Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Increase Position Limits for Options on Certain Exchange-Traded Funds and an Exchange-Traded Note, 25026-25033 [2021-09774]
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25026
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
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For the Commission, by the Division of
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[FR Doc. 2021–09768 Filed 5–7–21; 8:45 am]
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[Release No. 34–91767; File No. SR–CBOE–
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Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Increase
Position Limits for Options on Certain
Exchange-Traded Funds and an
Exchange-Traded Note
May 4, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 21,
2021, Cboe Exchange, Inc. (‘‘Exchange’’
or ‘‘Cboe Options’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to increase
position limits for options on certain
exchange-traded funds (‘‘ETFs’’) and
exchange-traded notes (‘‘ETNs’’). 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
For further information; please contact
1 15
58 17
CFR 200.30–3(a)(12).
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
Position limits are designed to
address potential manipulative schemes
and adverse market impacts
surrounding the use of options, such as
disrupting the market in the security
underlying the options. While position
limits should address and discourage
the potential for manipulative schemes
and adverse market impact, if such
limits are set too low, participation in
the options market may be discouraged.
The Exchange believes that position
limits must therefore be balanced
between mitigating concerns of any
potential manipulation and the cost of
inhibiting potential hedging activity that
could be used for legitimate economic
purposes.
The Exchange has observed an
ongoing increase in demand, for both
trading and hedging purposes, in
options on the following exchangetraded products (‘‘ETPs’’): (1) SPDR
Gold Shares (‘‘GLD’’), (2) iShares Silver
Trust (‘‘SLV’’), (3) iShares iBoxx $
Investment Grade Corporate Bond ETF
(‘‘LQD’’), (4) VanEck Vectors Gold
Miners ETF (‘‘GDX’’), (5) iPath S&P 500
VIX Short-Term Futures ETN (‘‘VXX’’),
and (6) ProShares Ultra VIX Short-Term
Futures ETF (‘‘UVXY’’, and collectively,
with the aforementioned ETFs, the
‘‘Underlying ETPs’’). Though the
demand for these options appears to
have increased, position limits for
options on the Underlying ETPs have
remained the same. The Exchange
believes these unchanged position
limits may have impeded, and may
continue to impede, trading activity and
strategies of investors, such as use of
effective hedging vehicles or income
generating strategies (e.g., buy-write or
put-write), and the ability of MarketMakers to make liquid markets with
tighter spreads in these options
resulting in the transfer of volume to
over-the-counter (‘‘OTC’’) markets. OTC
transactions occur through bilateral
agreements, the terms of which are not
publicly disclosed to the marketplace.
As such, OTC transactions do not
contribute to the price discovery process
on a public exchange or other lit
markets. Therefore, the Exchange
believes that the proposed increases in
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position limits for options on the
Underlying ETPs may enable liquidity
providers to provide additional liquidity
to the Exchange and other market
participants to transfer their liquidity
demands from OTC markets to the
Exchange. As described in further detail
below, the Exchange believes that the
continuously increasing market
capitalization of the Underlying ETPs,
ETP component securities, as well as
the highly liquid markets for those
securities, reduces the concerns for
potential market manipulation and/or
disruption in the underlying markets
upon increasing position limits, while
the rising demand for trading options on
the Underlying ETPs for legitimate
economic purposes compels an increase
in position limits.
Proposed Position Limits for Options on
the Underlying ETPs
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Position limits for options on ETPs
are determined pursuant to Rule 8.30
and vary according to the number of
outstanding shares and the trading
volumes of the underlying stocks or
ETPs over the past six months. Pursuant
to Rule 8.30, the largest in capitalization
and the most frequently traded stocks
and ETPs have an option position limit
of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the
same side of the market; and smaller
capitalization stocks and ETPs have
position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market.
Options on GLD, SLV, LQD, GDX, VXX
and UVXY are currently subject to the
standard position limit of 250,000
contracts as set forth in Rule 8.30. Rule
8.30.07 sets forth separate, higher
position limits for options on specific
ETPs. The Exchange proposes to amend
Rule 8.30.07 to increase the position
limits and, as a result, exercise limits,
for options on each of GLD, SLV,
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LQD,GDX, VXX and UVXY.3 The table
below represents the current, and
proposed, position limits for options on
the ETPs subject to this proposal:
Product
GLD ..........
SLV ...........
LQD ..........
GDX ..........
VXX ...........
UVXY ........
Current
position
limit
250,000
250,000
250,000
250,000
250,000
250,000
Proposed
position
limit
1,000,000
500,000
500,000
500,000
500,000
500,000
The Exchange notes that the proposed
position limit for options on GLD is
consistent with existing position limits
for options on the iShares Russell 2000
ETF (‘‘IWM’’), the iShares MSCI
Emerging Markets ETF (‘‘EEM’’), iShares
China Large-Cap ETF (‘‘FXI’’) and
iShares MSCI EAFE ETF (‘‘EFA’’), while
the proposed limits for options on LQD,
SLV and GDX are consistent with
current position limits for options on
the iShares MSCI Brazil Capped ETF
(‘‘EWZ’’), iShares 20+ Year Treasury
Bond Fund ETF (‘‘TLT’’), iShares MSCI
Japan ETF (‘‘EWJ’’), iShares iBoxx High
Yield Corporate Bond Fund (‘‘HYG’’)
and Financial Select Sector SPDR Fund
(‘‘XLF’’). The Exchange represents that
the Underlying ETPs qualify for either
(1) the initial listing criteria set forth in
Rule 4.3.06(c) for ETFs holding non-U.S.
component securities, (2) generic listing
standards for series of portfolio
depository receipts and index fund
shares based on international or global
indexes under which a comprehensive
surveillance agreement (‘‘CSA’’) is not
required, or (3) the initial listing criteria
set forth in Rule 4.3.13(c) for ETNs (or,
Index-Linked Securities), as well as the
continued listing criteria in Rule 4.4 (for
ETFs) 4 and Rule 4.4.14 (for ETNs). In
3 By
virtue of [sic] 8.42.02, which is not being
amended by this filing, the exercise limits for GLD,
SLV, LQD, GDX, VXX and UVXY options would be
similarly increased.
4 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
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25027
compliance with its listing rules, the
Exchange also represents that non-U.S.
component securities that are not
subject to a comprehensive surveillance
agreement (‘‘CSA’’) do not, in the
aggregate, represent more than more
than 50% of the weight of any of the
Underlying ETPs that are ETFs.5
Composition and Growth Analysis for
Underlying ETPs
As stated above, position (and
exercise) limits are intended to prevent
the establishment of options positions
that can be used to or potentially create
incentives to manipulate the underlying
market so as to benefit options
positions. The Securities and Exchange
Commission (the ‘‘Commission’’) has
recognized that these limits are
designed to minimize the potential for
mini-manipulations and for corners or
squeezes of the underlying market, as
well as serve to reduce the possibility
for disruption of the options market
itself, especially in illiquid classes.6 The
Underlying ETPs, as well as the ETP
components, are highly liquid and are
based on a broad set of highly liquid
securities and other reference assets, as
demonstrated through the trading
statistics presented in this proposal. To
support the proposed position limit
increases, the Exchange considered the
liquidity of the Underlying ETPs, the
value of the underlying securities or
index components and relevant
marketplace, the share and option
volume for the Underlying ETPs, and,
where applicable, the availability or
comparison of economically equivalent
products to options on the Underlying
ETPs.
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See Rule 4.3.06(c); Rule 4.4.06.
5 See Rule 4.3.06(c).
6 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29).
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The Exchange has collected the
following trading statistics regarding
ADV 7
(ETF shares)
(millions)
Product
GLD .......................
SLV .......................
LQD .......................
GDX ......................
VXX .......................
UVXY ....................
shares of and options on the Underlying
ETPs and the values of the Underlying
ADV
(option contracts)
12.3
33.1
14.1
39.4
39.3
29.3
257,700
376,700
30,300
166,000
289,800
113,500
The Exchange has collected the same
trading statistics, where applicable, as
above regarding a sample of other ETPs,
Product
ADV
(ETF shares)
(millions)
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EEM ................................
FXI ..................................
EFA .................................
EWZ ................................
TLT ..................................
EWJ ................................
HYG ................................
Shares
outstanding
(millions) 8
354.30
619.3
308.1
419.8
110.8
228.7
Fund
market cap
(USD) (millions) 9
70,195.7
14,228.4
54,113.7
16,170.5
1,023.
1,580.6
as well as the current position limits for
options on such ETPs pursuant to Rule
8.30.07, to draw comparisons in support
ADV
(option contracts)
55.9
24.6
29.6
29.2
11.5
8.2
30.5
Shares
outstanding
(millions)
284,700
128,900
130,900
139,400
111,800
15,500
261,600
581.4
91.2
719.4
173.8
103.7
185.3
254.5
30,262.2
4,398.9
53,808.1
6,506.8
17,121.3
13,860.7
24,067.5
Gold Shares represent fractional,
undivided beneficial ownership
interests in the Trust, the sole assets of
which are gold bullion. The spot price
for gold is determined by market forces
in the 24-hour global OTC market for
gold including spot, forwards, and
options and other derivatives, together
with exchange-traded futures and
options. The Net Asset Value (‘‘NAV’’)
of the Trust is calculated based on the
total ounces of gold owned by the Trust
valued at the London Bullion Market
Association (‘‘LBMA’’) Gold Price PM of
that day (plus any cash held by the
Trust less accrued expenses).12 The
Exchange has observed that the ADV in
GLD shares has increased from
approximately 8.7 million shares in
2019 to 12.3 million shares by the end
of 2020. Similarly, the ADV in options
on GLD has increased from
approximately 153,900 option contracts
in 2019 to 257,700 option contracts by
the end of 2020. The Exchange also
notes that in the first quarter of 2021,
GLD options experienced an ADV of
approximately 395,100 option contracts.
