Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend IM-3120-2 to BOX Rule 3120 (“Position Limits”) To Increase Position Limits for Options on Certain Exchange-Traded Funds (“ETFs”), and Thereby Similarly Increase Exercise Limits Under IM-3140-1 for Certain ETFs, 31267-31273 [2020-11041]
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Federal Register / Vol. 85, No. 100 / Friday, May 22, 2020 / Notices
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 9 and
subparagraph (f)(6) of Rule 19b–4
thereunder.10
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days from the
date of filing. However, Rule 19b–
4(f)(6)(iii) 11 permits the Commission to
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. The
Commission notes that waiver of the
operative delay would allow the
Exchange to provide the auto-match
functionality immediately available to
Participants. The Commission also notes
that the proposed rule change is
substantially similar to functionality on
another options exchange.12 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 waives
the 30-day operative delay and
designates the proposed rule change
operative upon filing.13
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
9 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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.
11 17 CFR 240.19b–4(f)(6)(iii).
12 See supra note 5.
13 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
10 17
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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
to determine whether the proposed rule
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 rule-comments@
sec.gov. Please include File Number SR–
BOX–2020–12 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–BOX–2020–12. 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
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31267
to make available publicly. All
submissions should refer to File
Number SR–BOX–2020–12, and should
be submitted on or before June 12, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–11039 Filed 5–21–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88894; File No. SR–BOX–
2020–13]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend IM–3120–2 to
BOX Rule 3120 (‘‘Position Limits’’) To
Increase Position Limits for Options on
Certain Exchange-Traded Funds
(‘‘ETFs’’), and Thereby Similarly
Increase Exercise Limits Under IM–
3140–1 for Certain ETFs
May 18, 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 May 7,
2020, BOX Exchange LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend IM–
3120–2 to BOX Rule 3120 (‘‘Position
Limits’’) to increase position limits for
options on certain exchange-traded
funds (‘‘ETFs’’), and thereby similarly
increase exercise limits under IM–3140–
1 for certain ETFs. The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
Room and also on the Exchange’s
internet website at https://
boxoptions.com.
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 85, No. 100 / Friday, May 22, 2020 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
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 IM–
3120–2 to BOX Rule 3120 (‘‘Position
Limits’’) to increase the position limits
for options on the following exchange
trade funds (‘‘ETFs’’): Standard and
Poor’s Depositary Receipts Trust
(‘‘SPY’’), iShares MSCI EAFE ETF
(‘‘EFA’’), iShares China Large-Cap ETF
(‘‘FXI’’), iShares iBoxx High Yield
Corporate Bond Fund (‘‘HYG’’), and
Financial Select Sector SPDR Fund
(‘‘XLF’’). This is a competitive filing that
is based on a proposal recently
submitted by the Chicago Board Options
Exchange Incorporated (‘‘Cboe’’) and
approved by the Commission.3
Position limits are designed to
address potential manipulative schemes
and adverse market impacts
surrounding the use of options, such as
disrupting the market in the security
underlying the options. While position
limits should address and discourage
the potential for manipulative schemes
and adverse market impact, if such
limits are set too low, participation in
the options market may be discouraged.
The Exchange believes that position
limits must therefore be balanced
between mitigating concerns of any
potential manipulation and the cost of
inhibiting potential hedging activity that
could be used for legitimate economic
purposes.
According to Cboe, market
participants have increased their
demand for options on SPY, EFA, FXI,
HYG, and XLF (collectively, the
‘‘Underlying ETFs’’) for both trading
and hedging purposes.4 Cboe noted that
although the demand for these options
3 See
Securities Exchange Act Release No. 34–
88768 (April 29, 2020), 85 FR 26736 (May 5, 2020)
(Order Granting Accelerated Approval of SR–BOX–
2020–015 [sic] as Modified by Amendment No. 1).
4 Id.
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appears to have increased, position
limits for options on the Underlying
ETFs have remained the same. The
Exchange believes these unchanged
position limits may have impeded, and
may continue to impede, trading
activity and strategies of investors, such
as use of effective hedging vehicles or
income generating strategies (e.g., buywrite or put-write), and the ability of
Market-Makers to make liquid markets
with tighter spreads in these options
resulting in the transfer of volume to
over-the-counter (‘‘OTC’’) markets. OTC
transactions occur through bilateral
agreements, the terms of which are not
publically disclosed to the marketplace.
As such, OTC transactions do not
contribute to the price discovery process
on a public exchange or other lit
markets. Therefore, the Exchange
believes that the proposed increases in
position limits for options on the
Underlying ETFs may enable liquidity
providers to provide additional liquidity
to the Exchange and other market
participants to transfer their liquidity
demands from OTC markets to the
Exchange, as well as other options
exchange on which they participate. As
described in further detail below, the
Exchange believes that the continuously
increasing market capitalization of the
Underlying ETFs and ETF component
securities, as well as the highly liquid
markets for those securities, reduces the
concerns for potential market
manipulation and/or disruption in the
underlying markets upon increasing
position limits, while the rising demand
for trading options on the Underlying
ETFs for legitimate economic purposes
compels an increase in position limits.
Proposed Position Limits for Options on
the Underlying ETFs
Position limits for options on ETFs
are determined pursuant to Rule 3120,
and vary according to the number of
outstanding shares and the trading
volumes of the underlying stocks or
ETFs over the past six months. Pursuant
to Exchange Rule 3120, the largest in
capitalization and the most frequently
traded stocks and ETFs have an option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and
smaller capitalization stocks and ETFs
have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.
Options on HYG and XLF are currently
subject to the standard position limit of
250,000 contracts as set forth in
Exchange Rule 3120. Rule IM–3120–2
sets forth separate position limits for
options on specific ETFs, including
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SPY, FXI, and EFA. In addition, BOX
Rule 3140 and IM–3140–1 (which are
not being amended by this filing),
establish exercise limits for the
aforementioned ETFs.
The Exchange proposes to amend
Rule IM–3120–2 to double the position
limits and, as a result, exercise limits,
for options on each of HYG, XLF, FXI,
EFA and SPY. By virtue of IM–3140–1,
the exercise limits for EFA, FXI, HYG,
XLF, and SPY would similarly increase.
The table below represents the current,
and proposed, position limits for
options on the ETFs subject to this
proposal:
ETF
SPY ...........
EFA ...........
FXI ............
HYG ..........
XLF ...........
Current
position limit
1,800,000
500,000
500,000
250,000
250,000
Proposed
position limit
3,600,000
1,000,000
1,000,000
500,000
500,000
The Exchange notes that the proposed
position limits for options on EFA and
FXI are consistent with existing position
limits for options on the iShares Russell
2000 ETF (‘‘IWM’’) and the iShares
MSCI Emerging Markets ETF (‘‘EEM’’),
while the proposed limits for options on
XLF and HYG are consistent with
current position limits for options on
the iShares MSCI Brazil Capped ETF
(‘‘EWZ’’), iShares 20+ Year Treasury
Bond Fund ETF (‘‘TLT’’), and iShares
MSCI Japan ETF (‘‘EWJ’’). The Exchange
represents that the Underlying ETFs
qualify for either (1) the initial listing
criteria set forth in Exchange Rule
5020(h)(2) for ETFs holding non-U.S.
component securities, or (2) generic
listing standards for series of portfolio
depository receipts and index fund
shares based on international or global
indexes under which a comprehensive
surveillance agreement (‘‘CSA’’) is not
required, as well as the continued
listing criteria in Rule 5030.5 In
compliance with its listing rules, the
Exchange also represents that non-U.S.
component securities that are not
subject to a CSA do not, in the
aggregate, represent more than 50% of
the weight of any of the Underlying
ETFs.6
Cboe’s Composition and Growth
Analysis for Underlying ETFs
As stated above, position (and
exercise) limits are intended to prevent
the establishment of options positions
5 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See Rule 5020(h)(2); Rule 5030(h).
