Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.8-O To Increase Position Limits for Options on Certain Exchange-Traded Funds, 47457-47463 [2020-16995]
Download as PDF
<![CDATA[
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and Rule 19b–4(f)(6)(iii)
thereunder.12
A proposed rule change filed under
Rule 19b–4(f)(6) 13 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),14 the
Commission may 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 proposal may
become operative by July 31, 2020. The
Commission believes that waiver of the
30-day operative delay is consistent
with the protection of investors and the
public interest because it implements an
amendment to the CAT NMS Plan
approved by the Commission.15
Accordingly, the Commission hereby
waives the 30-day operative delay and
designates the proposal operative as of
July 31, 2020.16
At any time within 60 days of the
filing of this proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will 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:
11 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s 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.
13 17 CFR 240.19b–4(f)(6).
14 17 CFR 240.19b–4(f)(6)(iii).
15 See Securities Exchange Act Release No. 89397
(July 24, 2020) (Federal Register publication
pending).
16 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
jbell on DSKJLSW7X2PROD with NOTICES
12 17
VerDate Sep<11>2014
16:55 Aug 04, 2020
Jkt 250001
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–
NYSECHX–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–NYSECHX–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 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–NYSECHX–2020–23, and
should be submitted on or before
August 26, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–16998 Filed 8–4–20; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89427; File No. SR–
NYSEArca–2020–70]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 6.8–O To
Increase Position Limits for Options on
Certain Exchange-Traded Funds
July 30, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on July 24,
2020, NYSE Arca, Inc. (‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Rule 6.8–O (Position Limits) to increase
the position limits for options on certain
exchange-traded funds (‘‘ETFs’’). 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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this filing is to amend
Commentary .06(f) to Rule 6.4–O to
BILLING CODE 8011–01–P
15 U.S.C. 78s(b)(1).
15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1
2
17 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00120
Fmt 4703
Sfmt 4703
47457
E:\FR\FM\05AUN1.SGM
05AUN1
47458
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
increase the position limits for options
on the following ETFs: Standard and
Poor’s Depositary Receipts Trust
(‘‘SPY’’), iShares MSCI EAFE ETF
(‘‘EFA’’), iShares China Large-Cap ETF
(‘‘FXI’’), iShares iBoxx High Yield
Corporate Bond Fund (‘‘HYG’’), and
Financial Select Sector SPDR Fund
(‘‘XLF’’). Although the proposed change
does not amend the text of Rule 6.9–O
(Exercise Limits), when the proposed
rule is effective and operative, the
exercise limits for the options that are
subject to this proposed rule change
would increase, because Rule 6.9–O
provides that the exercise limits for
index options and ETF options,
respectively, are equivalent to their
position limits. This is a competitive
filing that is based on a proposal
recently submitted by the Chicago Board
Options Exchange Incorporated
(‘‘Cboe’’) and approved by the
Commission.4
Position limits are designed to
address potential manipulative schemes
and adverse market impacts
surrounding the use of options, such as
disrupting the market in the security
underlying the options. While position
limits should address and discourage
the potential for manipulative schemes
and adverse market impact, if such
limits are set too low, participation in
the options market may be discouraged.
The Exchange believes that position
limits must therefore be balanced
between mitigating concerns of any
potential manipulation and the cost of
inhibiting potential hedging activity that
could be used for legitimate economic
purposes.
According to Cboe, market
participants have increased their
demand for options on SPY, EFA, FXI,
HYG, and XLF (collectively, the
‘‘Underlying ETFs’’) for both trading
and hedging purposes. Cboe noted that
although the demand for these options
appears to have increased, position
limits for options on the Underlying
ETFs, have remained the same. The
Exchange believes these unchanged
position limits may have impeded, and
may continue to impede, trading
activity and strategies of investors, such
as use of effective hedging vehicles or
income generating strategies (e.g., buywrite or put-write), and the ability of a
Market Maker 5 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
publicly disclosed to the marketplace.
As such, OTC transactions do not
contribute to the price discovery process
on a public exchange or other lit
markets.
Based on the foregoing, 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
enable other market participants to
transfer their liquidity demands from
OTC markets to the Exchange (or other
options exchanges on which they
participate). As described in further
detail below, the Exchange believes that
the continuously increasing market
capitalization of the Underlying ETFs
and ETF component securities, as well
as the highly liquid markets for those
securities, reduces the concerns for
potential market manipulation and/or
disruption in the underlying markets
upon increasing position limits, while
the rising demand for trading options on
the Underlying ETFs for legitimate
economic purposes compels an increase
Options
jbell on DSKJLSW7X2PROD with NOTICES
4 See Securities Exchange Act Release No. 88768
(April 29, 2020) 85 FR 26736 (May 5, 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
16:55 Aug 04, 2020
Jkt 250001
Proposed Position and Exercise Limits
for Options on the Underlying ETFs
Position limits for options on ETFs
are determined pursuant to Rule 6.8–O,
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 Rule 6.8–O, 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 as set forth in Rule
6.8–O. Commentary .06(f) to Rule 6.8–
O sets forth separate position limits for
options on specific ETFs, including
SPY, FXI and EFA. In addition, Rule
6.9–O (which is not being amended by
this filing), establishes exercise limits
for the aforementioned ETFs.
The Exchange proposes to amend
Rule 6.8–O Commentary .06(f) to double
the position limits and, as a result,
exercise limits, for options on the
Underlying ETFs, i.e., for each of HYG,
XLF, FXI, EFA and SPY. By virtue of
Rule 6.9–O, the exercise limits for EFA,
FXI, HYG, XLF, and SPY would
similarly increase.
