Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Increase Position Limits for Options on Certain Exchange-Traded Funds and Indexes, 26736-26740 [2020-09520]
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Federal Register / Vol. 85, No. 87 / Tuesday, May 5, 2020 / Notices
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This Notice will be published in the
Federal Register.
[Release No. 34–88768; File No. SR–CBOE–
2020–015]
Erica A. Barker,
Secretary.
[FR Doc. 2020–09557 Filed 5–4–20; 8:45 am]
BILLING CODE P
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[FR Doc. 2020–09714 Filed 5–1–20; 4:15 pm]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Increase
Position Limits for Options on Certain
Exchange-Traded Funds and Indexes
April 29, 2020.
I. Introduction
On February 26, 2020, Cboe
Exchange, Inc. (‘‘Exchange’’ or ‘‘Cboe’’)
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 Interpretation and
Policy .07 of Exchange Rule 8.30,
Position Limits, and Rule 8.31, Position
Limits for Broad-Based Index Options,
to increase the position limits for
options on the following exchangetraded funds (‘‘ETFs’’) and indexes: The
Standard and Poor’s Depositary Receipts
Trust (‘‘SPY’’), iShares China Large-Cap
ETF (‘‘FXI’’), iShares MSCI EAFE ETF
(‘‘EFA’’), iShares iBoxx High Yield
Corporate Bond Fund (‘‘HYG’’),
Financial Select Sector SPDR Fund
(‘‘XLF’’), Market Vectors Oil Services
ETF (‘‘OIH’’),3 MSCI Emerging Markets
Index (‘‘MXEF’’), and MSCI EAFE Index
(‘‘MXEA’’). The proposed rule change
was published for comment in the
Federal Register on March 16, 2020.4
On April 16, 2020, the Exchange
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 As noted below, the Exchange subsequently
amended its proposal to remove the proposed
increase in position limits for options on OIH. See
infra note 5.
4 See Securities Exchange Act Release No. 88350
(March 10, 2020), 85 FR 15003 (‘‘Notice’’).
Comments on the proposed rule change can be
found at: https://www.sec.gov/comments/sr-cboe2020-015/srcboe2020015.htm.
2 17
PO 00000
Frm 00081
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Sfmt 4703
submitted Amendment No. 1 to the
proposed rule change.5 The Commission
is publishing this notice to solicit
comment on Amendment No. 1, and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
II. Description of the Proposal, as
Modified by Amendment No. 1
Currently, position limits for options
on ETFs such as those subject to the
proposal, as amended,6 are determined
pursuant to Rule 8.30, and, with certain
exceptions, vary by tier according to the
number of outstanding shares and past
six-month trading volume of the
underlying security.7 Options in the
highest tier—i.e., options that overlie
securities with the largest numbers of
outstanding shares and trading
volume—have a standard option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.8 In
addition, Interpretation and Policy .07
of Rule 8.30 currently sets forth separate
position limits for options on certain
ETFs, including 1,800,000 contracts for
options on SPY, and 500,000 contracts
for options on FXI and EFA. Similarly,
position limits for options on broadbased indexes such as those subject to
the proposal, as amended,9 are
determined pursuant to Rule 8.31,
which provides a position limit of
25,000 contracts for options, restricted
to no more than 15,000 near-term, on all
broad-based indexes except those
specifically listed under Rule 8.31 for
5 In Amendment No. 1, the Exchange: (1)
Provided additional justification and analysis in
support of the proposal, which is summarized
below; (2) revised its proposal to eliminate the
proposed increase to position limits for options on
OIH; and (3) made technical, corrective, and
clarifying changes. The full text of Amendment No.
1 is available on the Commission’s website at:
https://www.sec.gov/comments/sr-cboe-2020-015/
srcboe2020015-7081714-215592.pdf.
6 See Notice, supra note 4, at 15005–06, for
descriptions provided by the Exchange regarding
the composition and design of the underlying ETFs
of each of the ETF options subject to this proposal.
7 Pursuant to Rule 8.42, Interpretation and Policy
.02, which provides that the exercise limits for ETF
options are equivalent to their position limits, the
exercise limits for each of these options would be
increased to the level of the new position limits.
8 To be eligible for this tier, either the recent sixmonth trading volume of the underlying security
must have totaled at least 100,000,000 shares; or the
most recent six-month trading volume of the
underlying security must have totaled at least
75,000,000 shares and the underlying security must
have at least 300,000,000 shares currently
outstanding. See Rule 8.30, Interpretation and
Policy .02(e). Options on XLF and HYG currently
fall into this tier.
9 See Notice, supra note 4, at 15006–07, for
descriptions provided by the Exchange regarding
the composition and design of the underlying
indexes of each of the index options subject to this
proposal.
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which a separate position limit is
provided.10
In the proposal, as amended, the
Exchange proposes to revise
Interpretation and Policy .07 to Rule
8.30 and Rule 8.31 to increase the
position limits for options on certain
ETFs and index options, as described
more fully below.11 The Exchange states
its belief that increasing the position
limits for these options will lead to a
more liquid and competitive market
environment for these options that will
benefit customers interested in these
products.12
First, the Exchange proposes to
increase the position limits for options
on XLF and HYG, each of which fall
into the highest standard tier set forth in
Rule 8.30. The Exchange proposes to
increase the current position limit of
250,000 contracts for options on these
securities to 500,000 contracts.13 In
support of this change, the Exchange
compares certain trading characteristics
of XLF and HYG (the average daily
trading volume of the security and of
the overlying option), as well as the
number of outstanding shares and
market capitalization of each of these
securities, to the same figures for the
iShares 20+ Year Treasury Bond Fund
ETF (‘‘TLT’’) and the iShares MSCI
Japan ETF (‘‘EWJ’’) (and, for XLF only,
the iShares MSCI Brazil Capped ETF
(‘‘EWZ’’)), all of which currently have a
position limit of 500,000 contracts.14
10 Pursuant to Rule 8.42(b), which provides that
the exercise limits for index options are equivalent
to their position limits, the exercise limits for each
of these options would be increased to the level of
the new position limits.
11 The Exchange also proposes to update the
PowerShares QQQ Trust (‘‘QQQ’’) symbol in
Interpretation and Policy .07 of Rule 8.30 from
QQQQ to QQQ to accurately reflect the current
ticker symbol. See Notice, supra note 4, at 15005
n.19.
12 See id. at 15007.
13 In connection with this change, the exercise
limits for these options would rise to 500,000
contracts. See supra note 7.
14 See Notice, supra note 4, at 15005–06;
Amendment No. 1, supra note 5, at 3–4. With
respect to trading characteristics, specifically, the
Exchange states that the average daily trading
volumes of XLF and HYG for the periods analyzed
were 48.8 million shares and 20.0 million shares,
respectively. The figures for EWZ, TLT, and EWJ
were 26.7 million shares, 9.6 million shares, and 7.2
million shares, respectively. With regard to the
overlying options, trading volumes for XLF options
and HYG options were 102,100 contracts and
193,700 contracts, respectively, while trading
volumes for EWZ options, TLT options, and EWJ
options were 186,500 contracts, 95,200 contracts,
and 5,700 contracts, respectively. The Exchange
further states that the total shares outstanding was
793.6 million for XLF and 216.6 million for HYG
compared to 233 million for EWZ, 128.1 million for
TLT, and 236.6 million for EWJ. Finally, the
Exchange states that the fund market cap for XLF
was $24.6 billion and HYG was $19.1 billion
compared to $11.3 billion for EWZ, $17.5 billion for
TLT, and $14.2 billion for EWJ.