6 See Rule 5020(h)(2)(ii)(A).
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that can be used or might create
incentives to manipulate the underlying
market so as to benefit options
positions. The Securities and Exchange
Commission (the ‘‘Commission’’) has
recognized that these limits are
designed to minimize the potential for
mini-manipulations and for corners or
squeezes of the underlying market, as
well as serve to reduce the possibility
for disruption of the options market
itself, especially in illiquid classes.7 The
Underlying ETFs as well as the ETF
components are highly liquid, and are
based on a broad set of highly liquid
securities and other reference assets, as
demonstrated by the trading statistics
collected by Cboe.8 The Commission
recognized the liquidity of the securities
comprising the underlying interest of
SPY and permitted no position limits on
SPY options from 2012 through 2018.9
ADV 11
(ETF shares)
Product
SPY .............
FXI ..............
EFA .............
HYG ............
XLF .............
70.3
26.1
25.1
20.0
48.8
million
million
million
million
million
...................
...................
...................
...................
...................
To support its proposed position limit
increases, Cboe conducted an analysis
in support of its proposal. BOX agrees
with Cboe’s trading statistics and
analysis. In support of its proposal,
Cboe considered both liquidity of the
Underlying ETFs and the component
securities of the Underlying ETFs, as
well as the availability of economically
equivalent products to the overlying
options and their respective position
limits. For instance, some of the
Underlying ETFs are based upon broadbased indices that underlie cash-settled
options, and therefore the options on
the Underlying ETFs are economically
equivalent to the options on those
indices, which have no position limits.
Other Underlying ETFs are based upon
broad-based indices that underlie cashsettled options with position limits
reflecting notional values that are larger
than current position limits for options
ADV
(option contracts)
2.8 million .....................
196,600 ........................
155,900 ........................
193,700 ........................
102,100 ........................
In addition, Cboe also collected the
same trading statistics, where
applicable, as above regarding a sample
of other ETFs, as well as the current
ADV
(ETF shares)
QQQ .........
EWZ .........
TLT ...........
EWJ ..........
30.2 million ................
26.7 million ................
9.6 million ..................
7.2 million ..................
968.7
106.8
928.2
216.6
793.6
million
million
million
million
million
.................
.................
.................
.................
.................
Fund market cap
(USD)
312.9 billion ..................
4.8 billion ......................
64.9 billion ....................
19.1 billion ....................
24.6 billion ....................
position limits for options on such
ETFs, in order to draw comparisons in
support of their proposed position limit
increases for options on a number of
ADV
(option
contracts)
Product
Shares outstanding
(ETFs) 12
670,200
186,500
95,200
5,700
Shares outstanding
(EFTs)
410.3 million ..............
233 million .................
128.1 million ..............
236.6 million ..............
on the ETFs based on the same indices.
For indexes that are tracked by an
Underlying ETF but on which there are
no options listed, the Exchange believes,
based on the liquidity, depth and
breadth of the underlying market of the
components of the indexes, that each of
the indexes referenced by the applicable
ETFs would be considered a broadbased index under the Exchange’s
Rules. Additionally, if in some cases
certain position limits are appropriate
for the options overlying comparable
indexes or basket of securities that the
Underlying ETFs track, then those
economically equivalent position limits
should be appropriate for the options
overlying the Underlying ETFs.
The Exchange notes, the following
trading statistics have been collected by
Cboe,10 regarding shares of and options
on the Underlying ETFs, as well as the
component securities:
billion
billion
billion
billion
29.3 trillion.
28.0 trillion.
19.3 trillion.
14906.4 billion.
3.8 trillion.
Underlying ETFs (see further discussion
below):
Fund market cap
(USD)
88.7
11.3
17.5
14.2
Total market cap of
ETF Components 13
.................
.................
.................
.................
Total market cap of
ETF components
10.1 trillion .................
234.6 billion ...............
N/A ............................
3 trillion ......................
Current
position
limits
1,800,000
500,000
500,000
500,000
The following analysis, which BOX
agrees with, was conducted by Cboe in
support of its proposal. Cboe noted that,
overall, the liquidity in the shares of the
Underlying ETFs and in the component
securities of the Underlying ETFs, and
in their overlying options, as well as the
large market capitalizations and
structure of each of the Underlying
ETFs, support the proposal to increase
the position limits for each option class.
Given the robust liquidity and
capitalization in the Underlying ETFs
and in the component securities of the
Underlying ETFs, the Exchange does not
anticipate that the proposed increase in
position limits would create significant
price movements. Also, the Exchange
believes the market capitalization of the
underlying component securities of the
applicable index or reference asset are
large enough to adequately absorb
potential price movements that may be
caused by large trades.
Specifically, the Exchange notes that
SPY tracks the performance of the S&P
500 Index, which is an index of
7 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR-NYSEAmex-2012-29).
8 See supra note 3.
9 See Securities Exchange Act Release Nos. 67936
(September 27, 2012), 77 FR 60491 (October 3,
2012) (SR–BOX–2012–013), which implemented a
pilot program that ran through 2017, during which
there were no position limits for options on SPY.
The Exchange notes that throughout the duration of
the pilot program it was not aware of any problems
created or adverse consequences as a result of the
pilot program. See also Securities Exchange Act
Release No. 34–83414 (June 12, 2018), 83 FR 28296
(June 18, 2018) (SR–BOX–2018–22).
10 See Securities Exchange Act Release No. 34–
88350 (March 10, 2020), 85 FR 15003 (March 16,
2020) (SR–CBOE–2020–015).
11 Cboe’s Average daily volume (ADV) data for
ETF shares and options contracts are for all of 2019.
Additionally, reference to ADV in ETF shares, and
ETF options herein this proposal are for all of 2019,
unless otherwise indicated.
12 Shares Outstanding and Fund Market
Capitalization Data in the tables presented herein
this filing were sourced from Bloomberg and the
Cboe’s internal data on January 2, 2020.
13 Total Market Capitalization of the ETF
Components presented in the tables herein this
filing were sourced from Bloomberg on January 3,
2020, as well as directly from the issuers’ websites.
14 Total Market Capitalization of HYG was
sourced from IHS Markit, which sends daily
constituent information to Cboe.
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Federal Register / Vol. 85, No. 100 / Friday, May 22, 2020 / Notices
diversified large cap U.S. companies.15
It is composed of 505 selected stocks
spanning over approximately 24
separate industry groups. The S&P 500
is one of the most commonly followed
equity indices, and is widely considered
to be the best indicator of stock market
performance as a whole. SPY is one of
the most actively traded ETFs. In
support of its proposal to increase
position limits for SPY to 3,600,000
contracts, Cboe compared SPY’s ADV
from 2017 to the end of 2019, and found
that SPY’s ADV has increased from
approximately 64.6 million shares to
70.3 million shares.16 Similarly, Cboe
noted SPY’s ADV in options contracts
has increased from 2.6 million to 2.8
million through 2019.17 Cboe’s data
shows the demand for options trading
on SPY has continued to increase;
however, the position limits have
remained the same, which the Exchange
believes may have impacted growth in
SPY option volume from 2017 through
2019. In addition, Cboe notes that SPY
shares are more liquid than
PowerShares QQQ Trust (‘‘QQQ’’)
shares, which is also currently subject to
a position limit of 1,800,000 contracts.18
Specifically, according to Cboe’s
statistical comparison, SPY currently
experiences over twice the ADV in
shares and over four times the ADV in
options than that of QQQ.19
EFA tracks the performance of MSCI
EAFE Index (‘‘MXEA’’), which is
comprised of over 900 large and midcap securities across 21 developed
markets, including countries in Europe,
Australia and the Far East, excluding
the U.S. and Canada.20 In support of its
proposal to increase the position limit
for EFA, Cboe’s proposal specifies, that
from 2017 through 2019, ADV has
grown significantly in shares of EFA
and in options on EFA, from
approximately 19.4 million shares in
15 See SPDR S&P 500 ETF Trust, available at:
https://www.ssga.com/us/en/individual/etfs/funds/
spdr-sp-500-etf-trust-spy (January 21, 2020).
