Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating To Adopt Rule 6.10 To Introduce a Voluntary Compression Service for Market Makers, 19067-19077 [2021-07385]
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Federal Register / Vol. 86, No. 68 / Monday, April 12, 2021 / Notices
shall either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether the proposed rule
change should be disapproved. The 45th
day after publication of the Notice of
Filing is April 16, 2021. The
Commission is extending this 45-day
time period.
In order to provide the Commission
with sufficient time to consider the
Proposed Rule Change, the Commission
finds that it is appropriate to designate
a longer period within which to take
action on the Proposed Rule Change.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the
Exchange Act,7 designates May 31, 2021
as the date by which the Commission
shall either approve, disapprove, or
institute proceedings to determine
whether to disapprove proposed rule
change SR–OCC–2021–003.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07386 Filed 4–9–21; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–91482; File No. SR–CBOE–
2021–020]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change Relating To
Adopt Rule 6.10 To Introduce a
Voluntary Compression Service for
Market Makers
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April 6, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 24,
2021, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
8 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
7 Id.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to adopt
Rule 6.10. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
1. Purpose
The Exchange proposes to adopt Rule
6.10 to provide Market-Makers with an
additional voluntary compression tool
that will permit them to more efficiently
compress their index option portfolios
in order to reduce the required capital
attributable to their portfolios while
maintaining their risk exposure. The
Exchange understands that regulatory
capital requirements have impeded
liquidity providers’ (market-makers, in
particular) ability to provide liquidity to
the market. In response, the Exchange
has made certain tools available that
Trading Permit Holders (‘‘TPHs’’) can
use to compress the notional size of
their portfolios to reduce the capital
attributable to those portfolios. Pursuant
to Rule 5.6(c), the Exchange may make
compression orders available to TPHs,
which orders enable TPHs (after
submitting compression position lists to
the Exchange) to execute orders in S&P
500 Index (‘‘SPX’’) options without
exposure to reduce the aggregate capital
attributable to those positions (subject to
certain requirements). Additionally,
pursuant to Rule 6.8, TPHs may transfer
positions in exchange-listed options off
the Exchange if the transfer does not
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19067
result in a change in ownership and
reduces the risk-weighted assets
(‘‘RWA’’) associated with those
positions. The Exchange believes
compression continues to be an
important tool to enable Market-Makers
to efficiently manage the size of their
portfolios and the amount of capital that
must be maintained by their Clearing
TPHs (‘‘CTPHs’’) in connection with
those portfolios. As a result, the
Exchange regularly reviews its
compression tools and evaluates
potential enhancements to those tools.
The Exchange believes that permitting
TPHs to execute offsetting SPX options
positions without exposure using
compression orders and to effect offfloor RWA transfers of exchange-listed
options has had a beneficial effect on
the bank regulatory capital requirements
of CTPHs’ parent companies without
adversely affecting the quality of the
options market. The Exchange has
determined that a combination of
elements of these two tools would
increase the efficiency of compression
for Market-Makers. Specifically, the
Exchange proposes, notwithstanding
Rule 5.12,3 the Exchange may make
available to Market-Makers a
multilateral compression service for
certain index options identified by the
Exchange,4 pursuant to which a MarketMaker may close or open 5 positions in
options listed on the Exchange to reduce
regulatory capital attributable to its
portfolio.6
Rule 15c3–1 (Net Capital
Requirements for Brokers or Dealers)
3 Rule 5.12 generally requires transactions in
listed options to occur on a national securities
exchange, unless an exception applies. Transactions
effected pursuant to proposed Rule 6.10 would be
such an exception.
4 The Exchange will announce which index
options for which it will make the compression
service available pursuant to Rule 1.5. Rule 1.5
provides that the Exchange announces to Trading
Permit Holders all determinations it makes
pursuant to the Rules via, among other
communication methods, specifications, notices, or
regulatory circulars with appropriate advanced
notice, which are posted on the Exchange’s website.
The Exchange intends to initially make the
compression service available for SPX options and
then will phase in additional index options.
5 The Exchange intends to phase in its availability
of the compression service, and the initial version
will be available only to close positions. The
Exchange will announce the date on which it will
make the compression service available for opening
positions as well, pursuant to Rule 1.5.
6 This is the same purpose as other currently
available compression tools, such as compression
orders. See Rule 5.6(c) (definition of compression
orders). Rule 11.6 requires each Market-Maker to
maintain net capital sufficient to comply with the
requirements of Securities and Exchange Act (the
‘‘Act’’) Rule 15c3–1. 17 CFR 240.15c3–1.
Additionally, Market-Makers must comply with
capital requirements imposed by their CTPHs or the
Options Clearing Corporation (‘‘OCC’’) (if the
Market-Maker is also a CTPH).
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(‘‘Net Capital Rules’’) requires that every
registered broker-dealer, including every
Market-Maker, maintain certain
specified minimum levels of capital.
The Net Capital Rules are designed to
protect securities customers,
counterparties, and creditors by
requiring that broker-dealers always
have sufficient liquid resources on hand
to meet their financial obligations.
Notably, hedged positions, including
offsetting futures and options contract
positions, result in certain net capital
requirement reductions under the Net
Capital Rules.7
All OCC clearing members are subject
to the Net Capital Rules. However, a
subset of clearing members are
subsidiaries of U.S. bank holding
companies, which, due to their
affiliations with their parent U.S. bank
holding companies, must comply with
additional bank regulatory capital
requirements pursuant to rulemaking
required under the Dodd-Frank Wall
Street Reform and Consumer Protection
Act.8 Pursuant to this mandate, the
Board of Governors of the Federal
Reserve System, the Office of the
Comptroller of the Currency, and the
Federal Deposit Insurance Corporation
approved a comprehensive regulatory
capital framework for subsidiaries of
U.S. bank holding company clearing
firms.9 Generally, these rules imposed
higher minimum capital requirements,
more restrictive capital eligibility
standards, and higher asset risk weights
than were previously mandated for
clearing members that are subsidiaries
of U.S. bank holding companies under
the Net Capital Rules. Furthermore,
these rules do not permit deductions for
hedged securities or offsetting options
positions.10 Rather, capital charges
7 In addition, the Net Capital Rules permit various
offsets under which a percentage of an option
position’s gain at any one valuation point is
allowed to offset another position’s loss at the same
valuation point (e.g. vertical spreads).
8 H.R. 4173 (amending section 3(a) of the
Securities Exchange Act of 1934 (the ‘‘Act’’) (15
U.S.C. 78c(a))).
9 12 CFR 50; 79 FR 61440 (Liquidity Coverage
Ratio: Liquidity Risk Measurement Standards).
10 Many options strategies, including relatively
simple strategies often used by retail customers and
more sophisticated strategies used by marketmakers and institutions, are risk-limited strategies
or options spread strategies that employ offsets or
hedges to achieve certain investment outcomes.
Such strategies typically involve the purchase and
sale of multiple options (and may be coupled with
purchases or sales of the underlying assets),
executed simultaneously as part of the same
strategy. In many cases, the potential market
exposure of these strategies is limited and defined.
Whereas regulatory capital requirements have
historically reflected the risk-limited nature of
carrying offsetting positions, these positions may
now be subject to large regulatory capital
requirements. Various factors, including
administration costs; transaction fees; and limited
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under these standards are based on the
aggregate notional value of short
positions regardless of offsets. As a
result, CTPHs generally must hold
substantially more bank regulatory
capital than would otherwise be
required under the Net Capital Rules.11
The impact of these regulatory capital
rules is compounded in index options
markets due to the large notional value
of index option contracts and the
potentially significant number of open
index options positions.
The Exchange believes these
regulatory capital requirements have
impeded efficient use of capital and
undermine the critical liquidity role that
Market-Makers play in the options
market by limiting the amount of capital
CTPHs can allocate to clearing member
transactions. Specifically, the Exchange
understands these rules have caused,
and may continue to cause, CTPHs to
impose stricter position limits on their
clearing members. These stricter
position limits may impact the liquidity
Market-Makers (who participate on a
significant portion of index option
trades on the Exchange) might supply in
the options market, which impact may
be heightened when markets are
volatile, and this impact may be
compounded when a CTPH has
multiple Market-Maker client accounts,
each having largely risk-neutral
portfolio holdings.12
In November 2019, bank regulatory
agencies approved a rulemaking
requiring banks to replace the Current
Exposure Method (‘‘CEM’’) with the
Standardized Approach to Counterparty
Credit Risk (‘‘SA–CCR’’) by January 1,
2022. The Exchange believes CEM’s
primary flaws arise from the
methodology’s insensitivity to actual
risk. For example, CEM does not
account for the delta (i.e., market
sensitivity) of an option position or fully
recognize the offsetting of positions
with opposite economic exposures. The
Exchange believes implementation of
SA–CCR will help correct many of
CEM’s flaws by incorporating risksensitive principles, such as delta
weighting options positions and more
market demand or counterparty interest, however,
discourage market participants from closing these
positions even though many market participants
likely would prefer to close the positions rather
than carry them to expiration.
11 See Letter from Cboe, New York Stock
Exchange, and Nasdaq, Inc., to the Honorable
Randal Quarles, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System,
March 18, 2020.
12 Several Market-Makers continue to express to
the Exchange that these rules could hamper their
ability to provide consistent liquidity in the index
options markets, and have inquired about the
ability engage in multilateral compression, as they
are able to do for their futures positions.
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beneficial netting of derivative contracts
that have economically meaningful
relationships. This means that SA–CCR,
when implemented, will be less
punitive to CTPHs (and the market
participants for which they clear
options positions) than CEM as it relates
to options positions. Some CTPHs have
implemented SA–CCR, while others
have not and continue to use CEM.
However, the Exchange believes
implementation by all CTPHs of SA–
CCR will not eliminate the need for
Market-Makers to manage their
positions or be concerned about the
accumulation of cleared positions
(particularly in options with larger
notional values) that ultimately
contribute to their net capital
requirements and those of their clearing
firms and thus the capital ratios with
which those firms need to comply. The
Exchange notes there are few clearing
banks, and even fewer that clear for
options market-makers. Increased
clearing of over-the-counter products,
such as swaps, by these same clearing
banks means there is a risk of less
available clearing bandwidth for listed
options, even with the adoption of SA–
CCR. Additionally, market-makers will
continue to hold positions that are
virtually riskless but have a significant
capital impact that could be compressed
in order to free up balance sheets to
enable market-makers to continue to
provide meaningful liquidity to the
market. Therefore, even when all banks
have implemented SA–CCR, the
Exchange believes compression will
continue to be a valuable tool for
Market-Makers.13
As noted above, the Exchange
currently offers its TPHs tools they may
use to reduce the regulatory
requirements attributable to their
portfolios, which the Exchange believes
has had a beneficial effect on the bank
regulatory capital requirements of
CTPHs’ parent companies without
adversely affecting the quality of the
options market.14 The proposed rule
change is a further enhancement to the
set of compression tools the Exchange
13 The Exchange notes at least one other market
offers certain of its members a multilateral
compression tool for competitive products. See
Chicago Mercantile Exchange, Inc. (‘‘CME’’) Rule
857, the purpose of which is to provide market
participants and their clearing members with
capital relief in listed equities options without
materially changing the risk exposure of a given
participant’s portfolio. See CME Equity Options
Compression Overview, at https://
www.cmegroup.com/trading/equity-index/cmeequity-options-compression-overview.html.
14 See, e.g., Rules 5.6(c) (definition of
compression orders) and 5.32, 5.33, and 5.88
(describing how compression orders may execute),
and 6.8 (describing permissible off-floor RWA
transfers).
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currently offers, combining certain
features of those tools. Specifically,
pursuant to proposed Rule 6.10(a), in a
manner and format and at times
determines by the Exchange, of which
the Exchange will provide reasonable
and sufficient advanced notice, a
Market-Maker (‘‘compression
participant’’) may submit into an
Exchange system a list of open index
positions it would like to close and, if
it chooses, index option positions it
would like to open to replace any of
those closing positions (‘‘position
lists’’). A compression participant must
include the amount of capital reduction
associated with each closing position
and the amount of capital increase
associated with each opening position
(with the amount of capital in a
measurement unit of the compression
participant’s choosing) included on a
position list submitted to the Exchange.
Market participants measure capital
using various industry standards, which
provide them with the ability to select
the most appropriate measurement unit
for their organizations and risk
management practices. Therefore, the
Exchange believes it is reasonable to
permit Market-Makers to provide capital
amounts on their position lists using the
measurement unit they generally use.
The positions in the position list must
in the aggregate reduce regulatory
capital attributable to those positions
(based on the capital amounts provided
by compression participants) in
accordance with the purpose of the
proposed compression service.15
Additionally, a compression participant
may define and input optional risk
constraints on its position list that it
wants applied to any compression
proposal. For example, a compression
participant may constrain the net cost of
a compression portfolio compared to its
specified values or constrain the net
delta by expiration that would result
from a compression proposal.
Permitting compression participants to
input these constraints will allow
compression participants to effect
compression of their portfolios in a
manner consistent with their own risk
management practices and achieve the
goals they seek from the compression
service.
The Exchange intends to offer the
compression service with sufficient
frequency to permit Market-Makers to
respond to intra-month reviews of
15 This is consistent with compression orders. See
Rule 5.6(c) (definition of compression orders, which
provide that compression orders may be used to
reduce required capital associated with open SPX
positions, and may include open positions to
replace closing positions to reduce capital
associated with open positions).
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regulatory capital necessary for their
positions by clearing firms.16 The
proposed flexibility will permit the
Exchange to adjust the frequency (with
sufficient notice) of availability of the
compression service if the Exchange
deems such frequency to be more
appropriate, such as in response to
market conditions. The proposed
flexibility is also consistent with the
currently flexibility regarding the
availability of compression orders.17
The proposed process regarding the
submission of position lists is similar to
the current process for submitting
compression position lists in connection
with the submission of compression
orders. Currently, prior to submitting
compression orders, TPHs must submit
lists of open SPX options positions they
would like to close using compression
orders (while TPHs may open positions
using compression orders, but do not
need to include those positions on
compression position lists submitted in
advance to the Exchange). The proposed
compression service will similarly
require Market-Makers to submit lists of
open option positions they would like
to close and also require them to submit
option positions they would like to
open using the compression service.18
The Exchange believes requiring
inclusion of any positions to be opened
(in addition to closed) in the positions
list submitted to the compression
service (as well as capital attributable to
those positions) will provide the
Exchange with additional information
when determining whether the
compression participants are using the
compression service to reduce
regulatory capital attributable to their
positions. Therefore, the Exchange
believes the proposed requirements for
use of the compression service,
particularly the requirement to include
the amount of capital associated with
each position and the requirement that
the positions must in the aggregate
reduce attributable regulatory capital
(similar to compression orders are net
position closing or neutral), are
reasonable, as they will create
additional controls to limit use of the
compression service to legitimate
compression purposes.