The table below represents the current
and proposed position limits for options
on the Underlying ETFs, including the
addition to the table of HYG and XLF,
with new text signified by italics and tobe-deleted text signified in brackets.6
Position limits
PowerShares QQQ TrustSM, Series 1 (QQQ) ........................................
SPDR® S&P 500® ETF (SPY) .................................................................
iShares® Russell 2000® ETF (IWM) ........................................................
SPDR®Dow Jones Industrial AverageSM ETF Trust (DIA) .....................
iShares MSCI Emerging Markets ETF (EEM) .........................................
iShares China Large-Cap ETF (FXI) ........................................................
iShares MSCI EAFE ETF (EFA) ..............................................................
iShares MSCI Brazil Capped ETF (EWZ) ................................................
iShares 20+ Year Treasury Bond Fund ETF (TLT) .................................
iShares MSCI Japan ETF (EWJ) .............................................................
iShares iBoxx High Yield Corporate Bond Fund (‘‘HYG’’) .......................
Financial Select Sector SPDR Fund (‘‘XLF’’) ...........................................
VerDate Sep<11>2014
in position limits (and corresponding
exercise limits).
1,800,000 contracts
[1,800,000]3,600,000 contracts
1,000,000 contracts
300,000 contracts
1,000,000 contracts
[500,000]1,000,000 contracts
[500,000]1,000,000 contracts
500,000 contracts
500,000 contracts
500,000 contracts
500,000 contracts
500,000 contracts
Indexes) (the ‘‘Cboe Approval Order’’). Cboe also
increased position limits for options overlying the
MSCI Emerging Markets Index (‘‘MXEF’’) and the
MSCI EAFE Index (‘‘MXEA’’), however, because the
Exchange does not list options on the MXEF or
MXEA indexes this proposal does not include them.
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
5 The term ‘‘Market Maker’’ refers to Market
Makers and Lead Market Makers, collectively. See
Rule 6.32–O. A Market Maker has the rights and
responsibilities set forth in Rules 6.37–O through
6.30–O.
6 See proposed Rule 6.8–O, Commentary .06(f).
E:\FR\FM\05AUN1.SGM
05AUN1
47459
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
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 Rule 5.3–O(g)(2) for ETFs holding
non-U.S. component securities, or
(2) the generic listing standards for
series of portfolio depository receipts
and index fund shares based on
international or global indexes under
which a comprehensive surveillance
agreement (‘‘CSA’’) is not required, as
well as the continued listing criteria in
Rule 5.4–O.7 In compliance with its
listing rules, the Exchange also
represents that non U.S. component
securities that are not subject to a CSA
do not, in the aggregate, represent more
than 50% of the weight of any of the
Underlying ETFs.8
Cboe’s Composition and Growth
Analysis for Underlying ETFs
As stated above, position limits are
intended to prevent the establishment of
ADV 13
(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)
................
................
................
................
................
jbell on DSKJLSW7X2PROD with NOTICES
In addition, Cboe also collected the
same trading statistics, where
applicable, as above regarding a sample
of other ETFs, as well as the current
Product
ADV
(ETF shares)
QQQ ....................
30.2 million ...........
16:55 Aug 04, 2020
Jkt 250001
2.8 million .................
196,600 ....................
155,900 ....................
193,700 ....................
102,100 ....................
Shares outstanding
(ETFS) 14
968.7
106.8
928.2
216.6
793.6
million
million
million
million
million
.................
.................
.................
.................
.................
position limits for options on such
ETFs, in order to draw comparisons in
support of their proposed position limit
increases fo9r options on a number of
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 cashsettled options with position limits
reflecting notional values that are larger
than current position limits for options
on the ETFs based on the same indices.
For indexes that are tracked by an
Underlying ETF but on which there are
no options listed, the Exchange believes,
based on the liquidity, depth and
breadth of the underlying market of the
components of the indexes, that each of
the indexes referenced by the applicable
ETFs would be considered a broadbased index under the Exchange’s
Rules. Additionally, if in some cases
certain position limits are appropriate
for the options overlying comparable
indexes or basket of securities that the
Underlying ETFs track, then those
economically equivalent position limits
should be appropriate for the options
overlying the Underlying ETFs.
The Exchange notes that the following
trading statistics regarding shares of and
options on the Underlying ETFs, as well
as the component securities have been
collected by Cboe: 12
Total market
cap of ETF
components 15
Fund market cap
(USD)
312.9 billion ..............
4.8 billion ..................
64.9 billion ................
19.1 billion ................
24.6 billion ................
29.3 trillion
28.0 trillion
19.3 trillion
906.4 billion 16
3.8 trillion
Underlying ETFs (see further discussion
below):
ADV
(option contracts)
Shares outstanding
(ETFs)
Fund market cap
(USD)
Total market cap of
ETF components
670,200
410.3 million ...........
88.7 billion ...........
10.1 trillion .............
7 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 Rules 5.3(g)(2) and 5.4–O(k).
8 See Rule 5.3–O(g)(2)(B).
9 See Securities Exchange Act Release No. 68001
(October 5, 2012), 77 FR 62303 (October 12, 2012)
(SR–NYSEArca–2012–112).