16 See supra note 3.
17 See Securities Exchange Act Release No. 83415
(June 12, 2018), 83 FR 28274 (June 18, 2018) (SR–
CBOE–2018–042); and 34–83414 (June 12, 2018), 83
FR 28296 (June 18, 2020) (SR–BOX–2018–22).
18 The Exchange notes that it also updates the
PowerShares QQQ Trust symbol in IM–3120–2 from
QQQQ to QQQ as this accurately reflects the
current ticker symbol for PowerShares QQQ, which
was officially changed from QQQQ to QQQ by
Invesco PowerShares Capital Management LLC in
2011. See Morningstar, PowerShares Changes
Ticker Symbol of Tech-Heavy QQQ ETF, available
at morningstar.com/articles/374713/powershareschanges-tickersymbol-of-tech-heavy-qqq-etf (March
23, 2011).
19 The 2019 ADV for QQQ shares is 30.2 million
and for options on QQQ is 670,200.
20 See iShares MSCI EAFE ETF, available at
https://www.ishares.com/us/products/239623/
ishares-msci-eafe-etf (February 10, 2020).
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18:07 May 21, 2020
Jkt 250001
2017 to 25.1 million through 2019, and
from approximately 98,800 options
contract in 2017 to 155,900 through
2019. Further, Cboe compared the
notional value of EFA’s share price of
$69.44 and MXEA’s index level of
2036.94, approximately 29 EFA option
contracts equal one MXEA option
contract. Based on the above
comparison of notional values, Cboe
concluded that a position limit for EFA
options would be economically
equivalent to that of MXEA options
which equates to 725,000 contracts
(previously) and 1,450,000 for Cboe’s
current 50,000 contract position limit
for MXEA options.21 Cboe also noted
that MXEA index options have an ADV
of 594 options contracts, which equate
to an ADV of 17,226 EFA option
contracts (as that is 29 times the size of
594). The Exchange believes the
significantly higher actual ADV
(155,900 contracts), economically
equivalent ADV (17,226 contracts),
notional value, and economically
equivalent position limits for EFA as
compared to MXEA options, supports
an increase in position limits for EFA
options from 500,000 contracts to
1,000,000 contracts.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks.22 According to Cboe, FXI shares
and options have also experienced
increased liquidity since 2017, as ADV
has grown from approximately 15.1
million shares in 2017 to 26.1 million
through 2019, as well as approximately
71,900 options contracts in 2017 to
196,600 through 2019. Cboe notes that
although there are currently no options
on the FTSE China 50 Index listed for
trading, the components of the FTSE
China 50 Index, which can be used to
create a basket of stocks that equate to
the FXI ETF, currently have a market
capitalization of approximately $28
trillion and FXI has a market
capitalization of $4.8 billion (as
indicated above), which the Exchange
believes are both large enough to absorb
potential price movements caused by a
large trade in FXI.
XLF invests in a wide array of
financial service firms with diversified
business lines ranging from investment
management to commercial and
investment banking. It generally
corresponds to the price and yield
performance of publicly traded equity
securities of companies in the SPDR
21 The Exchange notes that BOX does not list
options on foreign indexes.
22 See iShares China Large-Cap ETF, available at
https://www.ishares.com/us/products/239536/
ishares-china-largecap-etf (February 10, 2020).
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Financial Select Sector Index.23 In
support of its proposal, Cboe compared
XLF’s ADV in shares and in options to
the ADV in shares and options for EWZ
(26.7 million shares and 186,500
options contracts), TLT (9.6 million
shares and 95,200 options contracts),
and EWJ (7.2 million shares and 5,700
options contracts). According to Cboe,
XLF experiences significantly greater
ADV in shares and options than EWZ,
TLT, and EWJ, which already have a
position limit of 500,000 contracts—the
proposed position limit for XLF options.
According to Cboe, although there are
no options listed on the SPDR Financial
Select Sector Index listed for trading,
the components of the index, which can
be used to create a basket of stocks that
equate to the XLF ETF, currently have
a market capitalization of $3.8 trillion
(indicated above). Additionally, XLF
has a market capitalization of $24.6
billion. The Exchange believes that both
of these are large enough to absorb
potential price movements caused by a
large trade in XLF.
Finally, HYG attempts to track the
investment results of Markit iBoxx USD
Liquid High Yield Index, which is
composed of U.S. dollar-denominated,
high-yield corporate bonds and is one of
the most widely used high-yield bond
ETFs.24 To support its proposed
position limit increase on HYG, Cboe
compared the HYG’s ADV in share and
options to that of both TLT (9.6 million
shares and 95,200 options contracts),
and EWJ (7.2 million shares and 5,700
options contracts). BOX agrees with
Cboe’s comparison and following
analysis. Cboe found that HYG
experiences significantly higher ADV in
shares and options than both TLT and
EWJ, which are currently subject to a
position limit of 500,000 options
contracts—the proposed limit for
options on HYG. According to Cboe,
while HYG does not have an index
option analogue listed for trading, Cboe
believes that its market capitalization of
$19.1 billion, and of $906.4 billion in
component securities, is adequate to
absorb a potential price movement that
may be caused by large trades in HYG.
Creation and Redemption for ETFs
The Exchange believes that the
creation and redemption process for
ETFs will lessen the potential for
manipulative activity with options on
the Underlying ETFs. When an ETF
23 See Select Sector SPDR ETFs, XLF, available at
https://www.sectorspdr.com/sectorspdr/sector/xlf
(January 15, 2020).
24 See iShares iBoxx $ High Yield Corporate Bond
ETF, available at https://www.ishares.com/us/
products/239565/ishares-iboxx-high-yieldcorporatebond-etf (January 15, 2020).
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provider wants to create more shares, it
looks to an Authorized Participant
(generally a market maker or other large
financial institution) to acquire the
securities the ETF is to hold. For
instance, when an ETF is designed to
track the performance of an index, the
Authorized Participant can purchase all
the constituent securities in the exact
same weight as the index, then deliver
those shares to the ETF provider. In
exchange, the ETF provider gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. The price is based
on the net asset value, not the market
value at which the ETF is trading. The
creation of new ETF units can be
conducted during an entire trading day,
and is not subject to position limits.
This process works in reverse where the
ETF provider seeks to decrease the
number of shares that are available to
trade. The creation and redemption
process, therefore, creates a direct link
to the underlying components of the
ETF, and serves to mitigate potential
price impact of the ETF shares that
might otherwise result from increased
position limits for the ETF options.
The Exchange understands that the
ETF creation and redemption process
seeks to keep an ETF’s share price
trading in line with the ETF’s
underlying net asset value. Because an
ETF trades like a stock, its share price
will fluctuate during the trading day,
due to simple supply and demand. If
demand to buy an ETF is high, for
instance, the ETF’s share price might
rise above the value of its underlying
securities. When this happens, the
Authorized Participant believes the ETF
may now be overpriced, so it may buy
shares of the component securities and
then sell ETF shares in the open market
(i.e. creations). This may drive the ETF’s
share price back toward the underlying
net asset value. Likewise, if the ETF
share price starts trading at a discount
to the securities it holds, the Authorized
Participant can buy shares of the ETF
and redeem them for the underlying
securities (i.e. redemptions). Buying
undervalued ETF shares may drive the
share price of the ETF back toward fair
value. This arbitrage process helps to
keep an ETF’s share price in line with
the value of its underlying portfolio.