The Exchange believes permitting
Market-Makers to open positions as part
16 The Exchange intends to initially offer the
compression service on a weekly basis.
17 See Rule 5.6(c).
18 When the functionality to permit positions to
be opened in the compression service is available,
it will be within the discretion of a Market-Maker
to open positions as part of the process; however,
if a Market-Maker does want to open positions as
part of compression, then it must include those
opening positions on its position list.
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19069
of the compression service (as they may
currently do with compression orders)
may provide additional opportunities to
reduce more regulatory capital
attributable to their portfolios than if
they were restricted to only closing
positions. The goal of compression is to
alleviate bank regulatory capital
requirements attributable to a market
participant’s portfolio. This can be
achieved by closing positions, which
ultimately reduces the regulatory capital
associated with a Market-Maker’s
portfolio. However, regulatory capital
reduction may be also achieved by
‘‘swapping’’ open positions with new
positions for which there is lower
regulatory capital associated. The
Exchange understands Market-Makers
may do this for risk management
purposes. Specifically, Market-Makers
retain certain options positions in their
portfolios for hedging and risk exposure
purposes. However, the calculation of
regulatory capital associated with
options positions involves a complex
formula (and, as noted above, may be
calculated using different methods), but
it ultimately is calculating an amount
based on the quantity of a position times
the strike price (which is why the large
notional value of index options has
created issues for Market-Makers).
Therefore, an option position with a
lower strike price will likely have lower
regulatory capital associated with that
position than regulatory capital
associated with a higher strike price. A
Market-Maker may identify options with
lower strikes that provide it with
substantially similar risk exposure as
some of its open positions while
maintaining a hedge within its portfolio.
Merely closing such higher-strike
positions may reduce the required
capital associated with the market
participant’s portfolio, but such closure
may leave portions of that portfolio
unhedged and thus subject to higher
risk. By ‘‘swapping’’ its current open
positions in options with higher strikes
with positions in options with lower
strikes (often using box spreads and
combos), a market participant may
maintain the same risk exposure in its
portfolio while replacing higher-strike
positions with lower-strike positions in
order to swap related exposures.
For example, suppose a Market-Maker
has 100 contracts in an SPX box spread
with October expiration and strike
prices of 3500 and 3600. Suppose
another Market-Maker has 100 contracts
for the offsetting box spread, but also
want to buy 100 contracts in an SPX box
spread with October expiration and
strike prices of 1500 and 1600. Each
Market-Maker in this transaction would
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be opening positions in 400 contracts as
well as closing positions in 400
contracts. While each Market-Maker
would have the same number of open
positions after this transaction, the
regulatory capital associated with each
Market-Maker’s portfolio would be
significantly reduced given the newly
opened positions have strike prices
2000 lower than the closed positions.
Execution of this transaction would be
riskless and would provide meaningful
regulatory capital relief to the MarketMakers. Ultimately, transactions like
this example are essentially riskless
exchanges that carry no profit or loss for
market participants, but rather are
intended to provide a seamless method
for market participants to reduce margin
and capital requirements while
maintaining the same risk exposure
within their portfolios.
Currently, compression orders are
limited to SPX options, as such options
have a large notional value and
represent the most volume executed on
the Exchange.19 Off-floor RWA transfers
may occur in any exchange-listed
option; however, transfers of multiply
listed equity options are subject to the
rules of all options exchanges that list
those options, and thus would only be
permissible if all other options
exchanges permitted such off-floor
transfers. The Exchange believes it is
appropriate to offer the compression
service for index options listed on the
Exchange, as such index options may
only be listed on the Exchange and its
affiliated exchanges (and thus would
not be constrained by the rules of other
options exchanges to the extent they do
not permit off-floor transfers for
compression purposes).20 Additionally,
the index value of nearly all index
options the Exchange lists for trading is
at least 100,21 making the notional value
of an index option at least 10,000.22
Given the high notional value associated
with index option contracts in general,
the Exchange believes Market-Makers
could benefit from compressing index
options beyond SPX options within
their portfolio. The following table lists
the indexes on which the Exchange
19 See Rules 5.6(c) (definition of compression
order).
20 Certain index options listed on the Exchange
are also listed on its affiliated options exchanges,
which intend to submit separate filing adopting the
proposed multilateral compression process upon
Commission approval of this proposed rule filing.
21 The level of VIX is generally below 100.
22 The Exchange may consider to further expand
the compression service to equity options (like offfloor RWA transfers) and would submit a separate
rule filing in the event it determined to do so. The
Exchange notes the off-floor compression of equity
options, which are multiply listed, would be subject
to the rules of other options exchanges.
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currently lists options, as well as the
value of the index as of the close of
trading on March 1, 2021:
Index
(option symbol)
Current
value
S&P 500 Index (SPX) .............................
Mini-S&P 500 Index (XSP) ......................
Russell 2000 Index (RUT) .......................
Mini-Russell 2000 Index (MRUT) ............
Cboe Volatility Index (VIX) ......................
Dow Jones Industrial Average (DJX) ......
S&P 100 Index (OEX and XEO) .............
S&P 500 ESG Index (SPESG) ...............
S&P Materials Select Sector Index
(SIXB) ..................................................
S&P Industrials Select Sector Index
(SIXI) ....................................................
S&P Financial Select Sector Index
(SIXM) ..................................................
S&P Real Estate Select Sector Index
(SIXRE) ................................................
S&P Utilities Select Sector Index (SIXU)
S&P Health Care Select Sector Index
(SIXV) ..................................................
MSCI EAFE Index (MXEA) .....................
MSCI Emerging Markets Index (MXEF)
Russell 1000 Growth Index (RLG) ..........
Russell 1000 Value Index (RLV) .............
Russell 1000 Index (RUI) ........................
3,901.82
390.18
2,275.32
227.53
23.35
315.36
1,773.40
330.51
796.03
933.99
409.44
182.02
601.62
1,150.89
2,198.61
1,362.47
2,469.71
1,444.77
2,211.99
The large notional size of most index
options compounds the negative impact
of Net Capital Rules, which apply to
positions in all index options, and may
impact all client clearing members of
clearing firms affiliated with U.S.-bank
holding companies. Clearing firms may
request that Market-Makers reduce
positions in listed options in addition to
SPX, and the proposed rule change will
provide Market-Makers with an efficient
mechanism to do so with respect to
their index option positions.
The proposed rule change also limits
the compression service to MarketMakers. While compression orders and
off-floor RWA transfers are currently
available to all TPHs, a prior tool the
Exchange offered for compression
purposes was limited to MarketMakers.23 The Exchange believes this is
appropriate given the important role
Market-Makers play in the options
market and, as discussed above, the
disproportionate impact Net Capital
Rules have had on Market-Makers.
Market-Makers in all index options
ultimately hold a significant amount of
open interest in these high-valued
options due to their serving as the
primarily liquidity providers, which
results in their participation on a
significant number of trades that occur.
Expanding compression to all index
options will permit Market-Makers in
all index options to more efficiently
compress the size of their portfolios in
terms of notional size while maintaining
23 See Securities Exchange Act Notice 84344
(October 2, 2018), 83 FR 50721 (October 9, 2018)
(SR–CBOE–2018–056) (which permitted on-floor
RWA transfers).
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their risk portfolio, which will free up
their balance sheets and permit them to
continue to provide meaningful
liquidity in more markets. This
additional liquidity would ultimately
benefit all market participants.
Pursuant to proposed paragraph (b),
the Exchange will create a compression
proposal by conducting an automated
matching process to determine which
positions among the compression
participants can offset. Specifically, at a
time after the market close of Regular
Trading Hours (‘‘RTH’’) 24 on days the
Exchange accepts position lists pursuant
to proposed paragraph (a), an Exchange
automated process will match offsetting
positions (in an anonymized manner) of
compression participants that submitted
position lists. This automated process
matches offsetting positions on the
position lists of compression
participants to maximize the aggregate
capital reduction among the
compression participants. Because the
process is automated, it does not
consider the identities of the
compression participants and instead
objectively optimizes the aggregate
compression when creating a
compression proposal. The resulting
group of offsetting position matches
among the compression participants on
an anonymous basis constitutes the
‘‘compression proposal.’’ Offsetting
positions will be matched at the
‘‘compression price.’’ The Exchange will
programmatically determine the
‘‘compression price’’ using generally
accepted volatility and options pricing
models and considering the national
best bid or offer (‘‘NBBO’’) at the close
of the trading day, the market prices at
the daily market time, and the
theoretical values provided by the
compression participants in their
position lists. The compression price
may be in $0.01 increments. A
compression proposal must be
consistent with all risk constraints set
by the compressional participants when
submitting their position lists. In a
manner and format and at times
determined by the Exchange, of which
the Exchange will provide reasonable
and sufficient advanced notice, the
Exchange will notify each compression
participant of the compression proposal.
This proposed process is similar to
the Exchange’s provision of individual
position files to TPHs with respect to
compression orders. Because
compression transactions effected
through the compression service will be
single leg, a compression proposal will
24 Currently, the RTH trading session closes at
4:15 p.m. Eastern time for most index options. See
Rule 5.1(b)(2).
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not consist of multi-leg positions as the
current position files provided by the
Exchange with respect to compression
orders.25 Additionally, like the position
files the Exchange provides to TPHs
with respect to compression orders, the
proposed compression service will
identify for which positions from a
compression participant’s position list
there is offsetting size from another
compression participant.26 Unlike
compression orders, a compression
proposal will not identify the MarketMakers that will be the contra-parties to
compression transactions. This
information is currently provided for
compression orders, as TPHs need to
seek out contra-parties to submit
compression orders. However, the
compression service enhances this
process by doing this on behalf of
Market-Makers, thus reducing this
burden on Market-Makers and
eliminating the need to identify
counterparties in the compression
proposal.
The compression proposal will
include a compression price for each
position (which, like the compression
price of compression orders, may be in
$0.01 increments).27 The Exchange
calculates this value using substantially
similar pricing models that it
understands other market participants
use when pricing options. The Exchange
currently disseminates indicative values
for certain classes at the end of the
trading day using the method, which the
Exchange understands market
participants currently use for various
purposes including risk management
purposes.28 The Exchange believes its
programmatically determined
compression price using generally
accepted volatility and options pricing
models and available pricing
information will provide compression
25 See
rule 5.6(c).
khammond on DSKJM1Z7X2PROD with NOTICES
26 Id.
27 TPHs submit compression orders with the price
of execution (which is subject to certain pricing
requirements). See id. Compression orders may also
currently be executed in pennies. Because many
series the Exchange expects Market-Makers will
attempt to close will be out-of-the-money, and
essentially worthless, Market-Makers may not
otherwise close positions in these series if a higher
minimum increment causes the price to be too
much higher than the option’s value. The Exchange
believes it is reasonable to permit these orders to
be entered and executed in penny increments to
provide flexibility that will enable Market-Makers
to encourage participation in the compression
service and maximize the reduction in capital
attributable to their positions.
28 See Rule 4.17 (pursuant to which the Exchange
currently disseminates indicates values for various
options (including most index options the Exchange
lists for trading)). The Exchange also uses similar
values in certain circumstances when evaluating
obvious errors that occur on the Exchange. See Rule
6.5, Interpretation and Policy .08.
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participants with a reasonable value at
which to effect their compression
transactions.
The Exchange believes the proposed
matching process enhances the process
currently available with respect to
compression orders, as it calculates for
Market-Makers the positions that may
be offset by positions of multiple other
Market-Makers that could maximize
compression results. Today, if a MarketMaker receives a position file regarding
other TPHs that have offsetting size,
they must all then coordinate to submit
various orders for unexposed execution
to achieve the same results. The
proposed process more efficiently
identifies the different parties with
contra-side interest against which a
Market-Maker may execute its positions
for compression purposes. As a result,
the proposed process reduces the
burden on Market-Makers of finding
other Market-Makers with offsetting size
they are willing trade when they
attempt to compress their portfolios.
With respect to the compression service,
the Exchange would be bringing
together purchasers and sellers of index
options for the purpose of compression,
which is consistent with its role as an
exchange under the Exchange Act.29
Those purchasers and sellers would
continue to have ultimate discretion as
to whether to effect the proposed
compression transactions. The Exchange
believes compression to be a valuable
service to provide to Market-Makers, as
compression enhances liquidity in the
marketplace, which may lead to more
liquidity and competition and tighter
spreads, which ultimately benefits the
entire market.
Like the current position match files
the Exchange provides to TPHs in
connection with compression orders,
compression proposals generated by the
Exchange pursuant to the proposed
compression service are provided to
Market-Makers for informational
purposes only. A Market-Maker can
choose to take no action once it receives
a compression proposal. Individual
Market-Makers will continue to
determine whether to submit position
lists to the compression service and
whether to accept or decline
compression proposals (and thus
whether to effect or not effect the
compression transactions with the
compression proposals). As further
described below, whether a MarketMaker chooses to accept the
compression proposal and effect the
29 See
15 U.S.C. 78c(a)(1) (which defines an
‘‘exchange’’ as an organization that constitutes,
maintains, or provides a marketplace or facilities for
bringing together purchases and sellers of
securities).
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19071
compression transactions described
therein is solely within the discretion of
the Market-Maker. The Exchange’s
provision of the compression proposal
does not constitute advice, guidance, a
commitment to trade, an execution, or a
recommendation to trade, as is the case
today for compression orders.
Proposed paragraph (c) describes the
conclusion of the compression process,
including how compression transactions
may be effected. Specifically, each
compression participant for which a
compression proposal includes at least
one offsetting position match 30 must
notify the Exchange in the Exchangedesignated form and manner no later
than the Exchange-established deadline
of whether the compression participant
approves the compression proposal. If
all compression participants
affirmatively approve the compression
proposal, then the Exchange effects the
transactions comprising the
compression proposal at the specified
compression prices. If any compression
participant for which a compression
proposal includes at least one offsetting
position match declines (or does not
respond to the Exchange by the
deadline), then no compression
transactions are effected. In other words,
whether a Market-Maker effects any
compression transactions (at the
specified compression prices) set forth
in the compression proposal is solely
within the discretion of the MarketMaker. If a Market-Maker evaluates a
compression proposal and determines it
is not in its interest to effect the
transactions as set forth in the proposal,
then no compression transactions are
effected. Because the compression
proposal only achieves its goals of
maximized compression if all
compression participants approve of the
proposal, it requires unanimous
approval. As is the case for any
transaction effected on the Exchange, all
counterparties must agree to the
transaction.
