Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase Position Limits for Options on Certain Exchange-Traded Funds, 68018-68023 [2021-25990]
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Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
comments more efficiently, please use
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amendments, all written statements
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change that are filed with the
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those that may be withheld from the
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provisions of 5 U.S.C. 552, will be
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–26068 Filed 11–29–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93658; File No. SR–ISE–
2021–25]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Increase Position
Limits for Options on Certain
Exchange-Traded Funds
lotter on DSK11XQN23PROD with NOTICES1
November 23, 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 November
19, 2021, Nasdaq ISE, LLC (‘‘ISE’’ or
19 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1
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‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to increase
position limits for options on certain
exchange-traded funds (‘‘ETFs’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/ise/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
ISE proposes to increase certain
position and exercise limits within
Options 9, Section 13 and 15,
respectively, similar to the Cboe
Options Exchange, Inc. (‘‘Cboe’’).3
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.
3 See Securities Exchange Act Release No. 93525
(November 4, 2021), 86 FR 62584 (November 10,
2021) (SR–Cboe–2021–029) (Notice of Filing of
Amendment Nos. 2 and 3 and Order Granting
Accelerated Approval of a Proposed Rule Change,
as Modified by Amendment Nos. 1, 2, and 3, To
Increase Position Limits for Options on Two
Exchange-Traded Funds).
PO 00000
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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 funds (‘‘ETFs’’): (1) iShares iBoxx
$ Investment Grade Corporate Bond ETF
(‘‘LQD’’); and (2) VanEck Vectors Gold
Miners ETF (‘‘GDX’’), (collectively
‘‘Underlying ETFs’’). Though the
demand for these options appears to
have increased, position limits for
options on the Underlying ETFs have
remained the same. The Exchange
believes these unchanged position
limits may have impeded, and may
continue to impede, trading activity and
strategies of investors, such as use of
effective hedging vehicles or income
generating strategies (e.g., buy-write or
put-write), and the ability of 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
position limits for options on the
Underlying ETFs may enable liquidity
providers to provide additional liquidity
to the Exchange and other market
participants to transfer their liquidity
demands from OTC markets to the
Exchange. As described in further detail
below, the Exchange believes that the
continuously increasing market
capitalization of the Underlying ETFs,
ETF components, as well as the highly
liquid markets for each, reduces the
concerns for potential market
manipulation and/or disruption in the
underlying markets upon increasing
position limits, while the rising demand
for trading options on the Underlying
ETFs for legitimate economic purposes
compels an increase in position limits.
Proposed Position Limits for Options on
the Underlying ETFs
Proposed Position Limits for options
on ETFs are determined pursuant to
Options 9, Section 13 and vary
according to the number of outstanding
shares and the trading volumes of the
underlying equity security (which
includes ETFs) over the past six months.
Pursuant to Options 9, Section 13, the
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largest in capitalization and the most
frequently traded ETFs have an option
position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market; and
smaller capitalization stocks and ETFs
have position limits of 200,000, 75,000,
50,000 or 25,000 contracts (with
adjustments for splits, recapitalizations,
etc.) on the same side of the market.
Options on LQD and GDX are currently
subject to the standard position limit of
250,000 contracts as set forth in Options
9, Section 13. Supplementary .01 to
Options 9, Section 13 sets forth
separate, higher position limits for
specific equity options (including
options on specific ETFs).4 The
Exchange proposes to amend
Supplementary .01 to Options 9, Section
13 to increase the position limits and
[sic] for options on each of LQD and
GDX.5 The table below represents the
current, and proposed, position limits
for options on the ETFs subject to this
proposal:
Current
position
limit
Product
LQD ..........
GDX ..........