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In addition, the Exchange proposes to
increase the position limits for options
on EFA and FXI from 500,000 contracts
to 1,000,000 contracts.15 In support of
the change for EFA options, the
Exchange provides the trading
characteristics of EFA, and compares
the position limits for options on EFA
to those of MXEA, the analogue index,
which currently has a position limit of
25,000 contracts (proposed herein to be
increased to 50,000 contracts), as
adjusted using a notional value
comparison by which approximately 29
EFA option contracts equal one MXEA
option contract.16 The Exchange states
that, accordingly, a position limit for
EFA options that would be
economically equivalent to the current
position limit for MXEA options would
be 725,000 contracts, and 1,450,000
contracts at the proposed increased
MXEA position limit level.17 The
Exchange therefore believes that the
higher actual and economically
equivalent trading volumes, notional
value, and economically equivalent
position limits for EFA options as
compared to MXEA options supports
the proposed increase in position
limits.18 In support of the change for
FXI options, the Exchange provides the
trading characteristics for FXI shares
and options, as well as the market
capitalization of FXI and the
components of the underlying FTSE
China 50 Index, which the Exchange
believes are both large enough to absorb
potential price movements caused by a
large trade in FXI.19
The Exchange also proposes to
increase the position limits for options
on SPY from 1,800,000 contracts to
3,600,000 contracts.20 In support of this
change, the Exchange compares the
trading and other characteristics of SPY
to those of QQQ and states that SPY is
15 In connection with this change, the exercise
limits for these options would rise to 1,000,000
contracts. See supra note 7.
16 See Notice, supra note 4, at 15005–06.
Specifically, the Exchange states that the average
daily trading volume for EFA was 25.1 million
shares, the average daily volume for the overlying
options was 156,000 contracts, the total shares
outstanding for EFA was 928.2 million, and the
fund market cap for EFA was $64.9 billion.
17 See id. at 15006.
18 See Amendment No. 1, supra note 5, at 9.
19 See Notice, supra note 4, at 15005–06.
Specifically, the Exchange states that the average
daily trading volume for FXI was 26.1 million
shares, the average daily volume for the overlying
options was 196,600 contracts, the total shares
outstanding for FXI was 106.8 million, and the fund
market cap for FXI was $4.8 billion, while the
market capitalization of the components of the
reference index, the FTSE China 50 Index, was $28
trillion.
20 In connection with this change, the exercise
limits for these options would rise to 3,600,000
contracts. See supra note 7.
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26737
significantly more liquid than QQQ,
which is also currently subject to a
position limit of 1,800,000 contracts.21
Finally, the Exchange proposes to
increase the position limits for options
on MXEA and MXEF from 25,000
contracts to 50,000 contracts and to
eliminate the near-term position limit
restriction on these options.22 In
support of this change, the Exchange
provides the trading characteristics and
market capitalizations of MXEA and
MXEF, and compares the notionally
adjusted position limits for MXEA and
MXEF to the position limits for options
on EFA and EEM (currently 1,000,000
contracts for EEM and proposed herein
to be 1,000,000 contracts for EFA), the
ETFs that track the MXEA and MXEF
indexes, respectively.23 In Amendment
No. 1, the Exchange provides additional
support for its proposal to eliminate
near-term position limit restrictions for
MXEA and MXEF options by stating
that such near-term restrictions
introduce additional complexity for
market participants utilizing these
options to hedge.24 In addition, the
Exchange provides near-term and total
open interest statistics comparing
MXEA and MXEF to options on the S&P
100 Index (‘‘OEX’’ and ‘‘XEO’’), which
are not currently subject to any nearterm position limits.25 Based on the
21 See Notice, supra note 4, at 15005–06;
Amendment No. 1, supra note 5, at 3–4.
Specifically, the Exchange states that the average
daily trading volume for SPY was 70.3 million
shares compared to 30.2 million shares for QQQ,
while the average daily volume for options
contracts overlying SPY was 2.8 million, as
compared to 670,200 for QQQ. The Exchange
further states that the total shares outstanding for
SPY was 968.7 million compared to 410.3 million
for QQQ. Finally, the Exchange states that the fund
market cap for SPY was $312.9 billion compared to
$88.7 billion for QQQ.
22 In connection with this change, the exercise
limits for these options would rise to 50,000
contracts. See supra note 10.
23 See Notice, supra note 4, at 15005–07.
Specifically, the Exchange states that the average
daily volume for options contracts overlying MXEA
and MXEF was 594 contracts and 1,055 contracts,
respectively. The Exchange further states that the
number of component securities for MXEA and
MXEF were 917 and 1,404, respectively. Finally,
the Exchange states that the index market cap was
$14.9 trillion for MXEA and $6.2 trillion for MXEF.
24 See Amendment No. 1, supra note 5, at 5.
25 See id. at 5–6. Specifically, the Exchange states
that the average near-term open interest for MXEA
and MXEF was 3,022 contracts and 10,915
contracts, respectively, as compared to 4,926
contracts for OEX and 6,789 contracts for XEO. The
Exchange further states that the average total open
interest was 13,380 contracts and 32,910 contracts
for MXEA and MXEF, respectively, as compared to
10,489 contracts for OEX and 9,970 contracts for
XEO. Finally, the Exchange states that the average
daily volume for OEX and XEO options was 1,454
contracts and 891 contracts, respectively, which the
Exchange believes is comparable to the average
daily volume for options contracts overlying MXEA
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information it gathered, the Exchange
believes that the proposed elimination
of near-term position limits for MXEA
and MXEF is consistent with the
existing limits of comparable indexes
and would not raise any potential issues
with respect to manipulation or
disruption in the near months.26
The Exchange states that the current
position limits for the options subject to
the proposal may have impeded the
ability of market makers to make
markets on the Exchange.27 Specifically,
the Exchange avers, the proposal is
designed to encourage liquidity
providers to provide additional liquidity
to the Exchange and other market
participants to shift liquidity from overthe-counter markets onto the Exchange,
as well as other options exchanges on
which they participate, which, it
believes, will enhance the process of
price discovery conducted on the
Exchange through increased order
flow.28 The proposal will also benefit
market participants, the Exchange
maintains, by providing them with a
more effective trading and hedging
vehicle.29
With regard to the concerns that
position limits generally are meant to
address, the Exchange represents that
the structure of the underlying ETFs and
indexes of the options subject to this
proposal; the considerable market
capitalization of the funds, underlying
component securities, and indexed
component securities; and the liquidity
of the market for options on those ETFs
and indexes and the underlying
component securities mitigates concerns
regarding potential manipulation of the
products and disruption of the
underlying markets due to the increased
position limits.30 The Exchange
elaborates further and describes in
detail: (i) The creation and redemption
process for ETFs; (ii) the arbitrage
activity that ensues when such
instruments are overpriced or are
trading at a discount to the securities on
which they are based, and which, the
Exchange maintains, helps to keep the
instrument’s price in line with the value
of its underlying portfolio; and (iii) how
these processes, in the Exchange’s view,
serve to mitigate the potential price
impact of the ETF shares that might
otherwise result from increased position
limits.31
and MXEF, which was 594 contracts and 1,055
contracts, respectively.