10 See supra note 4.
11 See supra note 9 (Order approving the
Exchange’s; implementation of the pilot program
that ran through 2017, during which there were no
VerDate Sep<11>2014
options positions that can be used or
might create incentives to manipulate
the underlying market so as to benefit
options positions. The Securities and
Exchange Commission (the
‘‘Commission’’) has recognized that
these limits are designed to minimize
the potential for mini-manipulations
and for corners or squeezes of the
underlying market, as well as serve to
reduce the possibility for disruption of
the options market itself, especially in
illiquid classes.9 The Underlying ETFs
as well as the ETF components are
highly liquid, and are based on a broad
set of highly liquid securities and other
reference assets, as demonstrated by the
trading statistics collected by Cboe.10
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 2018.11
To support its proposed position limit
increases, Cboe conducted an analysis
in support of its proposal. The Exchange
agrees with Cboe’s trading statistics and
analysis. In support of its proposal,
Cboe considered both liquidity of the
Underlying ETFs and the component
securities of the Underlying ETFs, as
well as the availability of economically
equivalent products to the overlying
options and their respective position
limits. For instance, some of the
Underlying ETFs are based upon broad-
position limits for options on SPY). See also
Securities Exchange Act Release No. 83413 (June
12, 2018) 83 FR 28277 (June 18, 2018) (SR–
NYSEArca–2018–44). The Exchange notes that
throughout the duration of the pilot program it was
not aware of any problems created or adverse
consequences as a result of the pilot program.
12 See Securities Exchange Act Release No. 34–
88350 (March 10, 2020), 85 FR 15003 (March 16,
2020) (SR–CBOE–2020–015).
13 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
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
Current
position limits
1,800,000
ETF options in this proposal are for all of 2019,
unless otherwise indicated.
14 Shares Outstanding and Fund Market
Capitalization Data in the tables presented in this
filing were sourced from Bloomberg and the Cboe’s
internal data on January 2, 2020.
15 Total Market Capitalization of the ETF
Components presented in the tables in this filing
were sourced from Bloomberg on January 3, 2020,
as well as directly from the issuers’ websites.
16 Total Market Capitalization of HYG was
sourced from IHS Markit, which sends daily
constituent information to Cboe.
E:\FR\FM\05AUN1.SGM
05AUN1
47460
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
Product
ADV
(ETF shares)
EWZ ....................
TLT ......................
EWJ .....................
26.7 million ...........
9.6 million .............
7.2 million .............
ADV
(option contracts)
Shares outstanding
(ETFs)
Fund market cap
(USD)
Total market cap of
ETF components
186,500
95,200
5,700
233 million ..............
128.1 million ..........
236.6 million ...........
11.3 billion ...........
17.5 billion ...........
14.2 billion ...........
234.6 billion ...........
N/A .........................
3 trillion ..................
jbell on DSKJLSW7X2PROD with NOTICES
The following analysis, which the
Exchange agrees with, was conducted
by Cboe in support of its proposal. Cboe
noted that, overall, the liquidity in the
shares of the Underlying ETFs and in
the component securities of the
Underlying ETFs and in their overlying
options, as well as the large market
capitalization and structure of each of
the Underlying ETFs support the
proposal to increase the position limits
for each option class. Given the robust
liquidity and capitalization in the
Underlying ETFs and in the component
securities of the Underlying ETFs the
Exchange does not anticipate that the
proposed increase in position limits
would create significant price
movements. Also, the Exchange believes
the market capitalization of the
underlying component securities of the
applicable index or reference asset are
large enough to adequately absorb
potential price movements that may be
caused by large trades.
Specifically, the Exchange notes that
SPY tracks the performance of the S&P
500® Index, which is an index of
diversified large cap U.S. companies.17
It is composed of 505 selected stocks
spanning over approximately 24
separate industry groups. The S&P 500®
is one of the most commonly followed
equity indices, and is widely considered
to be the best indicator of stock market
performance as a whole. SPY is one of
the most actively traded ETFs.
In support of its proposal to increase
position limits for SPY to 3,600,000
contracts, Cboe compared SPY’s ADV
from 2017 to the end of 2019, and found
that SPY’s ADV has increased from
approximately 64.6 million shares to
70.3 million shares.18 Similarly, Cboe
noted SPY’s ADV in options contracts
has increased from 2.6 million to 2.8
million through 2019.19 Cboe’s data
shows the demand for options trading
17 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).
18 See Securities Exchange Act Release 83066
(April 19, 2018) 83 FR 18099 (April 25, 2018) (SR–
NYSEArca–2018–23) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Modify Rule 6.8–O, Commentary .06 To Expand
Position Limits for Options on Certain ExchangeTraded Funds).
19 See Securities Exchange Act Release No. 83413
(June 12, 2018) 83 FR 28277 (June 18, 2018) (SR–
NYSEArca–2018–44) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
to Amend Commentary .06 to Rule 6.8–O).
VerDate Sep<11>2014
16:55 Aug 04, 2020
Jkt 250001
on SPY has continued to increase,
however, the position limits have
remained the same, which the Exchange
believes may have impacted growth in
SPY option volume from 2017 through
2019. In addition, Cboe notes that SPY
shares are more liquid than
PowerShares QQQ TrustSM (‘‘QQQ’’)
shares, which is also currently subject to
a position limit of 1,800,000 contracts.
Specifically, according to Cboe’s
statistical comparison, SPY currently
experiences over twice the ADV in
shares and over four times the ADV in
options than that of QQQ.20
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.21 In support of its
proposal to increase the position limit
for EFA, Cboe’s proposal specifies, 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
contracts 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, and calculated that
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 (prior to Cboe’s recent
change) and 1,450,000 for Cboe’s
current 50,000 contract position limit
for MXEA options.22
Cboe also noted that MXEA index
options have an ADV of 594 options
contracts, which equates 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
20 The 2019 ADV for QQQ shares is 30.2 million
and for options on QQQ is 670,200.
