Self-Regulatory Organizations; Nasdaq ISE, LLC; 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 Certain Exchange-Traded Funds, 39607-39613 [2020-14120]
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Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Notices
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2020–24 and should be
submitted on or before July 22, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14118 Filed 6–30–20; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–89152; File No. SR–ISE–
2020–23]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; 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 Certain Exchange-Traded
Funds
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 ISE, LLC (‘‘ISE’’ 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
certain exchange-traded funds (‘‘ETFs’’),
and similarly increase exercise limits
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
21 17
within Options 9, Section 15, Exercise
Limits.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
1. Purpose
The Exchange proposes to amend
Options 9, Section 13, Position Limits,
to increase position limits for options on
certain exchange-traded funds (‘‘ETFs’’),
and similarly increase exercise limits
within Options 9, Section 15, Exercise
Limits. The Exchange proposes to
specifically amend Supplementary
Material .01 to Options 9, Section 13
and Supplementary Material .01 to
Options 9, Section 15. These proposed
rule changes are based on the similar
proposal by Cboe Exchange, Inc.
(‘‘Cboe’’).3 The Exchange also proposes
to make a minor non-substantive
technical corrections to an ETF name
within Supplementary Material .01 to
Options 9, Section 13 and
Supplementary Material .01 to 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
3 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 the MSCI Emerging Markets Index
(‘‘MXEF’’) and the MSCI EAFE Index (‘‘MXEA’’).
The Exchange, however, does not list options on the
MXEF or MXEA indexes. Accordingly, this
proposal is limited to the ETFs described above.
PO 00000
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39607
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’’), iShares® MSCI EAFE ETF
(‘‘EFA’’), iShares® China Large-Cap ETF
(‘‘FXI’’), iShares® iBoxx® High Yield
Corporate Bond Fund (‘‘HYG’’),
Financial Select Sector SPDR® Fund
(‘‘XLF’’) (collectively, with the
aforementioned ETFs, the ‘‘Underlying
ETFs’’) for both trading and hedging
purposes. Though the demand for these
options on the Underlying ETFs appear
to have increased, position limits (and
corresponding exercise limits) for these
options 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 (and exercise 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
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economic purposes compels an increase
in position limits (and corresponding
exercise limits).
Proposed Position Limits for Options on
the Underlying ETFs
Position limits for options on ETFs
are determined pursuant to Options 9,
Section 13, 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 Options 9, Section 13, 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,
recapitalizations, 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. Options 9, Section 13 sets
forth separate position limits for options
on specific ETFs, including SPY, FXI
and EFA. In addition, the Exchange is
making corresponding amendments to
exercise limits within Options 9,
Section 15.
The Exchange proposes to amend
Options 9, Section 13 and Options 9,
Section 15, respectively, to double the
position and exercise limits for options
on each of FXI, EFA, SPY, HYG and
XLF. The Exchange also proposes to list
position and exercise limits for HYG
and XLF within Options 9, Section 13
and Options 9, Section 15, respectively.
The table below represents the current,
and proposed, position limits for
options on the ETFs subject to this
proposal:
Current
position
limit
ETF
SPY ..........................................................................................................................................................................
EFA ..........................................................................................................................................................................
FXI ...........................................................................................................................................................................
HYG .........................................................................................................................................................................
XLF ..........................................................................................................................................................................
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 to Options 4,
Section 3(h) 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 Options 4, Section 4.4
In compliance with its listing rules, the
Exchange also represents that non-U.S.
component securities that are not
subject to a comprehensive surveillance
agreement (‘‘CSA’’) do not, in the
aggregate, represent more than more
than 50% of the weight of any of the
Underlying ETFs.5
4 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 Options 4, Section 4(h).
5 See Options 4, Section 3(h).
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Composition and Growth Analysis for
Underlying ETFs
As stated above, position (and
exercise) limits are intended to prevent
the establishment of options positions
that can be used or might create
incentives to manipulate the underlying
market so as to benefit 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.6 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 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 2018.7
To support the proposed position
limit increases (and corresponding
6 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29).
7 See Securities Exchange Act Release No. 68000
(October 5, 2012), 77 FR 62300 (October 12, 2012)
(SR–ISE–2012–81), 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. 83416 (June 12, 2018), 83 FR 28293
(June 18, 2018) (SR–ISE–2018–53).