Following any unanimous approval of
a compression proposal, the Exchange
(a) distributes the information regarding
the completed package to the
compression participants (which
information will also be available to
CTPHs) and to OCC for processing and
(b) disseminates the information
regarding each compression transaction
30 It is possible that the automated matching
process described in proposed paragraph (b) will
not find for a compression participant any offsetting
positions of other compression participants. In that
case, the compression participant with no offsetting
position matches needs to take no action.
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effected.31 The Exchange believes it is
appropriate to share the results of any
compression transactions with the
Clearing Trading Permit Holders of the
compression participants, as the
impacted positions will ultimately be
held within the clearing accounts of
these CTPHs. Additionally, CTPHs have
an interest in the open interest of the
Market-Makers for which they perform
clearing services, because CTPHs
impose capital restrictions on these
Market-Makers based on their open
interest.32 In addition, the Exchange
believes it will benefit the market to
disseminate information for
compression trades as it does for all
other transactions so that all market
participants have knowledge of
compression transactions that occur and
have knowledge of any changes to open
interest in the applicable products.
Compression transactions are effected
within the accounts of the compression
participants and occur in accordance
with OCC Rules (as is the case with
other off-floor transfers). Compression
transactions may be subject to
applicable laws, rules, and regulations,
including rules of other self-regulatory
organizations.33
The primary difference between the
compression service and compression
orders is that the compression
transactions Market-Makers decide to
effect will occur off-floor after trading
hours. Effecting compression
transactions after the close of trading
will provide Market-Makers with
several benefits, including certainty
regarding positions they may want to
compress (as positions may change
regularly throughout the trading day)
and not having to interrupt their
provision of liquidity during the trading
day to engage in risk management.
Additionally, this will permit MarketMakers to not divert resources during
the trading day from providing liquidity
to the market to effecting transactions
for risk management purposes.
Currently, compression orders may be
effected without exposure on the
Exchange, which is similar to the
proposed compression transactions. The
proposed compression service
Class
Expiry
eliminates the step of needing to bring
orders that will not be exposed to the
Exchange. As the primary purpose of
the proposed compression transactions
is to compress the notional size of
Market-Makers’ portfolios so that they
may provide additional liquidity into
the market (rather than, for example,
obtain price improvement), the
Exchange believes the benefits of
exposure and execution on an exchange
are not applicable to compression
transactions. Additionally, because the
Exchange will disseminate compression
transaction information, the
compression service will provide
transparency to the market regarding
compression transactions. The Exchange
currently permits transfers of SPX
option positions (which may net against
each other) to occur off the Exchange for
similar reasons.34
To demonstrate how the Exchange
will conduct its multilateral
compression service, suppose three
Market-Makers submit to the Exchange
the following position lists:
Strike
Put/call
Quantity
MM1
SPX
SPX
SPX
SPX
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2020–12–24
2020–12–24
2020–12–24
2020–12–24
3700
3700
3800
3800
C
P
C
P
300
¥100
¥100
¥50
2020–12–24
2020–12–24
2020–12–24
2020–12–24
3700
3700
3800
3800
C
P
C
P
–50
50
50
750
2020–12–24
2020–12–24
2020–12–24
2020–12–24
3700
3700
3800
3800
C
P
C
P
¥25
50
0
¥25
MM2
SPX
SPX
SPX
SPX
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
MM3
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SPX
SPX
SPX
SPX
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
In total, across the four series, MM1
submitted 550 contracts for
compression, MM2 submitted 900
contracts for compression, and MM3
submitted 100 contracts for
compression. For purposes of this
example, no Market-Maker included
additional parameters to be considered
in the compression matching process.
The Exchange’s automated matching
process evaluates these positions (on an
anonymized basis) to maximize the
number of positions among the three
Market-Makers that can be compressed,
which results in the following trade
matches:
31 The Exchange will be disseminating
compression transaction information to OPRA. The
Exchange is working with OPRA to have an
indicator applied to compression transaction
information disseminated through OPRA but does
not expect that indicator to be available upon
implementation of the compression service.
32 It is for similar reasons that CTPHs may
currently submit compression-position lists to the
Exchange in connection with the submission of
compression orders. See Rule 5.6(c).
33 Post-trade positions are held in accounts at the
OCC. Therefore, any post-trade activity that occurs
would be effected within those accounts. The
Exchange has held multiple discussions with the
OCC regarding the compression service, and the
OCC has indicated its ability to accommodate any
effected compression transactions. Any
compression transactions will be subject to all
applicable recordkeeping requirements applicable
to Market-Makers under the Act and the rules and
regulations thereunder, such as Rule 17a–3 and
17a–4.
34 See Rule 6.8.
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Class
Expiry
Strike
Trade
quantity
Put/call
Contra
Compression
price
MM1
SPX
SPX
SPX
SPX
SPX
SPX
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
2020–12–24
2020–12–24
2020–12–24
2020–12–24
2020–12–24
2020–12–24
3700
3700
3700
3700
3800
3800
C
C
P
P
C
P
¥50
¥25
50
50
50
50
MM2
MM3
MM2
MM3
MM2
MM2
1.00
1.00
1.00
1.00
0.50
1.50
3700
3700
3800
3800
3800
C
P
C
P
P
50
¥50
¥50
¥50
¥25
MM1
MM1
MM1
MM1
MM3
1.00
1.00
0.50
1.50
1.50
3700
3700
3800
C
P
P
25
¥50
25
MM1
MM1
MM2
1.00
1.00
1.50
MM2
SPX
SPX
SPX
SPX
SPX
..................................................................
..................................................................
..................................................................
..................................................................
..................................................................
2020–12–24
2020–12–24
2020–12–24
2020–12–24
2020–12–24
MM3
SPX ..................................................................
SPX ..................................................................
SPX ..................................................................
khammond on DSKJM1Z7X2PROD with NOTICES
In total, if all three Market-Makers
approved of this compression proposal,
MM1 would compress 275 contracts,
MM2 would compress 225 contracts,
and MM3 would compress 100
contracts, for a total of 600 contracts
among all three Market-Makers,
representing nearly 40% of the 1,550
total contracts submitted by the three
Market-Makers. With a notional value of
nearly $400,000 per SPX contract, this
compression would permit these
Market-Makers to eliminate positions
from their accounts that equate to a
significant reduction in necessary
capital to be maintained in those
accounts, which the Market-Makers
could instead put back into the
market.35
The Exchange believes the proposed
compression service will provide
Market-Makers with an additional tool
to reduce regulatory capital attributable
to their portfolios in accordance with
their businesses and risk management
practices. The Exchange understands
from customers, and Market-Makers in
particular, there continues to be a
significant need to reduce regulatory
capital attributable to their open interest
based on then-current market
conditions. The need for compression is
particularly true during times of
extreme volatility, such as the recent
historic levels of market volatility,
35 The Exchange notes each Market-Maker would
retain any uncompressed positions. Each MarketMaker would have the option to resubmit these
uncompressed positions on a new position list at
the times permitted by the Exchange to potentially
be part of a different compression proposal.
Additionally, if any of the Market-Makers declined
this compression proposal, the Market-Makers
could similarly resubmit new position lists if they
so choose.
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2020–12–24
2020–12–24
2020–12–24
which can make providing liquidity in
index options immensely more
challenging when market participants
need liquidity the most. The Exchange
believes the ability of Market-Makers to
compress their portfolios helps reduce
the risk of market dislocation, especially
during periods of increased volume and
volatility, as they can continue
providing liquidity during such times
(which may increase the regulatory
capital attributed to their portfolios)
because they will know that they can
subsequently reduce their open
positions (and concomitant regulatory
capital).
As noted above, because some CTPHs
carrying these are bank-owned broker/
dealers, those CTPHs are subject to
further bank regulatory capital
requirements, which result in these
additional punitive capital requirements
being passed on to their market-maker
clients.36 The Exchange believes
implementation of SA–CCR by all
CTPHs will not eliminate the need for
Market-Makers to engage in the
compression of their portfolios. MarketMakers regularly avail themselves of
compression orders, in which they use
the information provided in the
Exchange-provided position lists to
identify potential counterparties that
similarly need to close index option
open interest. Additionally, certain
TPHs avail themselves of off-floor RWA
transfers across their own accounts to
similarly achieve this purpose. The
proposed compression transactions will
36 See Letter from Cboe, New York Stock
Exchange, and Nasdaq, Inc., to the Honorable
Randal Quarles, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System,
March 18, 2020.
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be able to occur in numerous options as
part of multilateral transactions effected
at a single time, which will permit
Market-Makers’ to compress their
portfolios more efficiently than they can
using current compression tools. The
proposed compression service
streamlines current compression tools,
which the Exchange believes will
permit Market-Makers to reduce more
efficiently any potential negative impact
on the market-making community that
has resulted from bank regulatory
capital requirements. The Exchange
expects the proposed compression
service will provide Market-Makers
with an additional avenue to free up
much needed capital, which will benefit
the entire market and all investors.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.37 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 38 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
37 15
38 15
E:\FR\FM\12APN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
12APN1
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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) 39 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change will remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest because it seeks to further
mitigate the potentially negative effects
of net capital requirements on liquidity
in the index options markets. As
described above, current regulatory
capital requirements impede efficient
use of capital and undermine the critical
liquidity role that Market-Makers play
in the index options market by limiting
the amount of capital CTPHs allocate to
clearing member transactions.
Specifically, the rules have caused
CTPHs to impose stricter position limits
on their clearing members. In turn, this
could force Market-Makers to reduce the
size of their quotes and result in
reduced liquidity in the market. The
Exchange believes that providing
Market-Makers with a more efficient
mechanism to reduce regulatory capital
attributable to their portfolios will
permit Market-Makers to contribute to
the availability of liquidity in the index
options market and help ensure that
these markets retain their competitive
balance. The Exchange believes that the
proposed rule would serve to protect
investors by helping maintain a
consistent continued depth of liquidity,
particularly in volatile market
conditions when liquidity is needed the
most by investors.
The proposed rule change will
provide liquidity providers with the
ability to reduce regulatory capital more
efficiently attributable to their open
interest in index options as part of a
multilateral matching process. Current
compression tools require MarketMakers to identify counterparties
against which to execute compression
volume as part of multiple transactions
or limit how positions may be
transferred off-exchange. The proposed
compression process is a streamlined
version of the process used for
compression orders, with three main
differences (some of which incorporate
elements of off-floor RWA transfers).
First, the compression service would
eliminate the burden on Market-Makers
to identify potentially multiple
39 Id.
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counterparties to effect compression
transactions that would achieve the
compression goals of all compression
transaction parties. The Exchange
understands that TPHs generally submit
compression-list positions with the goal
of identifying other TPHs with offsetting
positions that will enable them to
submit compression orders. While the
Exchange provides TPHs that submit
compression-list positions with a list of
positions for which there is offsetting
size and the identities of the TPHs with
that offsetting size, TPHs must still seek
each other out to determine how to
offset as much as possible among each
other to achieve their compression
goals, and then submit various crossing
orders to do so. The proposed
compression service eliminates this
step, as the Exchange’s automated
process will match offsetting size among
multiple compression participants as a
single step. With respect to the
proposed compression service, the
Exchange would be bringing together
purchases and sellers of index options
for the purpose of compression who
ultimately decide into which
transactions they will or will not enter,
which is consistent with its role as an
exchange under the Exchange Act.40
Second, unlike compression orders,
compression transactions effected
through the proposed compression
service would occur off-exchange and
outside of regular trading hours.
Compression orders are executed on the
Exchange, but are not exposed before
execution. The Exchange recognizes the
numerous benefits of executing options
transactions occur on an exchange,
including price transparency, potential
price improvement, and a clearing
guarantee. However, the Exchange
believes exposure and execution of
compression transactions on the
Exchange would have minimal
benefits.41 When TPHs previously
exposed compression orders to the
trading floor, the Exchange observed
that market participants generally
deferred their allocations to permit a
clean cross. Because orders that were
executed in compression forums on the
trading floor were generally not broken
up, and because the purpose of these
trades is unrelated to profits and losses
(making the price at which the
transaction is executed relatively
40 See 15 U.S.C. 78c(a)(1) (which defines an
‘‘exchange’’ as an organization that constitutes,
maintains, or provides a marketplace or facilities for
bringing together purchases and sellers of
securities).
41 Because compression transactions will be
effected within clearing accounts at the OCC, any
compression transactions will continue have a
clearing guarantee.
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unimportant like competitive trades),
the Exchange believes it is appropriate
to not require exposure of these orders
in an electronic or open outcry setting.
Compression orders are currently not
exposed on the Exchange for the same
purpose.42 The Exchange believes that
TPHs understand the benefits that
compression may bring to liquidity on
the Exchange to the benefit of all market
participants, which benefit the
Exchange believes is greater than the
benefit of exposing compression
transactions prior to execution.
The Exchange believes the benefits of
permitting compression transactions to
occur off the exchange exceed any
benefits that may result from executing
these orders on the Exchange. The
Exchange notes that the benefits of
requiring a broker to expose an order on
the trading floor generally flow to that
order, which include the potential of
price improvement for the order and to
locate liquidity against which to execute
the order. The compression service,
however, will have located the
necessary liquidity to offset the
positions a Market-Maker is seeking to
close (or open) as part of compression,
as that is necessary given the nature of
these transactions. Additionally, the
Compression transactions have a narrow
scope and are intended to achieve a
limited purpose. The compression
service is not intended to be a
competitive trading tool. There is no
need for price discovery or
improvement, as the purpose of the
transfer is to reduce capital
requirements attributable to a market
participants’ positions. Unlike trades on
an exchange, the price at which a
compression transaction occurs is a
secondary concern for the participants—
the resulting reduction in capital
attributable a Market-Maker’s portfolio
is the critical part of compression.
Additionally, the Exchange intends to
disseminate transaction information for
all effected compression transactions to
OPRA,43 so there will be transparency to
the public regarding the prices and sizes
of compression transactions. Because
compression transactions will be
effected off-exchange and not during the
trading day, they will not be subject to
an NBBO or customer priority like
compression orders. However, the
prices of these transactions must be
executed at a programmatically
determined price that incorporates
42 See
Rules 5.32, 5.33, and 5.88.
discussed above, the Exchange is working
with OPRA to have an indicator applied to
compression transaction information disseminated
through OPRA but does not expect that indicator to
be available upon implementation of the
compression service.
