Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to Adopt Related Futures Cross (“RFC”) Orders, 44125-44129 [2020-15687]

Download as PDF Federal Register / Vol. 85, No. 140 / Tuesday, July 21, 2020 / Notices 14. Transaction Fees.31 Any transaction fee (including break-up, structuring, monitoring or commitment fees but excluding brokerage or underwriting compensation permitted by section 17(e) or 57(k)) received in connection with any Co-Investment Transaction will be distributed to the participants on a pro rata basis based on the amounts they invested or committed, as the case may be, in such Co-Investment Transaction. If any transaction fee is to be held by an Adviser pending consummation of the transaction, the fee will be deposited into an account maintained by the Adviser at a bank or banks having the qualifications prescribed in section 26(a)(1), and the account will earn a competitive rate of interest that will also be divided pro rata among the participants. None of the Advisers, the Affiliated Fund, the other Regulated Funds or any affiliated person of the Affiliated Fund or the Regulated Funds will receive any additional compensation or remuneration of any kind as a result of or in connection with a Co-Investment Transaction other than (i) in the case of the Regulated Funds and the Affiliated Fund, the pro rata transaction fees described above and fees or other compensation described in Condition 2(c)(iii)(B)(z), (ii) brokerage or underwriting compensation permitted by section 17(e) or 57(k) or (iii) in the case of the Advisers, investment advisory compensation paid in accordance with investment advisory agreements between the applicable Regulated Fund(s) or Affiliated Fund(s) and its Adviser. 15. Independence. If the Holders own in the aggregate more than 25 percent of the Shares of a Regulated Fund, then the Holders will vote such Shares as directed by an independent third party when voting on (1) the election of directors; (2) the removal of one or more directors; or (3) any other matter under either the Act or applicable State law affecting the Board’s composition, size or manner of election. jbell on DSKJLSW7X2PROD with NOTICES For the Commission, by the Division of Investment Management, under delegated authority. J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–15685 Filed 7–20–20; 8:45 am] BILLING CODE 8011–01–P 31 Applicants are not requesting and the Commission is not providing any relief for transaction fees received in connection with any Co-Investment Transaction. VerDate Sep<11>2014 17:42 Jul 20, 2020 Jkt 250001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89325; File No. SR–CBOE– 2020–060] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to Adopt Related Futures Cross (‘‘RFC’’) Orders July 15, 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 July 1, 2020, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) proposes to adopt Related Futures Cross (‘‘RFC’’) Orders. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. PO 00000 1 2 15 U.S.C. 78s(b)(1). 17 CFR 240.19b–4. Frm 00087 Fmt 4703 Sfmt 4703 44125 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt RFC orders on a permanent basis. On the Exchange’s trading floor, floor brokers execute crosses of option combos (i.e., synthetic futures) on the trading floor on behalf of market participants who were exchanging futures contracts for related options positions. Market participants enter into these exchanges in order to swap related exposures. For instance, if a market participant has positions in VIX options but would prefer to hold a corresponding position in VIX futures (such as, for example, to reduce margin or risk related to the option positions), that market participant may swap its VIX options positions with another market participant(s)’s VIX futures positions that have corresponding risk exposure.3 The Exchange understands from customers that the need to reduce risk is prevalent in VIX and SPX, particularly when the markets are volatile, and that they often have corresponding futures that could make these exchanges possible. For example, Cboe Futures Exchange LLC (‘‘CFE’’) permit these types of exchanges with respect to VIX futures pursuant to CFE Rule 414.4 A key element to these exchanges is that both of the option and future transactions must occur between the same market participants. When a floor broker represented the cross of the option contracts on the trading floor in accordance with applicable rules,5 while in-crowd market participants had the opportunity to bid or offer to participate on the trade, those participants generally declined to participate upon hearing that the cross was part of an exchange of related futures contracts. While not required by the Rules, the Rules permit in-crowd market participants to decline to accept contracts that would otherwise be allocated to them.6 The Exchange understands these market participants decline this allocation voluntarily, as 3 The transaction between the market participants for the futures positions occurs in accordance with the rules of the applicable designated contract market that lists the futures. See, e.g., Cboe Futures Exchange LLC Rule 414. 4 Currently, CME, which lists futures that correspond to SPX options, does not offer similar exchange opportunities. If CME implements a rule to permit them, the proposed rule change will permit TPHs to similar use RFC orders to swap exposure with corresponding futures that transact pursuant to CME’s rules. 5 See Rules 5.85 and 5.87. 6 See Rule 5.85(a)(2)(C)(iv). E:\FR\FM\21JYN1.SGM 21JYN1 44126 Federal Register / Vol. 85, No. 140 / Tuesday, July 21, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES they are aware of the need for market participants to execute these crosses cleanly for the transfer of risk between participants to be effective.7 These are riskless exchanges that carry no profit or loss for the market participants that are party to the transactions, but rather are intended to provide a seamless method for market participants to reduce margin and capital requirements while maintaining the same risk exposure within their portfolios. From March 16 to June 12, 2020, the Exchange closed its trading floor in response to the coronavirus pandemic. During that time, the Exchange operated in an all-electronic configuration, which would have prevented market participants from executing these crosses. As a result, the Exchange adopted Rule 5.24(e)(1)(D) to permit Trading Permit Holders (‘‘TPHs’’) to execute RFC orders while the trading floor was closed.8 When the trading floor reopened on June 15, 2020, RFC orders were no longer available. However, the Exchange has received feedback from customers regarding the benefits of RFC orders, including the efficiency it provided with respect to the execution of these crosses. Therefore, the Exchange proposes to adopt RFC orders that can be executed electronically or in open outcry on a permanent basis. The proposed rule change adds RFC orders to the list of complex order instructions in Rule 5.33(b)(5). For purposes of electronic trading, a ‘‘Related Futures Cross’’ or ‘‘RFC’’ order is an SPX or VIX complex order comprised of an option combo order coupled with a contra-side order or orders totaling an equal number of option combo orders. For purposes of open outcry trading, an RFC order is an SPX or VIX complex order comprised of an option combo that may execute against a contra-side RFC order or orders totaling an equal number of option combo orders. An RFC order must be identified to the Exchange as being part of an exchange of option contracts for related futures positions.9 The proposed definition of RFC order for electronic trading purposes is identical to the current definition in 7 Additionally, many market-makers in the crowd that decline their allocations in these crosses often similarly engage in these exchanges for similar purposes, so may similarly benefit from the ability to execute these clean crosses. 