PO 00000
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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
increase in exercise limits), the
Exchange 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 cashsettled 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 ETF analogues.
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 is presenting data
collected by Cboe as part of its initial
filing to increase position and exercise
limits on the Underlying ETFs, that the
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Commission approved,8 following
trading statistics regarding shares of and
ADV 9
(ETF shares)
Product
SPY ........................
FXI .........................
EFA ........................
HYG .......................
XLF ........................
70.3
26.1
25.1
20.0
48.8
million
million
million
million
million
ADV
(option contracts)
.............
.............
.............
.............
.............
ADV
(ETF shares)
QQQ .......................
EWZ ........................
TLT .........................
EWJ ........................
30.2 million .............
26.7 million .............
9.6 million ...............
7.2 million ...............
The Exchange believes 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
(and corresponding exercise limits).
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.
The following analyses for the
Underlying ETFs, 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.14 The
8 See
supra note 3.
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.
10 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’’).
11 See Amendment No. 1, at page 4.
12 See Notice, at note 13.
9 Cboe’s
02:07 Jul 01, 2020
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968.7
106.8
928.2
216.6
793.6
million
million
million
million
million
.............
.............
.............
.............
.............
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 proposed
ADV
(option contracts)
Product
670,200
186,500
95,200
5,700
Shares outstanding
(ETFs)
410.3 million ..........
233 million .............
128.1 million ..........
236.6 million ..........
13 See
88.7
11.3
17.5
14.2
billion
billion
billion
billion
supra note 3.
supra note 3.
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 Securities Exchange Release No. 83156
(May 2, 2018), 83 FR 20882 (May 8, 2018) (SR–ISE–
2018–39) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend
ISE Rules 412, Position Limits, and 414, Exercise
Limits). See also supra note 3.
14 See
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312.9 billion ...........
4.8 billion ...............
64.9 billion .............
19.1 billion .............
24.6 billion .............
Total market cap of
ETF components 11
29.3 trillion
28.0 trillion
19.3 trillion
906.4 billion 12
3.8 trillion
position limit increases for options on a
number of the Underlying ETFs (see
further discussion below):
Fund market cap
(USD)
Exchange notes that SPY tracks the
performance of the S&P 500 Index,
which is an index of 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, and, since 2017,16
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 2019.17 As noted, 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
PO 00000
Fund market cap
(USD)
Shares outstanding
(ETFs) 10
2.8 million
196,600
155,900
193,700
102,100
The Exchange is presenting the
following data collected by Cboe as part
of its initial filing, that the Commission
has approved,13 for the same trading
statistics, where applicable, as above
VerDate Sep<11>2014
options on the Underlying ETFs, as well
as the component securities:
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
ADV in shares and over four times the
ADV in options than that of QQQ.18
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.19 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
17 See also Securities Exchange Act Release No.
83416 (June 12, 2018), 83 FR 28293 (June 18, 2018)
(SR–ISE–2018–53) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend
Position and Exercise Limits for Options on the SPY
Exchange Traded Fund).
18 The 2019 ADV for QQQ shares is 30.2 million
and for options on QQQ is 670,200.
19 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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current 50,000 contract position limit
for MXEA options.20 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.21 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
Financial Select Sector Index.22 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
20 The Exchange does not list options on foreign
indexes.
21 See iShares China Large-Cap ETF, available at
https://www.ishares.com/us/products/239536/
ishares-china-largecap-etf (February 10, 2020).
22 See Select Sector SPDR ETFs, XLF, available at
https://www.sectorspdr.com/sectorspdr/sector/xlf
(January 15, 2020).
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01:53 Jul 01, 2020
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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.23 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). The Exchange 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
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
23 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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Frm 00092
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Sfmt 4703
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 Member 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
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from this reporting requirement,
however, the Exchange may access
Market-Maker position information.24
Moreover, the Exchange’s requirement
that Members 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.25
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.26
The Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,27 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 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 Member must maintain
for a large position held by itself or by
24 The Options Clearing Corporation (‘‘OCC’’)
through the Large Option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for Member compliance with position
reporting requirements by collecting data from each
Member, consolidating the information, and
ultimately providing detailed listings of each
Member’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’’).
25 See Options 6E, Section 2 for reporting
requirements.
26 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.
27 17 CFR 240.13d–1.
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its customer.28 In addition, Rule 15c3–
1 29 imposes a capital charge on
Members to the extent of any margin
deficiency resulting from the higher
margin requirement.