43 As
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available pricing information and uses
generally accepted volatility and
options pricing models, which the
Exchange believes will result in
compression transactions being
executed at reasonable market prices.44
The Exchange notes other off-floor
transfers effected for compression
purposes are not required to occur at
prices at or within the then-prevailing
NBBO or better than any resting Priority
Customer orders.45 The proposed rule
change is narrow in scope, as it is
limited to Market-Makers and index
options and to transactions executed for
the purpose of reducing required
regulatory capital, which the Exchange
believes makes permitting compression
transactions to occur off the floor
appropriate and important to support
the provision of liquidity in the listed
options market.
Third, the proposed compression
service will be limited to MarketMakers, unlike compression orders,
which are available to all TPHs.46
Although the Exchange is seeking to
limit participation in the compression
service to Market-Makers, the Exchange
believes the proposal is not designed to
permit discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes it is appropriate
to restrict the compression service to
Market-Makers given the critical role
Market-Makers play in the options
markets. The proposed rule change
seeks to alleviate the negative impact of
bank capital requirements on the
primary liquidity providers in the listed
options market (i.e., Market-Makers),
who have been and continue to be
disproportionately impacted by Net
Capital Requirements governing bankaffiliated clearing firms.47 As discussed
above, the proposed rule change would
reduce the burden on Market-Makers to
compress the size of their portfolios
compared to currently available
compression tools. Additionally, given
that the proposed compression
44 Additionally, the Exchange believes the fact
that compression transactions will occur at a
programmatically determined price (and thus not
permitting compression participants to determine
their own compression prices) will provide an
additional control to limit the use of the
compression service to legitimate compression
purposes.
45 See Rule 6.8.
46 The Exchange notes a previously available
compression tool was limited to Market-Makers for
a similar purpose. See Securities Exchange Act
Notice 84344 (October 2, 2018), 83 FR 50721
(October 9, 2018) (SR–CBOE–2018–056) (which
permitted on-floor RWA transfers).
47 See Letter from Cboe, New York Stock
Exchange, and Nasdaq, Inc., to the Honorable
Randal Quarles, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System,
March 18, 2020.
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transactions may only occur if all
parties agree to a compression proposal,
the Exchange wants to ensure that
compression participants are those
willing to put the resources into creating
position lists and engage in the
compression transactions in order to
encourage participation.48 The vast
majority of market participants that
have made use of the Exchange’s other
compression tools are Market-Makers,
so the Exchange believes limiting the
proposed compression service will not
unduly burden other TPHs.49 MarketMakers are subject to quoting
obligations, which generally result in
them taking on significant amounts of
positions that ultimately become subject
to capital requirements, which may
ultimately restrict the liquidity these
Market-Makers can provide to the
market. The Exchange believes the
proposed rule change will still benefit
all market participants, as the resulting
compression transactions will result in
the ability of Market-Makers to provide
additional liquidity to the index options
market. The Exchange believes the
ability for Market-Makers to efficiently
and effectively compress their portfolios
in one step off the Exchange will reduce
the risk of market dislocation and not
interfere with Market-Maker’s
continuous provision of liquidity,
especially during periods of increased
volume and volatility. Market-Makers
will be able to continue providing
liquidity during such times (increasing
the capital attributed to their portfolios)
because they will know that they can
subsequently reduce their open
positions across numerous options at
one time.
The Exchange also believes it is
reasonable to limit the proposed
compression service to index options.
Currently, compression orders are
limited to SPX options, as such options
have a large notional value and
represent the most volume executed on
the Exchange.50 Off-floor RWA transfers
may occur in any exchange-listed
option; however, transfers of multiply
listed equity options are subject to the
rules of all options exchanges that list
those options, and thus would only be
permissible if all other options
exchanges permitted such off-floor
transfers. The Exchange believes it is
appropriate to offer the compression
service for index options listed on the
48 CME currently limits participants in its
compression service to those that satisfy certain
eligibility criteria.
49 The Exchange notes that current compressions
tools will continue to remain available to all TPHs.
See Rules 5.6(c) and 6.8.
50 See Rules 5.6(c) (definition of compression
order).
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19075
Exchange, as such index options may
only be listed on the Exchange and its
affiliated exchanges (and thus would
not be constrained by the rules of other
options exchanges to the extent they do
not permit off-floor transfers for
compression purposes).51 Additionally,
the index value of nearly all index
options the Exchange lists for trading is
at least 100,52 making the notional value
of an index option at least 10,000.53
Given the high notional value associated
with index option contracts in general,
the Exchange believes Market-Makers
could benefit from compressing index
options beyond SPX options within
their portfolio. The large notional size of
most index options compounds the
negative impact of Net Capital Rules,
which apply to positions in all index
options, and may impact all client
clearing members of clearing firms
affiliated with U.S.-bank holding
companies. Clearing firms may request
that Market-Makers reduce positions in
listed options in addition to SPX, and
the proposed rule change will provide
Market-Makers with an efficient
mechanism to do so with respect to
their index option positions.
The proposed flexibility with respect
to when the Exchange will accept and
make available lists of positions MarketMakers would like to compress will
permit the Exchange to react to market
conditions and facilitate Market-Makers’
reduction of index option open interest
in response to volatility as necessary.54
The Exchange intends to make the
compression service available with
sufficient frequency to permit MarketMakers to effect compression
transactions in accordance with their
own needs (as long as they previously
submitted the applicable positions to
the Exchange in advance), as well as to
address intra-month position reviews by
their CTPHs. The Exchange believes this
enhanced compression process will
allow Market-Makers to more efficiently
reduce the necessary regulatory capital
associated with their options positions
and permit them to provide more
liquidity in the market. This additional
51 Certain index options listed on the Exchange
are also listed on its affiliated options exchanges,
which intend to submit separate filing adopting the
proposed multilateral compression process upon
Commission approval of this proposed rule filing.
52 The level of VIX is generally below 100.
53 The Exchange may consider to further expand
the compression service to equity options (like offfloor RWA transfers) and would submit a separate
rule filing in the event it determined to do so. The
Exchange notes the off-floor compression of equity
options, which are multiply listed, would be subject
to the rules of other options exchanges.
54 This flexibility is consistent with the
Exchange’s current flexibility regarding the
availability of compression orders.
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Federal Register / Vol. 86, No. 68 / Monday, April 12, 2021 / Notices
liquidity may result in tighter spreads
and more execution opportunities,
which benefits all investors, particularly
in volatile markets.
It is critical that Market-Makers be
able to efficiently manage capital and
margin requirements so that they
continuously have sufficient capital
available to provide to the markets,
which benefits all market participants.
Many Market-Makers clear through
CTPHs that have been impacted by bank
regulatory capital requirements, and
therefore the Exchange believes all
market participants understand and
respect the need of Market-Makers to
reduce capital attributable to their
positions in accordance with capital
reviews performed by CTPHs as
efficiently as possible, including
through the use of compression. MarketMakers regularly avail themselves of
compression orders, in which they use
the information provided in the
Exchange-provided position lists to
identify potential counterparties that
similarly need to close index option
open interest. Additionally, certain
TPHs avail themselves of off-floor RWA
transfers across their own accounts to
similarly achieve this purpose. The
Exchange believes the proposed rule
change is narrowly tailored for the
specific purpose of facilitating the
ability of Market-Makers to alleviate the
negative effects of current bank
regulatory capital requirements on
index options that generally have large
notional values. The proposed
compression process will permit
multilateral transactions in numerous
options to be effected at a single time,
which will permit Market-Makers’ to
compress their portfolios more
efficiently than they can using current
compression tools. The proposed
compression service streamlines current
compression tools, which the Exchange
believes will permit Market-Makers to
reduce more efficiently any potential
negative impact on the market-making
community that has resulted from bank
regulatory capital requirements. The
Exchange expects the proposed
compression service will provide
Market-Makers with an additional
avenue to free up much needed capital,
which will benefit the entire market and
all investors. The Exchange believes the
proposed rule change will protect
investors by providing a more seamless
execution of compression transactions
and thus facilitate a more efficient way
for liquidity providers to meet their
capital requirements, which will protect
investors as a result of the continued
depth of liquidity in the index options
market. Continuous increased liquidity
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21:37 Apr 09, 2021
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in the options market may provide more
trading opportunities and tighter
spreads, providing for robust markets
for all market participants.
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 purpose
of the proposed rule change is to
alleviate the negative impact of bank
capital requirements on options market
liquidity providers. The proposed
compression service is not intended to
be a competitive trading tool.
The Exchange does not believe the
proposed rule change will impose any
burden on intramarket competition, as
the compression service will be
available to all Market-Makers and to all
index options, which generally carry a
higher notional value (as noted above).
Use of the compression service is
completely voluntary and within the
discretion of a Market-Maker. The
Exchange believes it is appropriate to
restrict the compression service to
Market-Makers given the critical role
Market-Makers play in the options
markets.55 As discussed above, the
proposed rule change would reduce the
burden on Market-Makers to compress
the size of their portfolios compared to
currently available compression tools.
Additionally, given that the proposed
compression transactions may only
occur if all parties agree to a
compression proposal, the Exchange
wants to ensure that compression
participants are those willing to put the
resources into creating position lists and
engage in the compression transactions
in order to encourage participation.56
The vast majority of market participants
that used the Exchange’s other
compression tools are Market-Makers,
so the Exchange believes limiting the
proposed compression service will not
unduly burden other TPHs. MarketMakers are subject to quoting
obligations, which generally result in
them taking on significant amounts of
positions that ultimately become subject
to capital requirements, which may
ultimately restrict the liquidity these
Market-Makers can provide to the
market. The Exchange believes the
proposed rule change will still benefit
55 See Letter from Cboe, New York Stock
Exchange, and Nasdaq, Inc., to the Honorable
Randal Quarles, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System,
March 18, 2020.
56 CME currently limits participants in its
compression service to those that satisfy certain
eligibility criteria.
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all market participants, as the resulting
compression transactions will result in
the ability of Market-Makers to provide
additional liquidity to the index options
market. The Exchange notes that all
TPHs continue to have the opportunity
to compress positions using the other
compression tools the Exchange makes
available.
The Exchange also believes it is
reasonable to limit the proposed
compression service to index options.
Currently, compression orders are
limited to SPX options, as such options
have a large notional value and
represent the most volume executed on
the Exchange.57 Off-floor RWA transfers
may occur in any exchange-listed
option; however, transfers of multiply
listed equity options are subject to the
rules of all options exchanges that list
those options, and thus would only be
permissible if all other options
exchanges permitted such off-floor
transfers. The Exchange believes it is
appropriate to offer the compression
service for index options listed on the
Exchange, as such index options may
only be listed on the Exchange and its
affiliated exchanges (and thus would
not be constrained by the rules of other
options exchanges to the extent they do
not permit off-floor transfers for
compression purposes).58 Additionally,
the index value of nearly all index
options the Exchange lists for trading is
at least 100,59 making the notional value
of an index option at least 10,000.60
Given the high notional value associated
with index option contracts in general,
the Exchange believes Market-Makers
could benefit from compressing index
options beyond SPX options within
their portfolio. The large notional size of
most index options compounds the
negative impact of Net Capital Rules,
which apply to positions in all index
options, and may impact all client
clearing members of clearing firms
affiliated with U.S.-bank holding
companies. Clearing firms may request
that Market-Makers reduce positions in
listed options in addition to SPX, and
the proposed rule change will provide
Market-Makers with an efficient
57 See Rules 5.6(c) (definition of compression
order).
58 Certain index options listed on the Exchange
are also listed on its affiliated options exchanges,
which intend to submit separate filing adopting the
proposed multilateral compression process upon
Commission approval of this proposed rule filing.
59 The level of VIX is generally below 100.
60 The Exchange may consider to further expand
the compression service to equity options (like offfloor RWA transfers) and would submit a separate
rule filing in the event it determined to do so. The
Exchange notes the off-floor compression of equity
options, which are multiply listed, would be subject
to the rules of other options exchanges.
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mechanism to do so with respect to
their index option positions.
The Exchange does not believe the
proposed rule change will impose any
burden on intermarket competition, as it
will apply only to index options that are
currently listed for trading only on the
Exchange (and its affiliated options
exchanges).61 The proposed rule change
is intended create a more efficient
effective mechanism for market
participants to reduce regulatory capital
attributable to all index options in their
portfolios. The proposal is broader than
compression orders, which are limited
to SPX options, and the Exchange
believes making the compression
service available to all index options
will provide Market-Makers with
additional compression opportunities,
which will free up their balance sheets
to provide more liquidity in all index
options, not just SPX.62 When
attempting to compress positions,
Market-Makers are not seeking price
improvement but rather looking to free
up capital that will permit them to
continue to provide liquidity to the
market in their appointed classes, and
thus is not intended to have a
competitive impact. Because
compression transaction information
will be disseminated, all market
participants will have access to the
same information regarding
compression transactions as they do to
all other transaction information that
occurs on the Exchange. The
compression service is intended to have
a limited purpose, which is to relieve
the burden on liquidity providers in the
options market by reducing the capital
requirements attributable to their open
positions. As a result, Market-Makers
may be able to increase liquidity they
provide to the market, which liquidity
benefits all market participants.
Additionally, as noted above, the
proposed multilateral compression
service is substantially similar to one
CME offers for the compression of
futures positions.63
61 If the Commission approves the proposed rule
change, the Exchange’s affiliated options exchanges
intend to submit copycat rule filings.
62 As discussed above, the Exchange may
consider to further expand the compression service
to equity options (like off-floor RWA transfers) and
would submit a separate rule filing in the event it
determined to do so. The Exchange notes the offfloor compression of equity options, which are
multiply listed, would be subject to the rules of
other options exchanges.
63 See CME Rule 857.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2021–020 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2021–020. 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
PO 00000
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19077
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–CBOE–2021–020 and
should be submitted on or before May
3, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07385 Filed 4–9–21; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Reporting and Recordkeeping
Requirements Under OMB Review
Small Business Administration.
30-Day notice.
AGENCY:
ACTION:
The Small Business
Administration (SBA) is seeking
approval from the Office of Management
and Budget (OMB) for the information
collection described below. In
accordance with the Paperwork
Reduction Act and OMB procedures,
SBA is publishing this notice to allow
all interested member of the public an
additional 30 days to provide comments
on the proposed collection of
information.