8 Pursuant to current Rule 5.24(e)(1), RFC orders would be available until the earlier of the reopening of the trading floor or June 30, 2020. Because the proposed rule change proposes to adopt RFC orders on a permanent basis, the proposed rule change deletes the temporary RFC order rule in Rule 5.24(e)(1)(D). 9 See current Rule 5.24(e)(1)(D). VerDate Sep<11>2014 17:42 Jul 20, 2020 Jkt 250001 Rule 5.24(e)(1)(D). The proposed definition of RFC order for open outcry trading is identical as well, except it contemplates RFC orders to be submitted as two separate orders rather than a paired order, as paired orders are currently unable to route to PAR for manual handling. This is merely a difference in form of submission—as two orders are submitted to the System in one order message for electronic and two orders are submitted to the System in separate messages for open outcry— but the criteria to be considered an RFC order and the terms of execution are the same for both. The Exchange notes that currently, if a TPH wants to execute a cross of options orders as part of an exchange for related futures positions, such cross occurs with two separate orders, so the proposed rule change is consistent with current practice on the trading floor, except it eliminates the need for exposure. For purposes of the proposed RFC order instruction: • An SPX or VIX option combo order is a two-legged order with one leg to purchase (sell) SPX or VIX calls and another leg to sell (purchase) the same number of SPX or VIX, respectively, puts with the same expiration date and strike price.10 • An exchange of option contracts for related futures positions is a transaction entered into by market participants seeking to swap option positions with related futures positions with related exposures. • A related futures position is a position in a futures contract with either the same underlying as or a high degree of price correlation to the underlying of the option combo in the RFC order so that execution of the option combos in the RFC order would serve as an appropriate hedge for the related future positions. • In an exchange of contracts for related positions, one party(ies) must be the buyer(s) of (or the holder(s) of the long market exposure associated with) the options positions and the seller(s) of corresponding futures contracts and the other party(ies) must be the seller(s) of (or holder(s) of the short market exposure associated with) the options positions and the buyer(s) of the corresponding futures contracts. The quantity of the option contracts executed as part of the RFC order must correlate to the quantity represented by the related futures position portion of the exchange.11 The proposed rule change adopts Rule 5.33(m) to describe how RFC orders may PO 00000 10 11 See current Rule 5.24(e)(1)(D)(4). See current Rule 5.24(e)(1)(D)(5). Frm 00088 Fmt 4703 Sfmt 4703 execute. Specifically, proposed subparagraph (m)(1) states an RFC order will execute automatically on entry without exposure if: • Each option leg executes at a price that complies with Rule 5.33(f)(2),12 provided that no option leg executes at the same price as a Priority Customer Order in the Simple Book; and • each option leg executes at a price at or between the national best bid or offer (‘‘NBBO’’) for the applicable series; and • the execution price is better than the price of any complex order resting in the complex order book (‘‘COB’’), unless the RFC order is a Priority Customer Order and the resting complex order is a non-Priority Customer Order, in which case the execution price may be the same as or better than the price of the resting complex order. The System cancels an RFC order if it cannot execute.13 This provision provides that RFC orders must execute in accordance with the same priority principles that apply to all other complex orders on the Exchange, with additional restrictions so that no leg may trade at the same price as a resting Priority Customer order, which protects Priority Customer orders in the simple book and COB and prohibits trades through prices available in the book. Proposed paragraph (m) also provides the following: • The execution of an RFC order must happen contemporaneously with the execution of the related futures position portion of the exchange.14 12 Rule 5.33(f)(2) requires complex orders, which would include an RFC order, which by definition contains two option legs, to execution only if the execution price: At a net price: (i) That would cause any component of the complex strategy to be executed at a price of zero; (ii) worse than the synthetic best bid or offer (‘‘SBBO’’) or equal to the SBBO when there is a Priority Customer Order at the SBBO, except all-or-none complex orders may only execute at prices better than the SBBO; (iii) that would cause any component of the complex strategy to be executed at a price worse than the individual component prices on the Simple Book; (iv) worse than the price that would be available if the complex order Legged into the Simple Book; or (v) that would cause any component of the complex strategy to be executed at a price ahead of a Priority Customer Order on the Simple Book without improving the BBO of at least one component of the complex strategy. 13 See current Rule 5.24(e)(1)(D)(1)(b) and (2). 14 See proposed Rule 5.33(m)(3); see also current Rule 5.24(e)(1)(D)(6). Current Rule 5.24(e)(1)(D)(6) provides that RFC orders may only execute during the Regular Trading Hours session. The purpose of that restriction was because the functionality was intended to temporarily replicate trading that only occurred on the trading floor, which is only available during Regular Trading Hours. With permanent availability of this order instruction, the Exchange believes it is appropriate to make electronic RFC orders available during the Global Trading Hours session as well. This will provide market participants with flexibility to execute these E:\FR\FM\21JYN1.SGM 21JYN1 Federal Register / Vol. 85, No. 140 / Tuesday, July 21, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES • An RFC order may only be entered in the standard increment applicable to the class pursuant to Rule 5.33(f)(1)(A).15 Therefore, RFC orders may only be submitted in the same increments as all other complex orders in VIX and SPX, as applicable.16 • The transaction involving the related futures position of the exchange must comply with all applicable rules of the designated contract market on which the futures are listed for trading.17 • Rule 5.9 (related to exposure of orders on the Exchange) does not apply to executions of RFC orders.18 An RFC order is intended to provide a seamless mechanism to execute crosses without exposure, so proposed change is appropriate. As noted above, market participants execute crosses related to an exchange for related positions in open outcry on the Exchange’s trading floor. While incrowd market participants have the opportunity to bid or offer to participate on the trade, those participants generally decline to participate upon hearing that the cross was part of an exchange of related futures contracts. Therefore, in practice, the orders execute as clean crosses. To provide for a seamless experience in open outcry, the Exchange proposes to add RFC orders to the list of complex orders it may make available in open outcry.19 orders at more times, particularly given that futures may trade nearly 24 hours a day. See CFE trading hours, available at https://www.cboe.com/tradingresources/cfe-expiration-holiday-calendars. 