Additionally, comparing the statistics
shown in the tables above for GLD and
7 Average daily volume (ADV) data for ETP shares
and option contracts, as well as for ETF shares and
options on the comparative ETFs presented below,
are for all of 2020. Additionally, reference to ADV
in ETP shares and ETP options, and indexes herein
this proposal are for all of calendar year 2020,
unless otherwise indicated.
8 Shares Outstanding and Net Asset Values
(‘‘NAV’’), as well as for the comparative ETPs
presented below, are as of April 5, 2021 for all ETPs
except for VXX and UVXY, which are as of April
14, 2021.
9 Fund Market Capitalization data, as well as for
the comparative ETPs presented below, are as of
January 14, 2021.
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Share value 10 (USD)
161.71 (NAV).
22.57 (NAV).
130.13 (NAV).
33.80 (NAV).
10.31 (Closing Indicative Value).
4.85 (NAV).
of proposed position limit increases for
options on the Underlying ETPs (see
further discussion below):
Fund
market cap
(USD) (millions)
The Exchange believes that, overall,
the liquidity in the shares of the
Underlying ETPs and in their overlying
options, the larger market
capitalizations for each of the
Underlying ETPs, and the overall
market landscape relevant to each of the
Underlying ETPs support the proposal
to increase the position limits for each
option class. Given the robust liquidity
in and value of the Underlying ETPs
and their component securities, the
Exchange does not anticipate that the
proposed increase in position limits
would create significant price
movements as the relevant markets are
large enough to adequately absorb
potential price movements that may be
caused by larger trades.
Specifically, the investment objective
of GLD (also known as SPDR Gold
Trust, or the ‘‘Trust’’) is to track the
performance of the price of gold
bullion.11 GLD offers investors an
innovative, relatively cost efficient and
secure way to access the gold market,
without the necessity of taking physical
delivery of gold, and to buy and sell that
interest through the trading of a security
on a regulated stock exchange. SPDR
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ETPs and their component securities or
index components, as applicable:
Share value (USD)
53.79 (NAV) ....................
47.60 (NAV) ....................
77.02 (NAV) ....................
33.71 (NAV) ....................
136.85 (NAV) ..................
69.72 (NAV) ....................
86.86 (NAV) ....................
Current
position
limits
1,000,000
1,000,000
1,000,000
500,000
500,000
500,000
500,000
the sample of other ETFs with a current
position limit of 1,000,000 contracts, the
Exchange notes that the ADV for GLD
options (257,700 option contracts) are
more, or just as, liquid as EEM options
(284,700 option contracts), FXI options
(128,900 option contracts) and EFA
options (130,900 option contracts). Also,
as indicated in the table above, GLD’s
market capitalization (approximately
$70.2 billion) is higher than all three of
these comparable ETFs, and, in addition
to this, the Exchange notes that the NAV
of GLD is higher than that of the NAV
of EEM, FXI and EFA, which is
indicative that the total value of its
underlying components is generally
higher. The Exchange believes that
GLD’s share and option volume, its
market capitalization, and the
comparatively high value of its
underlying components (as indicated by
its NAV) are large enough to absorb
potential price movements caused by a
large trade in GLD.
Like that of GLD and spot gold, SLV
seeks to reflect generally the
performance of the price of silver and
represents a cost-efficient alternative to
investments in physical silver for
10 See
supra note 8.
SPDR Gold Shares, available at https://
www.ssga.com/us/en/intermediary/etfs/funds/spdrgold-shares-gld (January 11, 2021).
12 See State Street Global Advisors, SPDR Gold
Trust GLD, FAQ (July 2020), available at https://
www.ssga.com/library-content/products/fund-docs/
etfs/us/tax-documents/gld-faq.pdf.
11 See
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investors not otherwise in a position to
participate directly in the market for
physical silver. The SLV’s NAV is
derived from its holdings in silver
valued on the basis of the daily LBMA
Silver Price.13 SLV, too, has experienced
a significant increase in AVD [sic] in
shares and options from 2019 through
2020. It grew from approximately 13.6
million shares in 2019 to 33.1 million
shares by the end of 2020, and from
approximately 118,800 option contracts
in 2019 to 376,700 option contracts by
the end of 2020. The Exchange also
notes that SLV options experienced in
ADV of approximately 1.1 million
option contracts in the first quarter of
2021.14 Additionally, SLV generally
experiences a significantly greater ADV
in shares (33.1 million share) and in
options (376,700 option contracts) than
that of the ADV in shares and options
for EWZ (29.2 million shares and
139,300 option contracts), TLT (11.5
million shares and 111,800 option
contracts), EWJ (8.2 million shares and
15,500 option contracts) and HYG (30.5
million shares and 261,600 option
contracts), and also has a comparable, or
higher, market capitalization
(approximately $14.2 billion) than EWZ,
TLT and EWJ. As per the table above,
options on each of these ETFs already
have a position limit of 500,000
contracts — the proposed position limit
for SLV options. The Exchange believes
that SLV’s share and option volume and
its market capitalization are large
enough to absorb potential price
movements caused by a large trade in
SLV.
While the demand for options trading
on GLD and SLV has evidently
increased, and continues to increase, the
position limits have remained the same,
which the Exchange believes may be
impacting the ability of Trading Permit
Holders (‘‘TPHs’’) to effectively hedge
against exposure to physical gold and
silver. For example, a single TPH may
manage groups of mutual funds (i.e., a
fund complex), each of which may have
different growth objectives. If one
portfolio manager with a large group of
funds has a relatively small exposure to
spot gold or spot silver, they may hedge
such exposure using GLD options or
SLV options, respectively. Though
relatively small, this hedge (up to
13 See iShares Silver Trust, Fact Sheet as of 9/20/
2020, available at https://www.ishares.com/us/
literature/fact-sheet/slv-ishares-silver-trust-fundfact-sheet-en-us.pdf.
14 While volume in SLV options in the first
quarter of 2021 experienced significantly high
volume as a result of unusual market conditions,
the Exchange believes that the existing possibility
of such significant increases supports the proposed
position limit increase.
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250,00 [sic] option contracts for GLD
and for SLV) may utilize the TPH’s
entire capacity against the position
limit. As a result, the TPH’s other
portfolio managers must look to use
alternative vehicles to hedge gold or
silver exposure for the funds under their
management. The Exchange
understands that, unlike GLD or SLV
options, most of these alternatives
hedging vehicles are not a perfect hedge,
which creates liquidity issues and
results in increased trading costs. As a
result, the Exchange believes that the
proposed position limit increases for
both GLD and SLV options will allow
TPHs to effectively hedge their total
gold or silver exposure without having
to seek other, less precise hedging
vehicles.
LQD tracks the performance of the
Markit iBoxx USD Liquid Investment
Grade (‘‘IBOXIG’’) Index, which is an
index designed as a subset of the
broader U.S. dollar-denominated
corporate bond market which can be
used as a basis for tradable products,
such as ETFs, and is comprised of over
8,000 bonds.15 The Exchange notes that
from 2019 through 2020, ADV has
grown significantly in shares of LQD
and in options on LQD, from
approximately 9.7 million shares in
2019 to 14.1 million through 2020, and
from approximately 8,200 option
contracts in 2019 to 30,300 through
2020. LQD also continued to experience
significant growth in ADV in the first
quarter of 2021 with an ADV of
approximately 140,200 option contracts.
Further, LQD generally experiences
higher ADV in shares than both TLT
(11.5 million shares) and EWJ (8.2
million shares) and almost double the
ADV in option contracts than EWJ
(15,500 option contracts). Options on
each EWZ, TLT and EWJ are currently
subject to a position limit of 500,000
contracts—the proposed limit for
options on LQD. The NAV of LQD is
also higher than, or comparable to, that
of the NAV of the ETFs underlying the
options that are currently subject to a
position limit of 500,000 option
contracts (as presented in the table
above), which is indicative that the total
value of its underlying components is
generally higher or comparable. Per the
tables above, LQD’s total market
capitalization of approximately $54.1
billion is also higher than or comparable
to the total market capitalization of the
ETFs underlying the options currently
subject to a position limit of 5000,000
[sic] contracts. In addition to this, the
Exchange notes that, although there are
currently no options listed for trading
on the IBOXIG Index, the components 16
of the IBOXIG Index, which can be used
in creating a basket of securities that
equate to the LQD ETF, are made up of
over 8,000 bonds for which the
outstanding face value of each must be
greater than or equal to $2 billion.17 The
Exchange believes that the total value of
the bonds in the IBOXIG Index, coupled
with LQD’s share and option volume,
total market capitalization, and NAV
price indicates that the market is large
enough to absorb potential price
movements caused by a large trade in
LQD. Also, as evidenced above, trading
volume in LQD shares has increased
over the past few years and the
Exchange understands that market
participants’ need for options have
continued to grow alongside the ETF.