SUMMARY:
Submit comments on or before
May 12, 2021.
ADDRESSES: Written comments and
recommendations for this information
collection request should be sent within
30 days of publication of this notice to
www.reginfo.gov/public/do/PRAMain.
Find this particular information
collection request by selecting ‘‘Small
Business Administration’’; ‘‘Currently
Under Review,’’ then select the ‘‘Only
Show ICR for Public Comment’’
checkbox. This information collection
can be identified by title and/or OMB
Control Number.
DATES:
64 17
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]]>Agencies
[Federal Register Volume 86, Number 68 (Monday, April 12, 2021)]
[Notices]
[Pages 19067-19077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91482; File No. SR-CBOE-2021-020]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change Relating To Adopt Rule 6.10 To
Introduce a Voluntary Compression Service for Market Makers
April 6, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 24, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to adopt Rule 6.10. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Rule 6.10 to provide Market-Makers
with an additional voluntary compression tool that will permit them to
more efficiently compress their index option portfolios in order to
reduce the required capital attributable to their portfolios while
maintaining their risk exposure. The Exchange understands that
regulatory capital requirements have impeded liquidity providers'
(market-makers, in particular) ability to provide liquidity to the
market. In response, the Exchange has made certain tools available that
Trading Permit Holders (``TPHs'') can use to compress the notional size
of their portfolios to reduce the capital attributable to those
portfolios. Pursuant to Rule 5.6(c), the Exchange may make compression
orders available to TPHs, which orders enable TPHs (after submitting
compression position lists to the Exchange) to execute orders in S&P
500 Index (``SPX'') options without exposure to reduce the aggregate
capital attributable to those positions (subject to certain
requirements). Additionally, pursuant to Rule 6.8, TPHs may transfer
positions in exchange-listed options off the Exchange if the transfer
does not result in a change in ownership and reduces the risk-weighted
assets (``RWA'') associated with those positions. The Exchange believes
compression continues to be an important tool to enable Market-Makers
to efficiently manage the size of their portfolios and the amount of
capital that must be maintained by their Clearing TPHs (``CTPHs'') in
connection with those portfolios. As a result, the Exchange regularly
reviews its compression tools and evaluates potential enhancements to
those tools. The Exchange believes that permitting TPHs to execute
offsetting SPX options positions without exposure using compression
orders and to effect off-floor RWA transfers of exchange-listed options
has had a beneficial effect on the bank regulatory capital requirements
of CTPHs' parent companies without adversely affecting the quality of
the options market. The Exchange has determined that a combination of
elements of these two tools would increase the efficiency of
compression for Market-Makers. Specifically, the Exchange proposes,
notwithstanding Rule 5.12,\3\ the Exchange may make available to
Market-Makers a multilateral compression service for certain index
options identified by the Exchange,\4\ pursuant to which a Market-Maker
may close or open \5\ positions in options listed on the Exchange to
reduce regulatory capital attributable to its portfolio.\6\
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\3\ Rule 5.12 generally requires transactions in listed options
to occur on a national securities exchange, unless an exception
applies. Transactions effected pursuant to proposed Rule 6.10 would
be such an exception.
\4\ The Exchange will announce which index options for which it
will make the compression service available pursuant to Rule 1.5.
Rule 1.5 provides that the Exchange announces to Trading Permit
Holders all determinations it makes pursuant to the Rules via, among
other communication methods, specifications, notices, or regulatory
circulars with appropriate advanced notice, which are posted on the
Exchange's website. The Exchange intends to initially make the
compression service available for SPX options and then will phase in
additional index options.
\5\ The Exchange intends to phase in its availability of the
compression service, and the initial version will be available only
to close positions. The Exchange will announce the date on which it
will make the compression service available for opening positions as
well, pursuant to Rule 1.5.
\6\ This is the same purpose as other currently available
compression tools, such as compression orders. See Rule 5.6(c)
(definition of compression orders). Rule 11.6 requires each Market-
Maker to maintain net capital sufficient to comply with the
requirements of Securities and Exchange Act (the ``Act'') Rule 15c3-
1. 17 CFR 240.15c3-1. Additionally, Market-Makers must comply with
capital requirements imposed by their CTPHs or the Options Clearing
Corporation (``OCC'') (if the Market-Maker is also a CTPH).
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Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers)
[[Page 19068]]
(``Net Capital Rules'') requires that every registered broker-dealer,
including every Market-Maker, maintain certain specified minimum levels
of capital. The Net Capital Rules are designed to protect securities
customers, counterparties, and creditors by requiring that broker-
dealers always have sufficient liquid resources on hand to meet their
financial obligations. Notably, hedged positions, including offsetting
futures and options contract positions, result in certain net capital
requirement reductions under the Net Capital Rules.\7\
---------------------------------------------------------------------------
\7\ In addition, the Net Capital Rules permit various offsets
under which a percentage of an option position's gain at any one
valuation point is allowed to offset another position's loss at the
same valuation point (e.g. vertical spreads).
---------------------------------------------------------------------------
All OCC clearing members are subject to the Net Capital Rules.
However, a subset of clearing members are subsidiaries of U.S. bank
holding companies, which, due to their affiliations with their parent
U.S. bank holding companies, must comply with additional bank
regulatory capital requirements pursuant to rulemaking required under
the Dodd-Frank Wall Street Reform and Consumer Protection Act.\8\
Pursuant to this mandate, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation approved a comprehensive regulatory
capital framework for subsidiaries of U.S. bank holding company
clearing firms.\9\ Generally, these rules imposed higher minimum
capital requirements, more restrictive capital eligibility standards,
and higher asset risk weights than were previously mandated for
clearing members that are subsidiaries of U.S. bank holding companies
under the Net Capital Rules. Furthermore, these rules do not permit
deductions for hedged securities or offsetting options positions.\10\
Rather, capital charges under these standards are based on the
aggregate notional value of short positions regardless of offsets. As a
result, CTPHs generally must hold substantially more bank regulatory
capital than would otherwise be required under the Net Capital
Rules.\11\ The impact of these regulatory capital rules is compounded
in index options markets due to the large notional value of index
option contracts and the potentially significant number of open index
options positions.
---------------------------------------------------------------------------
\8\ H.R. 4173 (amending section 3(a) of the Securities Exchange
Act of 1934 (the ``Act'') (15 U.S.C. 78c(a))).
\9\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards).
\10\ Many options strategies, including relatively simple
strategies often used by retail customers and more sophisticated
strategies used by market-makers and institutions, are risk-limited
strategies or options spread strategies that employ offsets or
hedges to achieve certain investment outcomes. Such strategies
typically involve the purchase and sale of multiple options (and may
be coupled with purchases or sales of the underlying assets),
executed simultaneously as part of the same strategy. In many cases,
the potential market exposure of these strategies is limited and
defined. Whereas regulatory capital requirements have historically
reflected the risk-limited nature of carrying offsetting positions,
these positions may now be subject to large regulatory capital
requirements. Various factors, including administration costs;
transaction fees; and limited market demand or counterparty
interest, however, discourage market participants from closing these
positions even though many market participants likely would prefer
to close the positions rather than carry them to expiration.
\11\ See Letter from Cboe, New York Stock Exchange, and Nasdaq,
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of
the Board of Governors of the Federal Reserve System, March 18,
2020.
---------------------------------------------------------------------------
The Exchange believes these regulatory capital requirements have
impeded efficient use of capital and undermine the critical liquidity
role that Market-Makers play in the options market by limiting the
amount of capital CTPHs can allocate to clearing member transactions.
Specifically, the Exchange understands these rules have caused, and may
continue to cause, CTPHs to impose stricter position limits on their
clearing members. These stricter position limits may impact the
liquidity Market-Makers (who participate on a significant portion of
index option trades on the Exchange) might supply in the options
market, which impact may be heightened when markets are volatile, and
this impact may be compounded when a CTPH has multiple Market-Maker
client accounts, each having largely risk-neutral portfolio
holdings.\12\
---------------------------------------------------------------------------
\12\ Several Market-Makers continue to express to the Exchange
that these rules could hamper their ability to provide consistent
liquidity in the index options markets, and have inquired about the
ability engage in multilateral compression, as they are able to do
for their futures positions.
---------------------------------------------------------------------------
In November 2019, bank regulatory agencies approved a rulemaking
requiring banks to replace the Current Exposure Method (``CEM'') with
the Standardized Approach to Counterparty Credit Risk (``SA-CCR'') by
January 1, 2022. The Exchange believes CEM's primary flaws arise from
the methodology's insensitivity to actual risk. For example, CEM does
not account for the delta (i.e., market sensitivity) of an option
position or fully recognize the offsetting of positions with opposite
economic exposures. The Exchange believes implementation of SA-CCR will
help correct many of CEM's flaws by incorporating risk-sensitive
principles, such as delta weighting options positions and more
beneficial netting of derivative contracts that have economically
meaningful relationships. This means that SA-CCR, when implemented,
will be less punitive to CTPHs (and the market participants for which
they clear options positions) than CEM as it relates to options
positions. Some CTPHs have implemented SA-CCR, while others have not
and continue to use CEM. However, the Exchange believes implementation
by all CTPHs of SA-CCR will not eliminate the need for Market-Makers to
manage their positions or be concerned about the accumulation of
cleared positions (particularly in options with larger notional values)
that ultimately contribute to their net capital requirements and those
of their clearing firms and thus the capital ratios with which those
firms need to comply. The Exchange notes there are few clearing banks,
and even fewer that clear for options market-makers. Increased clearing
of over-the-counter products, such as swaps, by these same clearing
banks means there is a risk of less available clearing bandwidth for
listed options, even with the adoption of SA-CCR. Additionally, market-
makers will continue to hold positions that are virtually riskless but
have a significant capital impact that could be compressed in order to
free up balance sheets to enable market-makers to continue to provide
meaningful liquidity to the market. Therefore, even when all banks have
implemented SA-CCR, the Exchange believes compression will continue to
be a valuable tool for Market-Makers.\13\
---------------------------------------------------------------------------
\13\ The Exchange notes at least one other market offers certain
of its members a multilateral compression tool for competitive
products. See Chicago Mercantile Exchange, Inc. (``CME'') Rule 857,
the purpose of which is to provide market participants and their
clearing members with capital relief in listed equities options
without materially changing the risk exposure of a given
participant's portfolio. See CME Equity Options Compression
Overview, at https://www.cmegroup.com/trading/equity-index/cme-equity-options-compression-overview.html.
---------------------------------------------------------------------------
As noted above, the Exchange currently offers its TPHs tools they
may use to reduce the regulatory requirements attributable to their
portfolios, which the Exchange believes has had a beneficial effect on
the bank regulatory capital requirements of CTPHs' parent companies
without adversely affecting the quality of the options market.\14\ The
proposed rule change is a further enhancement to the set of compression
tools the Exchange
[[Page 19069]]
currently offers, combining certain features of those tools.
Specifically, pursuant to proposed Rule 6.10(a), in a manner and format
and at times determines by the Exchange, of which the Exchange will
provide reasonable and sufficient advanced notice, a Market-Maker
(``compression participant'') may submit into an Exchange system a list
of open index positions it would like to close and, if it chooses,
index option positions it would like to open to replace any of those
closing positions (``position lists''). A compression participant must
include the amount of capital reduction associated with each closing
position and the amount of capital increase associated with each
opening position (with the amount of capital in a measurement unit of
the compression participant's choosing) included on a position list
submitted to the Exchange. Market participants measure capital using
various industry standards, which provide them with the ability to
select the most appropriate measurement unit for their organizations
and risk management practices. Therefore, the Exchange believes it is
reasonable to permit Market-Makers to provide capital amounts on their
position lists using the measurement unit they generally use. The
positions in the position list must in the aggregate reduce regulatory
capital attributable to those positions (based on the capital amounts
provided by compression participants) in accordance with the purpose of
the proposed compression service.\15\ Additionally, a compression
participant may define and input optional risk constraints on its
position list that it wants applied to any compression proposal. For
example, a compression participant may constrain the net cost of a
compression portfolio compared to its specified values or constrain the
net delta by expiration that would result from a compression proposal.
Permitting compression participants to input these constraints will
allow compression participants to effect compression of their
portfolios in a manner consistent with their own risk management
practices and achieve the goals they seek from the compression service.
---------------------------------------------------------------------------
\14\ See, e.g., Rules 5.6(c) (definition of compression orders)
and 5.32, 5.33, and 5.88 (describing how compression orders may
execute), and 6.8 (describing permissible off-floor RWA transfers).
\15\ This is consistent with compression orders. See Rule 5.6(c)
(definition of compression orders, which provide that compression
orders may be used to reduce required capital associated with open
SPX positions, and may include open positions to replace closing
positions to reduce capital associated with open positions).
---------------------------------------------------------------------------
The Exchange intends to offer the compression service with
sufficient frequency to permit Market-Makers to respond to intra-month
reviews of regulatory capital necessary for their positions by clearing
firms.\16\ The proposed flexibility will permit the Exchange to adjust
the frequency (with sufficient notice) of availability of the
compression service if the Exchange deems such frequency to be more
appropriate, such as in response to market conditions. The proposed
flexibility is also consistent with the currently flexibility regarding
the availability of compression orders.\17\
---------------------------------------------------------------------------
\16\ The Exchange intends to initially offer the compression
service on a weekly basis.
\17\ See Rule 5.6(c).
---------------------------------------------------------------------------
The proposed process regarding the submission of position lists is
similar to the current process for submitting compression position
lists in connection with the submission of compression orders.
Currently, prior to submitting compression orders, TPHs must submit
lists of open SPX options positions they would like to close using
compression orders (while TPHs may open positions using compression
orders, but do not need to include those positions on compression
position lists submitted in advance to the Exchange). The proposed
compression service will similarly require Market-Makers to submit
lists of open option positions they would like to close and also
require them to submit option positions they would like to open using
the compression service.\18\ The Exchange believes requiring inclusion
of any positions to be opened (in addition to closed) in the positions
list submitted to the compression service (as well as capital
attributable to those positions) will provide the Exchange with
additional information when determining whether the compression
participants are using the compression service to reduce regulatory
capital attributable to their positions. Therefore, the Exchange
believes the proposed requirements for use of the compression service,
particularly the requirement to include the amount of capital
associated with each position and the requirement that the positions
must in the aggregate reduce attributable regulatory capital (similar
to compression orders are net position closing or neutral), are
reasonable, as they will create additional controls to limit use of the
compression service to legitimate compression purposes.