26 See id. at 6.
27 See Notice, supra note 4, at 15003.
28 See id. at 15003, 15008.
29 See id. at 15008.
30 See id.
31 See id. at 15007.
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In addition, the Exchange states that
(i) some of the subject ETFs are based
on broad-based indexes that underlie
cash-settled options that are
economically equivalent to the relevant
ETF and have no position limits; and (ii)
others are based on broad-based indexes
that underlie cash-settled options with
position limits reflecting a notional
value that is larger than the current
position limit for their ETF analogue.32
According to the Exchange, if certain
position limits are appropriate for the
options overlying comparable indexes
or comparable baskets of securities to
those that the ETFs subject to the
proposal track, or are appropriate for the
ETFs that track the indexes subject to
the proposal, then those same
economically equivalent position limits
should be appropriate for the options
overlying the relevant ETFs or
indexes.33 For the other ETFs in the
proposal where this does not apply
(because there are currently no options
listed on an index tracked by the ETF),
the Exchange argues that, based on the
liquidity, breadth, and depth of the
underlying market of the components of
such indexes, the index referenced by
the ETF would be considered a broadbased index under the Exchange’s
rules.34 Moreover, regarding the indexes
subject to the proposal, the Exchange
argues that the deep, liquid markets for
and market capitalization of the
component securities underlying such
indexes support the proposed position
limit increases for the options on those
indexes.35 The Exchange also cites data
in support of its argument that the
market capitalization of the underlying
index or reference asset of each of the
ETFs and indexes is large enough to
absorb any price movements that may
be caused by an oversized trade, and
thus justifies increasing position limits
for the options on these products.36
As noted, in Amendment No. 1, the
Exchange withdrew options on OIH
from the subject of the proposal, stating
that ‘‘the Exchange may propose an
increase for position limits for options
on OIH through a separate proposed
rule change submitted at a later date.’’ 37
Accordingly, this Order does not
address position limits for options on
OIH.
The Exchange also refers to other
provisions in its rules, noting, for
example, that the options reporting
requirements of Exchange Rule 8.43
32 See
id. at 15004.
id. at 15005.
34 See id. at 15004–05.
35 See id. at 15005.
36 See id.
37 See Amendment No. 1, supra note 5, at 6–7.
33 See
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Sfmt 4703
would continue to be applicable to the
options subject to the proposal.38 As set
forth in Exchange Rule 8.43(a), each
Trading Permit Holder (‘‘TPH’’) must
report to the Exchange certain
information in relation to any customer
who, acting alone, or in concert with
others, on the previous business day
maintained aggregate long or short
positions on the same side of the market
of 200 or more contracts in any single
class of option contracts dealt in on the
Exchange.39 Further, Exchange Rule
8.43(b) requires each TPH (other than an
Exchange market-maker or Designated
Primary Market-Maker) 40 that maintains
a position in excess of 10,000 non-FLEX
equity option contracts on the same side
of the market, on behalf of its own
account or for the account of a
customer, to report to the Exchange
information as to whether such
positions are hedged, and provide
documentation as to how such contracts
are hedged.41
The Exchange also represents that the
existing surveillance procedures and
reporting requirements at the Exchange
and other self-regulatory organizations
are capable of properly identifying
disruptive and/or manipulative trading
activity.42 The Exchange states that its
surveillance procedures utilize daily
monitoring of market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlying ETFs and indexes,
as applicable.43 In addition, the
Exchange states that its surveillance
procedures have been effective in the
past for the surveillance of trading in
the options subject to this proposal, and
will continue to be employed.44
The Exchange also argues that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a TPH
or its customer may try to maintain a
potentially large, unhedged position in
the options subject to this proposal.45
Current margin and risk-based haircut
methodologies, the Exchange states,
serve to limit the size of positions
maintained by any one account by
38 See
Notice, supra note 4, at 41460.
report must include, for each such class of
options, the number of option contracts comprising
each such position and, in the case of short
positions, whether covered or uncovered. See Rule
8.43(a).
40 According to the Exchange, market-makers
(including Designated Primary Market-Makers) are
exempt from the referenced reporting requirement
because market-maker information can be accessed
by the Exchange. See Notice, supra note 4, at 15007.
41 See id.
42 See id. at 15007–08.
43 See id. at 15008.
44 See id. at 15008 n.34.
45 See id. at 15008.
39 The
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increasing the margin and/or capital
that a TPH must maintain for a large
position held by itself or by its
customer.46 In addition, the Exchange
notes that the Commission’s net capital
rule, Rule 15c3–1 under the Act,47
imposes a capital charge on TPHs to the
extent of any margin deficiency
resulting from the higher margin
requirement.48
III. Discussion and Commission
Findings
The Commission finds that the
proposed rule change, as modified by
Amendment No. 1, is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.49 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,50 which requires, among
other things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
Position and exercise limits serve as
a regulatory tool designed to address
manipulative schemes and adverse
market impact surrounding the use of
options. Since the inception of
standardized options trading, the
options exchanges have had rules
limiting the aggregate number of options
contracts that a member or customer
may hold or exercise.51 These position
and exercise limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate the
underlying market so as to benefit the
options positions.52 In particular,
position and exercise limits are
designed to minimize the potential for
mini-manipulations and for corners or
squeezes of the underlying market.53 In
addition, such limits serve to reduce the
46 See
id.
CFR 240.15c3–1.
48 See Notice, supra note 4, at 15008.
49 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
50 15 U.S.C. 78f(b)(5).
51 See, e.g., Securities Exchange Act Release No.
45236 (January 4, 2002), 67 FR 1378 (January 10,
2002) (SR–Amex–2001–42).
52 See, e.g., Securities Exchange Act Release No.
47346 (February 11, 2003), 68 FR 8316 (February
20, 2003) (SR–CBOE–2002–26).
53 See id.
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47 17
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possibility of disruption of the options
market itself, especially in illiquid
classes.54
Over the years, the Commission has
taken a gradual, evolutionary approach
toward expansion of position and
exercise limits for option products
overlying certain ETFs where there is
considerable liquidity in both the
underlying cash markets and the
options markets, and, in the case of
certain broad-based index options,
toward elimination of such limits
altogether.55 The Commission has been
careful to balance two competing
concerns when considering proposals
by self-regulatory organizations to
change position and exercise limits. The
Commission has recognized that the
limits can be useful to prevent investors
from disrupting the market in securities
underlying the options.56 To this point,
commenters, writing in support of the
proposal, noted that the characteristics
of the products subject to the
Exchange’s proposal help to allay
concerns about disruption in the
underlying markets.57 One commenter
stated that the market capitalization of
the underlying ETFs of the ETF options
subject to the proposal, the ETF
component securities, and the
component securities of the underlying
indexes subject to the proposal are all
sufficiently large to mitigate any
54 See
id.