Surveillance and Reporting
Requirements
The Exchange believes that increasing
the position limits for the options on the
Underlying ETFs would lead to a more
liquid and competitive market
environment for these options, which
will benefit customers interested in
trading these products. The reporting
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requirement for the options on the
Underlying ETFs would remain
unchanged. Thus, the Exchange would
still require that each BOX Participant
that maintains positions in the options
on the same side of the market, for its
own account or for the account of a
customer, report certain information to
the Exchange. This information would
include, but would not be limited to, the
options’ positions, whether such
positions are hedged and, if so, a
description of the hedge(s). Exchange
Market-Makers 25 are exempt from this
reporting requirement, because Market
Maker information can be accessed
through the Exchange’s market
surveillance systems.26 In addition, the
general reporting requirement for
customer accounts that maintain an
aggregate long or short position of 200
or more options contracts of any single
class of options traded on BOX would
remain at this level for the options
subject to this proposal, and continue to
serve as an important part of the
Exchange’s surveillance efforts.27
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange
and other SROs are capable of properly
identifying disruptive and/or
manipulative trading activity. The
Exchange also represents that it has
adequate surveillances in place to detect
potential manipulation, as well as
reviews in place to identify potential
changes in composition of the
Underlying ETFs, and continued
compliance with the Exchange’s listing
standards. These procedures utilize
daily monitoring of market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlyings, as applicable.28
The Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,29 which are used to report
ownership of stock which exceeds 5%
of a company’s total stock issue and
may assist in providing information in
25 A Market Maker ‘‘is an Options Participant
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in the Rule 8000 Series.
All Market Makers are designated as specialists on
the Exchange for all purposes under the Exchange
Act or Rules thereunder.’’ See BOX Rule 100(a)(31).
26 The Exchange notes that the Financial Industry
Regulatory Authority (‘‘FINRA’’), pursuant to a
regulatory services agreement, operates surveillance
on behalf of BOX. This type of Market Maker
information can be found through FINRA.
27 See BOX Rule 3150 for reporting requirements.
28 These procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed by
FINRA on behalf of BOX.
29 17 CFR 240.13d–1.
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31271
monitoring for any potential
manipulative schemes.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
the options on the Underlying ETFs.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
or capital that a BOX Participant must
maintain for a large position held by
itself or by its customer.30 In addition,
Rule 15c3–1 31 imposes a capital charge
on BOX Participants to the extent of any
margin deficiency resulting from the
higher margin requirement.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,32 in general, and Section 6(b)(5) of
the Act,33 in particular, in that it is
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
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) 34 requirement that the rules of
an exchange not be designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed increase in position limits for
options on the Underlying ETFs will
remove impediments to and perfect the
mechanism of a free and open market
and national market system, and, in
general, protect investors and the public
interest, because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. The proposed
increases will allow market participants
to more fully implement hedging
strategies in related derivative products
and to further use options to achieve
investment strategies (e.g., there are
Exchange-Traded Products (‘‘ETPs’’)
that use options on the Underlying ETFs
as part of their investment strategy, and
30 See BOX Rule 10100 Series for a description of
margin requirements.
31 17 CFR 240.15c3–1.
32 15 U.S.C. 78f(b).
33 15 U.S.C. 78f(b)(5).
34 Id.
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the applicable position limits as they
stand today may inhibit these ETPs in
achieving their investment objectives, to
the detriment of investors). Also,
increasing the applicable position limits
may allow Market-Makers to provide the
markets for these options with more
liquidity in amounts commensurate
with increased consumer demand in
such markets. The proposed position
limit increases may also encourage other
liquidity providers to shift liquidity, as
well as encourage consumers to shift
demand, from over the counter markets
onto the Exchange, which will enhance
the process of price discovery
conducted on the Exchange through
increased order flow.
In addition, the Exchange believes
that the structure of the Underlying
ETFs, the considerable market
capitalization of the funds, underlying
component securities, and the liquidity
of the markets for the applicable options
and underlying component securities
will mitigate concerns regarding
potential manipulation of the products
and/or disruption of the underlying
markets upon increasing the relevant
position limits. As a general principle,
increases in market capitalizations,
active trading volume, and deep
liquidity of securities do not lead to
manipulation and/or disruption. This
general principle applies to the recently
observed increased levels of market
capitalization, trading volume, and
liquidity in shares of the Underlying
ETFs, and the components of the
Underlying ETFs (as described above),
the Exchange does not believe that the
options markets or underlying markets
would become susceptible to
manipulation and/or disruption as a
result of the proposed position limit
increases. Indeed, the Commission has
previously expressed the belief that
removing position and exercise limits
may bring additional depth and
liquidity to the options markets without
increasing concerns regarding
intermarket manipulation or disruption
of the options or the underlying
securities.35 More specifically, the
Commission recently approved Cboe’s
proposal to increase the position limits
for the Underlying ETFs in this filing.36
Further, the Exchange notes that the
proposed rule change to increase
position limits for select actively traded
options, is not novel and has been
previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
35 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
36 See supra note 3.
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limits for options on SPY.37
Additionally, the Commission has
approved similar proposed rule changes
by the Exchange to increase position
limits for options on highly liquid,
actively-traded ETFs.38 In approving the
permanent elimination of position (and
exercise limits) for such options, the
Commission relied heavily upon Cboe’s
surveillance capabilities, expressing
trust in the enhanced surveillances and
reporting safeguards that Cboe took in
order to detect and deter possible
manipulative behavior which might
arise from eliminating position and
exercise limits.39 Furthermore, as
described more fully above, the
proposed position limits for options on
EFA and FXI are consistent with
existing position limits for options on
IWM and EEM, and the proposed limits
for options on XLF and HYG are
consistent with current position limits
for options on EWZ, TLT, and EWJ.
The Exchange believes that BOX’s
surveillance and reporting safeguards
continue to be designed to deter and
detect possible manipulative behavior
that might arise from increasing or
eliminating position and exercise limits
in certain classes. Lastly, the Exchange
believes that the current financial
requirements imposed by the Exchange
and by the Commission adequately
address concerns regarding potentially
large, unhedged position in the options
on the Underlying ETFs, further
promoting just and equitable principles
of trading, the maintenance of a fair and
orderly market, and the protection of
investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
increased position limits (and exercise
limits) will be available to all market
participants and apply to each in the
same manner. The Exchange believes
that the proposed rule change will
provide additional opportunities for
market participants to more efficiently
achieve their investment and trading
objectives.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the Act. On the contrary,
the Exchange believes the proposal
promotes competition because it may
attract additional order flow from the
OTC market to exchanges, which would
in turn compete amongst each other for
those orders. The Exchange believes
market participants would benefit from
being able to trade options with
increased position limits in an exchange
environment in several ways, including
but not limited to the following: (1)
Enhanced efficiency in initiating and
closing out position; (2) increased
market transparency; and (3) heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor.
Further, the Exchange notes that the
rule change is being proposed as a
competitive response to a filing
submitted by Cboe that was recently
approved by the Commission.40
As such, the Exchange does not
believe that the proposed rule change
will impose any burden on competition
not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 41 and Rule 19b–
4(f)(6) thereunder.42
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
40 See
supra, note 3.
U.S.C. 78s(b)(3)(A).
42 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization 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.
41 15
37 See
supra notes 9 and 10.
supra note 3; see also Securities Exchange
Act Release No. 68086 (October 23, 2012), 77 FR
65600 (October 29, 2012) (SR–CBOE–2012–066);
and 34–68478 (December 19, 2012), 77 FR 76132
(December 26, 2012) (SR–BOX–2012–023).
39 See Securities Exchange Act Release Nos.
52650 (October 21, 2005), 70 FR 62147, at 62149
(October 28, 2005) (SR–CBOE–2005–41).
38 See
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Federal Register / Vol. 85, No. 100 / Friday, May 22, 2020 / Notices
Act 43 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 44
permits the Commission to 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 upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
BOX Participants that are also members
at CBOE where these increased position
limits are currently in place. For this
reason, the Commission believes that
waiver of the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal as operative
upon filing.45
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
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 rule-comments@
sec.gov. Please include File Number SR–
BOX–2020–13 on the subject line.
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6)(iii).