Particularly, the Exchange notes that in
the last year, market participants have
sought more cost-effective hedging
strategies through the use of LQD
options as a result of the borrow on
other fixed income ETFs, such as HYG.
Therefore, the Exchange believes that
because LQD options are being
increasingly utilized as an alternative to
similar products, such as HYG options,
then it is appropriate that options on
LQD be subject to the same 500,000
contract position limit that currently
exists for options on HYG.
GDX seeks to replicate as closely as
possible the price and yield
performance of the NYSE Arca Gold
Miners (‘‘GDMNTR’’) Index, which is
intended to track the overall
performance of companies involved in
the gold mining industry.18 ADV in
GDX options has increased from 2019
through 2020, with an ADV of
approximately 117,400 option contracts
in 2019 to an ADV of approximately
166,000 option contracts in 2020. The
Exchange notes that ADV in GDX shares
did not increase from 2019 to 2020.
GDX options also experienced an ADV
of approximately 287,800 option
contracts in the first quarter of 2021.
The Exchange notes that the ADV in
GDX shares (39.4 million) and options
on GDX (166,000 option contracts) are
greater than the ADV in EWZ (29.2
million shares and 139,300 option
contracts), TLT (11.5 million shares and
111,800 option contracts), EWJ (8.2
million shares and 15,500 option
contracts) and HYG (30.5 million shares
16 Investment
15 See
Markit iBoxx USD Liquid Investment Grade
Index, available at https://cdn.ihsmarkit.com/www/
pdf/MKT-iBoxx-USD-Liquid-Investment-GradeIndex-factsheet.pdf (January 14, 2021).
PO 00000
Frm 00191
Fmt 4703
Sfmt 4703
25029
grade corporate bonds.
supra note 14.
18 See VanEck Vectors Gold Miners ETF, available
at https://www.vaneck.com/library/vaneck-vectorsetfs/gdx-fact-sheet-pdf/ (January 14, 2021).
17 See
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and 261,600 option contracts), each of
which is currently subject to a position
limit of 500,000 option contracts—the
proposed limit for options on GDX. GDX
also experiences a comparable, or
higher, market capitalization
(approximately $16.2 billion) than EWZ,
TLT and EWZ. Additionally, like that of
LDQ above, there is currently no index
option analogue for the GDX ETF on the
GDMNTR Index approved for options
trading, however, the components of the
GDMNTR Index, which can be used to
create the GDX ETF, currently must
each have a market capitalization
greater than $750 million, an ADV of at
least 50,000 shares, and an average daily
value traded of at least $1 million in
order to be eligible for inclusion in the
GDMNTR Index. The Exchange believes
that the GDMNTR Index component
inclusion requirements, as well as
GDX’s share and option volume and
total market capitalization, indicate that
the GDX market is sufficiently large and
liquid enough to absorb price
movements as a result of potentially
oversized trades.
VXX ETNs (which are unsecured debt
obligations of the issuer) 19 are designed
to provide exposure to the S&P 500 VIX
Short-Term Futures Index Total Return
(‘‘SPVXSTR’’). The SPVXSTR Index is
designed to provide access to equity
market volatility through Cboe Volatility
(‘‘VIX’’) Index futures by offering
exposure to a daily rolling long position
in the first and second month VIX
futures contracts. The SPVXSTR Index
generally reflects market participants’
views of the future direction of the VIX
Index at the time of expiration of the
VIX futures contracts comprising the
index.20 VXX volume has increased over
the last years, growing from an ADV of
approximately 28.6 million shares and
179,200 option contracts in 2019 to an
ADV of approximately 39.3 million
shares and 289,800 option contracts in
2020.
Similarly, the UVXY ETF provides
leveraged exposure to the S&P 500 VIX
Short-Term Futures (‘‘SPVXSPID’’)
Index. Like the SPVXSTR Index, the
SPVXSPID Index measures the returns
of a portfolio of monthly VIX futures
contracts that rolls positions from firstmonth contracts into second-month
contracts on a daily basis and maintains
a weighted average of one month to
expiration. UVXY volume has increased
significantly from 2019 through 2020—
from an ADV of approximately 12
19 Barclays
Bank PLC.
iPath Series B S&P 500 VIX Short-Term
Futures ETN, Product Summary (April 13, 2021),
available at: https://www.ipathetn.com/US/16/en/
details.app?instrumentId=341408.
20 See
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million shares and 73,700 option
contracts in 2019 to an ADV of
approximately 29.3 million shares and
113,500 option contracts in 2020.
Both VXX and UVXY experience an
ADV in shares and option contracts that
is greater than, or comparable to, ADV
in shares and/or option contracts for
EWZ (29.2 million shares and 139,400
option contracts), TLT (11.5 million
shares and 111,800 option contracts),
EWJ (8.2 million shares and 15,500
option contracts), and HYG (30.5
million shares). As stated, options on
EWZ, TLT, EWJ and HYG are all
currently subject to the same position
limit (500,000 option contracts)
proposed for VXX and UVXY options.
The Exchange also notes that, while VIX
options share similar trading
characteristics with options on VXX and
UVXY, VIX options are not currently
subject to position limits.21 Moreover,
the 2020 ADV for trading in VIX futures
was approximately 192,000 contracts
and VIX futures currently have a value
of approximately $7.6 billion in open
interest. The Exchange believes that the
ADV in shares of and options on VXX
and UXVY, along with the robust
market that exists for the underlying
index components (VIX futures) in
connection with both ETPs, indicates
that the market for these ETPs is
sufficiently large and liquid enough to
absorb price movements and large- sized
trades. In addition to this, both the VXX
and UVXY are used as key indicators of
the health of the global volatility
market. The VIX futures that comprise
each product are a perfect hedge to the
underlying delta risk; however, such
futures are not recognized as hedges for
options contract equivalent of the net
delta (‘‘OCEND’’) purposes. A TPH that
is not delta neutral must be hedged to
the extent that the OCEND stays within
the applicable position limit. The
Exchange understands that due to the
OCEND limitations and current position
limits for options on VXX and UVXY,
TPHs must hedge with options and buy
or create shares of the underlying ETPs
despite already having a hedge on their
position via the component futures. As
a result, TPHs may be unable to provide
the most concise pricing to customers
participating in these ETPs due to the
increased costs associated with
transacting in additional or alternative
hedging vehicles in order to comply
with the position limits currently in
place. The Exchange also believes that
the approximate value of open interest
in VIX futures ($7.6 billion) potentially
necessitates substantial hedging
capacity as both ETPs provide exposure
21 See
PO 00000
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Frm 00192
Fmt 4703
Sfmt 4703
to volatility trading based on VIX
futures.
Creation and Redemption for ETPs
The Exchange believes that the
creation and redemption process for the
ETFs and ETN subject to this proposal
(VXX) will lessen the potential for
manipulative activity with options on
the Underlying ETPs. Regarding ETFs,
when an ETF provider wants to create
more shares, it looks to an Authorized
Participant (generally a market maker or
other large financial institution) to
acquire the securities the ETF is to hold.
For instance, when an ETF is designed
to track the performance of an index, the
Authorized Participant can purchase all
the constituent securities in the exact
same weight as the index, then deliver
those shares to the ETF provider. In
exchange, the ETF provider gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. The price is based
on the NAV, not the market value at
which the ETF is trading. The creation
of new ETF units can be conducted
during an entire trading day and is not
subject to position limits. This process
works in reverse where the ETF
provider seeks to decrease the number
of shares that are available to trade.
Regarding the process for the ETN
subject to this proposal, VXX, investors
may redeem VXX shares on any
redemption date,22 provided that the
minimum amount of VXX shares
redeemed is at least 25,000 shares.
Investors redeeming VXX shares receive
a cash payment equal to the applicable
closing indicative value on the
applicable valuation date (less the
redemption fee). While there is no direct
analogue to an ETF ‘‘creation’’ for an
ETN, the ETN issuer may sell additional
VXX shares from its inventory.23 In
order to redeem existing VXX shares or
issue new VXX shares, the issuer may
transact in VIX futures (selling VIX
futures in the case of a VXX redemption,
and purchasing VIX futures in the case
of issuing new VXX shares) in order to
hedge its exposure. The applicable
creation and redemption processes for
22 A redemption date for each series of VXX is the
third business day following each valuation date
(other than the final valuation date). The final
redemption date will be the third business day
following the valuation date that is immediately
prior to the final valuation date. If notice is
provided prior to noon E.T., the applicable
valuation date is the date on which notice is
provided; otherwise, the applicable valuation date
is the business day following the date on which
notice is provided. See VXX Prospectus, available
at https://www.ipathetn.com/US/16/en/
documentation.app?instrumentId
=341408&contentId=7549819.
23 There is currently no minimum number of
additional ETNs that an issuer may sell.
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the Underlying ETPs creates a direct
link to the underlying components of
the ETF or ETN and serves to mitigate
potential price impact of the ETF and
ETN shares that might otherwise result
from increased position limits for the
options on the Underlying ETPs.
The Exchange understands that the
ETF and ETN creation and redemption
processes seek to keep an ETF’s or
ETN’s share price trading in line with
the product’s underlying net asset value
(ETFs) or indicative value (ETNs).