Commission’s incremental approach to
approving changes in position and exercise limits
for option products overlying certain ETFs is wellestablished. See, e.g., Securities Exchange Act
Release Nos. 82770 (February 23, 2018), 83 FR 8907
(March 1, 2018) (SR–CBOE–2017–057) (approving
increase of position limits for options on certain
ETFs); 67672 (August 15, 2012), 77 FR 50750, 50752
& n.42 (August 22, 2012) (SR–NYSEAmex–2012–29)
(approving proposed rule change to eliminate
position limits for SPY options on a pilot basis);
64695 (June 17, 2011), 76 FR 36942, 36943 & n.19
(June 23, 2011) (SR–Phlx–2011–58) (approving
increase of SPY options position limit to 900,000
contracts). The Commission notes that the Exchange
filed an immediately effective proposed rule change
on June 4, 2018 to terminate its pilot program and
impose the current 1,800,000 contract position limit
for SPY options. See Securities Exchange Act
Release No. 83415 (June 12, 2018), 83 FR 28274
(June 18, 2018) (SR–CBOE–2018–042).
56 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11).
57 See letters to Vanessa Countryman, Secretary,
Commission, dated April 6, 2020, from Ellen
Greene, Managing Director, Equity and Options
Market Structure, Securities Industry and Financial
Markets Association (‘‘SIFMA Letter’’); Steve
Crutchfield, Head of Market Structure, Chicago
Trading Company (‘‘CTC Letter’’); and Venu
Palaparthi, Managing Director, Dash Financial
Technologies LLC (‘‘Dash Letter’’). One of these
commenters agreed with the Exchange’s statements
in support of the proposal with respect to the highly
liquid markets for the underlying securities, ‘‘even
to the extent that trading in such securities is
presenting somewhat differently during the current
market volatility.’’ SIFMA Letter at 2.
55 The
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
26739
concern about potential manipulation
and/or disruption in the underlying
markets upon increasing position limits
for the overlying options.58 Commenters
also stated that the creation and
redemption process for the underlying
ETFs of the ETF options subject to the
proposal will absorb price volatility
caused by large trades in the underlying
ETFs.59
At the same time, the Commission has
determined that limits should not be
established in a manner that will
unnecessarily discourage participation
in the options market by institutions
and other investors with substantial
hedging needs or to prevent specialists
and market makers from adequately
meeting their obligations to maintain a
fair and orderly market.60 Commenters
stated that failing to increase the
position limits for the options subject to
the proposal would impede trading
activity and investor strategies, such as
the use of effective hedging vehicles or
income-generating strategies.61 One of
those commenters further stated that
failing to increase the position limits for
the options subject to the proposal may
also impede the ability of market makers
to make liquid markets with tighter
spreads in such options.62
After careful consideration of the
proposal, as modified by Amendment
No. 1, and the comments received, the
Commission believes that it is
reasonable for the Exchange to increase
the position and exercise limits for
options on XLF and HYG to 500,000
contracts, for options on EFA and FXI
to 1,000,000 contracts, for options on
SPY to 3,600,000 contracts, and for
options on MXEA and MXEF to 50,000
contracts with no near-term position
limit. As noted above, the markets for
standardized options on these securities
and for the underlying products
themselves have substantial trading
volume and liquidity. The Commission
believes that this liquidity should
reduce the possibility of manipulating
these products and the disruption in the
underlying markets that lower position
limits may protect against.
The Commission also has considered
the creation and redemption process for
the ETFs subject to the proposal; the
existence of an issuer arbitrage
58 See SIFMA Letter at 1–2. A second commenter
also stated that the market capitalization and
diverse composition of the ETFs subject to the
proposal are of sufficient size to support the
proposed increase in position limits for the
associated options. See Dash Letter at 1.
59 See SIFMA Letter at 2; CTC Letter at 1.
60 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11).
61 See SIFMA Letter at 2; CTC Letter at 1.
62 See SIFMA Letter at 2.
E:\FR\FM\05MYN1.SGM
05MYN1
26740
Federal Register / Vol. 85, No. 87 / Tuesday, May 5, 2020 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
mechanism that helps keep each ETF’s
price in line with the value of its
underlying portfolio when overpriced or
trading at a discount to the securities on
which it is based; and how these
processes can serve to mitigate the
potential price impact of the ETF shares
that might otherwise result from
increased position limits.63
In addition, as discussed above, the
Exchange believes that current margin
and net capital requirements serve to
limit the size of positions maintained by
any one account.64 The Commission
agrees that these financial requirements
should help to address concerns that a
member or its customer may try to
maintain an inordinately large
unhedged position in the options
subject to this proposal and will help to
reduce risks if such a position is
established.
The Commission further agrees with
the Exchange that the reporting
requirements imposed by Exchange
Rule 8.43,65 as well as the Exchange’s
surveillance procedures, together with
those of other self-regulatory
organizations,66 should help protect
against potential manipulation. The
Commission expects that the Exchange
will continue to monitor trading in the
options subject to this proposal for the
purpose of discovering and sanctioning
manipulative acts and practices, and to
reassess the position and exercise limits,
if and when appropriate, in light of its
findings.
In sum, given the measure of liquidity
for the options subject to this proposal
and the underlying products, the
creation and redemption process and
issuer arbitrage mechanisms that exist
relating to the underlying instruments,
the margin and capital requirements
cited above, the Exchange’s options
reporting requirements, and the
Exchange’s surveillance procedures and
agreements with other markets, the
Commission believes that increasing the
position and exercise limits for XLF and
HYG options to 500,000 contracts, for
EFA and FXI options to 1,000,000
contracts, for SPY options to 3,600,000
contracts, and for MXEA and MXEF
options to 50,000 contracts with no
near-term position limit is consistent
with the Act.
IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
63 See
supra notes 30–31 and accompanying text.
supra notes 45–48 and accompanying text.
65 See supra notes 38–41 and accompanying text.
66 See supra notes 42–44 and accompanying text.
64 See
VerDate Sep<11>2014
19:16 May 04, 2020
Jkt 250001
arguments concerning whether
Amendment No. 1 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 rule-comments@
sec.gov. Please include File Number SR–
CBOE–2020–015 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2020–015. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–015, and
should be submitted on or before May
26, 2020.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 1 in the Federal
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
Register. As discussed above, in
Amendment No. 1, the Exchange: (1)
Provided additional justification and
analysis in support of the proposal,
which is summarized above; (2) revised
its proposal to eliminate the proposed
increase to position limits for options on
OIH; and (3) made technical, corrective,
and clarifying changes. The Commission
notes that Amendment No. 1 does not
otherwise modify the proposed rule
change, which was subject to a full
notice-and-comment period. Rather,
Amendment No. 1 serves to narrow the
scope of the original proposal by
maintaining the existing position limit
of 250,000 contracts for options on OIH.