15 See proposed Rule 5.33(m)(2). Rule 5.33(f)(1)(A) provides that the minimum increment for bids and offers on a complex order, and the increments at which components of a complex order may be executed, is set forth in Rule 5.4(b). Rule 5.4(b) states except as provided in Rule 5.33, the minimum increment for bids and offers on complex orders with any ratio equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) for equity and index options, and for Index Combo orders, is $0.01 or greater, which may be determined by the Exchange on a class-by-class basis, and the legs may be executed in $0.01 increments. The minimum increment for bids and offers on complex orders with any ratio less than one-to-three (.333) or greater than threeto-one (3.00) for equity and index options (except for Index Combo orders) is the standard increment for the class pursuant to paragraph (a), and the legs may be executed in the minimum increment applicable to the class pursuant to paragraph (a). Notwithstanding the foregoing, the minimum increment for bids and offers on complex orders in options on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX and XEO), except for box/roll spreads, is $0.05 or greater, or in any increment, which may be determined by the Exchange on a class-by-class basis. 16 See proposed Rule 5.33(m)(2); see also current Rule 5.24(e)(1)(D)(3). 17 See proposed Rule 5.33(m)(4); see also current Rule 5.24(e)(1)(D)(7). 18 See proposed Rule 5.33(m)(5); see also current Rule 5.24(e)(1)(D)(2). 19 See proposed Rule 5.83(b)(2). VerDate Sep<11>2014 17:42 Jul 20, 2020 Jkt 250001 RFC orders will execute in open outcry in a substantially similar manner as they do electronically. Specifically, proposed Rule 5.85(i) provides that an RFC orders execute against each other without representation on the trading floor if: • Each option leg executes at a price that complies with Rule 5.85(b),20 provided that no option leg executes at the same price as a Priority Customer Order in the Simple Book; • each option leg executes at a price at or between the NBBO for the applicable series; and • the execution price is better than the price of a complex order resting in the COB, unless the RFC order is a Priority Customer Order and the resting complex order is a non-Priority Customer Order, in which case the execution price may be the same as or better than the price of the resting complex order.21 RFC orders may not be executed unless the above criteria are satisfied. These execution criteria are the same as the proposed criteria for execution of RFC order electronically as described above, except the proposed rule change references the complex order priority applicable to open outcry trading rather than electronic trading. However, RFC orders, whether executed electronically or in open outcry may not trade, and may not have a leg trade, at the same price as a resting Priority Customer order. Proposed Rule 5.85(i) adopts the following provision that correspond to criteria applicable to electronic RFC orders, as described above: • An RFC order may only be entered in the standard increment applicable to the class pursuant to Rule 5.4(b).22 • The execution of an RFC order must happen contemporaneously with the 20 Rule 5.85(b) provides that a complex order (1) with any ratio equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) or (2) that is an Index Combo order may be executed at a net debit or credit price without giving priority to equivalent bids (offers) in the individual series legs that are represented in the trading crowd or in the Book if the price of at least one leg of the order improves the corresponding bid (offer) of a Priority Customer order(s) in the Book by at least one minimum trading increment as set forth in Rule 5.4(b). A complex order with any ratio less than one-to-three (.333) and greater than three-to-one (3.00) (except for an Index Combo order) may be executed in open outcry on the trading floor at a net debit or credit price without giving priority to equivalent bids (offers) in the individual series legs that are represented in the trading crowd or in the Book if each leg of the order betters the corresponding bid (offer) of a Priority Customer order(s) in the Book on each leg by at least one minimum trading increment as set forth in Rule 5.4(b). 21 See proposed Rule 5.85(i)(1). 22 See proposed Rule 5.85(i)(1)(2). PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 44127 execution of the related futures position portion of the exchange.23 • The transaction involving the related futures position of the exchange must comply with all applicable rules of the designated contract market on which the futures are listed for trading.24 • Rule 5.9 (related to exposure of orders on the Exchange) does not apply to executions of RFC orders.25 Allowing TPHs, and particularly market-makers, to exchange synthetic futures (long (short) call, short (long) put—combos) for listed futures replicates an execution opportunity available in an open outcry environment market participants often use to obtain relief from the effect of the current exposure method (‘‘CEM’’) on the options market. However, the proposed RFC order will provide market participants with opportunities to execute these necessary position reducing trades in VIX and SPX options in a more efficient and seamless manner, as it will not require exposure of these orders on the Exchange. The Exchange believes there are multiple reasons that make the proposed rule change to make RFC orders available permanently is appropriate to maintain fair and orderly markets. First, existing margin models do not fully recognize similar risks present in VIX and SPX derivatives positions held by the Exchange’s liquidity providing community. This results in an overestimation of risk causing Clearing TPHs to require outsized margin deposits from their marketmaker clients, which restricts the liquidity market-makers can provide to the markets. Second, because the Clearing TPHs carrying these positions are bank-owned broker/dealers they are subject to further bank regulatory capital requirements pursuant to CEM, which result in these additional punitive capital requirements being passed on to their market-maker clients.26 Finally, market volatility, such as the recent extreme volatility experienced in the markets, can make providing liquidity in VIX and SPX options immensely more challenging. The execution of options trades independent of the underlying futures hedge introduces additional risk to these transactions, which further reduces available liquidity a liquidity provider may See proposed Rule 5.85(i)(1)(3). See proposed Rule 5.85(i)(1)(4). 25 See proposed Rule 5.85(i)(1)(5). 26 See Letter from Cboe, New York Stock Exchange, and Nasdaq, Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, March 18, 2020. 23 24 E:\FR\FM\21JYN1.SGM 21JYN1 44128 Federal Register / Vol. 85, No. 140 / Tuesday, July 21, 2020 / Notices provide to the market. The combination of these factors negatively impacts the market-making community, which reduces liquidity available in the market. This is particularly true in an extremely volatile market, which is when the market needs this liquidity the most. The Exchange believes the proposed rule change will allow liquidity providers to execute trades tied to the underlying future (i.e., ‘‘delta-neutral’’) in a substantially similar manner as they are currently only able to do on the trading floor, which the Exchange believes will considerably reduce the risk inherent in trying to maintain a hedged portfolio. The Exchange believes the proposed rule change will reduce existing inefficiencies in the execution of these risk-reducing trades and provide market participants with additional flexibility to execute them (either electronically or in open outcry). As a result, the Exchange believes the proposed rule change will provide an additional method for liquidity providers to free up much needed capital, which will benefit the entire market and all investors. The proposed rule will require that the executing TPH identify these crosses as related to an exchange for related positions. As a result, the Exchange’s Regulatory Division has put in place a regulatory review plan that will permit it to ensure any RFC orders that are executed are done in conjunction with an exchange of contract for related positions as required by the proposed rule.27 jbell on DSKJLSW7X2PROD with NOTICES 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.28 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 29 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 27 This will be a continuation of the plan implemented in connection with the temporary RFC orders that were available when the trading floor was closed, which will apply to electronic and open outcry RFC orders. 