21 See iShares MSCI EAFE ETF, available at:
https://www.ishares.com/us/products/239623/
ishares-msci-eafe-etf (April 30, 2020).
22 The Exchange notes that it does not list options
on foreign indexes.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
Current
position limits
500,000
500,000
500,000
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.23 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.24 In
support of its proposal, Cboe compared
XLF’s ADV 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
23 See iShares China Large-Cap ETF, available at:
https://www.ishares.com/us/products/239536/
ishares-china-largecap-etf (April 30, 2020).
24 See Select Sector SPDR ETFs, XLF, available
at: https://www.sectorspdr.com/sectorspdr/sector/xlf
(April 30, 2020).
E:\FR\FM\05AUN1.SGM
05AUN1
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
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.25 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.
jbell on DSKJLSW7X2PROD with NOTICES
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
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.
See iShares iBoxx $ High Yield Corporate Bond
ETF, available at: https://www.ishares.com/us/
products/239565/ishares-iboxx-high-yieldcorporatebond-etf (April 30, 2020).
25
VerDate Sep<11>2014
16:55 Aug 04, 2020
Jkt 250001
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 26 that
maintains positions in the options on
the same side of the market, for its own
account or for the account of a
customer, report certain information to
the Exchange. This information would
include, but would not be limited to, the
options’ positions, whether such
positions are hedged and, if so, a
description of the hedge(s).
Market Makers would continue to be
exempt from this reporting requirement,
26 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with an OTP. OTP Holders and OTP
Firms are deemed ‘‘members’’ under the Exchange
Act. See Rule 1.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
47461
however, the Exchange may access
Market Maker position information.27
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.28
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.29
The Exchange also notes that large
stock holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,30 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
27 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’’).
28 See Rule 6.6–O.
29 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.
30 17 CFR 240.13d–1.
E:\FR\FM\05AUN1.SGM
05AUN1
47462
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
its customer.31 In addition, Rule 15c3–
1 imposes a capital charge on Members
to the extent of any margin deficiency
resulting from the higher margin
requirement.32
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,33 in general, and Section 6(b)(5) of
the Act,34 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest. Additionally, the
Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 35 requirement that the rules of
an exchange not be designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed increase in position limits for
options on the Underlying ETFs will
remove impediments to and perfect the
mechanism of a free and open market
and national market system, and, in
general, protect investors and the public
interest, because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. The proposed
increases will allow market participants
to more fully implement hedging
strategies in related derivative products
and to further use options to achieve
investment strategies (e.g., there are
Exchange-Traded Products (‘‘ETPs’’)
that use options on the Underlying ETFs
as part of their investment strategy, and
the applicable position limits as they
stand today may inhibit these ETPs in
achieving their investment objectives, to
the detriment of investors). Also,
increasing the applicable position limits
may allow Market Makers to provide the
markets for these options with more
liquidity in amounts commensurate
with increased consumer demand in
such markets. The proposed position
limit increases may also encourage other
liquidity providers to shift liquidity, as
well as encourage consumers to shift
demand, from OTC markets onto the
Exchange, which will enhance the
See Rule 4–O, Section 3.
17 CFR 240.15c3–1.
33 15 U.S.C. 78f(b).
34 15 U.S.C. 78f(b)(5).
35 Id.
31
36 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
37 See supra note 4.
38 See supra notes 9 and 11.
39 See supra note 19.
32
VerDate Sep<11>2014
16:55 Aug 04, 2020
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 tend to 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.36 More specifically, the
Commission recently approved Cboe’s
proposal to increase the position limits
for the Underlying ETFs in this filing.37
Further, the Exchange notes that the
proposed rule change to increase
position limits for select actively traded
options, is not novel and has been
previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for options on SPY.38
Additionally, the Commission has
approved similar proposed rule changes
by the Exchange to increase position
limits for options on highly liquid,
actively traded ETFs.39 In approving
increases in position (and exercise
limits) for such options in the past, the
Commission relied heavily upon the
exchanges’ surveillance capabilities,
expressing trust in the enhanced
surveillances and reporting safeguards
that exchanges took in order to detect
Jkt 250001
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
and deter possible manipulative
behavior which might arise from
eliminating position and exercise limits.
Furthermore, as described more fully
above, the proposed position limits for
options on EFA and FXI are consistent
with existing position limits for options
on IWM and EEM, and the proposed
limits for options on XLF and HYG are
consistent with current position limits
for options on EWZ, TLT, and EWJ.
The Exchange believes that its
surveillance and reporting safeguards
continue to be designed to deter and
detect possible manipulative behavior
that might arise from increasing or
eliminating position and exercise limits
in certain classes. Lastly, the Exchange
believes that the current financial
requirements imposed by the Exchange
and by the Commission adequately
address concerns regarding potentially
large, unhedged position in the options
on the Underlying ETFs, further
promoting just and equitable principles
of trading, the maintenance of a fair and
orderly market, and the protection of
investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
increased position limits (and exercise
limits) will be available to all market
participants and apply to each in the
same manner. The Exchange believes
that the proposed rule change will
provide additional opportunities for
market participants to more efficiently
achieve their investment and trading
objectives.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the Act. On the contrary,
the Exchange believes the proposal
promotes competition because it may
attract additional order flow from the
OTC market to exchanges, which would
in turn compete amongst each other for
those orders. The Exchange believes
market participants would benefit from
being able to trade options with
increased position limits in an exchange
environment in several ways, including
but not limited to the following: (1)
Enhanced efficiency in initiating and
closing out positions; (2) increased
market transparency; and (3) heightened
E:\FR\FM\05AUN1.SGM
05AUN1
Federal Register / Vol. 85, No. 151 / Wednesday, August 5, 2020 / Notices
contra-party creditworthiness due to the
role of OCC as issuer and guarantor.