The Commission also notes that
Amendment No. 1 provides additional
accuracy, clarity, and justification to the
proposal, thereby facilitating the
Commission’s ability to make the
findings set forth above to approve the
proposal. Accordingly, the Commission
finds good cause, pursuant to Section
19(b)(2) of the Act,67 to approve the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,68 that the
proposed rule change, as modified by
Amendment No. 1 (SR–CBOE–2020–
015), be, and hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–09520 Filed 5–4–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission Investor
Advisory Committee will hold a public
meeting on Thursday May 21, 2020, by
remote means and/or at the
Commission’s headquarters, 100 F St.
NE, Washington, DC 20549. The
meeting will begin at 10:00 a.m. (ET)
and will be open to the public.
PLACE: The meeting will be conducted
by remote means and/or at the
TIME AND DATE:
67 15
U.S.C. 78s(b)(2).
68 Id.
69 17
E:\FR\FM\05MYN1.SGM
CFR 200.30–3(a)(12).
05MYN1
]]>Agencies
[Federal Register Volume 85, Number 87 (Tuesday, May 5, 2020)]
[Notices]
[Pages 26736-26740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09520]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88768; File No. SR-CBOE-2020-015]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Increase
Position Limits for Options on Certain Exchange-Traded Funds and
Indexes
April 29, 2020.
I. Introduction
On February 26, 2020, Cboe Exchange, Inc. (``Exchange'' or
``Cboe'') 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 Interpretation and Policy .07 of Exchange
Rule 8.30, Position Limits, and Rule 8.31, Position Limits for Broad-
Based Index Options, to increase the position limits for options on the
following exchange-traded funds (``ETFs'') and indexes: The Standard
and Poor's Depositary Receipts Trust (``SPY''), iShares China Large-Cap
ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares iBoxx High
Yield Corporate Bond Fund (``HYG''), Financial Select Sector SPDR Fund
(``XLF''), Market Vectors Oil Services ETF (``OIH''),\3\ MSCI Emerging
Markets Index (``MXEF''), and MSCI EAFE Index (``MXEA''). The proposed
rule change was published for comment in the Federal Register on March
16, 2020.\4\ On April 16, 2020, the Exchange submitted Amendment No. 1
to the proposed rule change.\5\ The Commission is publishing this
notice to solicit comment on Amendment No. 1, and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ As noted below, the Exchange subsequently amended its
proposal to remove the proposed increase in position limits for
options on OIH. See infra note 5.
\4\ See Securities Exchange Act Release No. 88350 (March 10,
2020), 85 FR 15003 (``Notice''). Comments on the proposed rule
change can be found at: https://www.sec.gov/comments/sr-cboe-2020-015/srcboe2020015.htm.
\5\ In Amendment No. 1, the Exchange: (1) Provided additional
justification and analysis in support of the proposal, which is
summarized below; (2) revised its proposal to eliminate the proposed
increase to position limits for options on OIH; and (3) made
technical, corrective, and clarifying changes. The full text of
Amendment No. 1 is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-015/srcboe2020015-7081714-215592.pdf.
---------------------------------------------------------------------------
II. Description of the Proposal, as Modified by Amendment No. 1
Currently, position limits for options on ETFs such as those
subject to the proposal, as amended,\6\ are determined pursuant to Rule
8.30, and, with certain exceptions, vary by tier according to the
number of outstanding shares and past six-month trading volume of the
underlying security.\7\ Options in the highest tier--i.e., options that
overlie securities with the largest numbers of outstanding shares and
trading volume--have a standard option position limit of 250,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market.\8\ In addition, Interpretation and Policy
.07 of Rule 8.30 currently sets forth separate position limits for
options on certain ETFs, including 1,800,000 contracts for options on
SPY, and 500,000 contracts for options on FXI and EFA. Similarly,
position limits for options on broad-based indexes such as those
subject to the proposal, as amended,\9\ are determined pursuant to Rule
8.31, which provides a position limit of 25,000 contracts for options,
restricted to no more than 15,000 near-term, on all broad-based indexes
except those specifically listed under Rule 8.31 for
[[Page 26737]]
which a separate position limit is provided.\10\
---------------------------------------------------------------------------
\6\ See Notice, supra note 4, at 15005-06, for descriptions
provided by the Exchange regarding the composition and design of the
underlying ETFs of each of the ETF options subject to this proposal.
\7\ Pursuant to Rule 8.42, Interpretation and Policy .02, which
provides that the exercise limits for ETF options are equivalent to
their position limits, the exercise limits for each of these options
would be increased to the level of the new position limits.
\8\ To be eligible for this tier, either the recent six-month
trading volume of the underlying security must have totaled at least
100,000,000 shares; or the most recent six-month trading volume of
the underlying security must have totaled at least 75,000,000 shares
and the underlying security must have at least 300,000,000 shares
currently outstanding. See Rule 8.30, Interpretation and Policy
.02(e). Options on XLF and HYG currently fall into this tier.
\9\ See Notice, supra note 4, at 15006-07, for descriptions
provided by the Exchange regarding the composition and design of the
underlying indexes of each of the index options subject to this
proposal.
\10\ Pursuant to Rule 8.42(b), which provides that the exercise
limits for index options are equivalent to their position limits,
the exercise limits for each of these options would be increased to
the level of the new position limits.
---------------------------------------------------------------------------
In the proposal, as amended, the Exchange proposes to revise
Interpretation and Policy .07 to Rule 8.30 and Rule 8.31 to increase
the position limits for options on certain ETFs and index options, as
described more fully below.\11\ The Exchange states its belief that
increasing the position limits for these options will lead to a more
liquid and competitive market environment for these options that will
benefit customers interested in these products.\12\
---------------------------------------------------------------------------
\11\ The Exchange also proposes to update the PowerShares QQQ
Trust (``QQQ'') symbol in Interpretation and Policy .07 of Rule 8.30
from QQQQ to QQQ to accurately reflect the current ticker symbol.
See Notice, supra note 4, at 15005 n.19.
\12\ See id. at 15007.
---------------------------------------------------------------------------
First, the Exchange proposes to increase the position limits for
options on XLF and HYG, each of which fall into the highest standard
tier set forth in Rule 8.30. The Exchange proposes to increase the
current position limit of 250,000 contracts for options on these
securities to 500,000 contracts.\13\ In support of this change, the
Exchange compares certain trading characteristics of XLF and HYG (the
average daily trading volume of the security and of the overlying
option), as well as the number of outstanding shares and market
capitalization of each of these securities, to the same figures for the
iShares 20+ Year Treasury Bond Fund ETF (``TLT'') and the iShares MSCI
Japan ETF (``EWJ'') (and, for XLF only, the iShares MSCI Brazil Capped
ETF (``EWZ'')), all of which currently have a position limit of 500,000
contracts.\14\
---------------------------------------------------------------------------
\13\ In connection with this change, the exercise limits for
these options would rise to 500,000 contracts. See supra note 7.