---------------------------------------------------------------------------
\18\ When the functionality to permit positions to be opened in
the compression service is available, it will be within the
discretion of a Market-Maker to open positions as part of the
process; however, if a Market-Maker does want to open positions as
part of compression, then it must include those opening positions on
its position list.
---------------------------------------------------------------------------
The Exchange believes permitting Market-Makers to open positions as
part of the compression service (as they may currently do with
compression orders) may provide additional opportunities to reduce more
regulatory capital attributable to their portfolios than if they were
restricted to only closing positions. The goal of compression is to
alleviate bank regulatory capital requirements attributable to a market
participant's portfolio. This can be achieved by closing positions,
which ultimately reduces the regulatory capital associated with a
Market-Maker's portfolio. However, regulatory capital reduction may be
also achieved by ``swapping'' open positions with new positions for
which there is lower regulatory capital associated. The Exchange
understands Market-Makers may do this for risk management purposes.
Specifically, Market-Makers retain certain options positions in their
portfolios for hedging and risk exposure purposes. However, the
calculation of regulatory capital associated with options positions
involves a complex formula (and, as noted above, may be calculated
using different methods), but it ultimately is calculating an amount
based on the quantity of a position times the strike price (which is
why the large notional value of index options has created issues for
Market-Makers). Therefore, an option position with a lower strike price
will likely have lower regulatory capital associated with that position
than regulatory capital associated with a higher strike price. A
Market-Maker may identify options with lower strikes that provide it
with substantially similar risk exposure as some of its open positions
while maintaining a hedge within its portfolio. Merely closing such
higher-strike positions may reduce the required capital associated with
the market participant's portfolio, but such closure may leave portions
of that portfolio unhedged and thus subject to higher risk. By
``swapping'' its current open positions in options with higher strikes
with positions in options with lower strikes (often using box spreads
and combos), a market participant may maintain the same risk exposure
in its portfolio while replacing higher-strike positions with lower-
strike positions in order to swap related exposures.
For example, suppose a Market-Maker has 100 contracts in an SPX box
spread with October expiration and strike prices of 3500 and 3600.
Suppose another Market-Maker has 100 contracts for the offsetting box
spread, but also want to buy 100 contracts in an SPX box spread with
October expiration and strike prices of 1500 and 1600. Each Market-
Maker in this transaction would
[[Page 19070]]
be opening positions in 400 contracts as well as closing positions in
400 contracts. While each Market-Maker would have the same number of
open positions after this transaction, the regulatory capital
associated with each Market-Maker's portfolio would be significantly
reduced given the newly opened positions have strike prices 2000 lower
than the closed positions. Execution of this transaction would be
riskless and would provide meaningful regulatory capital relief to the
Market-Makers. Ultimately, transactions like this example are
essentially riskless exchanges that carry no profit or loss for market
participants, but rather are intended to provide a seamless method for
market participants to reduce margin and capital requirements while
maintaining the same risk exposure within their portfolios.
Currently, compression orders are limited to SPX options, as such
options have a large notional value and represent the most volume
executed on the Exchange.\19\ Off-floor RWA transfers may occur in any
exchange-listed option; however, transfers of multiply listed equity
options are subject to the rules of all options exchanges that list
those options, and thus would only be permissible if all other options
exchanges permitted such off-floor transfers. The Exchange believes it
is appropriate to offer the compression service for index options
listed on the Exchange, as such index options may only be listed on the
Exchange and its affiliated exchanges (and thus would not be
constrained by the rules of other options exchanges to the extent they
do not permit off-floor transfers for compression purposes).\20\
Additionally, the index value of nearly all index options the Exchange
lists for trading is at least 100,\21\ making the notional value of an
index option at least 10,000.\22\ Given the high notional value
associated with index option contracts in general, the Exchange
believes Market-Makers could benefit from compressing index options
beyond SPX options within their portfolio. The following table lists
the indexes on which the Exchange currently lists options, as well as
the value of the index as of the close of trading on March 1, 2021:
---------------------------------------------------------------------------
\19\ See Rules 5.6(c) (definition of compression order).
\20\ Certain index options listed on the Exchange are also
listed on its affiliated options exchanges, which intend to submit
separate filing adopting the proposed multilateral compression
process upon Commission approval of this proposed rule filing.
\21\ The level of VIX is generally below 100.
\22\ The Exchange may consider to further expand the compression
service to equity options (like off-floor RWA transfers) and would
submit a separate rule filing in the event it determined to do so.
The Exchange notes the off-floor compression of equity options,
which are multiply listed, would be subject to the rules of other
options exchanges.
------------------------------------------------------------------------
Current
Index (option symbol) value
------------------------------------------------------------------------
S&P 500 Index (SPX).......................................... 3,901.82
Mini-S&P 500 Index (XSP)..................................... 390.18
Russell 2000 Index (RUT)..................................... 2,275.32
Mini-Russell 2000 Index (MRUT)............................... 227.53
Cboe Volatility Index (VIX).................................. 23.35
Dow Jones Industrial Average (DJX)........................... 315.36
S&P 100 Index (OEX and XEO).................................. 1,773.40
S&P 500 ESG Index (SPESG).................................... 330.51
S&P Materials Select Sector Index (SIXB)..................... 796.03
S&P Industrials Select Sector Index (SIXI)................... 933.99
S&P Financial Select Sector Index (SIXM)..................... 409.44
S&P Real Estate Select Sector Index (SIXRE).................. 182.02
S&P Utilities Select Sector Index (SIXU)..................... 601.62
S&P Health Care Select Sector Index (SIXV)................... 1,150.89
MSCI EAFE Index (MXEA)....................................... 2,198.61
MSCI Emerging Markets Index (MXEF)........................... 1,362.47
Russell 1000 Growth Index (RLG).............................. 2,469.71
Russell 1000 Value Index (RLV)............................... 1,444.77
Russell 1000 Index (RUI)..................................... 2,211.99
------------------------------------------------------------------------
The large notional size of most index options compounds the
negative impact of Net Capital Rules, which apply to positions in all
index options, and may impact all client clearing members of clearing
firms affiliated with U.S.-bank holding companies. Clearing firms may
request that Market-Makers reduce positions in listed options in
addition to SPX, and the proposed rule change will provide Market-
Makers with an efficient mechanism to do so with respect to their index
option positions.
The proposed rule change also limits the compression service to
Market-Makers. While compression orders and off-floor RWA transfers are
currently available to all TPHs, a prior tool the Exchange offered for
compression purposes was limited to Market-Makers.\23\ The Exchange
believes this is appropriate given the important role Market-Makers
play in the options market and, as discussed above, the
disproportionate impact Net Capital Rules have had on Market-Makers.
Market-Makers in all index options ultimately hold a significant amount
of open interest in these high-valued options due to their serving as
the primarily liquidity providers, which results in their participation
on a significant number of trades that occur. Expanding compression to
all index options will permit Market-Makers in all index options to
more efficiently compress the size of their portfolios in terms of
notional size while maintaining their risk portfolio, which will free
up their balance sheets and permit them to continue to provide
meaningful liquidity in more markets. This additional liquidity would
ultimately benefit all market participants.
---------------------------------------------------------------------------
\23\ See Securities Exchange Act Notice 84344 (October 2, 2018),
83 FR 50721 (October 9, 2018) (SR-CBOE-2018-056) (which permitted
on-floor RWA transfers).
---------------------------------------------------------------------------
Pursuant to proposed paragraph (b), the Exchange will create a
compression proposal by conducting an automated matching process to
determine which positions among the compression participants can
offset. Specifically, at a time after the market close of Regular
Trading Hours (``RTH'') \24\ on days the Exchange accepts position
lists pursuant to proposed paragraph (a), an Exchange automated process
will match offsetting positions (in an anonymized manner) of
compression participants that submitted position lists. This automated
process matches offsetting positions on the position lists of
compression participants to maximize the aggregate capital reduction
among the compression participants. Because the process is automated,
it does not consider the identities of the compression participants and
instead objectively optimizes the aggregate compression when creating a
compression proposal. The resulting group of offsetting position
matches among the compression participants on an anonymous basis
constitutes the ``compression proposal.'' Offsetting positions will be
matched at the ``compression price.'' The Exchange will
programmatically determine the ``compression price'' using generally
accepted volatility and options pricing models and considering the
national best bid or offer (``NBBO'') at the close of the trading day,
the market prices at the daily market time, and the theoretical values
provided by the compression participants in their position lists. The
compression price may be in $0.01 increments. A compression proposal
must be consistent with all risk constraints set by the compressional
participants when submitting their position lists. In a manner and
format and at times determined by the Exchange, of which the Exchange
will provide reasonable and sufficient advanced notice, the Exchange
will notify each compression participant of the compression proposal.
---------------------------------------------------------------------------
\24\ Currently, the RTH trading session closes at 4:15 p.m.
Eastern time for most index options. See Rule 5.1(b)(2).
---------------------------------------------------------------------------
This proposed process is similar to the Exchange's provision of
individual position files to TPHs with respect to compression orders.
Because compression transactions effected through the compression
service will be single leg, a compression proposal will
[[Page 19071]]
not consist of multi-leg positions as the current position files
provided by the Exchange with respect to compression orders.\25\
Additionally, like the position files the Exchange provides to TPHs
with respect to compression orders, the proposed compression service
will identify for which positions from a compression participant's
position list there is offsetting size from another compression
participant.\26\ Unlike compression orders, a compression proposal will
not identify the Market-Makers that will be the contra-parties to
compression transactions. This information is currently provided for
compression orders, as TPHs need to seek out contra-parties to submit
compression orders. However, the compression service enhances this
process by doing this on behalf of Market-Makers, thus reducing this
burden on Market-Makers and eliminating the need to identify
counterparties in the compression proposal.
---------------------------------------------------------------------------
\25\ See rule 5.6(c).
\26\ Id.
---------------------------------------------------------------------------
The compression proposal will include a compression price for each
position (which, like the compression price of compression orders, may
be in $0.01 increments).\27\ The Exchange calculates this value using
substantially similar pricing models that it understands other market
participants use when pricing options. The Exchange currently
disseminates indicative values for certain classes at the end of the
trading day using the method, which the Exchange understands market
participants currently use for various purposes including risk
management purposes.\28\ The Exchange believes its programmatically
determined compression price using generally accepted volatility and
options pricing models and available pricing information will provide
compression participants with a reasonable value at which to effect
their compression transactions.
---------------------------------------------------------------------------
\27\ TPHs submit compression orders with the price of execution
(which is subject to certain pricing requirements). See id.
Compression orders may also currently be executed in pennies.
Because many series the Exchange expects Market-Makers will attempt
to close will be out-of-the-money, and essentially worthless,
Market-Makers may not otherwise close positions in these series if a
higher minimum increment causes the price to be too much higher than
the option's value. The Exchange believes it is reasonable to permit
these orders to be entered and executed in penny increments to
provide flexibility that will enable Market-Makers to encourage
participation in the compression service and maximize the reduction
in capital attributable to their positions.
\28\ See Rule 4.17 (pursuant to which the Exchange currently
disseminates indicates values for various options (including most
index options the Exchange lists for trading)). The Exchange also
uses similar values in certain circumstances when evaluating obvious
errors that occur on the Exchange. See Rule 6.5, Interpretation and
Policy .08.
---------------------------------------------------------------------------
The Exchange believes the proposed matching process enhances the
process currently available with respect to compression orders, as it
calculates for Market-Makers the positions that may be offset by
positions of multiple other Market-Makers that could maximize
compression results. Today, if a Market-Maker receives a position file
regarding other TPHs that have offsetting size, they must all then
coordinate to submit various orders for unexposed execution to achieve
the same results. The proposed process more efficiently identifies the
different parties with contra-side interest against which a Market-
Maker may execute its positions for compression purposes. As a result,
the proposed process reduces the burden on Market-Makers of finding
other Market-Makers with offsetting size they are willing trade when
they attempt to compress their portfolios. With respect to the
compression service, the Exchange would be bringing together purchasers
and sellers of index options for the purpose of compression, which is
consistent with its role as an exchange under the Exchange Act.\29\
Those purchasers and sellers would continue to have ultimate discretion
as to whether to effect the proposed compression transactions. The
Exchange believes compression to be a valuable service to provide to
Market-Makers, as compression enhances liquidity in the marketplace,
which may lead to more liquidity and competition and tighter spreads,
which ultimately benefits the entire market.
---------------------------------------------------------------------------
\29\ See 15 U.S.C. 78c(a)(1) (which defines an ``exchange'' as
an organization that constitutes, maintains, or provides a
marketplace or facilities for bringing together purchases and
sellers of securities).
---------------------------------------------------------------------------
Like the current position match files the Exchange provides to TPHs
in connection with compression orders, compression proposals generated
by the Exchange pursuant to the proposed compression service are
provided to Market-Makers for informational purposes only. A Market-
Maker can choose to take no action once it receives a compression
proposal. Individual Market-Makers will continue to determine whether
to submit position lists to the compression service and whether to
accept or decline compression proposals (and thus whether to effect or
not effect the compression transactions with the compression
proposals). As further described below, whether a Market-Maker chooses
to accept the compression proposal and effect the compression
transactions described therein is solely within the discretion of the
Market-Maker. The Exchange's provision of the compression proposal does
not constitute advice, guidance, a commitment to trade, an execution,
or a recommendation to trade, as is the case today for compression
orders.
Proposed paragraph (c) describes the conclusion of the compression
process, including how compression transactions may be effected.
Specifically, each compression participant for which a compression
proposal includes at least one offsetting position match \30\ must
notify the Exchange in the Exchange-designated form and manner no later
than the Exchange-established deadline of whether the compression
participant approves the compression proposal. If all compression
participants affirmatively approve the compression proposal, then the
Exchange effects the transactions comprising the compression proposal
at the specified compression prices. If any compression participant for
which a compression proposal includes at least one offsetting position
match declines (or does not respond to the Exchange by the deadline),
then no compression transactions are effected. In other words, whether
a Market-Maker effects any compression transactions (at the specified
compression prices) set forth in the compression proposal is solely
within the discretion of the Market-Maker. If a Market-Maker evaluates
a compression proposal and determines it is not in its interest to
effect the transactions as set forth in the proposal, then no
compression transactions are effected. Because the compression proposal
only achieves its goals of maximized compression if all compression
participants approve of the proposal, it requires unanimous approval.
As is the case for any transaction effected on the Exchange, all
counterparties must agree to the transaction.
