Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 9, Sections 13 and 15 To Increase the Position and Exercise Limits for Options on the SPDR® S&P 500® ETF Trust, 39640-39644 [2020-14117]
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Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Notices
Dated: June 25, 2020.
J. Matthew DeLesDernier,
Assistant Secretary.
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
[FR Doc. 2020–14106 Filed 6–30–20; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89150; File No. SR–BX–
2020–012]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Options 9,
Sections 13 and 15 To Increase the
Position and Exercise Limits for
Options on the SPDR® S&P 500® ETF
Trust
June 25, 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 June 17,
2020, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Options 9, Section 13, Position Limits,
to increase position limits for options on
the SPDR® S&P 500® ETF Trust
(‘‘SPY’’), and similarly increase exercise
limits within Options 9, Section 15,
Exercise Limits.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqbx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
1
2
15 U.S.C. 78s(b)(1).
17 CFR 240.19b–4.
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1. Purpose
The Exchange proposes to amend
Options 9, Section 13, Position Limits,
to increase position limits for options on
SPY. The Exchange’s position limits are
incorporated by reference to Cboe
Exchange, Inc. (‘‘Cboe’’), except for
SPY.3 The proposed amendments to
SPY are based on the similar proposal
by Cboe.4 The Exchange also proposes
to make minor non-substantive
technical corrections to Options 9,
Section 13 and Options 9, Section 15.
Each change will be described below.
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.
The Exchange has observed an
ongoing increase in demand in options
on the SPDR® S&P 500® ETF Trust
(‘‘SPY’’) for both trading and hedging
purposes. Though the demand for
3 See Options 9, Section 13(a)(1). The Exchange
notes that with respect to U.S. Dollar-Settled
Foreign Currency Options, those position limits are
incorporated by reference to Phlx. See Options 9,
Section 13(a)(4).
4 See Securities Exchange Act Release No. 88768
(April 29, 2020) (SR–CBOE–2020–015) (Notice of
Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change,
as Modified by Amendment No. 1, to Increase
Position Limits for Options on Certain ExchangeTraded Funds and Indexes). The Cboe proposal also
proposed to increase position limits for options
overlying a number of ETFs as well as the MSCI
Emerging Markets Index (‘‘MXEF’’) and the MSCI
EAFE Index (‘‘MXEA’’). The Exchange’s proposal
only proposes an increase to the position (and
exercise limit) for options overlying SPY. BX does
not list options on MXEF and MXEA. Also, other
options and Exchange-Traded Fund position limits,
which were amended in Cboe’s rule change, have
already been increased on BX because BX’s rules at
Options 9, Section 13 and Options 9, Section 15
incorporate its position limits and exercise limits to
Cboe, except for SPY. Accordingly, this proposal is
limited to SPY.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
options on SPY appear to have
increased, position limits (and
corresponding exercise limits) for
options on SPY 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
increase for position limits (and exercise
limits) on options on SPY 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 SPY
and SPY 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
SPY for legitimate economic purposes
compels an increase in position limits
(and corresponding exercise limits).
Proposed Position Limits for Options on
SPY
Options 9, Section 13 sets forth the
position limit for options on SPY. The
Exchange proposes to amend Options 9,
Section 13 to double the position limits
for options on SPY. The current position
limit for options on SPY is 1,800,000
and the proposed position limit for
options on SPY is 3,600,000. The
Exchange represents that SPY qualifies
for the initial listing criteria set forth in
Options 4, Section 3(i) for ETFs. In
addition, the Exchange is making
corresponding amendments to exercise
limits for options on SPY within
Options 9, Section 15.
Composition and Growth Analysis for
SPY
As stated above, position (and
exercise) limits are intended to prevent
the establishment of options positions
that can be used or might create
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incentives to manipulate the underlying
market so as to benefit options
positions. 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.5
SPY as well as SPY components are
highly liquid, and are based on a broad
set of highly liquid securities and other
reference assets, as demonstrated
through the trading statistics presented
Product
SPY ...........................
in this proposal. Indeed, 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 2018.6
To support the proposed position
limit increase (and corresponding
increase in exercise limit), the Exchange
considered both the liquidity of SPY
and the component securities of SPY, as
well as the availability of economically
equivalent products to the overlying
option and its respective position limit.
