generally engage in the above-explained attempts to reduce their options positions at the end of calendar quarters, when the Exchange understands CTPHs recalculate their leverage ratios in connection with bank capital regulatory requirements, 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 expected first quarter CTPH capital recalculation, which could permit continued liquidity and a fair and orderly market. As discussed above, the proposed rule change would apply temporarily, and only to one exclusively listed index option class, 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.30 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings 29 17 CFR 240.19b–4(f)(6)(iii). 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). 30 For E:\FR\FM\01APN1.SGM 01APN1 Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices 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: [FR Doc. 2020–06723 Filed 3–31–20; 8:45 am] Electronic Comments 60-Day Notice of Proposed Information Collection: Request for Advisory Opinion • 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–2020–026 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. jbell on DSKJLSW7X2PROD with NOTICES For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 J. Matthew DeLesDernier, Assistant Secretary. All submissions should refer to File Number SR–CBOE–2020–026. 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–2020–026, and should be submitted on or before April 22, 2020. VerDate Sep<11>2014 18:31 Mar 31, 2020 Jkt 250001 BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 11047] Notice of request for public comment. ACTION: The Department of State is seeking Office of Management and Budget (OMB) approval for the information collection described below. In accordance with the Paperwork Reduction Act of 1995, we are requesting comments on this collection from all interested individuals and organizations. The purpose of this notice is to allow 60 days for public comment preceding submission of the collection to OMB. DATES: The Department will accept comments from the public up to June 1, 2020. ADDRESSES: You may submit comments by any of the following methods: • Web: Persons with access to the internet may comment on this notice by going to www.Regulations.gov. You can search for the document by entering ‘‘Docket Number: DOS–2020–0007’’ in the Search field. Then click the ‘‘Comment Now’’ button and complete the comment form. • Email: DDTCPublicComments@ state.gov, ATTN: Advisory Opinion Form. • Regular Mail: Send written comments to: Directorate of Defense Trade Controls, Department of State; 2401 E St. NW, Suite H1205, Washington, DC 20522. You must include the DS form number (if applicable), information collection title, and the OMB control number in any correspondence. FOR FURTHER INFORMATION CONTACT: Direct requests for additional information regarding the collection listed in this notice, including requests for copies of the proposed collection instrument and supporting documents, to Andrea Battista, Directorate of Defense Trade Controls, Department of State, who may be reached at BattistaAl@state.gov or 202–663–3136 SUMMARY: 31 17 PO 00000 CFR 200.30–3(a)(12), (59). Frm 00139 Fmt 4703 Sfmt 4703 18323 (please include subject line ‘‘ATTN: Advisory Opinion Form’’). SUPPLEMENTARY INFORMATION: • Title of Information Collection: Request for Advisory Opinion. • OMB Control Number: 1405–0174. • Type of Request: Revision of a Currently Approved Collection. • Originating Office: T/PM/DDTC. • Form Number: DS–7786. • Respondents: Individuals and companies engaged in the business of exporting or temporarily importing defense articles or defense services. • Estimated Number of Respondents: 125. • Estimated Number of Responses: 125. • Average Time Per Response: 2 hours. • Total Estimated Burden Time: 250 hours. • Frequency: On occasion. • Obligation to Respond: Voluntary. We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary for the proper functions of the Department. • Evaluate the accuracy of our estimate of the time and cost burden for this proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including the use of automated collection techniques or other forms of information technology. Please note that comments submitted in response to this Notice are public record. Before including any detailed personal information, you should be aware that your comments as submitted, including your personal information, will be available for public review. Abstract of Proposed Collection The Directorate of Defense Trade Controls (DDTC), located in the Political-Military Affairs Bureau of the Department of State, has the principal mission of licensing the export and temporary import of defense articles or defense services as enumerated in the United States Munitions List (USML), and to ensure that the sale, transfer, or brokering of such items are in the interest of United States national security and foreign policy. Sections 126.9 and 129.9 of the International Traffic in Arms Regulations (ITAR, 22 CFR 120–130) may be used by entities and individuals involved in the brokering, manufacture, export, and temporary import of defense E:\FR\FM\01APN1.SGM 01APN1

Agencies

[Federal Register Volume 85, Number 63 (Wednesday, April 1, 2020)]
[Notices]
[Pages 18318-18323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06723]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88490; File No. SR-CBOE-2020-026]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Rule 5.24