28 15 U.S.C. 78f(b). 29 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:42 Jul 20, 2020 Jkt 250001 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) 30 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Exchange believes the proposed rule change will remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest. The proposed rule change will provide liquidity providers and other market participants with the ability to exchange SPX and VIX options positions with corresponding futures positions electronically in a substantially similar manner as are able to do on the trading floor was open. Additionally, the proposed rule change will enhance the process by which market participants are currently able to effect these exchanges on the trading floor. These exchanges allow market participants to reduce options positions in their hedged portfolios while maintaining the same risk exposure, which would reduce the necessary capital associated with those positions and permit them to provide more liquidity in the market. This additional liquidity may result in tighter spreads and more execution opportunities, which benefits all investors, particularly in the current volatile markets. The Exchange believes that its proposal is also consistent with the Act in that it seeks to mitigate the potentially negative effects of the bank capital requirements on liquidity in the VIX and SPX markets. As described above, current regulatory capital requirements could potentially impede efficient use of capital and undermine the critical liquidity role that MarketMakers and other liquidity providers play in the SPX and VIX options market by limiting the amount of capital Clearing TPHs (‘‘CTPHs’’) allocate to clearing member transactions. Specifically, the rules may cause CTPHs to impose stricter position limits on their clearing members. In turn, this could force Market-Makers to reduce the size of their quotes and result in reduced liquidity in the market. The Exchange believes that permitting TPHs to reduce options positions in SPX and VIX options that will permit them to maintain a hedged portfolio would likely contribute to the availability of liquidity in the SPX and VIX options PO 00000 30 Id. Frm 00090 Fmt 4703 Sfmt 4703 market and help ensure that these markets retain their competitive balance. The Exchange believes that the proposed rule would serve to protect investors by helping to ensure consistent continued depth of liquidity, particularly given current market conditions when liquidity is needed the most by investors. As noted above, the Exchange temporarily offered RFC orders in an all-electronic trading environment while the trading floor was closed. During that time, TPHs executed 869,800 VIX contracts as RFC orders. The Exchange estimates this equates to more than $80 million in capital that market participants were able to free up using RFC orders, which capital they then had available to put back into the market. The Exchange also believes the proposed rule change is consistent with the Act, because the proposed procedure is consistent with transactions that are otherwise permitted on the trading floor. The proposed rule would provide an electronic mechanism to replicate a process used on the trading floor and enhance the current process used on the trading floor. The proposed rule change will protect Priority Customer orders and orders on top of the book that comprise the BBO, as well as Priority Customer orders on the top of the COB. Additionally, the proposed rule change requires RFC orders to execute in the same increments as all other complex orders. While these crosses must currently be exposed on the trading floor, the Exchange observed that market participants generally deferred their allocations to permit a clean cross, as that is necessary for these transactions to achieve their intended effect. Because these orders were generally not broken up on the trading floor, and because the purpose of these trades is unrelated to profits and losses (making the price at which the transaction is executed relatively unimportant like competitive trades), the Exchange believes it is appropriate to not require exposure of these orders in an electronic or open outcry setting. The Exchange believes the proposed rule change, which is limited to two classes the Exchange believes are being significantly impacted by the inability to execute these crosses, and to option orders that qualify as combos tied to related futures positions, is narrowly tailored for the specific purpose of facilitating the ability of liquidity providers to reduce positions requiring significant capital as a result of current bank regulatory capital requirements and the current historic levels of market E:\FR\FM\21JYN1.SGM 21JYN1 Federal Register / Vol. 85, No. 140 / Tuesday, July 21, 2020 / Notices volatility. The Exchange believes the proposed rule change will protect investors by contributing to the continued depth of liquidity in the SPX and VIX options market. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe the proposed rule change will impose any burden on intramarket competition, RFC orders will be available to all market participants. As discussed above, while the proposed rule change is directed at market-makers, all market participants may use these orders in the same manner as long as all criteria of the proposed rule are satisfied. The Exchange does not believe the proposed rule change will impose any burden on intermarket competition, as it will apply only to products currently listed on the Exchange. Additionally, the proposed order is intended to accommodate riskless transactions for which parties are not seeking price improvement, but rather looking to swap risk exposure to free up capital that will permit those parties to continue to provide liquidity to the market, and thus is not intended to have a competitive impact. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. jbell on DSKJLSW7X2PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be 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. VerDate Sep<11>2014 17:42 Jul 20, 2020 Jkt 250001 Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2020–060 on the subject line. 44129 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89324; File No. SR–NYSE– 2020–59] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Price List Paper Comments July 15, 2020. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on July 1, 2020, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. All submissions should refer to File Number SR–CBOE–2020–060. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2020–060, and should be submitted on or before August 11, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–15687 Filed 7–20–20; 8:45 am] BILLING CODE 8011–01–P I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Price List to (1) adopt a new Step Up Tier 4 Adding Credit, and (2) extend through July 2020 the waiver of equipment and related service charges and trading license fees for NYSE Trading Floor-based member organizations implemented for April, May and June 2020. The Exchange proposes to implement the fee changes effective July 1, 2020. The proposed rule change is available on the Exchange’s website at www.nyse.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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those 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 parts of such statements. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 31 17 PO 00000 CFR 200.30–3(a)(12). Frm 00091 Fmt 4703 Sfmt 4703 E:\FR\FM\21JYN1.SGM 21JYN1