SPY is based upon the S&P 500 Index,
ADV 8
(ETF shares)
ADV
(option
contracts)
Shares
outstanding
(ETFs) 9
Fund
market cap
(USD)
70.3 ...........................
million ........................
2.8 million .................
968.7 million ...............
312.9 billion ..............
The Exchange is presenting the
following data collected by Cboe as part
of its initial filing, that the Commission
has approved,11 for 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 pursuant to
ADV
(option
contracts)
Product
ADV
(ETF shares)
QQQ .......................
30.2 million .............
670,200
410.3 million ..........
88.7 billion .............
10.1 trillion .............
Release No. 83423 (June 13, 2018), 83 FR 28481
(June 19, 2018) (SR–BX–2018–022).
7 See supra note 3.
8 Chboe’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.
9 See Amendment No. 1 to SR–CBOE–2020–015,
at page 4, available at https://www.sec.gov/
comments/sr-cboe-2020-015/srcboe20200157081714-215592.pdf (‘‘Amendment No. 1’’).
10 See Amendment No. 1, at page 4.
PO 00000
Frm 00123
Options 9, Section 13, to draw
comparisons in support of a proposed
position limit increase for options on
SPY (see further discussion below):
Total market cap
of ETF
components
5 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29).
6 See Securities Exchange Act Release No. 69179
(March 19, 2013), 78 FR 17952 (March 25, 2013)
(SR–BX–2013–024), 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 of result of the
pilot program. See also Securities Exchange Act
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29.3 trillion.
Fund market cap
(USD)
underlying component securities of the
S&P 500 Index are large enough to
adequately absorb potential price
movements that may be caused by large
trades.
The following analysis for SPY, which
the Exchange agrees with in support of
this proposal, as well as the statistics
presented in support thereof, were
presented by Cboe in their initial filing,
which was approved by the
Commission.12 The Exchange notes that
SPY tracks the performance of the S&P
500 Index, which is an index of
diversified large cap U.S. companies.13
01:53 Jul 01, 2020
Total market
cap of ETF
components 10
Shares outstanding
(ETFs)
The Exchange believes that, overall,
the liquidity in the shares of SPY and
in the component securities of SPY and
in its overlying options, as well as the
large market capitalizations and
structure of SPY support the proposal to
increase the position limit for SPY (and
corresponding exercise limit). Given the
robust liquidity and capitalization in
SPY and in the component securities of
SPY 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
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and therefore the options on SPY are
economically equivalent to the options
on the index, which have no position
limits. Accordingly, the Exchange
believes the position limit of 3,600,000
contracts is appropriate for options on
SPY.
The Exchange is presenting data
collected by Cboe as part of its initial
filing to increase the position and
exercise limit on SPY, that the
Commission approved,7 following
trading statistics regarding shares of and
options on SPY, as well as the
component securities:
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Current
position
limits
1,800,000
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, and,
since 2017,14 its ADV has increased
from approximately 64.6 million shares
to 70.3 million shares by the end of
2019. Similarly, its ADV in options
contracts has increased from 2.6 million
to 2.8 million through 2019.15 As noted,
11 See
supra note 4.
See supra note 4.
13 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).
14 See supra note 4.
15 See also Securities Exchange Act Release No.
83423 (June 13, 2018), 83 FR 28481 (June 19, 2018)
(SR–BX–2018–022) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend
Position Limits and Exercise Limits for Options on
the SPDR Exchange-Traded Fund).
12
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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. The Exchange
also notes that SPY shares are more
liquid than INVESCO QQQ TrustSM,
Series 1 (‘‘QQQ’’) shares, which is also
currently subject to a position limit of
1,800,000 contracts. Specifically, SPY
currently experiences over twice the
ADV in shares and over four times the
ADV in options than that of QQQ.16
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
SPY. When an ETF 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
16 The 2019 ADV for QQQ shares is 30.2 million
and for options on QQQ is 670,200.