---------------------------------------------------------------------------
\30\ It is possible that the automated matching process
described in proposed paragraph (b) will not find for a compression
participant any offsetting positions of other compression
participants. In that case, the compression participant with no
offsetting position matches needs to take no action.
---------------------------------------------------------------------------
Following any unanimous approval of a compression proposal, the
Exchange (a) distributes the information regarding the completed
package to the compression participants (which information will also be
available to CTPHs) and to OCC for processing and (b) disseminates the
information regarding each compression transaction
[[Page 19072]]
effected.\31\ The Exchange believes it is appropriate to share the
results of any compression transactions with the Clearing Trading
Permit Holders of the compression participants, as the impacted
positions will ultimately be held within the clearing accounts of these
CTPHs. Additionally, CTPHs have an interest in the open interest of the
Market-Makers for which they perform clearing services, because CTPHs
impose capital restrictions on these Market-Makers based on their open
interest.\32\ In addition, the Exchange believes it will benefit the
market to disseminate information for compression trades as it does for
all other transactions so that all market participants have knowledge
of compression transactions that occur and have knowledge of any
changes to open interest in the applicable products. Compression
transactions are effected within the accounts of the compression
participants and occur in accordance with OCC Rules (as is the case
with other off-floor transfers). Compression transactions may be
subject to applicable laws, rules, and regulations, including rules of
other self-regulatory organizations.\33\
---------------------------------------------------------------------------
\31\ The Exchange will be disseminating compression transaction
information to OPRA. The Exchange is working with OPRA to have an
indicator applied to compression transaction information
disseminated through OPRA but does not expect that indicator to be
available upon implementation of the compression service.
\32\ It is for similar reasons that CTPHs may currently submit
compression-position lists to the Exchange in connection with the
submission of compression orders. See Rule 5.6(c).
\33\ Post-trade positions are held in accounts at the OCC.
Therefore, any post-trade activity that occurs would be effected
within those accounts. The Exchange has held multiple discussions
with the OCC regarding the compression service, and the OCC has
indicated its ability to accommodate any effected compression
transactions. Any compression transactions will be subject to all
applicable recordkeeping requirements applicable to Market-Makers
under the Act and the rules and regulations thereunder, such as Rule
17a-3 and 17a-4.
---------------------------------------------------------------------------
The primary difference between the compression service and
compression orders is that the compression transactions Market-Makers
decide to effect will occur off-floor after trading hours. Effecting
compression transactions after the close of trading will provide
Market-Makers with several benefits, including certainty regarding
positions they may want to compress (as positions may change regularly
throughout the trading day) and not having to interrupt their provision
of liquidity during the trading day to engage in risk management.
Additionally, this will permit Market-Makers to not divert resources
during the trading day from providing liquidity to the market to
effecting transactions for risk management purposes. Currently,
compression orders may be effected without exposure on the Exchange,
which is similar to the proposed compression transactions. The proposed
compression service eliminates the step of needing to bring orders that
will not be exposed to the Exchange. As the primary purpose of the
proposed compression transactions is to compress the notional size of
Market-Makers' portfolios so that they may provide additional liquidity
into the market (rather than, for example, obtain price improvement),
the Exchange believes the benefits of exposure and execution on an
exchange are not applicable to compression transactions. Additionally,
because the Exchange will disseminate compression transaction
information, the compression service will provide transparency to the
market regarding compression transactions. The Exchange currently
permits transfers of SPX option positions (which may net against each
other) to occur off the Exchange for similar reasons.\34\
---------------------------------------------------------------------------
\34\ See Rule 6.8.
---------------------------------------------------------------------------
To demonstrate how the Exchange will conduct its multilateral
compression service, suppose three Market-Makers submit to the Exchange
the following position lists:
----------------------------------------------------------------------------------------------------------------
Class Expiry Strike Put/call Quantity
----------------------------------------------------------------------------------------------------------------
MM1
----------------------------------------------------------------------------------------------------------------
SPX................................... 2020-12-24 3700 C 300
SPX................................... 2020-12-24 3700 P -100
SPX................................... 2020-12-24 3800 C -100
SPX................................... 2020-12-24 3800 P -50
----------------------------------------------------------------------------------------------------------------
MM2
----------------------------------------------------------------------------------------------------------------
SPX................................... 2020-12-24 3700 C -50
SPX................................... 2020-12-24 3700 P 50
SPX................................... 2020-12-24 3800 C 50
SPX................................... 2020-12-24 3800 P 750
----------------------------------------------------------------------------------------------------------------
MM3
----------------------------------------------------------------------------------------------------------------
SPX................................... 2020-12-24 3700 C -25
SPX................................... 2020-12-24 3700 P 50
SPX................................... 2020-12-24 3800 C 0
SPX................................... 2020-12-24 3800 P -25
----------------------------------------------------------------------------------------------------------------
In total, across the four series, MM1 submitted 550 contracts for
compression, MM2 submitted 900 contracts for compression, and MM3
submitted 100 contracts for compression. For purposes of this example,
no Market-Maker included additional parameters to be considered in the
compression matching process. The Exchange's automated matching process
evaluates these positions (on an anonymized basis) to maximize the
number of positions among the three Market-Makers that can be
compressed, which results in the following trade matches:
[[Page 19073]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Compression
Class Expiry Strike Put/call Trade quantity Contra price
--------------------------------------------------------------------------------------------------------------------------------------------------------
MM1
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPX........................................ 2020-12-24 3700 C -50 MM2 1.00
SPX........................................ 2020-12-24 3700 C -25 MM3 1.00
SPX........................................ 2020-12-24 3700 P 50 MM2 1.00
SPX........................................ 2020-12-24 3700 P 50 MM3 1.00
SPX........................................ 2020-12-24 3800 C 50 MM2 0.50
SPX........................................ 2020-12-24 3800 P 50 MM2 1.50
--------------------------------------------------------------------------------------------------------------------------------------------------------
MM2
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPX........................................ 2020-12-24 3700 C 50 MM1 1.00
SPX........................................ 2020-12-24 3700 P -50 MM1 1.00
SPX........................................ 2020-12-24 3800 C -50 MM1 0.50
SPX........................................ 2020-12-24 3800 P -50 MM1 1.50
SPX........................................ 2020-12-24 3800 P -25 MM3 1.50
--------------------------------------------------------------------------------------------------------------------------------------------------------
MM3
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPX........................................ 2020-12-24 3700 C 25 MM1 1.00
SPX........................................ 2020-12-24 3700 P -50 MM1 1.00
SPX........................................ 2020-12-24 3800 P 25 MM2 1.50
--------------------------------------------------------------------------------------------------------------------------------------------------------
In total, if all three Market-Makers approved of this compression
proposal, MM1 would compress 275 contracts, MM2 would compress 225
contracts, and MM3 would compress 100 contracts, for a total of 600
contracts among all three Market-Makers, representing nearly 40% of the
1,550 total contracts submitted by the three Market-Makers. With a
notional value of nearly $400,000 per SPX contract, this compression
would permit these Market-Makers to eliminate positions from their
accounts that equate to a significant reduction in necessary capital to
be maintained in those accounts, which the Market-Makers could instead
put back into the market.\35\
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\35\ The Exchange notes each Market-Maker would retain any
uncompressed positions. Each Market-Maker would have the option to
resubmit these uncompressed positions on a new position list at the
times permitted by the Exchange to potentially be part of a
different compression proposal. Additionally, if any of the Market-
Makers declined this compression proposal, the Market-Makers could
similarly resubmit new position lists if they so choose.
---------------------------------------------------------------------------
The Exchange believes the proposed compression service will provide
Market-Makers with an additional tool to reduce regulatory capital
attributable to their portfolios in accordance with their businesses
and risk management practices. The Exchange understands from customers,
and Market-Makers in particular, there continues to be a significant
need to reduce regulatory capital attributable to their open interest
based on then-current market conditions. The need for compression is
particularly true during times of extreme volatility, such as the
recent historic levels of market volatility, which can make providing
liquidity in index options immensely more challenging when market
participants need liquidity the most. The Exchange believes the ability
of Market-Makers to compress their portfolios helps reduce the risk of
market dislocation, especially during periods of increased volume and
volatility, as they can continue providing liquidity during such times
(which may increase the regulatory capital attributed to their
portfolios) because they will know that they can subsequently reduce
their open positions (and concomitant regulatory capital).
As noted above, because some CTPHs carrying these are bank-owned
broker/dealers, those CTPHs are subject to further bank regulatory
capital requirements, which result in these additional punitive capital
requirements being passed on to their market-maker clients.\36\ The
Exchange believes implementation of SA-CCR by all CTPHs will not
eliminate the need for Market-Makers to engage in the compression of
their portfolios. Market-Makers regularly avail themselves of
compression orders, in which they use the information provided in the
Exchange-provided position lists to identify potential counterparties
that similarly need to close index option open interest. Additionally,
certain TPHs avail themselves of off-floor RWA transfers across their
own accounts to similarly achieve this purpose. The proposed
compression transactions will be able to occur in numerous options as
part of multilateral transactions effected at a single time, which will
permit Market-Makers' to compress their portfolios more efficiently
than they can using current compression tools. The proposed compression
service streamlines current compression tools, which the Exchange
believes will permit Market-Makers to reduce more efficiently any
potential negative impact on the market-making community that has
resulted from bank regulatory capital requirements. The Exchange
expects the proposed compression service will provide Market-Makers
with an additional avenue to free up much needed capital, which will
benefit the entire market and all investors.
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\36\ See Letter from Cboe, New York Stock Exchange, and Nasdaq,
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of
the Board of Governors of the Federal Reserve System, March 18,
2020.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\37\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \38\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and
[[Page 19074]]
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) \39\
requirement that the rules of an exchange not be designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
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\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(5).
\39\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, protect investors
and the public interest because it seeks to further mitigate the
potentially negative effects of net capital requirements on liquidity
in the index options markets. As described above, current regulatory
capital requirements impede efficient use of capital and undermine the
critical liquidity role that Market-Makers play in the index options
market by limiting the amount of capital CTPHs allocate to clearing
member transactions. Specifically, the rules have caused CTPHs to
impose stricter position limits on their clearing members. In turn,
this could force Market-Makers to reduce the size of their quotes and
result in reduced liquidity in the market. The Exchange believes that
providing Market-Makers with a more efficient mechanism to reduce
regulatory capital attributable to their portfolios will permit Market-
Makers to contribute to the availability of liquidity in the index
options market and help ensure that these markets retain their
competitive balance. The Exchange believes that the proposed rule would
serve to protect investors by helping maintain a consistent continued
depth of liquidity, particularly in volatile market conditions when
liquidity is needed the most by investors.
The proposed rule change will provide liquidity providers with the
ability to reduce regulatory capital more efficiently attributable to
their open interest in index options as part of a multilateral matching
process. Current compression tools require Market-Makers to identify
counterparties against which to execute compression volume as part of
multiple transactions or limit how positions may be transferred off-
exchange. The proposed compression process is a streamlined version of
the process used for compression orders, with three main differences
(some of which incorporate elements of off-floor RWA transfers). First,
the compression service would eliminate the burden on Market-Makers to
identify potentially multiple counterparties to effect compression
transactions that would achieve the compression goals of all
compression transaction parties. The Exchange understands that TPHs
generally submit compression-list positions with the goal of
identifying other TPHs with offsetting positions that will enable them
to submit compression orders. While the Exchange provides TPHs that
submit compression-list positions with a list of positions for which
there is offsetting size and the identities of the TPHs with that
offsetting size, TPHs must still seek each other out to determine how
to offset as much as possible among each other to achieve their
compression goals, and then submit various crossing orders to do so.
The proposed compression service eliminates this step, as the
Exchange's automated process will match offsetting size among multiple
compression participants as a single step. With respect to the proposed
compression service, the Exchange would be bringing together purchases
and sellers of index options for the purpose of compression who
ultimately decide into which transactions they will or will not enter,
which is consistent with its role as an exchange under the Exchange
Act.\40\
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\40\ See 15 U.S.C. 78c(a)(1) (which defines an ``exchange'' as
an organization that constitutes, maintains, or provides a
marketplace or facilities for bringing together purchases and
sellers of securities).
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Second, unlike compression orders, compression transactions
effected through the proposed compression service would occur off-
exchange and outside of regular trading hours. Compression orders are
executed on the Exchange, but are not exposed before execution. The
Exchange recognizes the numerous benefits of executing options
transactions occur on an exchange, including price transparency,
potential price improvement, and a clearing guarantee. However, the
Exchange believes exposure and execution of compression transactions on
the Exchange would have minimal benefits.\41\ When TPHs previously
exposed compression orders to the trading floor, the Exchange observed
that market participants generally deferred their allocations to permit
a clean cross. Because orders that were executed in compression forums
on the trading floor were generally not broken up, and because the
purpose of these trades is unrelated to profits and losses (making the
price at which the transaction is executed relatively unimportant like
competitive trades), the Exchange believes it is appropriate to not
require exposure of these orders in an electronic or open outcry
setting. Compression orders are currently not exposed on the Exchange
for the same purpose.\42\ The Exchange believes that TPHs understand
the benefits that compression may bring to liquidity on the Exchange to
the benefit of all market participants, which benefit the Exchange
believes is greater than the benefit of exposing compression
transactions prior to execution.
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\41\ Because compression transactions will be effected within
clearing accounts at the OCC, any compression transactions will
continue have a clearing guarantee.
\42\ See Rules 5.32, 5.33, and 5.88.
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The Exchange believes the benefits of permitting compression
transactions to occur off the exchange exceed any benefits that may
result from executing these orders on the Exchange. The Exchange notes
that the benefits of requiring a broker to expose an order on the
trading floor generally flow to that order, which include the potential
of price improvement for the order and to locate liquidity against
which to execute the order. The compression service, however, will have
located the necessary liquidity to offset the positions a Market-Maker
is seeking to close (or open) as part of compression, as that is
necessary given the nature of these transactions. Additionally, the
Compression transactions have a narrow scope and are intended to
achieve a limited purpose. The compression service is not intended to
be a competitive trading tool. There is no need for price discovery or
improvement, as the purpose of the transfer is to reduce capital
requirements attributable to a market participants' positions. Unlike
trades on an exchange, the price at which a compression transaction
occurs is a secondary concern for the participants--the resulting
reduction in capital attributable a Market-Maker's portfolio is the
critical part of compression. Additionally, the Exchange intends to
disseminate transaction information for all effected compression
transactions to OPRA,\43\ so there will be transparency to the public
regarding the prices and sizes of compression transactions. Because
compression transactions will be effected off-exchange and not during
the trading day, they will not be subject to an NBBO or customer
priority like compression orders. However, the prices of these
transactions must be executed at a programmatically determined price
that incorporates
[[Page 19075]]
available pricing information and uses generally accepted volatility
and options pricing models, which the Exchange believes will result in
compression transactions being executed at reasonable market
prices.\44\ The Exchange notes other off-floor transfers effected for
compression purposes are not required to occur at prices at or within
the then-prevailing NBBO or better than any resting Priority Customer
orders.\45\ The proposed rule change is narrow in scope, as it is
limited to Market-Makers and index options and to transactions executed
for the purpose of reducing required regulatory capital, which the
Exchange believes makes permitting compression transactions to occur
off the floor appropriate and important to support the provision of
liquidity in the listed options market.