Agencies

[Federal Register Volume 85, Number 140 (Tuesday, July 21, 2020)]
[Notices]
[Pages 44125-44129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89325; File No. SR-CBOE-2020-060]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating to Adopt Related Futures 
Cross (``RFC'') Orders

July 15, 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 July 1, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to adopt Related Futures Cross (``RFC'') Orders. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to adopt RFC orders on a permanent basis. On 
the Exchange's trading floor, floor brokers execute crosses of option 
combos (i.e., synthetic futures) on the trading floor on behalf of 
market participants who were exchanging futures contracts for related 
options positions. Market participants enter into these exchanges in 
order to swap related exposures. For instance, if a market participant 
has positions in VIX options but would prefer to hold a corresponding 
position in VIX futures (such as, for example, to reduce margin or risk 
related to the option positions), that market participant may swap its 
VIX options positions with another market participant(s)'s VIX futures 
positions that have corresponding risk exposure.\3\ The Exchange 
understands from customers that the need to reduce risk is prevalent in 
VIX and SPX, particularly when the markets are volatile, and that they 
often have corresponding futures that could make these exchanges 
possible. For example, Cboe Futures Exchange LLC (``CFE'') permit these 
types of exchanges with respect to VIX futures pursuant to CFE Rule 
414.\4\
---------------------------------------------------------------------------

    \3\ The transaction between the market participants for the 
futures positions occurs in accordance with the rules of the 
applicable designated contract market that lists the futures. See, 
e.g., Cboe Futures Exchange LLC Rule 414.
    \4\ Currently, CME, which lists futures that correspond to SPX 
options, does not offer similar exchange opportunities. If CME 
implements a rule to permit them, the proposed rule change will 
permit TPHs to similar use RFC orders to swap exposure with 
corresponding futures that transact pursuant to CME's rules.
---------------------------------------------------------------------------

    A key element to these exchanges is that both of the option and 
future transactions must occur between the same market participants. 
When a floor broker represented the cross of the option contracts on 
the trading floor in accordance with applicable rules,\5\ while in-
crowd market participants had the opportunity to bid or offer to 
participate on the trade, those participants generally declined to 
participate upon hearing that the cross was part of an exchange of 
related futures contracts. While not required by the Rules, the Rules 
permit in-crowd market participants to decline to accept contracts that 
would otherwise be allocated to them.\6\ The Exchange understands these 
market participants decline this allocation voluntarily, as

[[Page 44126]]

they are aware of the need for market participants to execute these 
crosses cleanly for the transfer of risk between participants to be 
effective.\7\ These are riskless exchanges that carry no profit or loss 
for the market participants that are party to the transactions, but 
rather are intended to provide a seamless method for market 
participants to reduce margin and capital requirements while 
maintaining the same risk exposure within their portfolios.
---------------------------------------------------------------------------

    \5\ See Rules 5.85 and 5.87.
    \6\ See Rule 5.85(a)(2)(C)(iv).
    \7\ Additionally, many market-makers in the crowd that decline 
their allocations in these crosses often similarly engage in these 
exchanges for similar purposes, so may similarly benefit from the 
ability to execute these clean crosses.
---------------------------------------------------------------------------

    From March 16 to June 12, 2020, the Exchange closed its trading 
floor in response to the coronavirus pandemic. During that time, the 
Exchange operated in an all-electronic configuration, which would have 
prevented market participants from executing these crosses. As a 
result, the Exchange adopted Rule 5.24(e)(1)(D) to permit Trading 
Permit Holders (``TPHs'') to execute RFC orders while the trading floor 
was closed.\8\ When the trading floor reopened on June 15, 2020, RFC 
orders were no longer available. However, the Exchange has received 
feedback from customers regarding the benefits of RFC orders, including 
the efficiency it provided with respect to the execution of these 
crosses. Therefore, the Exchange proposes to adopt RFC orders that can 
be executed electronically or in open outcry on a permanent basis.
---------------------------------------------------------------------------

    \8\ Pursuant to current Rule 5.24(e)(1), RFC orders would be 
available until the earlier of the reopening of the trading floor or 
June 30, 2020. Because the proposed rule change proposes to adopt 
RFC orders on a permanent basis, the proposed rule change deletes 
the temporary RFC order rule in Rule 5.24(e)(1)(D).
---------------------------------------------------------------------------

    The proposed rule change adds RFC orders to the list of complex 
order instructions in Rule 5.33(b)(5). For purposes of electronic 
trading, a ``Related Futures Cross'' or ``RFC'' order is an SPX or VIX 
complex order comprised of an option combo order coupled with a contra-
side order or orders totaling an equal number of option combo orders. 
For purposes of open outcry trading, an RFC order is an SPX or VIX 
complex order comprised of an option combo that may execute against a 
contra-side RFC order or orders totaling an equal number of option 
combo orders. An RFC order must be identified to the Exchange as being 
part of an exchange of option contracts for related futures 
positions.\9\
---------------------------------------------------------------------------

    \9\ See current Rule 5.24(e)(1)(D).
---------------------------------------------------------------------------

    The proposed definition of RFC order for electronic trading 
purposes is identical to the current definition in Rule 5.24(e)(1)(D). 
The proposed definition of RFC order for open outcry trading is 
identical as well, except it contemplates RFC orders to be submitted as 
two separate orders rather than a paired order, as paired orders are 
currently unable to route to PAR for manual handling. This is merely a 
difference in form of submission--as two orders are submitted to the 
System in one order message for electronic and two orders are submitted 
to the System in separate messages for open outcry--but the criteria to 
be considered an RFC order and the terms of execution are the same for 
both. The Exchange notes that currently, if a TPH wants to execute a 
cross of options orders as part of an exchange for related futures 
positions, such cross occurs with two separate orders, so the proposed 
rule change is consistent with current practice on the trading floor, 
except it eliminates the need for exposure.
    For purposes of the proposed RFC order instruction:
     An SPX or VIX option combo order is a two-legged order 
with one leg to purchase (sell) SPX or VIX calls and another leg to 
sell (purchase) the same number of SPX or VIX, respectively, puts with 
the same expiration date and strike price.\10\
---------------------------------------------------------------------------