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02:09 Jul 01, 2020
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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
SPY 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 SPY would remain
unchanged. Thus, the Exchange would
still require that each 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). Market
Makers would continue to be exempt
from this reporting requirement,
however, the Exchange may access
Market-Maker position information.17
Moreover, the Exchange’s requirement
that Participants file reports with the
Exchange for any customer who held
aggregate large long or short positions
on the same side of the market of 200
or more options contracts of any single
class for the previous day will remain at
this level for the options subject to this
proposal and will continue to serve as
an important part of the Exchange’s
surveillance efforts.18
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
17 The Options Clearing Corporation (‘‘OCC’’)
through the Large Option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for Participant compliance with position
reporting requirements by collecting data from each
Participant, consolidating the information, and
ultimately providing detailed listings of each
Participant’s report to the Exchange, as well as
Financial Industry Regulatory Authority, Inc.
(‘‘FINRA’’), acting as its agent pursuant to a
regulatory services agreement (‘‘RSA’’).
18 See Options 6E, Section 2 for reporting
requirements.
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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 SPY 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
underlying’s, as applicable.19 The
Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,20 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.
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 SPY. 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 Participant
must maintain for a large position held
by itself or by its customer.21 In
addition, Rule 15c3–1 22 imposes a
capital charge on Participants to the
extent of any margin deficiency
resulting from the higher margin
requirement.
Technical Corrections
The Exchange proposes to: (1) Update
the Chicago Board Options Exchange to
Cboe Exchange, Inc. (‘‘Cboe’’) as the
name of this self-regulatory organization
has changed; (2) rename the SPDR® S&P
500® exchange-traded fund (‘‘SPY ETF’’
or ‘‘SPY’’) as ‘‘SPDR® S&P 500® ETF
Trust (SPY) to update the name of this
product; (3) amend ‘‘Customer’’ to
‘‘customer’’ as this reference refers to
the customer of a Participant; and (4)
amend ‘‘PHLX’’ to ‘‘Phlx.’’
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
19 The Exchange believes these procedures have
been effective for the surveillance of trading the
options subject to this proposal, and will continue
to employ them.
20 17 CFR 240.13d–1.
21 See Options 6C, Section 3 for a description of
margin requirements.
22 17 CFR 240.15c3–1.
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Section 6(b) of the Act.23 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 25 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 limit for
options on the SPY will remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest, because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. The proposed
increase 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 SPY as part of their
investment strategy, and the applicable
position limits (and corresponding
exercise 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 SPY, the
considerable market capitalization of
the fund, 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
deters manipulation and/or disruption.
This general principle applies to the
recently observed increased levels of
market capitalization, trading volume,
and liquidity in SPY, and the
components of the Underlying ETFs
[sic] (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.26
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. The proposed increase to
the position and exercise limits on SPY
has recently been approved by the
Commission.27 The Commission has
previously approved, on a pilot basis,
eliminating position limits for options
on SPY.28 In approving increases in
position limits in the past, the
Commission relied heavily upon the
exchange’s surveillance capabilities,
expressing trust in the enhanced
surveillances and reporting safeguards
that the exchange took in order to detect
and deter possible manipulative
behavior which might arise from
eliminating position and exercise limits.
The Exchange’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.
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 SPY, further promoting
just and equitable principles of trading,
See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
27 See supra note 4.
28 See supra notes 9 and 10.
26
15 U.S.C. 78f(b).
24 15 U.S.C. 78f(b)(5).
25 Id.
23
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39643
the maintenance of a fair and orderly
market, and the protection of investors.
Technical Corrections
The Exchange’s proposal to make
various technical amendments, within
Options 9, Section 13 and Options 9,
Section 15 to: (1) Update the Chicago
Board Options Exchange to Cboe
Exchange, Inc. (‘‘Cboe’’) as the name of
this self-regulatory organization has
changed; (2) rename the SPDR® S&P
500® exchange-traded fund (‘‘SPY ETF’’
or ‘‘SPY’’) as ‘‘SPDR® S&P 500® ETF
Trust (SPY) to update the name of this
product; (3) amend ‘‘Customer’’ to
‘‘customer’’ as this reference refers to
the customer of a Participant; and (4)
amend ‘‘PHLX’’ to ‘‘Phlx.’’ Accordingly,
these amendments are non-substantive
technical changes which add clarity to
the Rulebook and are consistent with
the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
an unnecessary burden on intra-market
competition because it will apply to all
market participants. The Exchange does
not believe the proposed rule change
will impose any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act because the
increased position limit (and exercise
limit) 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 of market participants.