Technical Corrections
The Exchange also proposes to
rename SPDR Dow Jones® Industrial
Average ETF Trust (SPY) as SPDR® S&P
500® ETF Trust (SPY) to conform to the
correct name of the product.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.30 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 31 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) 32 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 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
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
the applicable position limits (and
28 See Options 6C, Section 3 for a description of
margin requirements.
29 17 CFR 240.15c3–1.
30 15 U.S.C. 78f(b).
31 15 U.S.C. 78f(b)(5).
32 Id.
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39611
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 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 deter
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.33
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 the
Underlying ETFs has recently been
approved by the Commission.34 The
Commission has previously approved,
on a pilot basis, eliminating position
33 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
34 See supra note 3.
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limits for options on SPY.35
Additionally, the Commission has
approved similar proposed rule changes
by the Exchange to increase position
limits for options on highly liquid,
actively traded ETFs.36 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.
Furthermore, the Exchange again
notes that that 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’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 the Underlying ETFs,
further promoting just and equitable
principles of trading, the maintenance
of a fair and orderly market, and the
protection of investors.
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 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.37 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. The
Exchange understands that other
options exchanges intend to file similar
proposed rule changes with the
Commission to increase position limits
on options on the Underlying ETFs.
This may further contribute to fair
competition among exchanges for
multiply listed options.
Technical Corrections
The Exchange’s proposal to make a
technical amendment to the name of an
ETF, within Supplementary Material .01
to Options 9, Section 13 and
Supplementary Material .01 to Options
9, Section 15 will correct the name of
this product and is therefore nonsubstantive. Accordingly, this technical
amendment is intended to bring greater
clarity to the rule text and is consistent
with the Act.
Technical Corrections
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
35 See
36 See
supra notes 7 and 8.
supra note 20.
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The Exchange’s proposal to make a
technical amendment to the name of an
ETF, within Supplementary Material .01
to Options 9, Section 13 and
Supplementary Material .01 to Options
9, Section 15 will correct the name of
this product and is therefore nonsubstantive. Accordingly, this technical
amendment is intended to bring greater
clarity to the rule text and does 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.
37 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 the Underlying ETFs and will
increase at those exchanges. See Nasdaq Stock
Market LLC Rules, Options 9, Section 13 (Position
Limits).
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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 38 and Rule 19b–
4(f)(6) thereunder.39
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 40 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 41
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 the products subject
to this proposal to those of Cboe, which
the Exchange believes will ensure fair
competition among exchanges and
provide consistency and uniformity
among members of both Cboe and ISE
by subjecting members of both
exchanges to the same position and
exercise limits for these multiply-listed
options classes. 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.42
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
38 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.
40 17 CFR 240.19b–4(f)(6).
41 17 CFR 240.19b–4(f)(6)(iii).
42 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).
39 17
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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:
to make available publicly. All
submissions should refer to File
Number SR–ISE–2020–23, and should
be submitted on or before July 22, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14120 Filed 6–30–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89154; File No. SR–MSRB–
2020–02]
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–
ISE–2020–23 on the subject line.
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Order Granting Approval of a
Proposed Rule Change To Align
Certain MSRB Rules to Securities
Exchange Act Rule 15 l –1, Regulation
Best Interest
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–ISE–2020–23. 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
June 25, 2020.
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01:53 Jul 01, 2020
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I. Introduction
On May 1, 2020, the Municipal
Securities Rulemaking Board (the
‘‘MSRB’’ or ‘‘Board’’) filed with the
Securities and Exchange Commission
(the ‘‘SEC’’ or ‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to align MSRB rules to the
Commission’s recently adopted Rule
15l-1 under the Exchange Act
(‘‘Regulation Best Interest’’); 3
specifically, amendments to MSRB Rule
G–8 (on books and records), MSRB Rule
G–9 (on preservation of records), MSRB
Rule G–19 (on suitability of
recommendations and transactions),
MSRB Rule G–20 (on gifts, gratuities,
non-cash compensation and expenses of
issuance), MSRB Rule G–48 (on
transactions with Sophisticated
Municipal Market Professionals
(‘‘SMMPs’’)), and the deletion of an
interpretation of MSRB Rule G–20 (the
‘‘proposed rule change’’).