Because an ETF trades like a stock, its
share price will fluctuate during the
trading day, due to simple supply and
demand. If demand to buy an ETF or
ETN is high, for instance, an ETF’s share
price might rise above the value of its
underlying securities or an ETN’s share
price above the value of the index
components. When this happens, the
Authorized Participant or issuer
believes the ETF or ETN may now be
overpriced, so it may buy shares of the
component securities (ETF) or buy same
the index component instruments (ETN)
and then sell ETF or ETN shares in the
open market. This may drive the ETF’s
or ETN’s share price back toward the
underlying net asset value or indicative
index value. Likewise, if an ETF or ETN
share price starts trading at a discount
to the securities it holds or its index
components, the Authorized Participant
or issuer can buy shares of the ETF or
ETN and redeem them for the
underlying securities or index
component instruments. Buying
undervalued ETF or ETN shares may
drive the share price of an ETF or ETN
back toward fair value. This arbitrage
process helps to keep an ETF’s and
ETN’s share price in line with the value
of its underlying portfolio or index
components.
Surveillance and Reporting
Requirements
The Exchange believes that increasing
the position limits for the options on the
Underlying ETPs would lead to a more
liquid and competitive market
environment for these options, which
will benefit customers interested in
trading these products. The reporting
requirement for the options on the
Underlying ETPs would remain
unchanged. Thus, the Exchange would
still require that each TPH or TPH
organization that maintains positions in
the options on the same side of the
market, for its own account or for the
account of a customer, report certain
information to the Exchange. This
information would include, but would
not be limited to, the options’ positions,
whether such positions are hedged and,
if so, a description of the hedge(s).
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Market-Makers 24 (including Designated
Primary Market-Makers (‘‘DPMs’’)) 25
would continue to be exempt from this
reporting requirement, however, the
Exchange may access Market-Maker
position information.26 Moreover, the
Exchange’s requirement that TPHs file
reports with the Exchange for any
customer who held aggregate large long
or short positions on the same side of
the market of 200 or more option
contracts of any single class for the
previous day will remain at this level
for the options subject to this proposal
and will continue to serve as an
important part of the Exchange’s
surveillance efforts.27
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange
and other SROs are capable of properly
identifying disruptive and/or
manipulative trading activity. The
Exchange also represents that it has
adequate surveillances in place to detect
potential manipulation, as well as
reviews in place to identify potential
changes in composition of the
Underlying ETPs and continued
compliance with the Exchange’s listing
standards. These procedures utilize
daily monitoring of market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlyings, as applicable.28
The Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,29 which are used to report
ownership of stock which exceeds 5%
of a company’s total stock issue and
may assist in providing information in
24 A Market-Maker [sic] ‘‘Trading Permit Holder
registered with the Exchange pursuant to Rule 3.52
for the purpose of making markets in option
contracts traded on the Exchange and that has the
rights and responsibilities set forth in Chapter 5,
Section D of the Rules.’’ See Rule 1.1.
25 A Designated Primary Market-Maker ‘‘is TPH
organization that is approved by the Exchange to
function in allocated securities as a Market-Maker
(as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise
provided under the rules of the Exchange.’’ See
Rule 1.1.
26 The Options Clearing Corporation (‘‘OCC’’)
through the Large option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for TPH compliance with position
reporting requirements by collecting data from each
TPH or TPH organization, consolidating the
information, and ultimately providing detailed
listings of each TPH’s report to the Exchange, as
well as Financial Industry Regulatory Authority,
Inc. (‘‘FINRA’’), acting as its agent pursuant to a
regulatory services agreement (‘‘RSA’’).
27 See Rule 8.43 for reporting requirements.
28 The Exchange believes these procedures have
been effective for the surveillance of trading the
options subject to this proposal and will continue
to employ them.
29 17 CFR 240.13d–1.
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25031
monitoring for any potential
manipulative schemes.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
the options on the Underlying ETPs.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
or capital that a TPH must maintain for
a large position held by itself or by its
customer.30 In addition, Rule 15c3–1 31
imposes a capital charge on TPHs to the
extent of any margin deficiency
resulting from the higher margin
requirement.
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.32 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 33 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 34 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed increase in position limits for
options on the Underlying ETPs will
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest, because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. The proposed
increases will allow market participants
30 See Rule 10.3 for a description of margin
requirements.
31 17 CFR 240.15c3–1.
32 15 U.S.C. 78f(b).
33 15 U.S.C. 78f(b)(5).
34 Id.
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to more fully implement hedging
strategies in related derivative products
and to further use options to achieve
investment strategies (e.g., there are
other ETPs that use options on the ETFs
or the ETN subject to this proposal as
part of their investment strategy, and the
applicable position limits as they stand
today may inhibit these other ETPs in
achieving their investment objectives, to
the detriment of investors). Also,
increasing the applicable position limits
may allow Market-Makers to provide the
markets for these options with more
liquidity in amounts commensurate
with increased consumer demand in
such markets. The proposed position
limit increases may also encourage other
liquidity providers to shift liquidity, as
well as encourage consumers to shift
demand, from over the counter markets
onto the Exchange, which will enhance
the process of price discovery
conducted on the Exchange through
increased order flow.
In addition, the Exchange believes
that the structure of the Underlying
ETPs, the considerable market
capitalization of the funds, underlying
component securities, and/or indexed
component securities, and the liquidity
of the markets for the applicable options
and underlying component securities
will mitigate concerns regarding
potential manipulation of the products
and/or disruption of the underlying
markets upon increasing the relevant
position limits. As a general principle,
increases in market capitalizations,
active trading volume, and deep
liquidity of securities do not lead to
manipulation and/or disruption. This
general principle applies to the recently
observed increased levels of market
capitalization and trading volume and
liquidity in shares of and options on the
Underlying ETPs (as described above),
and, as a result, the Exchange does not
believe that the options markets or
underlying markets would become
susceptible to manipulation and/or
disruption as a result of the proposed
position limit increases. Indeed, the
Commission has previously expressed
the belief that not just increasing, but
removing, position and exercise limits
may bring additional depth and
liquidity to the options markets without
increasing concerns regarding
intermarket manipulation or disruption
of the options or the underlying
securities.35
Further, the Exchange notes that the
proposed rule change to increase
position limits for select actively traded
35 See Securities Exchange Act Release No. 62147
[sic] (October 28 [sic], 2005) (SR–CBOE–2005–41),
at 62149.
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options is not novel and the
Commission has approved similar
proposed rule changes by the Exchange
to increase position limits for options on
similar, highly liquid and actively
traded ETPs.36 Furthermore, the
Exchange again notes that that the
proposed position limits for options on
GLD, SLV, LQD, GDX, VXX and UVXY
are consistent with existing position
limits for options on comparable ETPs
in Rule 8.30.07.
The Exchange’s surveillance and
reporting safeguards continue to be
designed to deter and detect possible
manipulative behavior that might arise
from increasing or eliminating position
and exercise limits in certain classes.
The Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged position in
the options on the Underlying ETPs,
further promoting just and equitable
principles of trading, the maintenance
of a fair and orderly market, and the
protection of investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
increased position limits (and exercise
limits) will be available to all market
participants and apply to each in the
same manner. The Exchange believes
that the proposed rule change will
provide additional opportunities for
market participants to more efficiently
achieve their investment and trading
objectives of market participants.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the Act. On the contrary,
the Exchange believes the proposal
promotes competition because it may
attract additional order flow from the
OTC market to exchanges, which would
in turn compete amongst each other for
those orders.37 The Exchange believes
36 See Securities Exchange Act Release Nos.
88768 (April 29, 2020), 85 FR 26736 (May 5, 2020)
(SR–CBOE–2020–015); 83415 (June 12, 2018), 83 FR
28274 (June 18, 2018) (SR–CBOE–2018–042); and
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066).
37 Additionally, several other options exchanges
have the same position limits as the Exchange, as
PO 00000
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market participants would benefit from
being able to trade options with
increased position limits in an exchange
environment in several ways, including
but not limited to the following: (1)
Enhanced efficiency in initiating and
closing out position; (2) increased
market transparency; and (3) heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor. The
Exchange notes that other options
exchanges may choose to file similar
proposals with the Commission to
increase position limits on options on
the Underlying ETPs.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2021–029 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
they incorporate by reference to the Exchange’s
position limits, and as a result the position limits
for options on the Underlying ETPs will increase at
those exchanges. For example, Nasdaq Options
position limits are determined by the position
limits established by the Exchange. See Nasdaq
Stock Market LLC Rules, Options 9, Sec. 13
(Position Limits).
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Commission, 100 F Street NE,
Washington, DC 20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
All submissions should refer to File
Number SR–CBOE–2021–029. 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–2021–029, and
should be submitted on or before June
1, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–09774 Filed 5–7–21; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–91764; File No. SR–GEMX–
2021–04]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Extend the Expiration
Date of the Temporary Amendments
Concerning Video Conference
Hearings
May 4, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 28,
2021, Nasdaq GEMX, LLC (‘‘GEMX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by the Exchange.