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.29 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
29 Additionally, several other options exchanges
have the same position limits as the Exchange is
proposing, as they incorporate by reference to
Cboe’s position limits, and as a result the position
limits for options on SPY and will increase at those
exchanges.
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market transparency; and (3) heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor. The
Exchange understands that other
options exchanges intend to file similar
proposed rule changes with the
Commission to increase position limits
on options on SPY. This may further
contribute to fair competition among
exchanges for multiply listed options.
Technical Corrections
The Exchange’s proposal to make
various technical amendments, within
Options 9, Section 13 and Options 9,
Section 15 to: (1) Update the Chicago
Board Options Exchange to Cboe
Exchange, Inc. (‘‘Cboe’’) as the name of
this self-regulatory organization has
changed; (2) rename the SPDR® S&P
500® exchange-traded fund (‘‘SPY ETF’’
or ‘‘SPY’’) as ‘‘SPDR® S&P 500® ETF
Trust (SPY) to update the name of this
product; (3) amend ‘‘Customer’’ to
‘‘customer’’ as this reference refers to
the customer of a Participant; and (4)
amend ‘‘PHLX’’ to ‘‘Phlx.’’ Accordingly,
these amendments are non-substantive
technical changes which add clarity to
the Rulebook and do not impose a
burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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 30 and Rule 19b–
4(f)(6) thereunder.31
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 32 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 33
30 15
U.S.C. 78s(b)(3)(A).
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.
32 17 CFR 240.19b–4(f)(6).
33 17 CFR 240.19b–4(f)(6)(iii).
31 17
VerDate Sep<11>2014
01:53 Jul 01, 2020
Jkt 250001
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 would allow the Exchange to
immediately increase its position and
exercise limits for options on SPY to
those of Cboe, which the Exchange
believes will ensure fair competition
among exchanges and provide
consistency for BX Participants that are
also members at Cboe where these
increased position and exercise 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.34
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:
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BX–2020–012. 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–BX–2020–012, and should
be submitted on or before July 22, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14117 Filed 6–30–20; 8:45 am]
BILLING CODE 8011–01–P
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–
BX–2020–012 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
34 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).
PO 00000
Frm 00126
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01JYN1
]]>Agencies
[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39640-39644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14117]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89150; File No. SR-BX-2020-012]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 9,
Sections 13 and 15 To Increase the Position and Exercise Limits for
Options on the SPDR[supreg] S&P 500[supreg] ETF Trust
June 25, 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 June 17, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\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 Options 9, Section 13, Position
Limits, to increase position limits for options on the SPDR[supreg] S&P
500[supreg] ETF Trust (``SPY''), and similarly increase exercise limits
within Options 9, Section 15, Exercise Limits.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
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 Options 9, Section 13, Position
Limits, to increase position limits for options on SPY. The Exchange's
position limits are incorporated by reference to Cboe Exchange, Inc.
(``Cboe''), except for SPY.\3\ The proposed amendments to SPY are based
on the similar proposal by Cboe.\4\ The Exchange also proposes to make
minor non-substantive technical corrections to Options 9, Section 13
and Options 9, Section 15. Each change will be described below.
---------------------------------------------------------------------------
\3\ See Options 9, Section 13(a)(1). The Exchange notes that
with respect to U.S. Dollar-Settled Foreign Currency Options, those
position limits are incorporated by reference to Phlx. See Options
9, Section 13(a)(4).
\4\ See Securities Exchange Act Release No. 88768 (April 29,
2020) (SR-CBOE-2020-015) (Notice of Filing of Amendment No. 1 and
Order Granting Accelerated Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, to Increase Position Limits for Options
on Certain Exchange-Traded Funds and Indexes). The Cboe proposal
also proposed to increase position limits for options overlying a
number of ETFs as well as the MSCI Emerging Markets Index (``MXEF'')
and the MSCI EAFE Index (``MXEA''). The Exchange's proposal only
proposes an increase to the position (and exercise limit) for
options overlying SPY. BX does not list options on MXEF and MXEA.