March 26, 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 26, 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 in 
Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    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-
trading rules of the Exchange would continue to apply. The Exchange 
recently proposed additional exceptions to Rules that would not apply 
during a time in which the trading floor in inoperable.\5\
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    \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\ See Securities Exchange Act Release Nos. 88386 (March 13, 
2020), 85 FR 15823 (March 19, 2020) (SR-CBOE-2020-019); and 88447 
(March 20, 2020) (SR-CBOE-2020-023). 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, the

[[Page 18319]]

Exchange facilitated compression forums on the trading floor at the end 
of each calendar week, month, and quarter in which Trading Permit 
Holders reduce open positions in series of SPX options in order to 
mitigate the effects of capital constraints on market participants and 
help ensure continued depth of liquidity in the SPX options market. 
Given the recent suspension of open outcry trading, the Exchange 
proposes to facilitate an electronic process that would permit TPHs to 
continue to efficiently reduce their open SPX positions and free up 
capital while the Exchange operates in an all-electronic environment, 
which is particularly important given current volatile market 
conditions.
    SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) 
(``Net Capital Rules'') requires that every registered broker-dealer 
maintain certain specified minimum levels of capital.\6\ The Net 
Capital Rules are designed to protect securities customers, 
counterparties, and creditors by requiring that broker-dealers have 
sufficient liquid resources on hand, at all times, to meet their 
financial obligations. Notably, hedged positions, including offsetting 
futures and options contract positions, result in certain net capital 
requirement reductions under the Net Capital Rules.\7\
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    \6\ 17 CFR 240.15c3-1.
    \7\ In addition, the Net Capital Rules permit various offsets 
under which a percentage of an option position's gain at any one 
valuation point is allowed to offset another position's loss at the 
same valuation point (e.g. vertical spreads).
---------------------------------------------------------------------------

    All Options Clearing Corporation (``OCC'') clearing members are 
subject to the Net Capital Rules. However, a subset of clearing members 
are subsidiaries of U.S. bank holding companies, which, due to their 
affiliations with their parent U.S. bank holding companies, must comply 
with additional bank regulatory capital requirements pursuant to 
rulemaking required under the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.\8\ Pursuant to this mandate, the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, and the Federal Deposit Insurance Corporation approved 
a comprehensive regulatory capital framework for subsidiaries of U.S. 
bank holding company clearing firms.\9\ Generally, these rules imposed 
higher minimum capital requirements, more restrictive capital 
eligibility standards, and higher asset risk weights than were 
previously mandated for clearing members that are subsidiaries of U.S. 
bank holding companies under the Net Capital Rules. Furthermore, these 
rules do not permit deductions for hedged securities or offsetting 
options positions.\10\ Rather, capital charges under these standards 
are based on the aggregate notional value of short positions regardless 
of offsets. As a result, Clearing Trading Permit Holders (``CTPHs'') 
generally must hold substantially more bank regulatory capital than 
would otherwise be required under the Net Capital Rules.\11\ The impact 
of these regulatory capital rules are compounded in the SPX options 
market due to the large notional value of SPX contracts.
---------------------------------------------------------------------------

    \8\ H.R. 4173 (amending section 3(a) of the Securities Exchange 
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
    \9\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity 
Risk Measurement Standards).
    \10\ Many options strategies, including relatively simple 
strategies often used by retail customers and more sophisticated 
strategies used by market-makers and institutions, are risk-limited 
strategies or options spread strategies that employ offsets or 
hedges to achieve certain investment outcomes. Such strategies 
typically involve the purchase and sale of multiple options (and may 
be coupled with purchases or sales of the underlying assets), 
executed simultaneously as part of the same strategy. In many cases, 
the potential market exposure of these strategies is limited and 
defined. Whereas regulatory capital requirements have historically 
reflected the risk-limited nature of carrying offsetting positions, 
these positions may now be subject to large regulatory capital 
requirements. Various factors, including administration costs; 
transaction fees; and limited market demand or counterparty 
interest, however, discourage market participants from closing these 
positions even though many market participants likely would prefer 
to close the positions rather than carry them to expiration.
    \11\ 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.
---------------------------------------------------------------------------

    The Exchange believes these regulatory capital requirements could 
impede efficient use of capital and undermine the critical liquidity 
role that Market-Makers play in the SPX options market by limiting the 
amount of capital CTPHs can allocate to clearing member transactions. 
Specifically, these rules may cause CTPHs to impose stricter position 
limits on their clearing members. These stricter position limits may 
impact the liquidity Market-Makers might supply in the SPX market,\12\ 
which impact may be heightened when markets are volatile, and this 
impact may be compounded when a CTPH has multiple Market-Maker client 
accounts, each having largely risk-neutral portfolio holdings.\13\
---------------------------------------------------------------------------