The Exchange has designated the
proposed rule change as constituting a
‘‘non-controversial’’ rule change under
paragraph (f)(6) of Rule 19b-4 under the
Act,3 which renders the proposal
effective upon receipt of this filing by
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to extend the
expiration date of the temporary
amendments in SR–GEMX–2020–21
from April 30, 2021, to August 31,
2021.4 The proposed rule change would
not make any changes to the text of the
Exchange rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/gemx/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
4 See Securities Exchange Act Release No. 90755
(Dec. 21, 2020), 85 FR 85819 (Dec. 29, 2020) (SR–
GEMX–2020–21). If the Exchange seeks to provide
additional temporary relief from the rule
requirements identified in this proposed rule
change beyond August 31, 2021, the Exchange will
submit a separate rule filing to further extend the
temporary extension of time. The amended
Exchange rules will revert to their original form at
the conclusion of the temporary relief period and
any extension thereof.
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2 17
38 17
CFR 200.30–3(a)(12).
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25033
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 continue to
harmonize Exchange Rule General 3,
Section 2 with recent changes by the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) to its Rule
1015 in response to the COVID–19
global health crisis and the
corresponding need to restrict in-person
activities.5 The Exchange originally
filed proposed rule change SR–GEMX–
2020–21, which allows the Exchange
Review Council (‘‘ERC’’) to conduct
hearings in connection with appeals of
Membership Application Program
decisions, on a temporary basis, by
video conference, if warranted by the
current COVID–19-related public health
risks posed by an in-person hearing.
While there are signs of improvement,
the COVID–19 conditions necessitating
the temporary amendments persist and,
based on its assessment of current
COVID–19 conditions and the lack of
certainty as to when COVID–19-related
health concerns and corresponding
restrictions will meaningfully subside,
the Exchange has determined that there
is a continued need for this temporary
relief for several months beyond April
30, 2021. Accordingly, the Exchange
proposes to extend the expiration date
of the temporary rule amendments in
5 See Securities Exchange Act Release No. 91495
(April 7, 2021), 86 FR 19306 (April 13, 2021) (SR–
FINRA–2021–006) (‘‘FINRA Filing’’). The Exchange
notes that the FINRA Filing also proposed to
temporarily amend FINRA Rules 9261, 9524, and
9830, which govern hearings in connection with
appeals of disciplinary actions, eligibility
proceedings, and temporary and permanent cease
and desist orders. The Exchange’s Rules 9261, 9524,
and 9830 incorporate by reference The Nasdaq
Stock Market LLC rules, which are the subject of a
separate filing. See SR–NASDAQ–2021–033 (April
28, 2021). Therefore, the Exchange is not proposing
to adopt that aspect of the FINRA Filing.
E:\FR\FM\10MYN1.SGM
10MYN1
]]>Agencies
[Federal Register Volume 86, Number 88 (Monday, May 10, 2021)]
[Notices]
[Pages 25026-25033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09774]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91767; File No. SR-CBOE-2021-029]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Increase Position Limits for
Options on Certain Exchange-Traded Funds and an Exchange-Traded Note
May 4, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 21, 2021, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to increase position limits for options on certain exchange-traded
funds (``ETFs'') and exchange-traded notes (``ETNs''). 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
Position limits are designed to address potential manipulative
schemes and adverse market impacts surrounding the use of options, such
as disrupting the market in the security underlying the options. While
position limits should address and discourage the potential for
manipulative schemes and adverse market impact, if such limits are set
too low, participation in the options market may be discouraged. The
Exchange believes that position limits must therefore be balanced
between mitigating concerns of any potential manipulation and the cost
of inhibiting potential hedging activity that could be used for
legitimate economic purposes.
The Exchange has observed an ongoing increase in demand, for both
trading and hedging purposes, in options on the following exchange-
traded products (``ETPs''): (1) SPDR Gold Shares (``GLD''), (2) iShares
Silver Trust (``SLV''), (3) iShares iBoxx $ Investment Grade Corporate
Bond ETF (``LQD''), (4) VanEck Vectors Gold Miners ETF (``GDX''), (5)
iPath S&P 500 VIX Short-Term Futures ETN (``VXX''), and (6) ProShares
Ultra VIX Short-Term Futures ETF (``UVXY'', and collectively, with the
aforementioned ETFs, the ``Underlying ETPs''). Though the demand for
these options appears to have increased, position limits for options on
the Underlying ETPs have remained the same. The Exchange believes these
unchanged position limits may have impeded, and may continue to impede,
trading activity and strategies of investors, such as use of effective
hedging vehicles or income generating strategies (e.g., buy-write or
put-write), and the ability of Market-Makers to make liquid markets
with tighter spreads in these options resulting in the transfer of
volume to over-the-counter (``OTC'') markets. OTC transactions occur
through bilateral agreements, the terms of which are not publicly
disclosed to the marketplace. As such, OTC transactions do not
contribute to the price discovery process on a public exchange or other
lit markets. Therefore, the Exchange believes that the proposed
increases in
[[Page 25027]]
position limits for options on the Underlying ETPs may enable liquidity
providers to provide additional liquidity to the Exchange and other
market participants to transfer their liquidity demands from OTC
markets to the Exchange. As described in further detail below, the
Exchange believes that the continuously increasing market
capitalization of the Underlying ETPs, ETP component securities, as
well as the highly liquid markets for those securities, reduces the
concerns for potential market manipulation and/or disruption in the
underlying markets upon increasing position limits, while the rising
demand for trading options on the Underlying ETPs for legitimate
economic purposes compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETPs
Position limits for options on ETPs are determined pursuant to Rule
8.30 and vary according to the number of outstanding shares and the
trading volumes of the underlying stocks or ETPs over the past six
months. Pursuant to Rule 8.30, the largest in capitalization and the
most frequently traded stocks and ETPs have an option position limit of
250,000 contracts (with adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and smaller capitalization stocks
and ETPs have position limits of 200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market. Options on GLD, SLV, LQD, GDX, VXX and
UVXY are currently subject to the standard position limit of 250,000
contracts as set forth in Rule 8.30. Rule 8.30.07 sets forth separate,
higher position limits for options on specific ETPs. The Exchange
proposes to amend Rule 8.30.07 to increase the position limits and, as
a result, exercise limits, for options on each of GLD, SLV, LQD,GDX,
VXX and UVXY.\3\ The table below represents the current, and proposed,
position limits for options on the ETPs subject to this proposal:
---------------------------------------------------------------------------
\3\ By virtue of [sic] 8.42.02, which is not being amended by
this filing, the exercise limits for GLD, SLV, LQD, GDX, VXX and
UVXY options would be similarly increased.
------------------------------------------------------------------------
Current Proposed
Product position position
limit limit
------------------------------------------------------------------------
GLD..................................... 250,000 1,000,000
SLV..................................... 250,000 500,000
LQD..................................... 250,000 500,000
GDX..................................... 250,000 500,000
VXX..................................... 250,000 500,000
UVXY.................................... 250,000 500,000
------------------------------------------------------------------------
The Exchange notes that the proposed position limit for options on
GLD is consistent with existing position limits for options on the
iShares Russell 2000 ETF (``IWM''), the iShares MSCI Emerging Markets
ETF (``EEM''), iShares China Large-Cap ETF (``FXI'') and iShares MSCI
EAFE ETF (``EFA''), while the proposed limits for options on LQD, SLV
and GDX are consistent with current position limits for options on the
iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury
Bond Fund ETF (``TLT''), iShares MSCI Japan ETF (``EWJ''), iShares
iBoxx High Yield Corporate Bond Fund (``HYG'') and Financial Select
Sector SPDR Fund (``XLF''). The Exchange represents that the Underlying
ETPs qualify for either (1) the initial listing criteria set forth in
Rule 4.3.06(c) for ETFs holding non-U.S. component securities, (2)
generic listing standards for series of portfolio depository receipts
and index fund shares based on international or global indexes under
which a comprehensive surveillance agreement (``CSA'') is not required,
or (3) the initial listing criteria set forth in Rule 4.3.13(c) for
ETNs (or, Index-Linked Securities), as well as the continued listing
criteria in Rule 4.4 (for ETFs) \4\ and Rule 4.4.14 (for ETNs). In
compliance with its listing rules, the Exchange also represents that
non-U.S. component securities that are not subject to a comprehensive
surveillance agreement (``CSA'') do not, in the aggregate, represent
more than more than 50% of the weight of any of the Underlying ETPs
that are ETFs.\5\
---------------------------------------------------------------------------
\4\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Rule 4.3.06(c); Rule 4.4.06.
\5\ See Rule 4.3.06(c).
---------------------------------------------------------------------------
Composition and Growth Analysis for Underlying ETPs
As stated above, position (and exercise) limits are intended to
prevent the establishment of options positions that can be used to or
potentially create incentives to manipulate the underlying market so as
to benefit options positions. The Securities and Exchange Commission
(the ``Commission'') has recognized that these limits are designed to
minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market, as well as serve to reduce the
possibility for disruption of the options market itself, especially in
illiquid classes.\6\ The Underlying ETPs, as well as the ETP
components, are highly liquid and are based on a broad set of highly
liquid securities and other reference assets, as demonstrated through
the trading statistics presented in this proposal. To support the
proposed position limit increases, the Exchange considered the
liquidity of the Underlying ETPs, the value of the underlying
securities or index components and relevant marketplace, the share and
option volume for the Underlying ETPs, and, where applicable, the
availability or comparison of economically equivalent products to
options on the Underlying ETPs.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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[[Page 25028]]
The Exchange has collected the following trading statistics
regarding shares of and options on the Underlying ETPs and the values
of the Underlying ETPs and their component securities or index
components, as applicable:
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV \7\ (ETF Shares Fund market cap
Product shares) ADV (option outstanding (USD) (millions) Share value \10\ (USD)
(millions) contracts) (millions) \8\ \9\
--------------------------------------------------------------------------------------------------------------------------------------------------------
GLD......................................... 12.3 257,700 354.30 70,195.7 161.71 (NAV).