    \10\ See current Rule 5.24(e)(1)(D)(4).
---------------------------------------------------------------------------

     An exchange of option contracts for related futures 
positions is a transaction entered into by market participants seeking 
to swap option positions with related futures positions with related 
exposures.
     A related futures position is a position in a futures 
contract with either the same underlying as or a high degree of price 
correlation to the underlying of the option combo in the RFC order so 
that execution of the option combos in the RFC order would serve as an 
appropriate hedge for the related future positions.
     In an exchange of contracts for related positions, one 
party(ies) must be the buyer(s) of (or the holder(s) of the long market 
exposure associated with) the options positions and the seller(s) of 
corresponding futures contracts and the other party(ies) must be the 
seller(s) of (or holder(s) of the short market exposure associated 
with) the options positions and the buyer(s) of the corresponding 
futures contracts. The quantity of the option contracts executed as 
part of the RFC order must correlate to the quantity represented by the 
related futures position portion of the exchange.\11\
---------------------------------------------------------------------------

    \11\ See current Rule 5.24(e)(1)(D)(5).
---------------------------------------------------------------------------

    The proposed rule change adopts Rule 5.33(m) to describe how RFC 
orders may execute. Specifically, proposed subparagraph (m)(1) states 
an RFC order will execute automatically on entry without exposure if:
     Each option leg executes at a price that complies with 
Rule 5.33(f)(2),\12\ provided that no option leg executes at the same 
price as a Priority Customer Order in the Simple Book; and
---------------------------------------------------------------------------

    \12\ Rule 5.33(f)(2) requires complex orders, which would 
include an RFC order, which by definition contains two option legs, 
to execution only if the execution price: At a net price: (i) That 
would cause any component of the complex strategy to be executed at 
a price of zero; (ii) worse than the synthetic best bid or offer 
(``SBBO'') or equal to the SBBO when there is a Priority Customer 
Order at the SBBO, except all-or-none complex orders may only 
execute at prices better than the SBBO; (iii) that would cause any 
component of the complex strategy to be executed at a price worse 
than the individual component prices on the Simple Book; (iv) worse 
than the price that would be available if the complex order Legged 
into the Simple Book; or (v) that would cause any component of the 
complex strategy to be executed at a price ahead of a Priority 
Customer Order on the Simple Book without improving the BBO of at 
least one component of the complex strategy.
---------------------------------------------------------------------------

     each option leg executes at a price at or between the 
national best bid or offer (``NBBO'') for the applicable series; and
     the execution price is better than the price of any 
complex order resting in the complex order book (``COB''), unless the 
RFC order is a Priority Customer Order and the resting complex order is 
a non-Priority Customer Order, in which case the execution price may be 
the same as or better than the price of the resting complex order.
    The System cancels an RFC order if it cannot execute.\13\ This 
provision provides that RFC orders must execute in accordance with the 
same priority principles that apply to all other complex orders on the 
Exchange, with additional restrictions so that no leg may trade at the 
same price as a resting Priority Customer order, which protects 
Priority Customer orders in the simple book and COB and prohibits 
trades through prices available in the book.
---------------------------------------------------------------------------

    \13\ See current Rule 5.24(e)(1)(D)(1)(b) and (2).
---------------------------------------------------------------------------

    Proposed paragraph (m) also provides the following:
     The execution of an RFC order must happen 
contemporaneously with the execution of the related futures position 
portion of the exchange.\14\
---------------------------------------------------------------------------

    \14\ See proposed Rule 5.33(m)(3); see also current Rule 
5.24(e)(1)(D)(6). Current Rule 5.24(e)(1)(D)(6) provides that RFC 
orders may only execute during the Regular Trading Hours session. 
The purpose of that restriction was because the functionality was 
intended to temporarily replicate trading that only occurred on the 
trading floor, which is only available during Regular Trading Hours. 
With permanent availability of this order instruction, the Exchange 
believes it is appropriate to make electronic RFC orders available 
during the Global Trading Hours session as well. This will provide 
market participants with flexibility to execute these orders at more 
times, particularly given that futures may trade nearly 24 hours a 
day. See CFE trading hours, available at https://www.cboe.com/trading-resources/cfe-expiration-holiday-calendars.

---------------------------------------------------------------------------

[[Page 44127]]

     An RFC order may only be entered in the standard increment 
applicable to the class pursuant to Rule 5.33(f)(1)(A).\15\ Therefore, 
RFC orders may only be submitted in the same increments as all other 
complex orders in VIX and SPX, as applicable.\16\
---------------------------------------------------------------------------

    \15\ See proposed Rule 5.33(m)(2). Rule 5.33(f)(1)(A) provides 
that the minimum increment for bids and offers on a complex order, 
and the increments at which components of a complex order may be 
executed, is set forth in Rule 5.4(b). Rule 5.4(b) states except as 
provided in Rule 5.33, the minimum increment for bids and offers on 
complex orders with any ratio equal to or greater than one-to-three 
(.333) and less than or equal to three-to-one (3.00) for equity and 
index options, and for Index Combo orders, is $0.01 or greater, 
which may be determined by the Exchange on a class-by-class basis, 
and the legs may be executed in $0.01 increments. The minimum 
increment for bids and offers on complex orders with any ratio less 
than one-to-three (.333) or greater than three-to-one (3.00) for 
equity and index options (except for Index Combo orders) is the 
standard increment for the class pursuant to paragraph (a), and the 
legs may be executed in the minimum increment applicable to the 
class pursuant to paragraph (a). Notwithstanding the foregoing, the 
minimum increment for bids and offers on complex orders in options 
on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX and XEO), 
except for box/roll spreads, is $0.05 or greater, or in any 
increment, which may be determined by the Exchange on a class-by-
class basis.
    \16\ See proposed Rule 5.33(m)(2); see also current Rule 
5.24(e)(1)(D)(3).
---------------------------------------------------------------------------