Further, the Exchange notes that the
rule change is being proposed as a
competitive response to a filing
submitted by Cboe that was recently
approved by the Commission.40 As
such, the Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 41 and Rule 19b–
4(f)(6) thereunder.42
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 43 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 44
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
See supra note 4.
15 U.S.C. 78s(b)(3)(A).
42 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
43 17 CFR 240.19b–4(f)(6).
44 17 CFR 240.19b–4(f)(6)(iii).
40
jbell on DSKJLSW7X2PROD with NOTICES
41
VerDate Sep<11>2014
16:55 Aug 04, 2020
Jkt 250001
47463
Exchange participants that are also
members at Cboe where these increased
position limits are currently in place.
For this reason, the Commission
believes that waiver of the 30-day
operative delay is consistent with the
protection of investors and the public
interest. Therefore, the Commission
hereby waives the operative delay and
designates the proposal as operative
upon filing.45
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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–NYSEArca–2020–70, and
should be submitted on or before
August 26, 2020.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
J. Matthew DeLesDernier,
Assistant Secretary.
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–
NYSEArca–2020–70 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–NYSEArca–2020–70. 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
45 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
[FR Doc. 2020–16995 Filed 8–4–20; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 11175]
Determination Pursuant to the Foreign
Missions Act
Pursuant to the authority vested in the
Secretary of State by the laws of the
United States including the Foreign
Missions Act (22 U.S.C. 4301 et seq.)
and delegated from the Under Secretary
for Management pursuant to the
Delegation of Authority No. 484, dated
May 26, 2020, I hereby determine under
section 22 U.S.C. 4305(b) that to protect
the interests of the United States, it is
necessary to require the People’s
Republic of China to forego use of the
following real properties as of the times
and dates listed below:
1. 3417 Montrose Boulevard, Houston,
TX, beginning 4:00 p.m. Central
Daylight Time on July 24, 2020;
2. 811 Holman Street, Houston, TX,
beginning 4:00 p.m. Central Daylight
Time on July 24, 2020;
3. 7600 Almeda Road, Houston, TX,
beginning 4:00 p.m. Central Daylight
Time on August 23, 2020.
For purposes of this determination the
real property locations listed above
include any buildings and/or
46
17 CFR 200.30–3(a)(12).
E:\FR\FM\05AUN1.SGM
05AUN1
]]>Agencies
[Federal Register Volume 85, Number 151 (Wednesday, August 5, 2020)]
[Notices]
[Pages 47457-47463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16995]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89427; File No. SR-NYSEArca-2020-70]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.8-O
To Increase Position Limits for Options on Certain Exchange-Traded
Funds
July 30, 2020.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on July 24, 2020, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 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 Rule 6.8-O (Position Limits) to
increase the position limits for options on certain exchange-traded
funds (``ETFs''). 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to amend Commentary .06(f) to Rule
6.4-O to
[[Page 47458]]
increase the position limits for options on the following ETFs:
Standard and Poor's Depositary Receipts Trust (``SPY''), iShares MSCI
EAFE ETF (``EFA''), iShares China Large-Cap ETF (``FXI''), iShares
iBoxx High Yield Corporate Bond Fund (``HYG''), and Financial Select
Sector SPDR Fund (``XLF''). Although the proposed change does not amend
the text of Rule 6.9-O (Exercise Limits), when the proposed rule is
effective and operative, the exercise limits for the options that are
subject to this proposed rule change would increase, because Rule 6.9-O
provides that the exercise limits for index options and ETF options,
respectively, are equivalent to their position limits. This is a
competitive filing that is based on a proposal recently submitted by
the Chicago Board Options Exchange Incorporated (``Cboe'') and approved
by the Commission.\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 88768 (April 29,
2020) 85 FR 26736 (May 5, 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 Approval Order''). Cboe also increased position
limits for options overlying the MSCI Emerging Markets Index
(``MXEF'') and the MSCI EAFE Index (``MXEA''), however, because the
Exchange does not list options on the MXEF or MXEA indexes this
proposal does not include them.
---------------------------------------------------------------------------
Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
According to Cboe, market participants have increased their demand
for options on SPY, EFA, FXI, HYG, and XLF (collectively, the
``Underlying ETFs'') for both trading and hedging purposes. Cboe noted
that although the demand for these options appears to have increased,
position limits for options on the Underlying ETFs, have remained the
same. The Exchange believes these unchanged position limits may have
impeded, and may continue to impede, trading activity and strategies of
investors, such as use of effective hedging vehicles or income
generating strategies (e.g., buy-write or put-write), and the ability
of a Market Maker \5\ 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 publicly disclosed to the marketplace. As
such, OTC transactions do not contribute to the price discovery process
on a public exchange or other lit markets.
---------------------------------------------------------------------------
\5\ The term ``Market Maker'' refers to Market Makers and Lead
Market Makers, collectively. See Rule 6.32-O. A Market Maker has the
rights and responsibilities set forth in Rules 6.37-O through 6.30-
O.
---------------------------------------------------------------------------
Based on the foregoing, 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 enable other market participants to
transfer their liquidity demands from OTC markets to the Exchange (or
other options exchanges on which they participate). As described in
further detail below, the Exchange believes that the continuously
increasing market capitalization of the Underlying ETFs and ETF
component securities, as well as the highly liquid markets for those
securities, reduces the concerns for potential market manipulation and/
or disruption in the underlying markets upon increasing position
limits, while the rising demand for trading options on the Underlying
ETFs for legitimate economic purposes compels an increase in position
limits (and corresponding exercise limits).