The proposed rule change was
published for comment in the Federal
Register on May 12, 2020.4 The public
comment period closed on June 2,
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.15 l –1; see also Exchange Act
Release No. 86031 (June 5, 2019), 84 FR 33318 (July
12, 2019) (File No. S7–07–18) (‘‘Regulation Best
Interest Adopting Release’’).
4 Securities Exchange Act Release No. 88829 (May
6, 2020) (the ‘‘Notice’’), 85 FR 28082 (May 12, 2020)
(MSRB–2020–02).
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1 15
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39613
2020.5 As described further below, the
Commission is approving the proposed
rule change.
II. Description of Proposed Rule Change
As described further below, the MSRB
proposed to align MSRB rules with
Regulation Best Interest by revising the
MSRB’s rules to comport with
Regulation Best Interest obligations
involving: (i) Suitability, by amending
MSRB Rule G–19 to apply only in
circumstances in which Regulation Best
Interest does not apply and eliminate
the control element from the
quantitative suitability obligation for
recommendations subject to MSRB Rule
G–19, and MSRB Rule G–48 to make
clear that the exception from the
requirement to perform a customerspecific suitability analysis when
making a recommendation to a
Sophisticated Municipal Market
Participant (‘‘SMMP’’) (as defined in
MSRB Rule D–15) is available only for
recommendations that are subject to
MSRB Rule G–19; (ii) non-cash
compensation, by updating MSRB Rule
G–20 to require any permissible noncash compensation to align with the
applicable requirements of Regulation
Best Interest; and (iii) books and
records, by requiring dealers to maintain
books and records required by
Regulation Best Interest and the related
SEC Form CRS requirement through
revisions to MSRB Rules G–8 and G–9.
A. Background
On June 5, 2019, the SEC adopted
Regulation Best Interest, which
establishes a new standard of conduct
for Broker-Dealers 6 and natural persons
who are associated persons of a BrokerDealer.
Specifically, this standard of conduct
for a Broker-Dealer applies when
making a recommendation to a retail
customer, defined generally as a natural
person or the legal representative of
such person, who receives and uses a
recommendation from a Broker-Dealer
primarily for personal, family, or
household purposes, of any securities
transaction or investment strategy
involving securities.7 The Commission
5 All comment letters received on the proposed
rule change are available on the Commission’s
website at https://www.sec.gov.
6 Under Regulation Best Interest, ‘‘broker-dealers’’
are defined as ‘‘broker-dealers and natural persons
who are associated persons of a broker-dealer
(unless otherwise indicated, together referred to as
‘‘broker-dealer[s]’’). Regulation Best Interest
Adopting Release, 84 FR at 33318. Each brokerdealer subject to Regulation Best Interest is referred
to herein as a ‘‘Broker-Dealer’’ and, collectively as
‘‘Broker-Dealers.’’
7 Id.
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]]>Agencies
[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39607-39613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14120]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89152; File No. SR-ISE-2020-23]
Self-Regulatory Organizations; Nasdaq ISE, LLC; 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 Certain Exchange-Traded Funds
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 ISE, LLC (``ISE'' 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 certain exchange-
traded funds (``ETFs''), 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://ise.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 certain exchange-
traded funds (``ETFs''), and similarly increase exercise limits within
Options 9, Section 15, Exercise Limits. The Exchange proposes to
specifically amend Supplementary Material .01 to Options 9, Section 13
and Supplementary Material .01 to Options 9, Section 15. These proposed
rule changes are based on the similar proposal by Cboe Exchange, Inc.
(``Cboe'').\3\ The Exchange also proposes to make a minor non-
substantive technical corrections to an ETF name within Supplementary
Material .01 to Options 9, Section 13 and Supplementary Material .01 to
Options 9, Section 15. Each change will be described below.
---------------------------------------------------------------------------
\3\ 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 the
MSCI Emerging Markets Index (``MXEF'') and the MSCI EAFE Index
(``MXEA''). The Exchange, however, does not list options on the MXEF
or MXEA indexes. Accordingly, this proposal is limited to the ETFs
described above.
---------------------------------------------------------------------------
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''),
iShares[supreg] MSCI EAFE ETF (``EFA''), iShares[supreg] China Large-
Cap ETF (``FXI''), iShares[supreg] iBoxx[supreg] High Yield Corporate
Bond Fund (``HYG''), Financial Select Sector SPDR[supreg] Fund
(``XLF'') (collectively, with the aforementioned ETFs, the ``Underlying
ETFs'') for both trading and hedging purposes. Though the demand for
these options on the Underlying ETFs appear to have increased, position
limits (and corresponding exercise limits) for these options 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 (and exercise
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
[[Page 39608]]
economic purposes compels an increase in position limits (and
corresponding exercise limits).