SLV......................................... 33.1 376,700 619.3 14,228.4 22.57 (NAV).
LQD......................................... 14.1 30,300 308.1 54,113.7 130.13 (NAV).
GDX......................................... 39.4 166,000 419.8 16,170.5 33.80 (NAV).
VXX......................................... 39.3 289,800 110.8 1,023. 10.31 (Closing Indicative
Value).
UVXY........................................ 29.3 113,500 228.7 1,580.6 4.85 (NAV).
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange has collected the same trading statistics, where
applicable, as above regarding a sample of other ETPs, as well as the
current position limits for options on such ETPs pursuant to Rule
8.30.07, to draw comparisons in support of proposed position limit
increases for options on the Underlying ETPs (see further discussion
below):
---------------------------------------------------------------------------
\7\ Average daily volume (ADV) data for ETP shares and option
contracts, as well as for ETF shares and options on the comparative
ETFs presented below, are for all of 2020. Additionally, reference
to ADV in ETP shares and ETP options, and indexes herein this
proposal are for all of calendar year 2020, unless otherwise
indicated.
\8\ Shares Outstanding and Net Asset Values (``NAV''), as well
as for the comparative ETPs presented below, are as of April 5, 2021
for all ETPs except for VXX and UVXY, which are as of April 14,
2021.
\9\ Fund Market Capitalization data, as well as for the
comparative ETPs presented below, are as of January 14, 2021.
\10\ See supra note 8.
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (ETF Shares Current
Product shares) ADV (option outstanding Fund market cap Share value (USD) position
(millions) contracts) (millions) (USD) (millions) limits
--------------------------------------------------------------------------------------------------------------------------------------------------------
EEM..................................... 55.9 284,700 581.4 30,262.2 53.79 (NAV)............... 1,000,000
FXI..................................... 24.6 128,900 91.2 4,398.9 47.60 (NAV)............... 1,000,000
EFA..................................... 29.6 130,900 719.4 53,808.1 77.02 (NAV)............... 1,000,000
EWZ..................................... 29.2 139,400 173.8 6,506.8 33.71 (NAV)............... 500,000
TLT..................................... 11.5 111,800 103.7 17,121.3 136.85 (NAV).............. 500,000
EWJ..................................... 8.2 15,500 185.3 13,860.7 69.72 (NAV)............... 500,000
HYG..................................... 30.5 261,600 254.5 24,067.5 86.86 (NAV)............... 500,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange believes that, overall, the liquidity in the shares of
the Underlying ETPs and in their overlying options, the larger market
capitalizations for each of the Underlying ETPs, and the overall market
landscape relevant to each of the Underlying ETPs support the proposal
to increase the position limits for each option class. Given the robust
liquidity in and value of the Underlying ETPs and their component
securities, the Exchange does not anticipate that the proposed increase
in position limits would create significant price movements as the
relevant markets are large enough to adequately absorb potential price
movements that may be caused by larger trades.
Specifically, the investment objective of GLD (also known as SPDR
Gold Trust, or the ``Trust'') is to track the performance of the price
of gold bullion.\11\ GLD offers investors an innovative, relatively
cost efficient and secure way to access the gold market, without the
necessity of taking physical delivery of gold, and to buy and sell that
interest through the trading of a security on a regulated stock
exchange. SPDR Gold Shares represent fractional, undivided beneficial
ownership interests in the Trust, the sole assets of which are gold
bullion. The spot price for gold is determined by market forces in the
24-hour global OTC market for gold including spot, forwards, and
options and other derivatives, together with exchange-traded futures
and options. The Net Asset Value (``NAV'') of the Trust is calculated
based on the total ounces of gold owned by the Trust valued at the
London Bullion Market Association (``LBMA'') Gold Price PM of that day
(plus any cash held by the Trust less accrued expenses).\12\ The
Exchange has observed that the ADV in GLD shares has increased from
approximately 8.7 million shares in 2019 to 12.3 million shares by the
end of 2020. Similarly, the ADV in options on GLD has increased from
approximately 153,900 option contracts in 2019 to 257,700 option
contracts by the end of 2020. The Exchange also notes that in the first
quarter of 2021, GLD options experienced an ADV of approximately
395,100 option contracts. Additionally, comparing the statistics shown
in the tables above for GLD and the sample of other ETFs with a current
position limit of 1,000,000 contracts, the Exchange notes that the ADV
for GLD options (257,700 option contracts) are more, or just as, liquid
as EEM options (284,700 option contracts), FXI options (128,900 option
contracts) and EFA options (130,900 option contracts). Also, as
indicated in the table above, GLD's market capitalization
(approximately $70.2 billion) is higher than all three of these
comparable ETFs, and, in addition to this, the Exchange notes that the
NAV of GLD is higher than that of the NAV of EEM, FXI and EFA, which is
indicative that the total value of its underlying components is
generally higher. The Exchange believes that GLD's share and option
volume, its market capitalization, and the comparatively high value of
its underlying components (as indicated by its NAV) are large enough to
absorb potential price movements caused by a large trade in GLD.
---------------------------------------------------------------------------
\11\ See SPDR Gold Shares, available at https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-gold-shares-gld (January 11, 2021).
\12\ See State Street Global Advisors, SPDR Gold Trust GLD, FAQ
(July 2020), available at https://www.ssga.com/library-content/products/fund-docs/etfs/us/tax-documents/gld-faq.pdf.
---------------------------------------------------------------------------
Like that of GLD and spot gold, SLV seeks to reflect generally the
performance of the price of silver and represents a cost-efficient
alternative to investments in physical silver for
[[Page 25029]]
investors not otherwise in a position to participate directly in the
market for physical silver. The SLV's NAV is derived from its holdings
in silver valued on the basis of the daily LBMA Silver Price.\13\ SLV,
too, has experienced a significant increase in AVD [sic] in shares and
options from 2019 through 2020. It grew from approximately 13.6 million
shares in 2019 to 33.1 million shares by the end of 2020, and from
approximately 118,800 option contracts in 2019 to 376,700 option
contracts by the end of 2020. The Exchange also notes that SLV options
experienced in ADV of approximately 1.1 million option contracts in the
first quarter of 2021.\14\ Additionally, SLV generally experiences a
significantly greater ADV in shares (33.1 million share) and in options
(376,700 option contracts) than that of the ADV in shares and options
for EWZ (29.2 million shares and 139,300 option contracts), TLT (11.5
million shares and 111,800 option contracts), EWJ (8.2 million shares
and 15,500 option contracts) and HYG (30.5 million shares and 261,600
option contracts), and also has a comparable, or higher, market
capitalization (approximately $14.2 billion) than EWZ, TLT and EWJ. As
per the table above, options on each of these ETFs already have a
position limit of 500,000 contracts -- the proposed position limit for
SLV options. The Exchange believes that SLV's share and option volume
and its market capitalization are large enough to absorb potential
price movements caused by a large trade in SLV.
---------------------------------------------------------------------------
\13\ See iShares Silver Trust, Fact Sheet as of 9/20/2020,
available at https://www.ishares.com/us/literature/fact-sheet/slv-ishares-silver-trust-fund-fact-sheet-en-us.pdf.
\14\ While volume in SLV options in the first quarter of 2021
experienced significantly high volume as a result of unusual market
conditions, the Exchange believes that the existing possibility of
such significant increases supports the proposed position limit
increase.
---------------------------------------------------------------------------
While the demand for options trading on GLD and SLV has evidently
increased, and continues to increase, the position limits have remained
the same, which the Exchange believes may be impacting the ability of
Trading Permit Holders (``TPHs'') to effectively hedge against exposure
to physical gold and silver. For example, a single TPH may manage
groups of mutual funds (i.e., a fund complex), each of which may have
different growth objectives. If one portfolio manager with a large
group of funds has a relatively small exposure to spot gold or spot
silver, they may hedge such exposure using GLD options or SLV options,
respectively. Though relatively small, this hedge (up to 250,00 [sic]
option contracts for GLD and for SLV) may utilize the TPH's entire
capacity against the position limit. As a result, the TPH's other
portfolio managers must look to use alternative vehicles to hedge gold
or silver exposure for the funds under their management. The Exchange
understands that, unlike GLD or SLV options, most of these alternatives
hedging vehicles are not a perfect hedge, which creates liquidity
issues and results in increased trading costs. As a result, the
Exchange believes that the proposed position limit increases for both
GLD and SLV options will allow TPHs to effectively hedge their total
gold or silver exposure without having to seek other, less precise
hedging vehicles.