Proposed Position and Exercise Limits for Options on the Underlying
ETFs
Position limits for options on ETFs are determined pursuant to Rule
6.8-O, 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 Rule 6.8-O, 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 as set forth in
Rule 6.8-O. Commentary .06(f) to Rule 6.8-O sets forth separate
position limits for options on specific ETFs, including SPY, FXI and
EFA. In addition, Rule 6.9-O (which is not being amended by this
filing), establishes exercise limits for the aforementioned ETFs.
The Exchange proposes to amend Rule 6.8-O Commentary .06(f) to
double the position limits and, as a result, exercise limits, for
options on the Underlying ETFs, i.e., for each of HYG, XLF, FXI, EFA
and SPY. By virtue of Rule 6.9-O, the exercise limits for EFA, FXI,
HYG, XLF, and SPY would similarly increase.
The table below represents the current and proposed position limits
for options on the Underlying ETFs, including the addition to the table
of HYG and XLF, with new text signified by italics and to-be-deleted
text signified in brackets.\6\
---------------------------------------------------------------------------
\6\ See proposed Rule 6.8-O, Commentary .06(f).
------------------------------------------------------------------------
Options Position limits
------------------------------------------------------------------------
PowerShares QQQ TrustSM, Series 1 (QQQ) 1,800,000 contracts
SPDR[supreg] S&P 500[supreg] ETF (SPY). [1,800,000]3,600,000 contracts
iShares[supreg] Russell 2000[supreg] 1,000,000 contracts
ETF (IWM).
SPDR[supreg]Dow Jones Industrial 300,000 contracts
AverageSM ETF Trust (DIA).
iShares MSCI Emerging Markets ETF (EEM) 1,000,000 contracts
iShares China Large-Cap ETF (FXI)...... [500,000]1,000,000 contracts
iShares MSCI EAFE ETF (EFA)............ [500,000]1,000,000 contracts
iShares MSCI Brazil Capped ETF (EWZ)... 500,000 contracts
iShares 20+ Year Treasury Bond Fund ETF 500,000 contracts
(TLT).
iShares MSCI Japan ETF (EWJ)........... 500,000 contracts
iShares iBoxx High Yield Corporate Bond 500,000 contracts
Fund (``HYG'').
Financial Select Sector SPDR Fund 500,000 contracts
(``XLF'').
------------------------------------------------------------------------
[[Page 47459]]
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 Rule 5.3-O(g)(2) for
ETFs holding non-U.S. component securities, or
(2) the generic listing standards for series of portfolio
depository receipts and index fund shares based on international or
global indexes under which a comprehensive surveillance agreement
(``CSA'') is not required, as well as the continued listing criteria in
Rule 5.4-O.\7\ In compliance with its listing rules, the Exchange also
represents that non U.S. component securities that are not subject to a
CSA do not, in the aggregate, represent more than 50% of the weight of
any of the Underlying ETFs.\8\
---------------------------------------------------------------------------
\7\ 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 Rules 5.3(g)(2) and 5.4-O(k).
\8\ See Rule 5.3-O(g)(2)(B).
---------------------------------------------------------------------------
Cboe's Composition and Growth Analysis for Underlying ETFs
As stated above, position 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 Securities and Exchange Commission (the ``Commission'')
has recognized that these limits are designed to minimize the potential
for mini-manipulations and for corners or squeezes of the underlying
market, as well as serve to reduce the possibility for disruption of
the options market itself, especially in illiquid classes.\9\ The
Underlying ETFs as well as the ETF components are highly liquid, and
are based on a broad set of highly liquid securities and other
reference assets, as demonstrated by the trading statistics collected
by Cboe.\10\ 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.\11\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 68001 (October 5,
2012), 77 FR 62303 (October 12, 2012) (SR-NYSEArca-2012-112).
\10\ See supra note 4.
\11\ See supra note 9 (Order approving the Exchange's;
implementation of the pilot program that ran through 2017, during
which there were no position limits for options on SPY). See also
Securities Exchange Act Release No. 83413 (June 12, 2018) 83 FR
28277 (June 18, 2018) (SR-NYSEArca-2018-44). The Exchange notes that
throughout the duration of the pilot program it was not aware of any
problems created or adverse consequences as a result of the pilot
program.
---------------------------------------------------------------------------
To support its proposed position limit increases, Cboe conducted an
analysis in support of its proposal. The Exchange agrees with Cboe's
trading statistics and analysis. In support of its proposal, Cboe
considered both liquidity of the Underlying ETFs and the component
securities of the Underlying ETFs, as well as the availability of
economically equivalent products to the overlying options and their
respective position limits. For instance, some of the Underlying ETFs
are based upon broad-based indices that underlie cash-settled options,
and therefore the options on the Underlying ETFs are economically
equivalent to the options on those indices, which have no position
limits. Other Underlying ETFs are based upon broad-based indices that
underlie cash-settled options with position limits reflecting notional
values that are larger than current position limits for options on the
ETFs based on the same indices. For indexes that are tracked by an
Underlying ETF but on which there are no options listed, the Exchange
believes, based on the liquidity, depth and breadth of the underlying
market of the components of the indexes, that each of the indexes
referenced by the applicable ETFs would be considered a broad-based
index under the Exchange's Rules. Additionally, if in some cases
certain position limits are appropriate for the options overlying
comparable indexes or basket of securities that the Underlying ETFs
track, then those economically equivalent position limits should be
appropriate for the options overlying the Underlying ETFs.