45 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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–BOX–2020–13. 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 such
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–BOX–2020–13, and should
be submitted on or before June 12, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–11041 Filed 5–21–20; 8:45 am]
43 17
44 17
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46 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88901; File Nos. SR–NYSE–
2020–05, SR–NYSEAMER–2020–05, SR–
NYSEArca–2020–08, SR–NYSECHX–2020–
02, SR–NYSENAT–2020–03, SR–NYSE–
2020–11, SR–NYSEAMER–2020–10, SR–
NYSEArca–2020–15, SR–NYSECHX–2020–
05, SR–NYSENAT–2020–08]
Self-Regulatory Organizations; New
York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., and NYSE National, Inc.;
Order Instituting Proceedings To
Determine Whether To Approve or
Disapprove Proposed Rule Changes
To Establish a Wireless Fee Schedule
Setting Forth Available Wireless
Bandwidth Connections and Wireless
Market Data Connections and
Associated Fees
May 18, 2020.
I. Introduction
On January 30, 2020, New York Stock
Exchange LLC (‘‘NYSE’’), NYSE
American LLC (‘‘NYSE American’’),
NYSE Arca, Inc. (‘‘NYSE Arca’’), NYSE
Chicago, Inc. (‘‘NYSE Chicago’’), and
NYSE National, Inc. (‘‘NYSE National’’)
(collectively, the ‘‘Exchanges’’) each
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange Act’’
or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2
a proposed rule change to establish a
schedule of Wireless Connectivity Fees
and Charges (‘‘Wireless Fee Schedule’’)
listing available wireless connections
between the Mahwah, New Jersey data
center (‘‘Mahwah Data Center’’) and
other data centers. The proposed rule
changes (collectively, ‘‘Wireless I’’) were
published for comment in the Federal
Register on February 18, 2020.3 On
April 1, 2020, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to either approve the Wireless I
proposed rule changes, disapprove the
proposed rule changes, or institute
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release Nos. 88168
(February 11, 2020), 85 FR 8938 (February 18, 2020)
(SR–NYSE–2020–05) (‘‘Wireless I Notice’’); 88169
(February 11, 2020), 85 FR 8946 (February 18, 2020)
(SR–NYSEAMER–2020–05); 88170 (February 11,
2020), 85 FR 8956 (February 18, 2020) (SR–
NYSEArca–2020–08); 88172 (February 11, 2020), 85
FR 8923 (February 18, 2020) (SR–NYSECHX–2020–
02); and 88171 (February 11, 2020), 85 FR 8930
(February 18, 2020) (SR–NYSENAT–2020–03)
(collectively, the ‘‘Wireless I Notices’’). Comments
received on the Wireless I Notices are available on
the Commission’s website at: https://www.sec.gov/
comments/sr-nyse-2020-05/srnyse202005.htm.
4 15 U.S.C. 78s(b)(2).
2 17
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Notices]
[Pages 31267-31273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11041]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88894; File No. SR-BOX-2020-13]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-3120-
2 to BOX Rule 3120 (``Position Limits'') To Increase Position Limits
for Options on Certain Exchange-Traded Funds (``ETFs''), and Thereby
Similarly Increase Exercise Limits Under IM-3140-1 for Certain ETFs
May 18, 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 May 7, 2020, BOX Exchange LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. 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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend IM-3120-2 to BOX Rule 3120
(``Position Limits'') to increase position limits for options on
certain exchange-traded funds (``ETFs''), and thereby similarly
increase exercise limits under IM-3140-1 for certain ETFs. The text of
the proposed rule change is available from the principal office of the
Exchange, at the Commission's Public Reference Room and also on the
Exchange's internet website at https://boxoptions.com.
[[Page 31268]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
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 IM-3120-2 to BOX Rule 3120
(``Position Limits'') to increase the position limits for options on
the following exchange trade funds (``ETFs''): Standard and Poor's
Depositary Receipts Trust (``SPY''), iShares MSCI EAFE ETF (``EFA''),
iShares China Large-Cap ETF (``FXI''), iShares iBoxx High Yield
Corporate Bond Fund (``HYG''), and Financial Select Sector SPDR Fund
(``XLF''). This is a competitive filing that is based on a proposal
recently submitted by the Chicago Board Options Exchange Incorporated
(``Cboe'') and approved by the Commission.\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 34-88768 (April 29,
2020), 85 FR 26736 (May 5, 2020) (Order Granting Accelerated
Approval of SR-BOX-2020-015 [sic] as Modified by Amendment No. 1).
---------------------------------------------------------------------------
Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
According to Cboe, market participants have increased their demand
for options on SPY, EFA, FXI, HYG, and XLF (collectively, the
``Underlying ETFs'') for both trading and hedging purposes.\4\ Cboe
noted that although the demand for these options appears to have
increased, position limits for options on the Underlying ETFs have
remained the same. The Exchange believes these unchanged position
limits may have impeded, and may continue to impede, trading activity
and strategies of investors, such as use of effective hedging vehicles
or income generating strategies (e.g., buy-write or put-write), and the
ability of Market-Makers to make liquid markets with tighter spreads in
these options resulting in the transfer of volume to over-the-counter
(``OTC'') markets. OTC transactions occur through bilateral agreements,
the terms of which are not publically disclosed to the marketplace. As
such, OTC transactions do not contribute to the price discovery process
on a public exchange or other lit markets. Therefore, the Exchange
believes that the proposed increases in position limits for options on
the Underlying ETFs may enable liquidity providers to provide
additional liquidity to the Exchange and other market participants to
transfer their liquidity demands from OTC markets to the Exchange, as
well as other options exchange on which they participate. As described
in further detail below, the Exchange believes that the continuously
increasing market capitalization of the Underlying ETFs and ETF
component securities, as well as the highly liquid markets for those
securities, reduces the concerns for potential market manipulation and/
or disruption in the underlying markets upon increasing position
limits, while the rising demand for trading options on the Underlying
ETFs for legitimate economic purposes compels an increase in position
limits.
---------------------------------------------------------------------------
\4\ Id.
---------------------------------------------------------------------------
Proposed Position Limits for Options on the Underlying ETFs
Position limits for options on ETFs are determined pursuant to Rule
3120, and vary according to the number of outstanding shares and the
trading volumes of the underlying stocks or ETFs over the past six
months. Pursuant to Exchange Rule 3120, the largest in capitalization
and the most frequently traded stocks and ETFs have an option position
limit of 250,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market; and smaller
capitalization stocks and ETFs have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. Options on HYG
and XLF are currently subject to the standard position limit of 250,000
contracts as set forth in Exchange Rule 3120. Rule IM-3120-2 sets forth
separate position limits for options on specific ETFs, including SPY,
FXI, and EFA. In addition, BOX Rule 3140 and IM-3140-1 (which are not
being amended by this filing), establish exercise limits for the
aforementioned ETFs.
The Exchange proposes to amend Rule IM-3120-2 to double the
position limits and, as a result, exercise limits, for options on each
of HYG, XLF, FXI, EFA and SPY. By virtue of IM-3140-1, the exercise
limits for EFA, FXI, HYG, XLF, and SPY would similarly increase. The
table below represents the current, and proposed, position limits for
options on the ETFs subject to this proposal:
------------------------------------------------------------------------
Current Proposed
ETF position limit position limit
------------------------------------------------------------------------
SPY..................................... 1,800,000 3,600,000
EFA..................................... 500,000 1,000,000
FXI..................................... 500,000 1,000,000
HYG..................................... 250,000 500,000
XLF..................................... 250,000 500,000
------------------------------------------------------------------------
The Exchange notes that the proposed position limits for options on
EFA and FXI are consistent with existing position limits for options on
the iShares Russell 2000 ETF (``IWM'') and the iShares MSCI Emerging
Markets ETF (``EEM''), while the proposed limits for options on XLF and
HYG are consistent with current position limits for options on the
iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury
Bond Fund ETF (``TLT''), and iShares MSCI Japan ETF (``EWJ''). The
Exchange represents that the Underlying ETFs qualify for either (1) the
initial listing criteria set forth in Exchange Rule 5020(h)(2) for ETFs
holding non-U.S. component securities, or (2) generic listing standards
for series of portfolio depository receipts and index fund shares based
on international or global indexes under which a comprehensive
surveillance agreement (``CSA'') is not required, as well as the
continued listing criteria in Rule 5030.\5\ In compliance with its
listing rules, the Exchange also represents that non-U.S. component
securities that are not subject to a CSA do not, in the aggregate,
represent more than 50% of the weight of any of the Underlying ETFs.\6\
---------------------------------------------------------------------------
\5\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Rule 5020(h)(2); Rule 5030(h).