\14\ See Notice, supra note 4, at 15005-06; Amendment No. 1,
supra note 5, at 3-4. With respect to trading characteristics,
specifically, the Exchange states that the average daily trading
volumes of XLF and HYG for the periods analyzed were 48.8 million
shares and 20.0 million shares, respectively. The figures for EWZ,
TLT, and EWJ were 26.7 million shares, 9.6 million shares, and 7.2
million shares, respectively. With regard to the overlying options,
trading volumes for XLF options and HYG options were 102,100
contracts and 193,700 contracts, respectively, while trading volumes
for EWZ options, TLT options, and EWJ options were 186,500
contracts, 95,200 contracts, and 5,700 contracts, respectively. The
Exchange further states that the total shares outstanding was 793.6
million for XLF and 216.6 million for HYG compared to 233 million
for EWZ, 128.1 million for TLT, and 236.6 million for EWJ. Finally,
the Exchange states that the fund market cap for XLF was $24.6
billion and HYG was $19.1 billion compared to $11.3 billion for EWZ,
$17.5 billion for TLT, and $14.2 billion for EWJ.
---------------------------------------------------------------------------
In addition, the Exchange proposes to increase the position limits
for options on EFA and FXI from 500,000 contracts to 1,000,000
contracts.\15\ In support of the change for EFA options, the Exchange
provides the trading characteristics of EFA, and compares the position
limits for options on EFA to those of MXEA, the analogue index, which
currently has a position limit of 25,000 contracts (proposed herein to
be increased to 50,000 contracts), as adjusted using a notional value
comparison by which approximately 29 EFA option contracts equal one
MXEA option contract.\16\ The Exchange states that, accordingly, a
position limit for EFA options that would be economically equivalent to
the current position limit for MXEA options would be 725,000 contracts,
and 1,450,000 contracts at the proposed increased MXEA position limit
level.\17\ The Exchange therefore believes that the higher actual and
economically equivalent trading volumes, notional value, and
economically equivalent position limits for EFA options as compared to
MXEA options supports the proposed increase in position limits.\18\ In
support of the change for FXI options, the Exchange provides the
trading characteristics for FXI shares and options, as well as the
market capitalization of FXI and the components of the underlying FTSE
China 50 Index, which the Exchange believes are both large enough to
absorb potential price movements caused by a large trade in FXI.\19\
---------------------------------------------------------------------------
\15\ In connection with this change, the exercise limits for
these options would rise to 1,000,000 contracts. See supra note 7.
\16\ See Notice, supra note 4, at 15005-06. Specifically, the
Exchange states that the average daily trading volume for EFA was
25.1 million shares, the average daily volume for the overlying
options was 156,000 contracts, the total shares outstanding for EFA
was 928.2 million, and the fund market cap for EFA was $64.9
billion.
\17\ See id. at 15006.
\18\ See Amendment No. 1, supra note 5, at 9.
\19\ See Notice, supra note 4, at 15005-06. Specifically, the
Exchange states that the average daily trading volume for FXI was
26.1 million shares, the average daily volume for the overlying
options was 196,600 contracts, the total shares outstanding for FXI
was 106.8 million, and the fund market cap for FXI was $4.8 billion,
while the market capitalization of the components of the reference
index, the FTSE China 50 Index, was $28 trillion.
---------------------------------------------------------------------------
The Exchange also proposes to increase the position limits for
options on SPY from 1,800,000 contracts to 3,600,000 contracts.\20\ In
support of this change, the Exchange compares the trading and other
characteristics of SPY to those of QQQ and states that SPY is
significantly more liquid than QQQ, which is also currently subject to
a position limit of 1,800,000 contracts.\21\
---------------------------------------------------------------------------
\20\ In connection with this change, the exercise limits for
these options would rise to 3,600,000 contracts. See supra note 7.
\21\ See Notice, supra note 4, at 15005-06; Amendment No. 1,
supra note 5, at 3-4. Specifically, the Exchange states that the
average daily trading volume for SPY was 70.3 million shares
compared to 30.2 million shares for QQQ, while the average daily
volume for options contracts overlying SPY was 2.8 million, as
compared to 670,200 for QQQ. The Exchange further states that the
total shares outstanding for SPY was 968.7 million compared to 410.3
million for QQQ. Finally, the Exchange states that the fund market
cap for SPY was $312.9 billion compared to $88.7 billion for QQQ.
---------------------------------------------------------------------------
Finally, the Exchange proposes to increase the position limits for
options on MXEA and MXEF from 25,000 contracts to 50,000 contracts and
to eliminate the near-term position limit restriction on these
options.\22\ In support of this change, the Exchange provides the
trading characteristics and market capitalizations of MXEA and MXEF,
and compares the notionally adjusted position limits for MXEA and MXEF
to the position limits for options on EFA and EEM (currently 1,000,000
contracts for EEM and proposed herein to be 1,000,000 contracts for
EFA), the ETFs that track the MXEA and MXEF indexes, respectively.\23\
In Amendment No. 1, the Exchange provides additional support for its
proposal to eliminate near-term position limit restrictions for MXEA
and MXEF options by stating that such near-term restrictions introduce
additional complexity for market participants utilizing these options
to hedge.\24\ In addition, the Exchange provides near-term and total
open interest statistics comparing MXEA and MXEF to options on the S&P
100 Index (``OEX'' and ``XEO''), which are not currently subject to any
near-term position limits.\25\ Based on the
[[Page 26738]]
information it gathered, the Exchange believes that the proposed
elimination of near-term position limits for MXEA and MXEF is
consistent with the existing limits of comparable indexes and would not
raise any potential issues with respect to manipulation or disruption
in the near months.\26\
---------------------------------------------------------------------------
\22\ In connection with this change, the exercise limits for
these options would rise to 50,000 contracts. See supra note 10.
\23\ See Notice, supra note 4, at 15005-07. Specifically, the
Exchange states that the average daily volume for options contracts
overlying MXEA and MXEF was 594 contracts and 1,055 contracts,
respectively. The Exchange further states that the number of
component securities for MXEA and MXEF were 917 and 1,404,
respectively. Finally, the Exchange states that the index market cap
was $14.9 trillion for MXEA and $6.2 trillion for MXEF.
\24\ See Amendment No. 1, supra note 5, at 5.
\25\ See id. at 5-6. Specifically, the Exchange states that the
average near-term open interest for MXEA and MXEF was 3,022
contracts and 10,915 contracts, respectively, as compared to 4,926
contracts for OEX and 6,789 contracts for XEO. The Exchange further
states that the average total open interest was 13,380 contracts and
32,910 contracts for MXEA and MXEF, respectively, as compared to
10,489 contracts for OEX and 9,970 contracts for XEO. Finally, the
Exchange states that the average daily volume for OEX and XEO
options was 1,454 contracts and 891 contracts, respectively, which
the Exchange believes is comparable to the average daily volume for
options contracts overlying MXEA and MXEF, which was 594 contracts
and 1,055 contracts, respectively.
\26\ See id. at 6.
---------------------------------------------------------------------------
The Exchange states that the current position limits for the
options subject to the proposal may have impeded the ability of market
makers to make markets on the Exchange.\27\ Specifically, the Exchange
avers, the proposal is designed to encourage liquidity providers to
provide additional liquidity to the Exchange and other market
participants to shift liquidity from over-the-counter markets onto the
Exchange, as well as other options exchanges on which they participate,
which, it believes, will enhance the process of price discovery
conducted on the Exchange through increased order flow.\28\ The
proposal will also benefit market participants, the Exchange maintains,
by providing them with a more effective trading and hedging
vehicle.\29\
---------------------------------------------------------------------------
\27\ See Notice, supra note 4, at 15003.