Proposed Position Limits for Options on the Underlying ETFs
Position limits for options on ETFs are determined pursuant to
Options 9, Section 13, 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 Options 9, Section 13, 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,
recapitalizations, 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. Options 9, Section 13 sets forth separate position
limits for options on specific ETFs, including SPY, FXI and EFA. In
addition, the Exchange is making corresponding amendments to exercise
limits within Options 9, Section 15.
The Exchange proposes to amend Options 9, Section 13 and Options 9,
Section 15, respectively, to double the position and exercise limits
for options on each of FXI, EFA, SPY, HYG and XLF. The Exchange also
proposes to list position and exercise limits for HYG and XLF within
Options 9, Section 13 and Options 9, Section 15, respectively. 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[supreg] Russell 2000 ETF (``IWM'') and the iShares[supreg]
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[supreg] MSCI Brazil Capped ETF (``EWZ''),
iShares[supreg] 20+ Year Treasury Bond Fund ETF (``TLT''), and
iShares[supreg] MSCI Japan ETF (``EWJ''). The Exchange represents that
the Underlying ETFs qualify for either (1) the initial listing criteria
set forth in to Options 4, Section 3(h) 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 Options 4, Section 4.\4\ In compliance
with its listing rules, the Exchange also represents that non-U.S.
component securities that are not subject to a comprehensive
surveillance agreement (``CSA'') do not, in the aggregate, represent
more than more than 50% of the weight of any of the Underlying ETFs.\5\
---------------------------------------------------------------------------
\4\ 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 Options 4, Section 4(h).
\5\ See Options 4, Section 3(h).
---------------------------------------------------------------------------
Composition and Growth Analysis for Underlying ETFs
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used or
might create incentives to manipulate the underlying market so as to
benefit 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.\6\ 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
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.\7\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
\7\ See Securities Exchange Act Release No. 68000 (October 5,
2012), 77 FR 62300 (October 12, 2012) (SR-ISE-2012-81), 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. 83416
(June 12, 2018), 83 FR 28293 (June 18, 2018) (SR-ISE-2018-53).
---------------------------------------------------------------------------
To support the proposed position limit increases (and corresponding
increase in exercise limits), the Exchange 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 ETF analogues. 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 is presenting data collected by Cboe as part of its
initial filing to increase position and exercise limits on the
Underlying ETFs, that the
[[Page 39609]]
Commission approved,\8\ following trading statistics regarding shares
of and options on the Underlying ETFs, as well as the component
securities:
---------------------------------------------------------------------------
\8\ See supra note 3.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding Fund market cap Total market cap of
Product ADV \9\ (ETF shares) ADV (option contracts) (ETFs) \10\ (USD) ETF components \11\
--------------------------------------------------------------------------------------------------------------------------------------------------------
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........ 906.4 billion \12\
XLF............................... 48.8 million........ 102,100 793.6 million....... 24.6 billion........ 3.8 trillion
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange is presenting the following data collected by Cboe as
part of its initial filing, that the Commission has approved,\13\ 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 proposed position limit increases for options
on a number of the Underlying ETFs (see further discussion below):
---------------------------------------------------------------------------
\9\ 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.
\10\ 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'').
\11\ See Amendment No. 1, at page 4.
\12\ See Notice, at note 13.
\13\ See supra note 3.
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
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 Exchange believes 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 (and
corresponding exercise limits). 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.
The following analyses for the Underlying ETFs, 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.\14\ 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.\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, and, since 2017,\16\ 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.\17\ As noted, 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.\18\
---------------------------------------------------------------------------
\14\ See supra note 3.
\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 Securities Exchange Release No. 83156 (May 2, 2018), 83
FR 20882 (May 8, 2018) (SR-ISE-2018-39) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules
412, Position Limits, and 414, Exercise Limits). See also supra note
3.
\17\ See also Securities Exchange Act Release No. 83416 (June
12, 2018), 83 FR 28293 (June 18, 2018) (SR-ISE-2018-53) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Position and Exercise Limits for Options on the SPY Exchange Traded
Fund).