\6\ See Rule 5020(h)(2)(ii)(A).
---------------------------------------------------------------------------
Cboe's Composition and Growth Analysis for Underlying ETFs
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions
[[Page 31269]]
that can be used or might create incentives to manipulate the
underlying market so as to benefit options positions. The Securities
and Exchange Commission (the ``Commission'') has recognized that these
limits are designed to minimize the potential for mini-manipulations
and for corners or squeezes of the underlying market, as well as serve
to reduce the possibility for disruption of the options market itself,
especially in illiquid classes.\7\ The Underlying ETFs as well as the
ETF components are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets, as demonstrated by
the trading statistics collected by Cboe.\8\ The Commission recognized
the liquidity of the securities comprising the underlying interest of
SPY and permitted no position limits on SPY options from 2012 through
2018.\9\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
\8\ See supra note 3.
\9\ See Securities Exchange Act Release Nos. 67936 (September
27, 2012), 77 FR 60491 (October 3, 2012) (SR-BOX-2012-013), which
implemented a pilot program that ran through 2017, during which
there were no position limits for options on SPY. The Exchange notes
that throughout the duration of the pilot program it was not aware
of any problems created or adverse consequences as a result of the
pilot program. See also Securities Exchange Act Release No. 34-83414
(June 12, 2018), 83 FR 28296 (June 18, 2018) (SR-BOX-2018-22).
---------------------------------------------------------------------------
To support its proposed position limit increases, Cboe conducted an
analysis in support of its proposal. BOX agrees with Cboe's trading
statistics and analysis. In support of its proposal, Cboe considered
both liquidity of the Underlying ETFs and the component securities of
the Underlying ETFs, as well as the availability of economically
equivalent products to the overlying options and their respective
position limits. For instance, some of the Underlying ETFs are based
upon broad-based indices that underlie cash-settled options, and
therefore the options on the Underlying ETFs are economically
equivalent to the options on those indices, which have no position
limits. Other Underlying ETFs are based upon broad-based indices that
underlie cash-settled options with position limits reflecting notional
values that are larger than current position limits for options on the
ETFs based on the same indices. For indexes that are tracked by an
Underlying ETF but on which there are no options listed, the Exchange
believes, based on the liquidity, depth and breadth of the underlying
market of the components of the indexes, that each of the indexes
referenced by the applicable ETFs would be considered a broad-based
index under the Exchange's Rules. Additionally, if in some cases
certain position limits are appropriate for the options overlying
comparable indexes or basket of securities that the Underlying ETFs
track, then those economically equivalent position limits should be
appropriate for the options overlying the Underlying ETFs.
The Exchange notes, the following trading statistics have been
collected by Cboe,\10\ regarding shares of and options on the
Underlying ETFs, as well as the component securities:
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 34-88350 (March 10,
2020), 85 FR 15003 (March 16, 2020) (SR-CBOE-2020-015).
\11\ Cboe's Average daily volume (ADV) data for ETF shares and
options contracts are for all of 2019. Additionally, reference to
ADV in ETF shares, and ETF options herein this proposal are for all
of 2019, unless otherwise indicated.
\12\ Shares Outstanding and Fund Market Capitalization Data in
the tables presented herein this filing were sourced from Bloomberg
and the Cboe's internal data on January 2, 2020.
\13\ Total Market Capitalization of the ETF Components presented
in the tables herein this filing were sourced from Bloomberg on
January 3, 2020, as well as directly from the issuers' websites.
\14\ Total Market Capitalization of HYG was sourced from IHS
Markit, which sends daily constituent information to Cboe.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding Total market cap of
Product ADV \11\ (ETF shares) ADV (option contracts) (ETFs) \12\ Fund market cap (USD) ETF Components \13\
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPY................................ 70.3 million.......... 2.8 million........... 968.7 million........ 312.9 billion........ 29.3 trillion.
FXI................................ 26.1 million.......... 196,600............... 106.8 million........ 4.8 billion.......... 28.0 trillion.
EFA................................ 25.1 million.......... 155,900............... 928.2 million........ 64.9 billion......... 19.3 trillion.
HYG................................ 20.0 million.......... 193,700............... 216.6 million........ 19.1 billion......... \14\906.4 billion.
XLF................................ 48.8 million.......... 102,100............... 793.6 million........ 24.6 billion......... 3.8 trillion.
--------------------------------------------------------------------------------------------------------------------------------------------------------
In addition, Cboe also collected the same trading statistics, where
applicable, as above regarding a sample of other ETFs, as well as the
current position limits for options on such ETFs, in order to draw
comparisons in support of their proposed position limit increases for
options on a number of Underlying ETFs (see further discussion below):
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current
Product ADV (ETF shares) ADV (option Shares outstanding Fund market cap Total market cap of position
contracts) (EFTs) (USD) ETF components limits
--------------------------------------------------------------------------------------------------------------------------------------------------------
QQQ.............................. 30.2 million........ 670,200 410.3 million....... 88.7 billion........ 10.1 trillion...... 1,800,000
EWZ.............................. 26.7 million........ 186,500 233 million......... 11.3 billion........ 234.6 billion...... 500,000
TLT.............................. 9.6 million......... 95,200 128.1 million....... 17.5 billion........ N/A................ 500,000
EWJ.............................. 7.2 million......... 5,700 236.6 million....... 14.2 billion........ 3 trillion......... 500,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following analysis, which BOX agrees with, was conducted by
Cboe in support of its proposal. Cboe noted that, overall, the
liquidity in the shares of the Underlying ETFs and in the component
securities of the Underlying ETFs, and in their overlying options, as
well as the large market capitalizations and structure of each of the
Underlying ETFs, support the proposal to increase the position limits
for each option class. Given the robust liquidity and capitalization in
the Underlying ETFs and in the component securities of the Underlying
ETFs, the Exchange does not anticipate that the proposed increase in
position limits would create significant price movements. Also, the
Exchange believes the market capitalization of the underlying component
securities of the applicable index or reference asset are large enough
to adequately absorb potential price movements that may be caused by
large trades.
Specifically, the Exchange notes that SPY tracks the performance of
the S&P 500 Index, which is an index of
[[Page 31270]]
diversified large cap U.S. companies.\15\ It is composed of 505
selected stocks spanning over approximately 24 separate industry
groups. The S&P 500 is one of the most commonly followed equity
indices, and is widely considered to be the best indicator of stock
market performance as a whole. SPY is one of the most actively traded
ETFs. In support of its proposal to increase position limits for SPY to
3,600,000 contracts, Cboe compared SPY's ADV from 2017 to the end of
2019, and found that SPY's ADV has increased from approximately 64.6
million shares to 70.3 million shares.\16\ Similarly, Cboe noted SPY's
ADV in options contracts has increased from 2.6 million to 2.8 million
through 2019.\17\ Cboe's data shows the demand for options trading on
SPY has continued to increase; however, the position limits have
remained the same, which the Exchange believes may have impacted growth
in SPY option volume from 2017 through 2019. In addition, Cboe notes
that SPY shares are more liquid than PowerShares QQQ Trust (``QQQ'')
shares, which is also currently subject to a position limit of
1,800,000 contracts.\18\ Specifically, according to Cboe's statistical
comparison, SPY currently experiences over twice the ADV in shares and
over four times the ADV in options than that of QQQ.\19\
---------------------------------------------------------------------------
\15\ See SPDR S&P 500 ETF Trust, available at: https://www.ssga.com/us/en/individual/etfs/funds/spdr-sp-500-etf-trust-spy
(January 21, 2020).