Also, other options and Exchange-Traded Fund position limits, which
were amended in Cboe's rule change, have already been increased on
BX because BX's rules at Options 9, Section 13 and Options 9,
Section 15 incorporate its position limits and exercise limits to
Cboe, except for SPY. Accordingly, this proposal is limited to SPY.
---------------------------------------------------------------------------
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.
The Exchange has observed an ongoing increase in demand in options
on the SPDR[supreg] S&P 500[supreg] ETF Trust (``SPY'') for both
trading and hedging purposes. Though the demand for options on SPY
appear to have increased, position limits (and corresponding exercise
limits) for options on SPY 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 increase for position limits (and exercise limits) on options
on SPY 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 SPY and SPY 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 SPY for legitimate economic purposes compels an
increase in position limits (and corresponding exercise limits).
Proposed Position Limits for Options on SPY
Options 9, Section 13 sets forth the position limit for options on
SPY. The Exchange proposes to amend Options 9, Section 13 to double the
position limits for options on SPY. The current position limit for
options on SPY is 1,800,000 and the proposed position limit for options
on SPY is 3,600,000. The Exchange represents that SPY qualifies for the
initial listing criteria set forth in Options 4, Section 3(i) for ETFs.
In addition, the Exchange is making corresponding amendments to
exercise limits for options on SPY within Options 9, Section 15.
Composition and Growth Analysis for SPY
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used or
might create
[[Page 39641]]
incentives to manipulate the underlying market so as to benefit options
positions. 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.\5\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
---------------------------------------------------------------------------
SPY as well as SPY components are highly liquid, and are based on a
broad set of highly liquid securities and other reference assets, as
demonstrated through the trading statistics presented in this proposal.
Indeed, 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.\6\
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\6\ See Securities Exchange Act Release No. 69179 (March 19,
2013), 78 FR 17952 (March 25, 2013) (SR-BX-2013-024), 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 of result of the
pilot program. See also Securities Exchange Act Release No. 83423
(June 13, 2018), 83 FR 28481 (June 19, 2018) (SR-BX-2018-022).
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To support the proposed position limit increase (and corresponding
increase in exercise limit), the Exchange considered both the liquidity
of SPY and the component securities of SPY, as well as the availability
of economically equivalent products to the overlying option and its
respective position limit. SPY is based upon the S&P 500 Index, and
therefore the options on SPY are economically equivalent to the options
on the index, which have no position limits. Accordingly, the Exchange
believes the position limit of 3,600,000 contracts is appropriate for
options on SPY.
The Exchange is presenting data collected by Cboe as part of its
initial filing to increase the position and exercise limit on SPY, that
the Commission approved,\7\ following trading statistics regarding
shares of and options on SPY, as well as the component securities:
---------------------------------------------------------------------------
\7\ See supra note 3.
\8\ Chboe'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.
\9\ See Amendment No. 1 to SR-CBOE-2020-015, at page 4,
available at https://www.sec.gov/comments/sr-cboe-2020-015/srcboe2020015-7081714-215592.pdf (``Amendment No. 1'').
\10\ See Amendment No. 1, at page 4.
\11\ See supra note 4.
\12\ See supra note 4.
\13\ 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).
\14\ See supra note 4.
\15\ See also Securities Exchange Act Release No. 83423 (June
13, 2018), 83 FR 28481 (June 19, 2018) (SR-BX-2018-022) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Position Limits and Exercise Limits for Options on the SPDR
Exchange-Traded Fund).
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (option Shares outstanding Total market cap of
Product ADV \8\ (ETF shares) contracts) (ETFs) \9\ Fund market cap (USD) ETF components \10\
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPY................................ 70.3.................. 2.8 million........... 968.7 million........ 312.9 billion........ 29.3 trillion.
million...............