    \12\ The Exchange notes Market-Makers participate on 
approximately 98% of SPX option trades on the Exchange.
    \13\ Several TPHs have indicated to the Exchange that these 
rules could hamper their ability to provide consistent liquidity in 
the current SPX market, and have inquired about the ability engage 
in compression trading prior to the end of the current quarter.
---------------------------------------------------------------------------

    The Exchange believes that permitting TPHs to reduce open interest 
in offsetting SPX options positions in open outcry compression forums 
has had a beneficial effect on the bank regulatory capital requirements 
of CTPHs' parent companies without adversely affecting the quality of 
the SPX options market. Accordingly, while the Exchange operates in an 
all-electronic environment, the Exchange proposes to adopt a similar 
process to occur electronically to encourage the compression of open 
interest in SPX. The Exchange believes lack of a method to reduce open 
interest in SPX options in an all-electronic environment may reduce 
liquidity in the market, which recently has experienced historic levels 
of volatility and is when the market needs this liquidity the most.
    Without an electronic compression forum, TPHs seeking to reduce 
open interest in SPX options for regulatory capital purposes could 
trade out of positions as they would trade any open positions. However, 
the Exchange understands that wide-scale reduction of open interest in 
SPX options in such a manner is burdensome. First, the range of 
positions held by different TPHs in SPX varies greatly. In some cases, 
a TPH may hold positions in thousands of series of SPX. The Exchange 
believes providing a forum for TPHs to periodically reduce open 
interest in SPX options would likely contribute additional liquidity 
and continued competitiveness to the SPX market. In addition, the 
Exchange believes that the proposed rule change will promote more 
efficient capital deployment in light of the regulatory capital 
requirements rules and help ensure continued depth of liquidity in the 
SPX options market during continued market volatility.
    The proposed rule change adopts Rule 5.24(e)(1)(E) to permit 
electronic compression trades during times when the trading floor is 
inoperable.\14\ The proposed electronic compression forum will function 
in a substantially similar manner as the open outcry compression forum 
functions pursuant to Rule 5.88. In general, the process would permit 
TPHs to submit lists of open positions to the Exchange that they wish 
to close against opposing (long/short) positions of other TPHs, which 
the Exchange would then aggregate into a single list

[[Page 18320]]

that would allow TPHs to more easily identify those positions with 
counterparty interest on the Exchange. Unlike open outcry compression 
forums, for which Rule 5.88 specifies the times at which TPHs may 
submit these lists, the Exchange will determine when electronic 
compression forums may occur.\15\ The Exchange will provide TPHs with 
reasonable, sufficient notice of the timing of electronic compression 
forums, and the associated times at which lists must be submitted. 
While the Exchange intends to offer electronic compression forums in 
connection with the upcoming end-of-quarter, the Exchange believes 
flexibility regarding when to offer electronic compression forums will 
permit it to react to market conditions and facilitate TPHs' reduction 
of SPX open interest in response to volatility as necessary.
---------------------------------------------------------------------------

    \14\ Like the other exceptions recently added to Rule 
5.24(e)(1), 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.
    \15\ See proposed Rule 5.24(e)(1)(E)(i). Pursuant to Rule 1.5, 
the Exchange will announce the times when TPHs may submit these 
position lists.
---------------------------------------------------------------------------

    As is the case with open outcry compression forums, all TPHs (or 
their CTPHs on their behalf) may submit position lists for 
participation in electronic compression forums, and receive lists of 
positions submitted to the Exchange. Additionally, a TPH may request to 
have its name withheld from the list the Exchange makes available to 
the TPHs that submit a position list, and the list will not indicate 
which TPHs hold which positions. TPHs that do not want to be listed as 
having contributed compression-list positions may inform the Exchange 
and will not be included in the listed TPHs. The Exchange believes this 
process to identify TPHs that seek to close compression-list positions 
in advance of a compression forum will increase opportunities for TPHs 
to ultimately close compression-list positions during a compression 
forum while, at the same time, providing the opportunity for anonymity.
    Proposed Rule 5.24(e)(1)(E)(ii) provides that in addition to the 
information set forth in Rule 5.88(a)(4) with respect to multi-leg 
positions, the Exchange will, for informational purposes, 
electronically distribute series positions within a strike range 
determined by the Exchange to each Trading Permit Holder that submitted 
compression-list positions to the Exchange.\16\ The Exchange believes 
this additional information will provide the Exchange with sufficient 
information to create larger packages of positions that may be 
compressed while operating in an all-electronic environment.
---------------------------------------------------------------------------