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\43\ As discussed above, the Exchange is working with OPRA to
have an indicator applied to compression transaction information
disseminated through OPRA but does not expect that indicator to be
available upon implementation of the compression service.
\44\ Additionally, the Exchange believes the fact that
compression transactions will occur at a programmatically determined
price (and thus not permitting compression participants to determine
their own compression prices) will provide an additional control to
limit the use of the compression service to legitimate compression
purposes.
\45\ See Rule 6.8.
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Third, the proposed compression service will be limited to Market-
Makers, unlike compression orders, which are available to all TPHs.\46\
Although the Exchange is seeking to limit participation in the
compression service to Market-Makers, the Exchange believes the
proposal is not designed to permit discrimination between customers,
issuers, brokers, or dealers. The Exchange believes it is appropriate
to restrict the compression service to Market-Makers given the critical
role Market-Makers play in the options markets. The proposed rule
change seeks to alleviate the negative impact of bank capital
requirements on the primary liquidity providers in the listed options
market (i.e., Market-Makers), who have been and continue to be
disproportionately impacted by Net Capital Requirements governing bank-
affiliated clearing firms.\47\ As discussed above, the proposed rule
change would reduce the burden on Market-Makers to compress the size of
their portfolios compared to currently available compression tools.
Additionally, given that the proposed compression transactions may only
occur if all parties agree to a compression proposal, the Exchange
wants to ensure that compression participants are those willing to put
the resources into creating position lists and engage in the
compression transactions in order to encourage participation.\48\ The
vast majority of market participants that have made use of the
Exchange's other compression tools are Market-Makers, so the Exchange
believes limiting the proposed compression service will not unduly
burden other TPHs.\49\ Market-Makers are subject to quoting
obligations, which generally result in them taking on significant
amounts of positions that ultimately become subject to capital
requirements, which may ultimately restrict the liquidity these Market-
Makers can provide to the market. The Exchange believes the proposed
rule change will still benefit all market participants, as the
resulting compression transactions will result in the ability of
Market-Makers to provide additional liquidity to the index options
market. The Exchange believes the ability for Market-Makers to
efficiently and effectively compress their portfolios in one step off
the Exchange will reduce the risk of market dislocation and not
interfere with Market-Maker's continuous provision of liquidity,
especially during periods of increased volume and volatility. Market-
Makers will be able to continue providing liquidity during such times
(increasing the capital attributed to their portfolios) because they
will know that they can subsequently reduce their open positions across
numerous options at one time.
---------------------------------------------------------------------------
\46\ The Exchange notes a previously available compression tool
was limited to Market-Makers for a similar purpose. See Securities
Exchange Act Notice 84344 (October 2, 2018), 83 FR 50721 (October 9,
2018) (SR-CBOE-2018-056) (which permitted on-floor RWA transfers).
\47\ See Letter from Cboe, New York Stock Exchange, and Nasdaq,
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of
the Board of Governors of the Federal Reserve System, March 18,
2020.
\48\ CME currently limits participants in its compression
service to those that satisfy certain eligibility criteria.
\49\ The Exchange notes that current compressions tools will
continue to remain available to all TPHs. See Rules 5.6(c) and 6.8.
---------------------------------------------------------------------------
The Exchange also believes it is reasonable to limit the proposed
compression service to index options. Currently, compression orders are
limited to SPX options, as such options have a large notional value and
represent the most volume executed on the Exchange.\50\ Off-floor RWA
transfers may occur in any exchange-listed option; however, transfers
of multiply listed equity options are subject to the rules of all
options exchanges that list those options, and thus would only be
permissible if all other options exchanges permitted such off-floor
transfers. The Exchange believes it is appropriate to offer the
compression service for index options listed on the Exchange, as such
index options may only be listed on the Exchange and its affiliated
exchanges (and thus would not be constrained by the rules of other
options exchanges to the extent they do not permit off-floor transfers
for compression purposes).\51\ Additionally, the index value of nearly
all index options the Exchange lists for trading is at least 100,\52\
making the notional value of an index option at least 10,000.\53\ Given
the high notional value associated with index option contracts in
general, the Exchange believes Market-Makers could benefit from
compressing index options beyond SPX options within their portfolio.
The large notional size of most index options compounds the negative
impact of Net Capital Rules, which apply to positions in all index
options, and may impact all client clearing members of clearing firms
affiliated with U.S.-bank holding companies. Clearing firms may request
that Market-Makers reduce positions in listed options in addition to
SPX, and the proposed rule change will provide Market-Makers with an
efficient mechanism to do so with respect to their index option
positions.
---------------------------------------------------------------------------
\50\ See Rules 5.6(c) (definition of compression order).
\51\ Certain index options listed on the Exchange are also
listed on its affiliated options exchanges, which intend to submit
separate filing adopting the proposed multilateral compression
process upon Commission approval of this proposed rule filing.
\52\ The level of VIX is generally below 100.
\53\ The Exchange may consider to further expand the compression
service to equity options (like off-floor RWA transfers) and would
submit a separate rule filing in the event it determined to do so.
The Exchange notes the off-floor compression of equity options,
which are multiply listed, would be subject to the rules of other
options exchanges.
---------------------------------------------------------------------------
The proposed flexibility with respect to when the Exchange will
accept and make available lists of positions Market-Makers would like
to compress will permit the Exchange to react to market conditions and
facilitate Market-Makers' reduction of index option open interest in
response to volatility as necessary.\54\ The Exchange intends to make
the compression service available with sufficient frequency to permit
Market-Makers to effect compression transactions in accordance with
their own needs (as long as they previously submitted the applicable
positions to the Exchange in advance), as well as to address intra-
month position reviews by their CTPHs. The Exchange believes this
enhanced compression process will allow Market-Makers to more
efficiently reduce the necessary regulatory capital associated with
their options positions and permit them to provide more liquidity in
the market. This additional
[[Page 19076]]
liquidity may result in tighter spreads and more execution
opportunities, which benefits all investors, particularly in volatile
markets.
---------------------------------------------------------------------------
\54\ This flexibility is consistent with the Exchange's current
flexibility regarding the availability of compression orders.
---------------------------------------------------------------------------
It is critical that Market-Makers be able to efficiently manage
capital and margin requirements so that they continuously have
sufficient capital available to provide to the markets, which benefits
all market participants. Many Market-Makers clear through CTPHs that
have been impacted by bank regulatory capital requirements, and
therefore the Exchange believes all market participants understand and
respect the need of Market-Makers to reduce capital attributable to
their positions in accordance with capital reviews performed by CTPHs
as efficiently as possible, including through the use of compression.
Market-Makers regularly avail themselves of compression orders, in
which they use the information provided in the Exchange-provided
position lists to identify potential counterparties that similarly need
to close index option open interest. Additionally, certain TPHs avail
themselves of off-floor RWA transfers across their own accounts to
similarly achieve this purpose. The Exchange believes the proposed rule
change is narrowly tailored for the specific purpose of facilitating
the ability of Market-Makers to alleviate the negative effects of
current bank regulatory capital requirements on index options that
generally have large notional values. The proposed compression process
will permit multilateral transactions in numerous options to be
effected at a single time, which will permit Market-Makers' to compress
their portfolios more efficiently than they can using current
compression tools. The proposed compression service streamlines current
compression tools, which the Exchange believes will permit Market-
Makers to reduce more efficiently any potential negative impact on the
market-making community that has resulted from bank regulatory capital
requirements. The Exchange expects the proposed compression service
will provide Market-Makers with an additional avenue to free up much
needed capital, which will benefit the entire market and all investors.
The Exchange believes the proposed rule change will protect investors
by providing a more seamless execution of compression transactions and
thus facilitate a more efficient way for liquidity providers to meet
their capital requirements, which will protect investors as a result of
the continued depth of liquidity in the index options market.
Continuous increased liquidity in the options market may provide more
trading opportunities and tighter spreads, providing for robust markets
for all market participants.
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 purpose of the proposed
rule change is to alleviate the negative impact of bank capital
requirements on options market liquidity providers. The proposed
compression service is not intended to be a competitive trading tool.
The Exchange does not believe the proposed rule change will impose
any burden on intramarket competition, as the compression service will
be available to all Market-Makers and to all index options, which
generally carry a higher notional value (as noted above). Use of the
compression service is completely voluntary and within the discretion
of a Market-Maker. The Exchange believes it is appropriate to restrict
the compression service to Market-Makers given the critical role
Market-Makers play in the options markets.\55\ As discussed above, the
proposed rule change would reduce the burden on Market-Makers to
compress the size of their portfolios compared to currently available
compression tools. Additionally, given that the proposed compression
transactions may only occur if all parties agree to a compression
proposal, the Exchange wants to ensure that compression participants
are those willing to put the resources into creating position lists and
engage in the compression transactions in order to encourage
participation.\56\ The vast majority of market participants that used
the Exchange's other compression tools are Market-Makers, so the
Exchange believes limiting the proposed compression service will not
unduly burden other TPHs. Market-Makers are subject to quoting
obligations, which generally result in them taking on significant
amounts of positions that ultimately become subject to capital
requirements, which may ultimately restrict the liquidity these Market-
Makers can provide to the market. The Exchange believes the proposed
rule change will still benefit all market participants, as the
resulting compression transactions will result in the ability of
Market-Makers to provide additional liquidity to the index options
market. The Exchange notes that all TPHs continue to have the
opportunity to compress positions using the other compression tools the
Exchange makes available.
---------------------------------------------------------------------------
\55\ See Letter from Cboe, New York Stock Exchange, and Nasdaq,
Inc., to the Honorable Randal Quarles, Vice Chair for Supervision of
the Board of Governors of the Federal Reserve System, March 18,
2020.
\56\ CME currently limits participants in its compression
service to those that satisfy certain eligibility criteria.
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The Exchange also believes it is reasonable to limit the proposed
compression service to index options. Currently, compression orders are
limited to SPX options, as such options have a large notional value and
represent the most volume executed on the Exchange.\57\ Off-floor RWA
transfers may occur in any exchange-listed option; however, transfers
of multiply listed equity options are subject to the rules of all
options exchanges that list those options, and thus would only be
permissible if all other options exchanges permitted such off-floor
transfers. The Exchange believes it is appropriate to offer the
compression service for index options listed on the Exchange, as such
index options may only be listed on the Exchange and its affiliated
exchanges (and thus would not be constrained by the rules of other
options exchanges to the extent they do not permit off-floor transfers
for compression purposes).\58\ Additionally, the index value of nearly
all index options the Exchange lists for trading is at least 100,\59\
making the notional value of an index option at least 10,000.\60\ Given
the high notional value associated with index option contracts in
general, the Exchange believes Market-Makers could benefit from
compressing index options beyond SPX options within their portfolio.
The large notional size of most index options compounds the negative
impact of Net Capital Rules, which apply to positions in all index
options, and may impact all client clearing members of clearing firms
affiliated with U.S.-bank holding companies. Clearing firms may request
that Market-Makers reduce positions in listed options in addition to
SPX, and the proposed rule change will provide Market-Makers with an
efficient
[[Page 19077]]
mechanism to do so with respect to their index option positions.
---------------------------------------------------------------------------
\57\ See Rules 5.6(c) (definition of compression order).
\58\ Certain index options listed on the Exchange are also
listed on its affiliated options exchanges, which intend to submit
separate filing adopting the proposed multilateral compression
process upon Commission approval of this proposed rule filing.
\59\ The level of VIX is generally below 100.
\60\ The Exchange may consider to further expand the compression
service to equity options (like off-floor RWA transfers) and would
submit a separate rule filing in the event it determined to do so.
The Exchange notes the off-floor compression of equity options,
which are multiply listed, would be subject to the rules of other
options exchanges.
---------------------------------------------------------------------------
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition, as it will apply only to index
options that are currently listed for trading only on the Exchange (and
its affiliated options exchanges).\61\ The proposed rule change is
intended create a more efficient effective mechanism for market
participants to reduce regulatory capital attributable to all index
options in their portfolios. The proposal is broader than compression
orders, which are limited to SPX options, and the Exchange believes
making the compression service available to all index options will
provide Market-Makers with additional compression opportunities, which
will free up their balance sheets to provide more liquidity in all
index options, not just SPX.\62\ When attempting to compress positions,
Market-Makers are not seeking price improvement but rather looking to
free up capital that will permit them to continue to provide liquidity
to the market in their appointed classes, and thus is not intended to
have a competitive impact. Because compression transaction information
will be disseminated, all market participants will have access to the
same information regarding compression transactions as they do to all
other transaction information that occurs on the Exchange. The
compression service is intended to have a limited purpose, which is to
relieve the burden on liquidity providers in the options market by
reducing the capital requirements attributable to their open positions.
As a result, Market-Makers may be able to increase liquidity they
provide to the market, which liquidity benefits all market
participants.
---------------------------------------------------------------------------
\61\ If the Commission approves the proposed rule change, the
Exchange's affiliated options exchanges intend to submit copycat
rule filings.
\62\ As discussed above, the Exchange may consider to further
expand the compression service to equity options (like off-floor RWA
transfers) and would submit a separate rule filing in the event it
determined to do so. The Exchange notes the off-floor compression of
equity options, which are multiply listed, would be subject to the
rules of other options exchanges.
---------------------------------------------------------------------------
Additionally, as noted above, the proposed multilateral compression
service is substantially similar to one CME offers for the compression
of futures positions.\63\
---------------------------------------------------------------------------
\63\ See CME Rule 857.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2021-020 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2021-020. 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-CBOE-2021-020 and should be submitted on
or before May 3, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07385 Filed 4-9-21; 8:45 am]
BILLING CODE 8011-01-P