\18\ 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.\19\ 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
[[Page 39610]]
current 50,000 contract position limit for MXEA options.\20\ 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.
---------------------------------------------------------------------------
\19\ See iShares MSCI EAFE ETF, available at https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (February
10, 2020).
\20\ The Exchange 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.\21\ 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.
---------------------------------------------------------------------------
\21\ 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.\22\ 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.
---------------------------------------------------------------------------
\22\ 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[supreg] 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.\23\ 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). The Exchange
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.
---------------------------------------------------------------------------
\23\ 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 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 Member 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
[[Page 39611]]
from this reporting requirement, however, the Exchange may access
Market-Maker position information.\24\ Moreover, the Exchange's
requirement that Members 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.\25\
---------------------------------------------------------------------------
\24\ The Options Clearing Corporation (``OCC'') through the
Large Option Position Reporting (``LOPR'') system acts as a
centralized service provider for Member compliance with position
reporting requirements by collecting data from each Member,
consolidating the information, and ultimately providing detailed
listings of each Member'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'').
\25\ 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 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.\26\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\27\ 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.
---------------------------------------------------------------------------
\26\ 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.
\27\ 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 Member must
maintain for a large position held by itself or by its customer.\28\ In
addition, Rule 15c3-1 \29\ imposes a capital charge on Members to the
extent of any margin deficiency resulting from the higher margin
requirement.
---------------------------------------------------------------------------
\28\ See Options 6C, Section 3 for a description of margin
requirements.
\29\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
Technical Corrections
The Exchange also proposes to rename SPDR Dow Jones[supreg]
Industrial Average ETF Trust (SPY) as SPDR[supreg] S&P 500[supreg] ETF
Trust (SPY) to conform to the correct name of the product.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\30\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \31\ 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) \32\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
\32\ 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 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
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 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 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 deter 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.\33\
---------------------------------------------------------------------------
\33\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
---------------------------------------------------------------------------
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 the Underlying ETFs has
recently been approved by the Commission.\34\ The Commission has
previously approved, on a pilot basis, eliminating position
[[Page 39612]]
limits for options on SPY.\35\ Additionally, the Commission has
approved similar proposed rule changes by the Exchange to increase
position limits for options on highly liquid, actively traded ETFs.\36\
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.
---------------------------------------------------------------------------
\34\ See supra note 3.
\35\ See supra notes 7 and 8.
\36\ See supra note 20.
---------------------------------------------------------------------------
Furthermore, the Exchange again notes that that 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'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 the Underlying ETFs, 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 a technical amendment to the name
of an ETF, within Supplementary Material .01 to Options 9, Section 13
and Supplementary Material .01 to Options 9, Section 15 will correct
the name of this product and is therefore non-substantive. Accordingly,
this technical amendment is intended to bring greater clarity to the
rule text and is 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 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 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.\37\ 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. The Exchange understands that
other options exchanges intend to file similar proposed rule changes
with the Commission to increase position limits on options on the
Underlying ETFs. This may further contribute to fair competition among
exchanges for multiply listed options.
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\37\ 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 the Underlying ETFs and will increase at those
exchanges. See Nasdaq Stock Market LLC Rules, Options 9, Section 13
(Position Limits).
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Technical Corrections
The Exchange's proposal to make a technical amendment to the name
of an ETF, within Supplementary Material .01 to Options 9, Section 13
and Supplementary Material .01 to Options 9, Section 15 will correct
the name of this product and is therefore non-substantive. Accordingly,
this technical amendment is intended to bring greater clarity to the
rule text and does 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 \38\ and Rule 19b-
4(f)(6) thereunder.\39\
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\38\ 15 U.S.C. 78s(b)(3)(A).
\39\ 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 \40\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \41\ 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 the products subject to this proposal to those of Cboe, which the
Exchange believes will ensure fair competition among exchanges and
provide consistency and uniformity among members of both Cboe and ISE
by subjecting members of both exchanges to the same position and
exercise limits for these multiply-listed options classes. 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.\42\
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\40\ 17 CFR 240.19b-4(f)(6).
\41\ 17 CFR 240.19b-4(f)(6)(iii).
\42\ 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
[[Page 39613]]
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-ISE-2020-23 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-ISE-2020-23. 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-ISE-2020-23, and should be submitted on
or before July 22, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14120 Filed 6-30-20; 8:45 am]
BILLING CODE 8011-01-P