    \16\ For purposes of proposed Rule 5.24(e)(1)(E), the term 
``multi-leg position file'' as used in Rule 5.88 will be replaced 
with ``position file.'' The position file will include the 
information set forth in Rule 5.88(a)(4) for both multi-leg 
positions and series positions within that Exchange-determined 
strike range.
---------------------------------------------------------------------------

    Proposed Rule 5.24(e)(1)(E)(iii) describes how trades may be 
executed in electronic compression forums. Specifically, the proposed 
rule change provides that in lieu of Rule 5.88(a)(6) (which provides 
that trades executed in an open outcry compression forum occur in 
accordance with regular open outcry trading rules, subject to certain 
exceptions), a Trading Permit Holder may submit an order in SPX option 
contracts coupled with a contra-side order or orders totaling an equal 
number of option contracts, which will execute automatically on entry 
without exposure. For purposes of proposed subparagraph (iii):
     A Trading Permit Holder must identify these orders as 
being part of an electronic compression forum. This is currently 
required in open outcry compression forums.\17\
---------------------------------------------------------------------------

    \17\ See Rule 5.88
---------------------------------------------------------------------------

     A Trading Permit Holder may execute a simple order as part 
of an electronic compression forum only if the execution price: (1) Is 
not at the same price as a Priority Customer order resting in the Book; 
and (2) is at or between the national best bid or offer (``NBBO''). 
Rule 5.9 (related to exposure of orders on the Exchange) does not apply 
to executions of SPX orders submitted into electronic compression 
forums. This provision provides that orders submitted into electronic 
compression forums must execute in accordance with the same priority 
principles that apply to all other simple orders on the Exchange, which 
protects Priority Customer orders in the simple book and prohibits 
trades through prices available in the book.
     A Trading Permit Holder may execute a complex order as 
part of an electronic compression forum only if: (1) Each option leg 
executes at a price that complies with Rule 5.33(f)(2),\18\ provided 
that no option leg executes at the same price as a Priority Customer 
Order in the Simple Book; (2) each option leg executes at a price at or 
between the NBBO for the applicable series; and (3) the execution price 
is better than the price of any complex order resting in the COB, 
unless the submitted complex 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 SPX orders submitted into 
electronic compression forums. This provision provides that orders 
submitted into an electronic compression forum 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.
---------------------------------------------------------------------------

    \18\ Rule 5.33(f)(2) requires complex orders to execute only if 
the execution price: at a net price: (1) That would cause any 
component of the complex strategy to be executed at a price of zero; 
(2) 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; (3) 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; (4) worse than the price that 
would be available if the complex order Legged into the Simple Book; 
or (5) 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.
---------------------------------------------------------------------------

     The System cancels an order submitted for execution in an 
electronic compression forum if it cannot execute. Therefore, if an 
order cannot execute in accordance with the execution price and 
priority requirements in the prior two bulleted paragraphs, it will be 
cancelled.
     Orders may only be submitted for execution in an 
electronic compression forum only if entered in the standard increment 
applicable to SPX options pursuant to Rule 5.4. Unlike in open outcry 
compression forums, in which closing transactions may be executed in 
pennies, the proposed rule change will require standard increments in 
order to take advantage of the proposed unexposed execution.
     Only closing orders may be executed in electronic 
compression forums. While open outcry compression forums contemplate 
that opening orders are permissible in certain circumstances, those 
orders are generally permitted by responded in the trading crowd. As 
orders submitted into an electronic compression forum will be done so 
without exposure, there will be no responses. The primary purpose of 
compression forum is to permit the closing of open SPX interest, the 
Exchange believes restricting electronic compression forums is 
appropriate.
    The Exchange understands from customers, and SPX Market-Makers in 
particular, that there is significant need to reduce open interest 
based on current market conditions. These market participants regularly 
avail themselves of open outcry compression forums, in which they use 
the information provided in the Exchange-provided