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange is presenting the following data collected by Cboe as
part of its initial filing, that the Commission has approved,\11\ for
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 pursuant to Options 9, Section 13, to draw
comparisons in support of a proposed position limit increase for
options on SPY (see further discussion below):
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current
Product ADV (ETF shares) ADV (option Shares outstanding Fund market cap Total market cap of position
contracts) (ETFs) (USD) ETF components limits
--------------------------------------------------------------------------------------------------------------------------------------------------------
QQQ.............................. 30.2 million........ 670,200 410.3 million....... 88.7 billion........ 10.1 trillion...... 1,800,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange believes that, overall, the liquidity in the shares of
SPY and in the component securities of SPY and in its overlying
options, as well as the large market capitalizations and structure of
SPY support the proposal to increase the position limit for SPY (and
corresponding exercise limit). Given the robust liquidity and
capitalization in SPY and in the component securities of SPY 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 S&P 500 Index are large enough to adequately absorb
potential price movements that may be caused by large trades.
The following analysis for SPY, which the Exchange agrees with in
support of this proposal, as well as the statistics presented in
support thereof, were presented by Cboe in their initial filing, which
was approved by the Commission.\12\ The Exchange notes that SPY tracks
the performance of the S&P 500 Index, which is an index of diversified
large cap U.S. companies.\13\ 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, and, since
2017,\14\ its ADV has increased from approximately 64.6 million shares
to 70.3 million shares by the end of 2019. Similarly, its ADV in
options contracts has increased from 2.6 million to 2.8 million through
2019.\15\ As noted,
[[Page 39642]]
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. The Exchange also notes that SPY shares are more liquid
than INVESCO QQQ Trust\SM\, Series 1 (``QQQ'') shares, which is also
currently subject to a position limit of 1,800,000 contracts.
Specifically, SPY currently experiences over twice the ADV in shares
and over four times the ADV in options than that of QQQ.\16\
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\16\ The 2019 ADV for QQQ shares is 30.2 million and for options
on QQQ is 670,200.
---------------------------------------------------------------------------
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 SPY. When an ETF 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 SPY 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
SPY would remain unchanged. Thus, the Exchange would still require that
each 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). Market Makers would continue to be exempt from this reporting
requirement, however, the Exchange may access Market-Maker position
information.\17\ Moreover, the Exchange's requirement that Participants
file reports with the Exchange for any customer who held aggregate
large long or short positions on the same side of the market of 200 or
more options contracts of any single class for the previous day will
remain at this level for the options subject to this proposal and will
continue to serve as an important part of the Exchange's surveillance
efforts.\18\
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\17\ The Options Clearing Corporation (``OCC'') through the
Large Option Position Reporting (``LOPR'') system acts as a
centralized service provider for Participant compliance with
position reporting requirements by collecting data from each
Participant, consolidating the information, and ultimately providing
detailed listings of each Participant's report to the Exchange, as
well as Financial Industry Regulatory Authority, Inc. (``FINRA''),
acting as its agent pursuant to a regulatory services agreement
(``RSA'').
\18\ See Options 6E, Section 2 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 SPY 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
underlying's, as applicable.\19\ The Exchange also notes that large
stock holdings must be disclosed to the Commission by way of Schedules
13D or 13G,\20\ 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.
---------------------------------------------------------------------------
\19\ The Exchange believes these procedures have been effective
for the surveillance of trading the options subject to this
proposal, and will continue to employ them.
\20\ 17 CFR 240.13d-1.
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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 SPY. 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 Participant must maintain for a large
position held by itself or by its customer.\21\ In addition, Rule 15c3-
1 \22\ imposes a capital charge on Participants to the extent of any
margin deficiency resulting from the higher margin requirement.
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\21\ See Options 6C, Section 3 for a description of margin
requirements.
\22\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
Technical Corrections
The Exchange proposes to: (1) Update the Chicago Board Options
Exchange to Cboe Exchange, Inc. (``Cboe'') as the name of this self-
regulatory organization has changed; (2) rename the SPDR[supreg] S&P
500[supreg] exchange-traded fund (``SPY ETF'' or ``SPY'') as
``SPDR[supreg] S&P 500[supreg] ETF Trust (SPY) to update the name of
this product; (3) amend ``Customer'' to ``customer'' as this reference
refers to the customer of a Participant; and (4) amend ``PHLX'' to
``Phlx.''