The Exchange notes that the following trading statistics regarding
shares of and options on the Underlying ETFs, as well as the component
securities have been collected by Cboe: \12\
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 34-88350 (March 10,
2020), 85 FR 15003 (March 16, 2020) (SR-CBOE-2020-015).
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (option Shares outstanding Fund market cap Total market cap of
Product ADV \13\ (ETF Shares) contracts) (ETFS) \14\ (USD) ETF components \15\
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 \16\
XLF................................ 48.8 million.......... 102,100............... 793.6 million........ 24.6 billion......... 3.8 trillion
--------------------------------------------------------------------------------------------------------------------------------------------------------
In addition, Cboe also collected the same trading statistics, where
applicable, as above regarding a sample of other ETFs, as well as the
current position limits for options on such ETFs, in order to draw
comparisons in support of their proposed position limit increases fo9r
options on a number of Underlying ETFs (see further discussion below):
---------------------------------------------------------------------------
\13\ 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 in this proposal are for all
of 2019, unless otherwise indicated.
\14\ Shares Outstanding and Fund Market Capitalization Data in
the tables presented in this filing were sourced from Bloomberg and
the Cboe's internal data on January 2, 2020.
\15\ Total Market Capitalization of the ETF Components presented
in the tables in this filing were sourced from Bloomberg on January
3, 2020, as well as directly from the issuers' websites.
\16\ Total Market Capitalization of HYG was sourced from IHS
Markit, which sends daily constituent information to Cboe.
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (ETF ADV (option Shares outstanding Fund market cap Total market cap of ETF Current
Product shares) contracts) (ETFs) (USD) components position limits
--------------------------------------------------------------------------------------------------------------------------------------------------------
QQQ.......................... 30.2 million.... 670,200 410.3 million........... 88.7 billion... 10.1 trillion........... 1,800,000
[[Page 47460]]
EWZ.......................... 26.7 million.... 186,500 233 million............. 11.3 billion... 234.6 billion........... 500,000
TLT.......................... 9.6 million..... 95,200 128.1 million........... 17.5 billion... N/A..................... 500,000
EWJ.......................... 7.2 million..... 5,700 236.6 million........... 14.2 billion... 3 trillion.............. 500,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following analysis, which the Exchange agrees with, was
conducted by Cboe in support of its proposal. Cboe noted that, overall,
the liquidity in the shares of the Underlying ETFs and in the component
securities of the Underlying ETFs and in their overlying options, as
well as the large market capitalization and structure of each of the
Underlying ETFs support the proposal to increase the position limits
for each option class. Given the robust liquidity and capitalization in
the Underlying ETFs and in the component securities of the Underlying
ETFs the Exchange does not anticipate that the proposed increase in
position limits would create significant price movements. Also, the
Exchange believes the market capitalization of the underlying component
securities of the applicable index or reference asset are large enough
to adequately absorb potential price movements that may be caused by
large trades.
Specifically, the Exchange notes that SPY tracks the performance of
the S&P 500[supreg] Index, which is an index of diversified large cap
U.S. companies.\17\ It is composed of 505 selected stocks spanning over
approximately 24 separate industry groups. The S&P 500[supreg] 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.
---------------------------------------------------------------------------
\17\ 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).
---------------------------------------------------------------------------
In support of its proposal to increase position limits for SPY to
3,600,000 contracts, Cboe compared SPY's ADV from 2017 to the end of
2019, and found that SPY's ADV has increased from approximately 64.6
million shares to 70.3 million shares.\18\ Similarly, Cboe noted SPY's
ADV in options contracts has increased from 2.6 million to 2.8 million
through 2019.\19\ Cboe's data shows the demand for options trading on
SPY has continued to increase, however, the position limits have
remained the same, which the Exchange believes may have impacted growth
in SPY option volume from 2017 through 2019. In addition, Cboe notes
that SPY shares are more liquid than PowerShares QQQ TrustSM (``QQQ'')
shares, which is also currently subject to a position limit of
1,800,000 contracts. Specifically, according to Cboe's statistical
comparison, SPY currently experiences over twice the ADV in shares and
over four times the ADV in options than that of QQQ.\20\
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release 83066 (April 19, 2018)
83 FR 18099 (April 25, 2018) (SR-NYSEArca-2018-23) (Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Modify Rule
6.8-O, Commentary .06 To Expand Position Limits for Options on
Certain Exchange-Traded Funds).
\19\ See Securities Exchange Act Release No. 83413 (June 12,
2018) 83 FR 28277 (June 18, 2018) (SR-NYSEArca-2018-44) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Amend
Commentary .06 to Rule 6.8-O).
\20\ 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.\21\ In support of its proposal to
increase the position limit for EFA, Cboe's proposal specifies, 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 contracts 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, and calculated that
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 (prior to Cboe's
recent change) and 1,450,000 for Cboe's current 50,000 contract
position limit for MXEA options.\22\
---------------------------------------------------------------------------
\21\ See iShares MSCI EAFE ETF, available at: https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf (April 30,
2020).
\22\ The Exchange notes that it does not list options on foreign
indexes.
---------------------------------------------------------------------------
Cboe also noted that MXEA index options have an ADV of 594 options
contracts, which equates 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.\23\ 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.
---------------------------------------------------------------------------
\23\ See iShares China Large-Cap ETF, available at: https://www.ishares.com/us/products/239536/ishares-china-largecap-etf (April
30, 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.\24\ In support of
its proposal, Cboe compared XLF's ADV 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
[[Page 47461]]
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.