LQD tracks the performance of the Markit iBoxx USD Liquid
Investment Grade (``IBOXIG'') Index, which is an index designed as a
subset of the broader U.S. dollar-denominated corporate bond market
which can be used as a basis for tradable products, such as ETFs, and
is comprised of over 8,000 bonds.\15\ The Exchange notes that from 2019
through 2020, ADV has grown significantly in shares of LQD and in
options on LQD, from approximately 9.7 million shares in 2019 to 14.1
million through 2020, and from approximately 8,200 option contracts in
2019 to 30,300 through 2020. LQD also continued to experience
significant growth in ADV in the first quarter of 2021 with an ADV of
approximately 140,200 option contracts. Further, LQD generally
experiences higher ADV in shares than both TLT (11.5 million shares)
and EWJ (8.2 million shares) and almost double the ADV in option
contracts than EWJ (15,500 option contracts). Options on each EWZ, TLT
and EWJ are currently subject to a position limit of 500,000
contracts--the proposed limit for options on LQD. The NAV of LQD is
also higher than, or comparable to, that of the NAV of the ETFs
underlying the options that are currently subject to a position limit
of 500,000 option contracts (as presented in the table above), which is
indicative that the total value of its underlying components is
generally higher or comparable. Per the tables above, LQD's total
market capitalization of approximately $54.1 billion is also higher
than or comparable to the total market capitalization of the ETFs
underlying the options currently subject to a position limit of
5000,000 [sic] contracts. In addition to this, the Exchange notes that,
although there are currently no options listed for trading on the
IBOXIG Index, the components \16\ of the IBOXIG Index, which can be
used in creating a basket of securities that equate to the LQD ETF, are
made up of over 8,000 bonds for which the outstanding face value of
each must be greater than or equal to $2 billion.\17\ The Exchange
believes that the total value of the bonds in the IBOXIG Index, coupled
with LQD's share and option volume, total market capitalization, and
NAV price indicates that the market is large enough to absorb potential
price movements caused by a large trade in LQD. Also, as evidenced
above, trading volume in LQD shares has increased over the past few
years and the Exchange understands that market participants' need for
options have continued to grow alongside the ETF. Particularly, the
Exchange notes that in the last year, market participants have sought
more cost-effective hedging strategies through the use of LQD options
as a result of the borrow on other fixed income ETFs, such as HYG.
Therefore, the Exchange believes that because LQD options are being
increasingly utilized as an alternative to similar products, such as
HYG options, then it is appropriate that options on LQD be subject to
the same 500,000 contract position limit that currently exists for
options on HYG.
---------------------------------------------------------------------------
\15\ See Markit iBoxx USD Liquid Investment Grade Index,
available at https://cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USD-Liquid-Investment-Grade-Index-factsheet.pdf (January 14, 2021).
\16\ Investment grade corporate bonds.
\17\ See supra note 14.
---------------------------------------------------------------------------
GDX seeks to replicate as closely as possible the price and yield
performance of the NYSE Arca Gold Miners (``GDMNTR'') Index, which is
intended to track the overall performance of companies involved in the
gold mining industry.\18\ ADV in GDX options has increased from 2019
through 2020, with an ADV of approximately 117,400 option contracts in
2019 to an ADV of approximately 166,000 option contracts in 2020. The
Exchange notes that ADV in GDX shares did not increase from 2019 to
2020. GDX options also experienced an ADV of approximately 287,800
option contracts in the first quarter of 2021. The Exchange notes that
the ADV in GDX shares (39.4 million) and options on GDX (166,000 option
contracts) are greater than the ADV in EWZ (29.2 million shares and
139,300 option contracts), TLT (11.5 million shares and 111,800 option
contracts), EWJ (8.2 million shares and 15,500 option contracts) and
HYG (30.5 million shares
[[Page 25030]]
and 261,600 option contracts), each of which is currently subject to a
position limit of 500,000 option contracts--the proposed limit for
options on GDX. GDX also experiences a comparable, or higher, market
capitalization (approximately $16.2 billion) than EWZ, TLT and EWZ.
Additionally, like that of LDQ above, there is currently no index
option analogue for the GDX ETF on the GDMNTR Index approved for
options trading, however, the components of the GDMNTR Index, which can
be used to create the GDX ETF, currently must each have a market
capitalization greater than $750 million, an ADV of at least 50,000
shares, and an average daily value traded of at least $1 million in
order to be eligible for inclusion in the GDMNTR Index. The Exchange
believes that the GDMNTR Index component inclusion requirements, as
well as GDX's share and option volume and total market capitalization,
indicate that the GDX market is sufficiently large and liquid enough to
absorb price movements as a result of potentially oversized trades.
---------------------------------------------------------------------------
\18\ See VanEck Vectors Gold Miners ETF, available at https://www.vaneck.com/library/vaneck-vectors-etfs/gdx-fact-sheet-pdf/
(January 14, 2021).
---------------------------------------------------------------------------
VXX ETNs (which are unsecured debt obligations of the issuer) \19\
are designed to provide exposure to the S&P 500 VIX Short-Term Futures
Index Total Return (``SPVXSTR''). The SPVXSTR Index is designed to
provide access to equity market volatility through Cboe Volatility
(``VIX'') Index futures by offering exposure to a daily rolling long
position in the first and second month VIX futures contracts. The
SPVXSTR Index generally reflects market participants' views of the
future direction of the VIX Index at the time of expiration of the VIX
futures contracts comprising the index.\20\ VXX volume has increased
over the last years, growing from an ADV of approximately 28.6 million
shares and 179,200 option contracts in 2019 to an ADV of approximately
39.3 million shares and 289,800 option contracts in 2020.
---------------------------------------------------------------------------
\19\ Barclays Bank PLC.
\20\ See iPath Series B S&P 500 VIX Short-Term Futures ETN,
Product Summary (April 13, 2021), available at: https://www.ipathetn.com/US/16/en/details.app?instrumentId=341408.
---------------------------------------------------------------------------
Similarly, the UVXY ETF provides leveraged exposure to the S&P 500
VIX Short-Term Futures (``SPVXSPID'') Index. Like the SPVXSTR Index,
the SPVXSPID Index measures the returns of a portfolio of monthly VIX
futures contracts that rolls positions from first-month contracts into
second-month contracts on a daily basis and maintains a weighted
average of one month to expiration. UVXY volume has increased
significantly from 2019 through 2020--from an ADV of approximately 12
million shares and 73,700 option contracts in 2019 to an ADV of
approximately 29.3 million shares and 113,500 option contracts in 2020.
Both VXX and UVXY experience an ADV in shares and option contracts
that is greater than, or comparable to, ADV in shares and/or option
contracts for EWZ (29.2 million shares and 139,400 option contracts),
TLT (11.5 million shares and 111,800 option contracts), EWJ (8.2
million shares and 15,500 option contracts), and HYG (30.5 million
shares). As stated, options on EWZ, TLT, EWJ and HYG are all currently
subject to the same position limit (500,000 option contracts) proposed
for VXX and UVXY options. The Exchange also notes that, while VIX
options share similar trading characteristics with options on VXX and
UVXY, VIX options are not currently subject to position limits.\21\
Moreover, the 2020 ADV for trading in VIX futures was approximately
192,000 contracts and VIX futures currently have a value of
approximately $7.6 billion in open interest. The Exchange believes that
the ADV in shares of and options on VXX and UXVY, along with the robust
market that exists for the underlying index components (VIX futures) in
connection with both ETPs, indicates that the market for these ETPs is
sufficiently large and liquid enough to absorb price movements and
large- sized trades. In addition to this, both the VXX and UVXY are
used as key indicators of the health of the global volatility market.
The VIX futures that comprise each product are a perfect hedge to the
underlying delta risk; however, such futures are not recognized as
hedges for options contract equivalent of the net delta (``OCEND'')
purposes. A TPH that is not delta neutral must be hedged to the extent
that the OCEND stays within the applicable position limit. The Exchange
understands that due to the OCEND limitations and current position
limits for options on VXX and UVXY, TPHs must hedge with options and
buy or create shares of the underlying ETPs despite already having a
hedge on their position via the component futures. As a result, TPHs
may be unable to provide the most concise pricing to customers
participating in these ETPs due to the increased costs associated with
transacting in additional or alternative hedging vehicles in order to
comply with the position limits currently in place. The Exchange also
believes that the approximate value of open interest in VIX futures
($7.6 billion) potentially necessitates substantial hedging capacity as
both ETPs provide exposure to volatility trading based on VIX futures.
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\21\ See Rule 8.31.
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Creation and Redemption for ETPs
The Exchange believes that the creation and redemption process for
the ETFs and ETN subject to this proposal (VXX) will lessen the
potential for manipulative activity with options on the Underlying
ETPs. Regarding ETFs, when an ETF provider wants to create more shares,
it looks to an Authorized Participant (generally a market maker or
other large financial institution) to acquire the securities the ETF is
to hold. For instance, when an ETF is designed to track the performance
of an index, the Authorized Participant can purchase all the
constituent securities in the exact same weight as the index, then
deliver those shares to the ETF provider. In exchange, the ETF provider
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. The price is based on the NAV, not
the market value at which the ETF is trading. The creation of new ETF
units can be conducted during an entire trading day and is not subject
to position limits. This process works in reverse where the ETF
provider seeks to decrease the number of shares that are available to
trade. Regarding the process for the ETN subject to this proposal, VXX,
investors may redeem VXX shares on any redemption date,\22\ provided
that the minimum amount of VXX shares redeemed is at least 25,000
shares. Investors redeeming VXX shares receive a cash payment equal to
the applicable closing indicative value on the applicable valuation
date (less the redemption fee). While there is no direct analogue to an
ETF ``creation'' for an ETN, the ETN issuer may sell additional VXX
shares from its inventory.\23\ In order to redeem existing VXX shares
or issue new VXX shares, the issuer may transact in VIX futures
(selling VIX futures in the case of a VXX redemption, and purchasing
VIX futures in the case of issuing new VXX shares) in order to hedge
its exposure. The applicable creation and redemption processes for
[[Page 25031]]
the Underlying ETPs creates a direct link to the underlying components
of the ETF or ETN and serves to mitigate potential price impact of the
ETF and ETN shares that might otherwise result from increased position
limits for the options on the Underlying ETPs.