\28\ See id. at 15003, 15008.
\29\ See id. at 15008.
---------------------------------------------------------------------------
With regard to the concerns that position limits generally are
meant to address, the Exchange represents that the structure of the
underlying ETFs and indexes of the options subject to this proposal;
the considerable market capitalization of the funds, underlying
component securities, and indexed component securities; and the
liquidity of the market for options on those ETFs and indexes and the
underlying component securities mitigates concerns regarding potential
manipulation of the products and disruption of the underlying markets
due to the increased position limits.\30\ The Exchange elaborates
further and describes in detail: (i) The creation and redemption
process for ETFs; (ii) the arbitrage activity that ensues when such
instruments are overpriced or are trading at a discount to the
securities on which they are based, and which, the Exchange maintains,
helps to keep the instrument's price in line with the value of its
underlying portfolio; and (iii) how these processes, in the Exchange's
view, serve to mitigate the potential price impact of the ETF shares
that might otherwise result from increased position limits.\31\
---------------------------------------------------------------------------
\30\ See id.
\31\ See id. at 15007.
---------------------------------------------------------------------------
In addition, the Exchange states that (i) some of the subject ETFs
are based on broad-based indexes that underlie cash-settled options
that are economically equivalent to the relevant ETF and have no
position limits; and (ii) others are based on broad-based indexes that
underlie cash-settled options with position limits reflecting a
notional value that is larger than the current position limit for their
ETF analogue.\32\ According to the Exchange, if certain position limits
are appropriate for the options overlying comparable indexes or
comparable baskets of securities to those that the ETFs subject to the
proposal track, or are appropriate for the ETFs that track the indexes
subject to the proposal, then those same economically equivalent
position limits should be appropriate for the options overlying the
relevant ETFs or indexes.\33\ For the other ETFs in the proposal where
this does not apply (because there are currently no options listed on
an index tracked by the ETF), the Exchange argues that, based on the
liquidity, breadth, and depth of the underlying market of the
components of such indexes, the index referenced by the ETF would be
considered a broad-based index under the Exchange's rules.\34\
Moreover, regarding the indexes subject to the proposal, the Exchange
argues that the deep, liquid markets for and market capitalization of
the component securities underlying such indexes support the proposed
position limit increases for the options on those indexes.\35\ The
Exchange also cites data in support of its argument that the market
capitalization of the underlying index or reference asset of each of
the ETFs and indexes is large enough to absorb any price movements that
may be caused by an oversized trade, and thus justifies increasing
position limits for the options on these products.\36\
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\32\ See id. at 15004.
\33\ See id. at 15005.
\34\ See id. at 15004-05.
\35\ See id. at 15005.
\36\ See id.
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As noted, in Amendment No. 1, the Exchange withdrew options on OIH
from the subject of the proposal, stating that ``the Exchange may
propose an increase for position limits for options on OIH through a
separate proposed rule change submitted at a later date.'' \37\
Accordingly, this Order does not address position limits for options on
OIH.
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\37\ See Amendment No. 1, supra note 5, at 6-7.
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The Exchange also refers to other provisions in its rules, noting,
for example, that the options reporting requirements of Exchange Rule
8.43 would continue to be applicable to the options subject to the
proposal.\38\ As set forth in Exchange Rule 8.43(a), each Trading
Permit Holder (``TPH'') must report to the Exchange certain information
in relation to any customer who, acting alone, or in concert with
others, on the previous business day maintained aggregate long or short
positions on the same side of the market of 200 or more contracts in
any single class of option contracts dealt in on the Exchange.\39\
Further, Exchange Rule 8.43(b) requires each TPH (other than an
Exchange market-maker or Designated Primary Market-Maker) \40\ that
maintains a position in excess of 10,000 non-FLEX equity option
contracts on the same side of the market, on behalf of its own account
or for the account of a customer, to report to the Exchange information
as to whether such positions are hedged, and provide documentation as
to how such contracts are hedged.\41\
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\38\ See Notice, supra note 4, at 41460.
\39\ The report must include, for each such class of options,
the number of option contracts comprising each such position and, in
the case of short positions, whether covered or uncovered. See Rule
8.43(a).
\40\ According to the Exchange, market-makers (including
Designated Primary Market-Makers) are exempt from the referenced
reporting requirement because market-maker information can be
accessed by the Exchange. See Notice, supra note 4, at 15007.
\41\ See id.
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The Exchange also represents that the existing surveillance
procedures and reporting requirements at the Exchange and other self-
regulatory organizations are capable of properly identifying disruptive
and/or manipulative trading activity.\42\ The Exchange states that its
surveillance procedures utilize daily monitoring of market activity via
automated surveillance techniques to identify unusual activity in both
options and the underlying ETFs and indexes, as applicable.\43\ In
addition, the Exchange states that its surveillance procedures have
been effective in the past for the surveillance of trading in the
options subject to this proposal, and will continue to be employed.\44\
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\42\ See id. at 15007-08.
\43\ See id. at 15008.
\44\ See id. at 15008 n.34.
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The Exchange also argues that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a TPH or its customer may try to maintain a potentially
large, unhedged position in the options subject to this proposal.\45\
Current margin and risk-based haircut methodologies, the Exchange
states, serve to limit the size of positions maintained by any one
account by
[[Page 26739]]
increasing the margin and/or capital that a TPH must maintain for a
large position held by itself or by its customer.\46\ In addition, the
Exchange notes that the Commission's net capital rule, Rule 15c3-1
under the Act,\47\ imposes a capital charge on TPHs to the extent of
any margin deficiency resulting from the higher margin requirement.\48\
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\45\ See id. at 15008.
\46\ See id.
\47\ 17 CFR 240.15c3-1.
\48\ See Notice, supra note 4, at 15008.
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III. Discussion and Commission Findings
The Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\49\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act,\50\ which requires, among other things, that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\49\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f(b)(5).
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Position and exercise limits serve as a regulatory tool designed to
address manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.\51\
These position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate the underlying market so as to benefit the
options positions.\52\ In particular, position and exercise limits are
designed to minimize the potential for mini-manipulations and for
corners or squeezes of the underlying market.\53\ In addition, such
limits serve to reduce the possibility of disruption of the options
market itself, especially in illiquid classes.\54\
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\51\ See, e.g., Securities Exchange Act Release No. 45236
(January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-2001-42).
\52\ See, e.g., Securities Exchange Act Release No. 47346
(February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-CBOE-2002-
26).
\53\ See id.
\54\ See id.