     The transaction involving the related futures position of 
the exchange must comply with all applicable rules of the designated 
contract market on which the futures are listed for trading.\17\
---------------------------------------------------------------------------

    \17\ See proposed Rule 5.33(m)(4); see also current Rule 
5.24(e)(1)(D)(7).
---------------------------------------------------------------------------

     Rule 5.9 (related to exposure of orders on the Exchange) 
does not apply to executions of RFC orders.\18\ An RFC order is 
intended to provide a seamless mechanism to execute crosses without 
exposure, so proposed change is appropriate.
---------------------------------------------------------------------------

    \18\ See proposed Rule 5.33(m)(5); see also current Rule 
5.24(e)(1)(D)(2).
---------------------------------------------------------------------------

    As noted above, market participants execute crosses related to an 
exchange for related positions in open outcry on the Exchange's trading 
floor. While in-crowd market participants have the opportunity to bid 
or offer to participate on the trade, those participants generally 
decline to participate upon hearing that the cross was part of an 
exchange of related futures contracts. Therefore, in practice, the 
orders execute as clean crosses. To provide for a seamless experience 
in open outcry, the Exchange proposes to add RFC orders to the list of 
complex orders it may make available in open outcry.\19\ RFC orders 
will execute in open outcry in a substantially similar manner as they 
do electronically. Specifically, proposed Rule 5.85(i) provides that an 
RFC orders execute against each other without representation on the 
trading floor if:
---------------------------------------------------------------------------

    \19\ See proposed Rule 5.83(b)(2).
---------------------------------------------------------------------------

     Each option leg executes at a price that complies with 
Rule 5.85(b),\20\ provided that no option leg executes at the same 
price as a Priority Customer Order in the Simple Book;
---------------------------------------------------------------------------

    \20\ Rule 5.85(b) provides that a complex order (1) with any 
ratio equal to or greater than one-to-three (.333) and less than or 
equal to three-to-one (3.00) or (2) that is an Index Combo order may 
be executed at a net debit or credit price without giving priority 
to equivalent bids (offers) in the individual series legs that are 
represented in the trading crowd or in the Book if the price of at 
least one leg of the order improves the corresponding bid (offer) of 
a Priority Customer order(s) in the Book by at least one minimum 
trading increment as set forth in Rule 5.4(b). A complex order with 
any ratio less than one-to-three (.333) and greater than three-to-
one (3.00) (except for an Index Combo order) may be executed in open 
outcry on the trading floor at a net debit or credit price without 
giving priority to equivalent bids (offers) in the individual series 
legs that are represented in the trading crowd or in the Book if 
each leg of the order betters the corresponding bid (offer) of a 
Priority Customer order(s) in the Book on each leg by at least one 
minimum trading increment as set forth in Rule 5.4(b).
---------------------------------------------------------------------------

     each option leg executes at a price at or between the NBBO 
for the applicable series; and
     the execution price is better than the price of a complex 
order resting in the COB, unless the RFC order is a Priority Customer 
Order and the resting complex order is a non-Priority Customer Order, 
in which case the execution price may be the same as or better than the 
price of the resting complex order.\21\
---------------------------------------------------------------------------

    \21\ See proposed Rule 5.85(i)(1).
---------------------------------------------------------------------------

    RFC orders may not be executed unless the above criteria are 
satisfied. These execution criteria are the same as the proposed 
criteria for execution of RFC order electronically as described above, 
except the proposed rule change references the complex order priority 
applicable to open outcry trading rather than electronic trading. 
However, RFC orders, whether executed electronically or in open outcry 
may not trade, and may not have a leg trade, at the same price as a 
resting Priority Customer order.
    Proposed Rule 5.85(i) adopts the following provision that 
correspond to criteria applicable to electronic RFC orders, as 
described above:
     An RFC order may only be entered in the standard increment 
applicable to the class pursuant to Rule 5.4(b).\22\
---------------------------------------------------------------------------

    \22\ See proposed Rule 5.85(i)(1)(2).
---------------------------------------------------------------------------

     The execution of an RFC order must happen 
contemporaneously with the execution of the related futures position 
portion of the exchange.\23\
---------------------------------------------------------------------------

    \23\ See proposed Rule 5.85(i)(1)(3).
---------------------------------------------------------------------------

     The transaction involving the related futures position of 
the exchange must comply with all applicable rules of the designated 
contract market on which the futures are listed for trading.\24\
---------------------------------------------------------------------------

    \24\ See proposed Rule 5.85(i)(1)(4).
---------------------------------------------------------------------------

     Rule 5.9 (related to exposure of orders on the Exchange) 
does not apply to executions of RFC orders.\25\
---------------------------------------------------------------------------

    \25\ See proposed Rule 5.85(i)(1)(5).
---------------------------------------------------------------------------

    Allowing TPHs, and particularly market-makers, to exchange 
synthetic futures (long (short) call, short (long) put--combos) for 
listed futures replicates an execution opportunity available in an open 
outcry environment market participants often use to obtain relief from 
the effect of the current exposure method (``CEM'') on the options 
market. However, the proposed RFC order will provide market 
participants with opportunities to execute these necessary position 
reducing trades in VIX and SPX options in a more efficient and seamless 
manner, as it will not require exposure of these orders on the 
Exchange.
    The Exchange believes there are multiple reasons that make the 
proposed rule change to make RFC orders available permanently is 
appropriate to maintain fair and orderly markets. First, existing 
margin models do not fully recognize similar risks present in VIX and 
SPX derivatives positions held by the Exchange's liquidity providing 
community. This results in an overestimation of risk causing Clearing 
TPHs to require out-sized margin deposits from their market-maker 
clients, which restricts the liquidity market-makers can provide to the 
markets. Second, because the Clearing TPHs carrying these positions are 
bank-owned broker/dealers they are subject to further bank regulatory 
capital requirements pursuant to CEM, which result in these additional 
punitive capital requirements being passed on to their market-maker 
clients.\26\ Finally, market volatility, such as the recent extreme 
volatility experienced in the markets, can make providing liquidity in 
VIX and SPX options immensely more challenging. The execution of 
options trades independent of the underlying futures hedge introduces 
additional risk to these transactions, which further reduces available 
liquidity a liquidity provider may