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of
[[Page 39643]]
Section 6(b) of the Act.\23\ Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \24\
requirements that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \25\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
---------------------------------------------------------------------------
The Exchange believes that the proposed increase in position limit
for options on the SPY will remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest, because it will
provide market participants with the ability to more effectively
execute their trading and hedging activities. The proposed increase
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 SPY as part of their investment
strategy, and the applicable position limits (and corresponding
exercise 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 SPY, the
considerable market capitalization of the fund, 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 deters manipulation and/or
disruption. This general principle applies to the recently observed
increased levels of market capitalization, trading volume, and
liquidity in SPY, and the components of the Underlying ETFs [sic] (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.\26\
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\26\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
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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. The proposed
increase to the position and exercise limits on SPY has recently been
approved by the Commission.\27\ The Commission has previously approved,
on a pilot basis, eliminating position limits for options on SPY.\28\
In approving increases in position limits in the past, the Commission
relied heavily upon the exchange's surveillance capabilities,
expressing trust in the enhanced surveillances and reporting safeguards
that the exchange took in order to detect and deter possible
manipulative behavior which might arise from eliminating position and
exercise limits.
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\27\ See supra note 4.
\28\ See supra notes 9 and 10.
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The Exchange'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. 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 SPY, further promoting just and equitable principles of
trading, the maintenance of a fair and orderly market, and the
protection of investors.
Technical Corrections
The Exchange's proposal to make various technical amendments,
within Options 9, Section 13 and Options 9, Section 15 to: (1) Update
the Chicago Board Options Exchange to Cboe Exchange, Inc. (``Cboe'') as
the name of this self-regulatory organization has changed; (2) rename
the SPDR[supreg] S&P 500[supreg] exchange-traded fund (``SPY ETF'' or
``SPY'') as ``SPDR[supreg] S&P 500[supreg] ETF Trust (SPY) to update
the name of this product; (3) amend ``Customer'' to ``customer'' as
this reference refers to the customer of a Participant; and (4) amend
``PHLX'' to ``Phlx.'' Accordingly, these amendments are non-substantive
technical changes which add clarity to the Rulebook and are consistent
with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose an unnecessary burden on intra-market competition because it
will apply to all market participants. The Exchange does not believe
the proposed rule change will impose any burden on inter-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limit (and exercise
limit) 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 of market
participants.
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.\29\ 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
[[Page 39644]]
market transparency; and (3) heightened contra-party creditworthiness
due to the role of OCC as issuer and guarantor. The Exchange
understands that other options exchanges intend to file similar
proposed rule changes with the Commission to increase position limits
on options on SPY. This may further contribute to fair competition
among exchanges for multiply listed options.
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\29\ Additionally, several other options exchanges have the same
position limits as the Exchange is proposing, as they incorporate by
reference to Cboe's position limits, and as a result the position
limits for options on SPY and will increase at those exchanges.
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Technical Corrections
The Exchange's proposal to make various technical amendments,
within Options 9, Section 13 and Options 9, Section 15 to: (1) Update
the Chicago Board Options Exchange to Cboe Exchange, Inc. (``Cboe'') as
the name of this self-regulatory organization has changed; (2) rename
the SPDR[supreg] S&P 500[supreg] exchange-traded fund (``SPY ETF'' or
``SPY'') as ``SPDR[supreg] S&P 500[supreg] ETF Trust (SPY) to update
the name of this product; (3) amend ``Customer'' to ``customer'' as
this reference refers to the customer of a Participant; and (4) amend
``PHLX'' to ``Phlx.'' Accordingly, these amendments are non-substantive
technical changes which add clarity to the Rulebook and do not impose a
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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 \30\ and Rule 19b-
4(f)(6) thereunder.\31\
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 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
Act \32\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \33\ 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 would allow
the Exchange to immediately increase its position and exercise limits
for options on SPY to those of Cboe, which the Exchange believes will
ensure fair competition among exchanges and provide consistency for BX
Participants that are also members at Cboe where these increased
position and exercise 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.\34\
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\32\ 17 CFR 240.19b-4(f)(6).
\33\ 17 CFR 240.19b-4(f)(6)(iii).
\34\ 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-BX-2020-012 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-BX-2020-012. 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-BX-2020-012, and should be submitted on
or before July 22, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14117 Filed 6-30-20; 8:45 am]
BILLING CODE 8011-01-P