\16\ See supra note 3.
\17\ See Securities Exchange Act Release No. 83415 (June 12,
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 34-83414
(June 12, 2018), 83 FR 28296 (June 18, 2020) (SR-BOX-2018-22).
\18\ The Exchange notes that it also updates the PowerShares QQQ
Trust symbol in IM-3120-2 from QQQQ to QQQ as this accurately
reflects the current ticker symbol for PowerShares QQQ, which was
officially changed from QQQQ to QQQ by Invesco PowerShares Capital
Management LLC in 2011. See Morningstar, PowerShares Changes Ticker
Symbol of Tech-Heavy QQQ ETF, available at morningstar.com/articles/374713/powershares-changes-tickersymbol-of-tech-heavy-qqq-etf (March
23, 2011).
\19\ The 2019 ADV for QQQ shares is 30.2 million and for options
on QQQ is 670,200.
---------------------------------------------------------------------------
EFA tracks the performance of MSCI EAFE Index (``MXEA''), which is
comprised of over 900 large and mid-cap securities across 21 developed
markets, including countries in Europe, Australia and the Far East,
excluding the U.S. and Canada.\20\ In support of its proposal to
increase the position limit for EFA, Cboe's proposal specifies, that
from 2017 through 2019, ADV has grown significantly in shares of EFA
and in options on EFA, from approximately 19.4 million shares in 2017
to 25.1 million through 2019, and from approximately 98,800 options
contract in 2017 to 155,900 through 2019. Further, Cboe compared the
notional value of EFA's share price of $69.44 and MXEA's index level of
2036.94, approximately 29 EFA option contracts equal one MXEA option
contract. Based on the above comparison of notional values, Cboe
concluded that a position limit for EFA options would be economically
equivalent to that of MXEA options which equates to 725,000 contracts
(previously) and 1,450,000 for Cboe's current 50,000 contract position
limit for MXEA options.\21\ Cboe also noted that MXEA index options
have an ADV of 594 options contracts, which equate to an ADV of 17,226
EFA option contracts (as that is 29 times the size of 594). The
Exchange believes the significantly higher actual ADV (155,900
contracts), economically equivalent ADV (17,226 contracts), notional
value, and economically equivalent position limits for EFA as compared
to MXEA options, supports an increase in position limits for EFA
options from 500,000 contracts to 1,000,000 contracts.
---------------------------------------------------------------------------
\20\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February
10, 2020).
\21\ The Exchange notes that BOX does not list options on
foreign indexes.
---------------------------------------------------------------------------
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks.\22\ According to Cboe, FXI
shares and options have also experienced increased liquidity since
2017, as ADV has grown from approximately 15.1 million shares in 2017
to 26.1 million through 2019, as well as approximately 71,900 options
contracts in 2017 to 196,600 through 2019. Cboe notes that although
there are currently no options on the FTSE China 50 Index listed for
trading, the components of the FTSE China 50 Index, which can be used
to create a basket of stocks that equate to the FXI ETF, currently have
a market capitalization of approximately $28 trillion and FXI has a
market capitalization of $4.8 billion (as indicated above), which the
Exchange believes are both large enough to absorb potential price
movements caused by a large trade in FXI.
---------------------------------------------------------------------------
\22\ See iShares China Large-Cap ETF, available at https://www.ishares.com/us/products/239536/ishares-china-largecap-etf
(February 10, 2020).
---------------------------------------------------------------------------
XLF invests in a wide array of financial service firms with
diversified business lines ranging from investment management to
commercial and investment banking. It generally corresponds to the
price and yield performance of publicly traded equity securities of
companies in the SPDR Financial Select Sector Index.\23\ In support of
its proposal, Cboe compared XLF's ADV in shares and in options to the
ADV in shares and options for EWZ (26.7 million shares and 186,500
options contracts), TLT (9.6 million shares and 95,200 options
contracts), and EWJ (7.2 million shares and 5,700 options contracts).
According to Cboe, XLF experiences significantly greater ADV in shares
and options than EWZ, TLT, and EWJ, which already have a position limit
of 500,000 contracts--the proposed position limit for XLF options.
According to Cboe, although there are no options listed on the SPDR
Financial Select Sector Index listed for trading, the components of the
index, which can be used to create a basket of stocks that equate to
the XLF ETF, currently have a market capitalization of $3.8 trillion
(indicated above). Additionally, XLF has a market capitalization of
$24.6 billion. The Exchange believes that both of these are large
enough to absorb potential price movements caused by a large trade in
XLF.
---------------------------------------------------------------------------
\23\ See Select Sector SPDR ETFs, XLF, available at https://www.sectorspdr.com/sectorspdr/sector/xlf (January 15, 2020).
---------------------------------------------------------------------------
Finally, HYG attempts to track the investment results of Markit
iBoxx USD Liquid High Yield Index, which is composed of U.S. dollar-
denominated, high-yield corporate bonds and is one of the most widely
used high-yield bond ETFs.\24\ To support its proposed position limit
increase on HYG, Cboe compared the HYG's ADV in share and options to
that of both TLT (9.6 million shares and 95,200 options contracts), and
EWJ (7.2 million shares and 5,700 options contracts). BOX agrees with
Cboe's comparison and following analysis. Cboe found that HYG
experiences significantly higher ADV in shares and options than both
TLT and EWJ, which are currently subject to a position limit of 500,000
options contracts--the proposed limit for options on HYG. According to
Cboe, while HYG does not have an index option analogue listed for
trading, Cboe believes that its market capitalization of $19.1 billion,
and of $906.4 billion in component securities, is adequate to absorb a
potential price movement that may be caused by large trades in HYG.
---------------------------------------------------------------------------
\24\ See iShares iBoxx $ High Yield Corporate Bond ETF,
available at https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (January 15, 2020).
---------------------------------------------------------------------------
Creation and Redemption for ETFs
The Exchange believes that the creation and redemption process for
ETFs will lessen the potential for manipulative activity with options
on the Underlying ETFs. When an ETF
[[Page 31271]]
provider wants to create more shares, it looks to an Authorized
Participant (generally a market maker or other large financial
institution) to acquire the securities the ETF is to hold. For
instance, when an ETF is designed to track the performance of an index,
the Authorized Participant can purchase all the constituent securities
in the exact same weight as the index, then deliver those shares to the
ETF provider. In exchange, the ETF provider gives the Authorized
Participant a block of equally valued ETF shares, on a one-for-one fair
value basis. The price is based on the net asset value, not the market
value at which the ETF is trading. The creation of new ETF units can be
conducted during an entire trading day, and is not subject to position
limits. This process works in reverse where the ETF provider seeks to
decrease the number of shares that are available to trade. The creation
and redemption process, therefore, creates a direct link to the
underlying components of the ETF, and serves to mitigate potential
price impact of the ETF shares that might otherwise result from
increased position limits for the ETF options.
The Exchange understands that the ETF creation and redemption
process seeks to keep an ETF's share price trading in line with the
ETF's underlying net asset value. Because an ETF trades like a stock,
its share price will fluctuate during the trading day, due to simple
supply and demand. If demand to buy an ETF is high, for instance, the
ETF's share price might rise above the value of its underlying
securities. When this happens, the Authorized Participant believes the
ETF may now be overpriced, so it may buy shares of the component
securities and then sell ETF shares in the open market (i.e.
creations). This may drive the ETF's share price back toward the
underlying net asset value. Likewise, if the ETF share price starts
trading at a discount to the securities it holds, the Authorized
Participant can buy shares of the ETF and redeem them for the
underlying securities (i.e. redemptions). Buying undervalued ETF shares
may drive the share price of the ETF back toward fair value. This
arbitrage process helps to keep an ETF's share price in line with the
value of its underlying portfolio.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits for the
options on the Underlying ETFs would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in trading these products. The reporting
requirement for the options on the Underlying ETFs would remain
unchanged. Thus, the Exchange would still require that each BOX
Participant that maintains positions in the options on the same side of
the market, for its own account or for the account of a customer,
report certain information to the Exchange. This information would
include, but would not be limited to, the options' positions, whether
such positions are hedged and, if so, a description of the hedge(s).