[[Page 44128]]

provide to the market. The combination of these factors negatively 
impacts the market-making community, which reduces liquidity available 
in the market. This is particularly true in an extremely volatile 
market, which is when the market needs this liquidity the most.
---------------------------------------------------------------------------

    \26\ See Letter from Cboe, New York Stock Exchange, and Nasdaq, 
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of 
the Board of Governors of the Federal Reserve System, March 18, 
2020.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change will allow liquidity 
providers to execute trades tied to the underlying future (i.e., 
``delta-neutral'') in a substantially similar manner as they are 
currently only able to do on the trading floor, which the Exchange 
believes will considerably reduce the risk inherent in trying to 
maintain a hedged portfolio. The Exchange believes the proposed rule 
change will reduce existing inefficiencies in the execution of these 
risk-reducing trades and provide market participants with additional 
flexibility to execute them (either electronically or in open outcry). 
As a result, the Exchange believes the proposed rule change will 
provide an additional method for liquidity providers to free up much 
needed capital, which will benefit the entire market and all investors.
    The proposed rule will require that the executing TPH identify 
these crosses as related to an exchange for related positions. As a 
result, the Exchange's Regulatory Division has put in place a 
regulatory review plan that will permit it to ensure any RFC orders 
that are executed are done in conjunction with an exchange of contract 
for related positions as required by the proposed rule.\27\
---------------------------------------------------------------------------

    \27\ This will be a continuation of the plan implemented in 
connection with the temporary RFC orders that were available when 
the trading floor was closed, which will apply to electronic and 
open outcry RFC orders.
---------------------------------------------------------------------------

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.\28\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \29\ 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) \30\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ Id.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest. The proposed rule change will provide liquidity 
providers and other market participants with the ability to exchange 
SPX and VIX options positions with corresponding futures positions 
electronically in a substantially similar manner as are able to do on 
the trading floor was open. Additionally, the proposed rule change will 
enhance the process by which market participants are currently able to 
effect these exchanges on the trading floor. These exchanges allow 
market participants to reduce options positions in their hedged 
portfolios while maintaining the same risk exposure, which would reduce 
the necessary capital associated with those positions and permit them 
to provide more liquidity in the market. This additional liquidity may 
result in tighter spreads and more execution opportunities, which 
benefits all investors, particularly in the current volatile markets.
    The Exchange believes that its proposal is also consistent with the 
Act in that it seeks to mitigate the potentially negative effects of 
the bank capital requirements on liquidity in the VIX and SPX markets. 
As described above, current regulatory capital requirements could 
potentially impede efficient use of capital and undermine the critical 
liquidity role that Market-Makers and other liquidity providers play in 
the SPX and VIX options market by limiting the amount of capital 
Clearing TPHs (``CTPHs'') allocate to clearing member transactions. 
Specifically, the rules may cause CTPHs to impose stricter position 
limits on their clearing members. In turn, this could force Market-
Makers to reduce the size of their quotes and result in reduced 
liquidity in the market. The Exchange believes that permitting TPHs to 
reduce options positions in SPX and VIX options that will permit them 
to maintain a hedged portfolio would likely contribute to the 
availability of liquidity in the SPX and VIX options market and help 
ensure that these markets retain their competitive balance. The 
Exchange believes that the proposed rule would serve to protect 
investors by helping to ensure consistent continued depth of liquidity, 
particularly given current market conditions when liquidity is needed 
the most by investors. As noted above, the Exchange temporarily offered 
RFC orders in an all-electronic trading environment while the trading 
floor was closed. During that time, TPHs executed 869,800 VIX contracts 
as RFC orders. The Exchange estimates this equates to more than $80 
million in capital that market participants were able to free up using 
RFC orders, which capital they then had available to put back into the 
market.
    The Exchange also believes the proposed rule change is consistent 
with the Act, because the proposed procedure is consistent with 
transactions that are otherwise permitted on the trading floor. The 
proposed rule would provide an electronic mechanism to replicate a 
process used on the trading floor and enhance the current process used 
on the trading floor. The proposed rule change will protect Priority 
Customer orders and orders on top of the book that comprise the BBO, as 
well as Priority Customer orders on the top of the COB. Additionally, 
the proposed rule change requires RFC orders to execute in the same 
increments as all other complex orders. While these crosses must 
currently be exposed on the trading floor, the Exchange observed that 
market participants generally deferred their allocations to permit a 
clean cross, as that is necessary for these transactions to achieve 
their intended effect. Because these orders were generally not broken 
up on the trading floor, and because the purpose of these trades is 
unrelated to profits and losses (making the price at which the 
transaction is executed relatively unimportant like competitive 
trades), the Exchange believes it is appropriate to not require 
exposure of these orders in an electronic or open outcry setting. The 
Exchange believes the proposed rule change, which is limited to two 
classes the Exchange believes are being significantly impacted by the 
inability to execute these crosses, and to option orders that qualify 
as combos tied to related futures positions, is narrowly tailored for 
the specific purpose of facilitating the ability of liquidity providers 
to reduce positions requiring significant capital as a result of 
current bank regulatory capital requirements and the current historic 
levels of market

[[Page 44129]]

volatility. The Exchange believes the proposed rule change will protect 
investors by contributing to the continued depth of liquidity in the 
SPX and VIX options market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition, RFC orders will be available to all market participants. 
As discussed above, while the proposed rule change is directed at 
market-makers, all market participants may use these orders in the same 
manner as long as all criteria of the proposed rule are satisfied. The 
Exchange does not believe the proposed rule change will impose any 
burden on intermarket competition, as it will apply only to products 
currently listed on the Exchange. Additionally, the proposed order is 
intended to accommodate riskless transactions for which parties are not 
seeking price improvement, but rather looking to swap risk exposure to 
free up capital that will permit those parties to continue to provide 
liquidity to the market, and thus is not intended to have a competitive 
impact.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2020-060 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-060. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal offices of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-060, and should be submitted 
on or before August 11, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15687 Filed 7-20-20; 8:45 am]
BILLING CODE 8011-01-P
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