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Over the years, the Commission has taken a gradual, evolutionary
approach toward expansion of position and exercise limits for option
products overlying certain ETFs where there is considerable liquidity
in both the underlying cash markets and the options markets, and, in
the case of certain broad-based index options, toward elimination of
such limits altogether.\55\ The Commission has been careful to balance
two competing concerns when considering proposals by self-regulatory
organizations to change position and exercise limits. The Commission
has recognized that the limits can be useful to prevent investors from
disrupting the market in securities underlying the options.\56\ To this
point, commenters, writing in support of the proposal, noted that the
characteristics of the products subject to the Exchange's proposal help
to allay concerns about disruption in the underlying markets.\57\ One
commenter stated that the market capitalization of the underlying ETFs
of the ETF options subject to the proposal, the ETF component
securities, and the component securities of the underlying indexes
subject to the proposal are all sufficiently large to mitigate any
concern about potential manipulation and/or disruption in the
underlying markets upon increasing position limits for the overlying
options.\58\ Commenters also stated that the creation and redemption
process for the underlying ETFs of the ETF options subject to the
proposal will absorb price volatility caused by large trades in the
underlying ETFs.\59\
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\55\ The Commission's incremental approach to approving changes
in position and exercise limits for option products overlying
certain ETFs is well-established. See, e.g., Securities Exchange Act
Release Nos. 82770 (February 23, 2018), 83 FR 8907 (March 1, 2018)
(SR-CBOE-2017-057) (approving increase of position limits for
options on certain ETFs); 67672 (August 15, 2012), 77 FR 50750,
50752 & n.42 (August 22, 2012) (SR-NYSEAmex-2012-29) (approving
proposed rule change to eliminate position limits for SPY options on
a pilot basis); 64695 (June 17, 2011), 76 FR 36942, 36943 & n.19
(June 23, 2011) (SR-Phlx-2011-58) (approving increase of SPY options
position limit to 900,000 contracts). The Commission notes that the
Exchange filed an immediately effective proposed rule change on June
4, 2018 to terminate its pilot program and impose the current
1,800,000 contract position limit for SPY options. See Securities
Exchange Act Release No. 83415 (June 12, 2018), 83 FR 28274 (June
18, 2018) (SR-CBOE-2018-042).
\56\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
\57\ See letters to Vanessa Countryman, Secretary, Commission,
dated April 6, 2020, from Ellen Greene, Managing Director, Equity
and Options Market Structure, Securities Industry and Financial
Markets Association (``SIFMA Letter''); Steve Crutchfield, Head of
Market Structure, Chicago Trading Company (``CTC Letter''); and Venu
Palaparthi, Managing Director, Dash Financial Technologies LLC
(``Dash Letter''). One of these commenters agreed with the
Exchange's statements in support of the proposal with respect to the
highly liquid markets for the underlying securities, ``even to the
extent that trading in such securities is presenting somewhat
differently during the current market volatility.'' SIFMA Letter at
2.
\58\ See SIFMA Letter at 1-2. A second commenter also stated
that the market capitalization and diverse composition of the ETFs
subject to the proposal are of sufficient size to support the
proposed increase in position limits for the associated options. See
Dash Letter at 1.
\59\ See SIFMA Letter at 2; CTC Letter at 1.
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At the same time, the Commission has determined that limits should
not be established in a manner that will unnecessarily discourage
participation in the options market by institutions and other investors
with substantial hedging needs or to prevent specialists and market
makers from adequately meeting their obligations to maintain a fair and
orderly market.\60\ Commenters stated that failing to increase the
position limits for the options subject to the proposal would impede
trading activity and investor strategies, such as the use of effective
hedging vehicles or income-generating strategies.\61\ One of those
commenters further stated that failing to increase the position limits
for the options subject to the proposal may also impede the ability of
market makers to make liquid markets with tighter spreads in such
options.\62\
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\60\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
\61\ See SIFMA Letter at 2; CTC Letter at 1.
\62\ See SIFMA Letter at 2.
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After careful consideration of the proposal, as modified by
Amendment No. 1, and the comments received, the Commission believes
that it is reasonable for the Exchange to increase the position and
exercise limits for options on XLF and HYG to 500,000 contracts, for
options on EFA and FXI to 1,000,000 contracts, for options on SPY to
3,600,000 contracts, and for options on MXEA and MXEF to 50,000
contracts with no near-term position limit. As noted above, the markets
for standardized options on these securities and for the underlying
products themselves have substantial trading volume and liquidity. The
Commission believes that this liquidity should reduce the possibility
of manipulating these products and the disruption in the underlying
markets that lower position limits may protect against.
The Commission also has considered the creation and redemption
process for the ETFs subject to the proposal; the existence of an
issuer arbitrage
[[Page 26740]]
mechanism that helps keep each ETF's price in line with the value of
its underlying portfolio when overpriced or trading at a discount to
the securities on which it is based; and how these processes can serve
to mitigate the potential price impact of the ETF shares that might
otherwise result from increased position limits.\63\
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\63\ See supra notes 30-31 and accompanying text.
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In addition, as discussed above, the Exchange believes that current
margin and net capital requirements serve to limit the size of
positions maintained by any one account.\64\ The Commission agrees that
these financial requirements should help to address concerns that a
member or its customer may try to maintain an inordinately large
unhedged position in the options subject to this proposal and will help
to reduce risks if such a position is established.
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\64\ See supra notes 45-48 and accompanying text.
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The Commission further agrees with the Exchange that the reporting
requirements imposed by Exchange Rule 8.43,\65\ as well as the
Exchange's surveillance procedures, together with those of other self-
regulatory organizations,\66\ should help protect against potential
manipulation. The Commission expects that the Exchange will continue to
monitor trading in the options subject to this proposal for the purpose
of discovering and sanctioning manipulative acts and practices, and to
reassess the position and exercise limits, if and when appropriate, in
light of its findings.
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\65\ See supra notes 38-41 and accompanying text.
\66\ See supra notes 42-44 and accompanying text.
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In sum, given the measure of liquidity for the options subject to
this proposal and the underlying products, the creation and redemption
process and issuer arbitrage mechanisms that exist relating to the
underlying instruments, the margin and capital requirements cited
above, the Exchange's options reporting requirements, and the
Exchange's surveillance procedures and agreements with other markets,
the Commission believes that increasing the position and exercise
limits for XLF and HYG options to 500,000 contracts, for EFA and FXI
options to 1,000,000 contracts, for SPY options to 3,600,000 contracts,
and for MXEA and MXEF options to 50,000 contracts with no near-term
position limit is consistent with the Act.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2020-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2020-015. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-015, and should be submitted
on or before May 26, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above, in Amendment No. 1, the
Exchange: (1) Provided additional justification and analysis in support
of the proposal, which is summarized above; (2) revised its proposal to
eliminate the proposed increase to position limits for options on OIH;
and (3) made technical, corrective, and clarifying changes. The
Commission notes that Amendment No. 1 does not otherwise modify the
proposed rule change, which was subject to a full notice-and-comment
period. Rather, Amendment No. 1 serves to narrow the scope of the
original proposal by maintaining the existing position limit of 250,000
contracts for options on OIH. The Commission also notes that Amendment
No. 1 provides additional accuracy, clarity, and justification to the
proposal, thereby facilitating the Commission's ability to make the
findings set forth above to approve the proposal. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\67\ to approve the proposed rule change, as modified by Amendment
No. 1, on an accelerated basis.
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\67\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\68\ that the proposed rule change, as modified by Amendment No. 1
(SR-CBOE-2020-015), be, and hereby is, approved on an accelerated
basis.
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\68\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09520 Filed 5-4-20; 8:45 am]
BILLING CODE 8011-01-P