Exchange Market-Makers \25\ are exempt from this reporting requirement,
because Market Maker information can be accessed through the Exchange's
market surveillance systems.\26\ In addition, the general reporting
requirement for customer accounts that maintain an aggregate long or
short position of 200 or more options contracts of any single class of
options traded on BOX would remain at this level for the options
subject to this proposal, and continue to serve as an important part of
the Exchange's surveillance efforts.\27\
---------------------------------------------------------------------------
\25\ A Market Maker ``is an Options Participant registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in the Rule 8000 Series. All Market
Makers are designated as specialists on the Exchange for all
purposes under the Exchange Act or Rules thereunder.'' See BOX Rule
100(a)(31).
\26\ The Exchange notes that the Financial Industry Regulatory
Authority (``FINRA''), pursuant to a regulatory services agreement,
operates surveillance on behalf of BOX. This type of Market Maker
information can be found through FINRA.
\27\ See BOX Rule 3150 for reporting requirements.
---------------------------------------------------------------------------
The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange and other SROs are capable of
properly identifying disruptive and/or manipulative trading activity.
The Exchange also represents that it has adequate surveillances in
place to detect potential manipulation, as well as reviews in place to
identify potential changes in composition of the Underlying ETFs, and
continued compliance with the Exchange's listing standards. These
procedures utilize daily monitoring of market activity via automated
surveillance techniques to identify unusual activity in both options
and the underlyings, as applicable.\28\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\29\ which are used to report ownership of stock
which exceeds 5% of a company's total stock issue and may assist in
providing information in monitoring for any potential manipulative
schemes.
---------------------------------------------------------------------------
\28\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed by FINRA on behalf of BOX.
\29\ 17 CFR 240.13d-1.
---------------------------------------------------------------------------
The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in the options
on the Underlying ETFs. Current margin and risk-based haircut
methodologies serve to limit the size of positions maintained by any
one account by increasing the margin and/or capital that a BOX
Participant must maintain for a large position held by itself or by its
customer.\30\ In addition, Rule 15c3-1 \31\ imposes a capital charge on
BOX Participants to the extent of any margin deficiency resulting from
the higher margin requirement.
---------------------------------------------------------------------------
\30\ See BOX Rule 10100 Series for a description of margin
requirements.
\31\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\32\ in general, and Section
6(b)(5) of the Act,\33\ in particular, in that it is 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 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) \34\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Id.
---------------------------------------------------------------------------
The Exchange believes that the proposed increase in position limits
for options on the Underlying ETFs will remove impediments to and
perfect the mechanism of a free and open market and national market
system, and, in general, protect investors and the public interest,
because it will provide market participants with the ability to more
effectively execute their trading and hedging activities. The proposed
increases will allow market participants to more fully implement
hedging strategies in related derivative products and to further use
options to achieve investment strategies (e.g., there are Exchange-
Traded Products (``ETPs'') that use options on the Underlying ETFs as
part of their investment strategy, and
[[Page 31272]]
the applicable position limits as they stand today may inhibit these
ETPs in achieving their investment objectives, to the detriment of
investors). Also, increasing the applicable position limits may allow
Market-Makers to provide the markets for these options with more
liquidity in amounts commensurate with increased consumer demand in
such markets. The proposed position limit increases may also encourage
other liquidity providers to shift liquidity, as well as encourage
consumers to shift demand, from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETFs, the considerable market capitalization of the funds,
underlying component securities, and the liquidity of the markets for
the applicable options and underlying component securities will
mitigate concerns regarding potential manipulation of the products and/
or disruption of the underlying markets upon increasing the relevant
position limits. As a general principle, increases in market
capitalizations, active trading volume, and deep liquidity of
securities do not lead to manipulation and/or disruption. This general
principle applies to the recently observed increased levels of market
capitalization, trading volume, and liquidity in shares of the
Underlying ETFs, and the components of the Underlying ETFs (as
described above), the Exchange does not believe that the options
markets or underlying markets would become susceptible to manipulation
and/or disruption as a result of the proposed position limit increases.
Indeed, the Commission has previously expressed the belief that
removing position and exercise limits may bring additional depth and
liquidity to the options markets without increasing concerns regarding
intermarket manipulation or disruption of the options or the underlying
securities.\35\ More specifically, the Commission recently approved
Cboe's proposal to increase the position limits for the Underlying ETFs
in this filing.\36\
---------------------------------------------------------------------------
\35\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
\36\ See supra note 3.
---------------------------------------------------------------------------
Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options, is not
novel and has been previously approved by the Commission. For example,
the Commission has previously approved, on a pilot basis, eliminating
position limits for options on SPY.\37\ Additionally, the Commission
has approved similar proposed rule changes by the Exchange to increase
position limits for options on highly liquid, actively-traded ETFs.\38\
In approving the permanent elimination of position (and exercise
limits) for such options, the Commission relied heavily upon Cboe's
surveillance capabilities, expressing trust in the enhanced
surveillances and reporting safeguards that Cboe took in order to
detect and deter possible manipulative behavior which might arise from
eliminating position and exercise limits.\39\ Furthermore, as described
more fully above, the proposed position limits for options on EFA and
FXI are consistent with existing position limits for options on IWM and
EEM, and the proposed limits for options on XLF and HYG are consistent
with current position limits for options on EWZ, TLT, and EWJ.
---------------------------------------------------------------------------
\37\ See supra notes 9 and 10.
\38\ See supra note 3; see also Securities Exchange Act Release
No. 68086 (October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-
CBOE-2012-066); and 34-68478 (December 19, 2012), 77 FR 76132
(December 26, 2012) (SR-BOX-2012-023).
\39\ See Securities Exchange Act Release Nos. 52650 (October 21,
2005), 70 FR 62147, at 62149 (October 28, 2005) (SR-CBOE-2005-41).
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The Exchange believes that BOX's surveillance and reporting
safeguards continue to be designed to deter and detect possible
manipulative behavior that might arise from increasing or eliminating
position and exercise limits in certain classes. Lastly, the Exchange
believes that the current financial requirements imposed by the
Exchange and by the Commission adequately address concerns regarding
potentially large, unhedged position in the options on the Underlying
ETFs, further promoting just and equitable principles of trading, the
maintenance of a fair and orderly market, and the protection of
investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders. The Exchange believes
market participants would benefit from being able to trade options with
increased position limits in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out position; (2) increased market transparency;
and (3) heightened contra-party creditworthiness due to the role of OCC
as issuer and guarantor. Further, the Exchange notes that the rule
change is being proposed as a competitive response to a filing
submitted by Cboe that was recently approved by the Commission.\40\
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\40\ See supra, note 3.
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As such, the Exchange does not believe that the proposed rule
change will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \41\ and Rule 19b-
4(f)(6) thereunder.\42\
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\41\ 15 U.S.C. 78s(b)(3)(A).
\42\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization 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 pursuant to Rule 19b-4(f)(6) under the
[[Page 31273]]
Act \43\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \44\ permits the
Commission to 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 upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
BOX Participants that are also members at CBOE where these increased
position limits are currently in place. For this reason, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest. Therefore, the
Commission hereby waives the operative delay and designates the
proposal as operative upon filing.\45\
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\43\ 17 CFR 240.19b-4(f)(6).
\44\ 17 CFR 240.19b-4(f)(6)(iii).
\45\ For purposes only of waiving the 30-day operative delay,
the Commission also 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 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-BOX-2020-13 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-BOX-2020-13. 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 such 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-BOX-2020-13, and should be submitted on
or before June 12, 2020.
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\46\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11041 Filed 5-21-20; 8:45 am]
BILLING CODE 8011-01-P