[[Page 18321]]

position lists to identify potential counterparties that similarly need 
to close SPX open interest. In accordance with standard open outcry 
trading rules, a floor broker would represent a cross of orders 
representing this interest to the trading crowd. While other in-crowd 
market participants have the opportunity to respond and participate in 
the transaction, generally the orders represented in the cross execute 
cleanly against each other. The proposed rule will require that the 
executing TPH identify these crosses as being submitted as part of an 
electronic compression forum. As a result, the Exchange's Regulatory 
Division intends to put in place a regulatory review plan that will 
permit it to ensure any SPX orders that are executed pursuant to the 
proposed rule change are done in accordance with the proposed rule.
    Providing TPHs, and Market-Makers in particular, with an electronic 
compression forum 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. As noted above, 
because some CTPHs carrying these are bank-owned broker/dealers, those 
CTPHs 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.\19\ 
Additionally, 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 the primary method 
used by market participants to execute necessary position-reducing 
trades in SPX options on the trading floor. Finally, the historic 
levels of market volatility has made providing liquidity in SPX options 
immensely more challenging. The execution of options trades through 
electronic trading to close this open SPX interest, as noted above, may 
be inefficient and ineffective.
---------------------------------------------------------------------------

    \19\ 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.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change to make available 
functionality that will allow liquidity providers to execute trades to 
reduce SPX open interest in a substantially similar manner as they were 
able to do on the trading floor. These closing transactions will help 
reduce any potential negative impact on the market-making community 
that may result from Net Capital Rules, which could reduce liquidity 
available in an extremely volatile market 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 the Exchange expects will free up 
liquidity providers' much needed capital, which will benefit the entire 
market and all investors.
    Generally, in SPX options (and other classes), the Exchange lists 
series with narrower strike intervals that are closer to the at-the-
money value, and with wider strike intervals that are further from the 
at-the-money value. The Exchange's internal listing procedures are 
intended to balance the need to list sufficient strikes to provide 
market participants with flexibility to manage their risk with Market-
Makers' quoting obligations. The Exchange understands from Market-
Makers that the need to quote in a significant number of series may 
contribute in part to their challenges in providing liquidity to the 
market. The Exchange represents it will review its internal listing 
procedures for SPX options and develop a plan to modify these 
procedures in an effort to reduce the number of listed strikes in a 
manner that may permit Market-Makers to further reduce SPX open 
interest (and thus free up capital to continue to provide 
liquidity).\20\
---------------------------------------------------------------------------

    \20\ While SPX options are listed for trading exclusively on 
Cboe Options, it competes with other listed options, such as options 
on the SPDR S&P 500 exchange-traded fund.
---------------------------------------------------------------------------

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.\21\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \22\ 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) \23\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Id.
---------------------------------------------------------------------------

    In particular, 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 reduce open interest in SPX options electronically in a 
substantially similar manner as they were able to do when the trading 
floor was open. The proposed flexibility with respect to when the 
Exchange will facilitate electronic compression forums will permit the 
Exchange to react to market conditions and facilitate TPHs' reduction 
of SPX open interest in response to volatility as necessary. Electronic 
compression forums will allow market participants to reduce options 
positions in order to reduce the necessary capital associated with 
those positions and 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 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 options market by limiting the amount of capital 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 options will 
permit to contribute to the availability of liquidity in the SPX 
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,

[[Page 18322]]

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 
orders submitted into electronic compression forums to execute in the 
same increments as all other orders in an electronic environment. 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), but rather to reduce open interest, 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 one 
class the Exchange believes is being significantly impacted by the 
inability to execute these crosses (and the one class in which open 
outcry compression forums occurred), 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 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, as electronic compression forums will be available to all 
market participants with SPX open interest. As discussed above, while 
the proposed rule change is directed at market-makers, all market 
participants may participate in these forums 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 SPX options, which 
are currently listed for trading only on the Exchange. Additionally, 
open outcry compression forums were limited to SPX options. In 
addition, the proposed rule change is intended to reduce open interest 
are not seeking price improvement, but rather looking to reduce open 
interest 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 \24\ and Rule 19b-4(f)(6) thereunder.\25\ 
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 \26\ and Rule 19b-
4(f)(6) thereunder.\27\
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    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 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) \28\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\29\ 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 SPX markets. The Exchange states its belief that 
market participants generally engage in the above-explained attempts to 
reduce their options positions at the end of calendar quarters, when 
the Exchange understands CTPHs recalculate their leverage ratios in 
connection with bank capital regulatory requirements, 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 expected first quarter CTPH capital recalculation, which could 
permit continued liquidity and a fair and orderly market. As discussed 
above, the proposed rule change would apply temporarily, and only to 
one exclusively listed index option class, 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.\30\
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    \28\ 17 CFR 240.19b-4(f)(6).
    \29\ 17 CFR 240.19b-4(f)(6)(iii).
    \30\ 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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings

[[Page 18323]]

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:

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-2020-026 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-2020-026. 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-2020-026, and should be submitted 
on or before April 22, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06723 Filed 3-31-20; 8:45 am]
 BILLING CODE 8011-01-P
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