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\22\ A redemption date for each series of VXX is the third
business day following each valuation date (other than the final
valuation date). The final redemption date will be the third
business day following the valuation date that is immediately prior
to the final valuation date. If notice is provided prior to noon
E.T., the applicable valuation date is the date on which notice is
provided; otherwise, the applicable valuation date is the business
day following the date on which notice is provided. See VXX
Prospectus, available at https://www.ipathetn.com/US/16/en/documentation.app?instrumentId=341408&contentId=7549819.
\23\ There is currently no minimum number of additional ETNs
that an issuer may sell.
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The Exchange understands that the ETF and ETN creation and
redemption processes seek to keep an ETF's or ETN's share price trading
in line with the product's underlying net asset value (ETFs) or
indicative value (ETNs). Because an ETF trades like a stock, its share
price will fluctuate during the trading day, due to simple supply and
demand. If demand to buy an ETF or ETN is high, for instance, an ETF's
share price might rise above the value of its underlying securities or
an ETN's share price above the value of the index components. When this
happens, the Authorized Participant or issuer believes the ETF or ETN
may now be overpriced, so it may buy shares of the component securities
(ETF) or buy same the index component instruments (ETN) and then sell
ETF or ETN shares in the open market. This may drive the ETF's or ETN's
share price back toward the underlying net asset value or indicative
index value. Likewise, if an ETF or ETN share price starts trading at a
discount to the securities it holds or its index components, the
Authorized Participant or issuer can buy shares of the ETF or ETN and
redeem them for the underlying securities or index component
instruments. Buying undervalued ETF or ETN shares may drive the share
price of an ETF or ETN back toward fair value. This arbitrage process
helps to keep an ETF's and ETN's share price in line with the value of
its underlying portfolio or index components.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits for the
options on the Underlying ETPs would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in trading these products. The reporting
requirement for the options on the Underlying ETPs would remain
unchanged. Thus, the Exchange would still require that each TPH or TPH
organization that maintains positions in the options on the same side
of the market, for its own account or for the account of a customer,
report certain information to the Exchange. This information would
include, but would not be limited to, the options' positions, whether
such positions are hedged and, if so, a description of the hedge(s).
Market-Makers \24\ (including Designated Primary Market-Makers
(``DPMs'')) \25\ would continue to be exempt from this reporting
requirement, however, the Exchange may access Market-Maker position
information.\26\ Moreover, the Exchange's requirement that TPHs file
reports with the Exchange for any customer who held aggregate large
long or short positions on the same side of the market of 200 or more
option contracts of any single class for the previous day will remain
at this level for the options subject to this proposal and will
continue to serve as an important part of the Exchange's surveillance
efforts.\27\
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\24\ A Market-Maker [sic] ``Trading Permit Holder registered
with the Exchange pursuant to Rule 3.52 for the purpose of making
markets in option contracts traded on the Exchange and that has the
rights and responsibilities set forth in Chapter 5, Section D of the
Rules.'' See Rule 1.1.
\25\ A Designated Primary Market-Maker ``is TPH organization
that is approved by the Exchange to function in allocated securities
as a Market-Maker (as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise provided under the rules
of the Exchange.'' See Rule 1.1.
\26\ The Options Clearing Corporation (``OCC'') through the
Large option Position Reporting (``LOPR'') system acts as a
centralized service provider for TPH compliance with position
reporting requirements by collecting data from each TPH or TPH
organization, consolidating the information, and ultimately
providing detailed listings of each TPH's report to the Exchange, as
well as Financial Industry Regulatory Authority, Inc. (``FINRA''),
acting as its agent pursuant to a regulatory services agreement
(``RSA'').
\27\ See Rule 8.43 for reporting requirements.
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange and other SROs are capable of
properly identifying disruptive and/or manipulative trading activity.
The Exchange also represents that it has adequate surveillances in
place to detect potential manipulation, as well as reviews in place to
identify potential changes in composition of the Underlying ETPs and
continued compliance with the Exchange's listing standards. These
procedures utilize daily monitoring of market activity via automated
surveillance techniques to identify unusual activity in both options
and the underlyings, as applicable.\28\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\29\ which are used to report ownership of stock
which exceeds 5% of a company's total stock issue and may assist in
providing information in monitoring for any potential manipulative
schemes.
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\28\ The Exchange believes these procedures have been effective
for the surveillance of trading the options subject to this proposal
and will continue to employ them.
\29\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in the options
on the Underlying ETPs. Current margin and risk-based haircut
methodologies serve to limit the size of positions maintained by any
one account by increasing the margin and/or capital that a TPH must
maintain for a large position held by itself or by its customer.\30\ In
addition, Rule 15c3-1 \31\ imposes a capital charge on TPHs to the
extent of any margin deficiency resulting from the higher margin
requirement.
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\30\ See Rule 10.3 for a description of margin requirements.
\31\ 17 CFR 240.15c3-1.
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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.\32\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \33\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \34\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Id.
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The Exchange believes that the proposed increase in position limits
for options on the Underlying ETPs will remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because it will provide market participants with the ability to more
effectively execute their trading and hedging activities. The proposed
increases will allow market participants
[[Page 25032]]
to more fully implement hedging strategies in related derivative
products and to further use options to achieve investment strategies
(e.g., there are other ETPs that use options on the ETFs or the ETN
subject to this proposal as part of their investment strategy, and the
applicable position limits as they stand today may inhibit these other
ETPs in achieving their investment objectives, to the detriment of
investors). Also, increasing the applicable position limits may allow
Market-Makers to provide the markets for these options with more
liquidity in amounts commensurate with increased consumer demand in
such markets. The proposed position limit increases may also encourage
other liquidity providers to shift liquidity, as well as encourage
consumers to shift demand, from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETPs, the considerable market capitalization of the funds,
underlying component securities, and/or indexed component securities,
and the liquidity of the markets for the applicable options and
underlying component securities will mitigate concerns regarding
potential manipulation of the products and/or disruption of the
underlying markets upon increasing the relevant position limits. As a
general principle, increases in market capitalizations, active trading
volume, and deep liquidity of securities do not lead to manipulation
and/or disruption. This general principle applies to the recently
observed increased levels of market capitalization and trading volume
and liquidity in shares of and options on the Underlying ETPs (as
described above), and, as a result, the Exchange does not believe that
the options markets or underlying markets would become susceptible to
manipulation and/or disruption as a result of the proposed position
limit increases. Indeed, the Commission has previously expressed the
belief that not just increasing, but removing, position and exercise
limits may bring additional depth and liquidity to the options markets
without increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.\35\
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\35\ See Securities Exchange Act Release No. 62147 [sic]
(October 28 [sic], 2005) (SR-CBOE-2005-41), at 62149.
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Further, the Exchange notes that the proposed rule change to
increase position limits for select actively traded options is not
novel and the Commission has approved similar proposed rule changes by
the Exchange to increase position limits for options on similar, highly
liquid and actively traded ETPs.\36\ Furthermore, the Exchange again
notes that that the proposed position limits for options on GLD, SLV,
LQD, GDX, VXX and UVXY are consistent with existing position limits for
options on comparable ETPs in Rule 8.30.07.
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\36\ See Securities Exchange Act Release Nos. 88768 (April 29,
2020), 85 FR 26736 (May 5, 2020) (SR-CBOE-2020-015); 83415 (June 12,
2018), 83 FR 28274 (June 18, 2018) (SR-CBOE-2018-042); and 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
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The Exchange's surveillance and reporting safeguards continue to be
designed to deter and detect possible manipulative behavior that might
arise from increasing or eliminating position and exercise limits in
certain classes. The Exchange believes that the current financial
requirements imposed by the Exchange and by the Commission adequately
address concerns regarding potentially large, unhedged position in the
options on the Underlying ETPs, further promoting just and equitable
principles of trading, the maintenance of a fair and orderly market,
and the protection of investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives of market
participants.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders.\37\ The Exchange
believes market participants would benefit from being able to trade
options with increased position limits in an exchange environment in
several ways, including but not limited to the following: (1) Enhanced
efficiency in initiating and closing out position; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
the role of OCC as issuer and guarantor. The Exchange notes that other
options exchanges may choose to file similar proposals with the
Commission to increase position limits on options on the Underlying
ETPs.
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\37\ Additionally, several other options exchanges have the same
position limits as the Exchange, as they incorporate by reference to
the Exchange's position limits, and as a result the position limits
for options on the Underlying ETPs will increase at those exchanges.
For example, Nasdaq Options position limits are determined by the
position limits established by the Exchange. See Nasdaq Stock Market
LLC Rules, Options 9, Sec. 13 (Position Limits).
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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 Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2021-029 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 25033]]
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2021-029. 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-2021-029, and should be submitted
on or before June 1, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09774 Filed 5-7-21; 8:45 am]
BILLING CODE 8011-01-P