---------------------------------------------------------------------------
\24\ See Select Sector SPDR ETFs, XLF, available at: https://www.sectorspdr.com/sectorspdr/sector/xlf (April 30, 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.\25\ 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.
---------------------------------------------------------------------------
\25\ See iShares iBoxx $ High Yield Corporate Bond ETF,
available at: https://www.ishares.com/us/products/239565/ishares-iboxx-high-yield-corporatebond-etf (April 30, 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 \26\
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).
---------------------------------------------------------------------------
\26\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with an OTP. OTP
Holders and OTP Firms are deemed ``members'' under the Exchange Act.
See Rule 1.
---------------------------------------------------------------------------
Market Makers would continue to be exempt from this reporting
requirement, however, the Exchange may access Market Maker position
information.\27\ 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.\28\
---------------------------------------------------------------------------
\27\ 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'').
\28\ See Rule 6.6-O.
---------------------------------------------------------------------------
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.\29\
---------------------------------------------------------------------------
\29\ 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.
---------------------------------------------------------------------------
The Exchange also notes that large stock holdings must be disclosed
to the Commission by way of Schedules 13D or 13G,\30\ 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.
---------------------------------------------------------------------------
\30\ 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
[[Page 47462]]
its customer.\31\ In addition, Rule 15c3-1 imposes a capital charge on
Members to the extent of any margin deficiency resulting from the
higher margin requirement.\32\
---------------------------------------------------------------------------
\31\ See Rule 4-O, Section 3.
\32\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\33\ in general, and Section
6(b)(5) of the Act,\34\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \35\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78f(b).
\34\ 15 U.S.C. 78f(b)(5).
\35\ Id.
---------------------------------------------------------------------------
The Exchange believes that the proposed increase in position limits
for options on the Underlying ETFs will remove impediments to and
perfect the mechanism of a free and open market and national market
system, and, in general, protect investors and the public interest,
because it will provide market participants with the ability to more
effectively execute their trading and hedging activities. The proposed
increases will allow market participants to more fully implement
hedging strategies in related derivative products and to further use
options to achieve investment strategies (e.g., there are Exchange-
Traded Products (``ETPs'') that use options on the Underlying ETFs as
part of their investment strategy, and the applicable position limits
as they stand today may inhibit these ETPs in achieving their
investment objectives, to the detriment of investors). Also, increasing
the applicable position limits may allow Market Makers to provide the
markets for these options with more liquidity in amounts commensurate
with increased consumer demand in such markets. The proposed position
limit increases may also encourage other liquidity providers to shift
liquidity, as well as encourage consumers to shift demand, from OTC
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 tend to 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.\36\ More specifically, the Commission recently approved
Cboe's proposal to increase the position limits for the Underlying ETFs
in this filing.\37\
---------------------------------------------------------------------------
\36\ See Securities Exchange Act Release No. 62147 (October 28,
2005) (SR-CBOE-2005-41), at 62149.
\37\ See supra note 4.
---------------------------------------------------------------------------
Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options, is not
novel and has been previously approved by the Commission. For example,
the Commission has previously approved, on a pilot basis, eliminating
position limits for options on SPY.\38\ Additionally, the Commission
has approved similar proposed rule changes by the Exchange to increase
position limits for options on highly liquid, actively traded ETFs.\39\
In approving increases in position (and exercise limits) for such
options in the past, the Commission relied heavily upon the exchanges'
surveillance capabilities, expressing trust in the enhanced
surveillances and reporting safeguards that exchanges took in order to
detect and deter possible manipulative behavior which might arise from
eliminating position and exercise limits.
---------------------------------------------------------------------------
\38\ See supra notes 9 and 11.
\39\ See supra note 19.
---------------------------------------------------------------------------
Furthermore, as described more fully above, the proposed position
limits for options on EFA and FXI are consistent with existing position
limits for options on IWM and EEM, and the proposed limits for options
on XLF and HYG are consistent with current position limits for options
on EWZ, TLT, and EWJ.
The Exchange believes that its surveillance and reporting
safeguards continue to be designed to deter and detect possible
manipulative behavior that might arise from increasing or eliminating
position and exercise limits in certain classes. Lastly, the Exchange
believes that the current financial requirements imposed by the
Exchange and by the Commission adequately address concerns regarding
potentially large, unhedged position in the options on the Underlying
ETFs, further promoting just and equitable principles of trading, the
maintenance of a fair and orderly market, and the protection of
investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders. The Exchange believes
market participants would benefit from being able to trade options with
increased position limits in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out positions; (2) increased market
transparency; and (3) heightened
[[Page 47463]]
contra-party creditworthiness due to the role of OCC as issuer and
guarantor. Further, the Exchange notes that the rule change is being
proposed as a competitive response to a filing submitted by Cboe that
was recently approved by the Commission.\40\ As such, the Exchange does
not believe that the proposed rule change will impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.
---------------------------------------------------------------------------
\40\ See supra note 4.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \41\ and Rule 19b-
4(f)(6) thereunder.\42\
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78s(b)(3)(A).
\42\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \43\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \44\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
Exchange participants that are also members at Cboe where these
increased position limits are currently in place. For this reason, the
Commission believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposal as operative upon filing.\45\
---------------------------------------------------------------------------
\43\ 17 CFR 240.19b-4(f)(6).
\44\ 17 CFR 240.19b-4(f)(6)(iii).
\45\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2020-70 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-NYSEArca-2020-70. 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-NYSEArca-2020-70, and should be
submitted on or before August 26, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
---------------------------------------------------------------------------
\46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16995 Filed 8-4-20; 8:45 am]
BILLING CODE 8011-01-P