I
250,000
250,000
Proposed
position
limit
500,000
500,000
I
The Exchange notes that the proposed
position limit for options on LQD 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’’), and iShares iBoxx
High Yield Corporate Bond Fund
(‘‘HYG’’). The Exchange represents that
the Underlying ETFs qualify for either
(1) the initial listing criteria set forth in
Options 4, Section 3(h) for ETFs holding
non-U.S. component securities, (2) the
generic listing standards for series of
portfolio depository receipts and index
fund shares based on international or
global indexes under which a
comprehensive surveillance agreement
(‘‘CSA’’) is not required, as well as (3)
the continued listing criteria in Options
4, Section 4(b) (for ETFs).6 In
compliance with its listing rules, the
Exchange also represents that non-U.S.
component securities that are not
subject to a comprehensive surveillance
agreement (‘‘CSA’’) do not, in the
aggregate, represent more than more
than 50% of the weight of any of the
Underlying ETFs.7
Composition and Growth Analysis for
Underlying ETPs
As stated above, position (and
exercise) limits are intended to prevent
ADV 9 (ETF
shares
millions)
Product
LQD ................................................................................
GDX ...............................................................................
Cboe collected the same trading
statistics as above regarding a sample of
other ETFs, as well as the current
lotter on DSK11XQN23PROD with NOTICES1
EWZ ...................................................
TLT .....................................................
EWJ ....................................................
29.2
11.5
8.2
4 Adjusted option series, in which one option
contract in the series represents the delivery of
other than 100 shares of the underlying security as
a result of a corporate action by the issuer of the
security underlying such option series, do not
impact the notional value of the underlying security
represented by those options. When an underlying
security undergoes a corporate action resulting in
adjusted series, the Exchange lists new standard
option series across all appropriate expiration
months the day after the existing series are
adjusted. The adjusted series are generally actively
traded for a short period of time following
adjustment, but orders to open options positions in
the underlying security are almost exclusively
placed in the new standard option series contracts.
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ADV (options
contract)
30,300
166,000
Shares
outstanding
(millions)
139,400
111,800
15,500
Frm 00121
Fmt 4703
54,113.7
16,170.5
Share value 12
(USD)
130.13 (NAV)
33.80 (NAV)
position limit increases for options on
the Underlying ETFs (see further
discussion below).
Fund market
cap (USD
millions)
173.8
103.7
185.3
Sfmt 4703
Fund market
cap (USD
millions)11
308.1
419.8
5 Similar amendments are being proposed for the
exercise limits for LQD and GDX options within
Options 9, Section 15. Exercise limits have been
established for the corresponding options at the
same levels as the corresponding security’s position
limits.
6 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
component securities are more stringent than the
maintenance listing criteria for those same ETF
options. See Options 4, Section 3(h); Options 4,
Section 4(b).
7 See Options 4, Section 3(h).
8 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29).
PO 00000
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 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.8 The
Underlying ETFs, as well as the ETF
components, are highly liquid and are
based on a broad set of highly liquid
securities and other reference assets, as
demonstrated through the trading
statistics presented in this proposal. To
support the proposed position limit
increases, the Exchange considered the
liquidity of the Underlying ETFs, the
value of the Underlying. ETFs, their
components and the relevant
marketplace, the share and option
volume for the Underlying ETFs, and,
where applicable, the availability or
comparison of economically equivalent
products to options on the Underlying
ETFs.
Cboe demonstrated the below trading
statistics regarding shares of and options
on the Underlying ETFs and the values
of the Underlying ETFs and their
components:
Shares
outstanding
(millions) 10
position limits for options on such ETFs
pursuant to its Rule 13.07, to draw
comparisons in support of the proposed
ADV (ETF
shares
millions)
Product
14.1
39.4
ADV (options
contracts)
68019
Share value
(USD)
6,506.8
17,121.3
13,860.7
33.71 (NAV)
136.85 (NAV)
69.72 (NAV)
Current
position
limits
500,000
500,000
500,000
9 Average daily volume (ADV) data for ETF 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 ETF shares and ETF options, and indexes herein
this proposal are for all of calendar year 2020,
unless otherwise indicated.
10 Shares Outstanding and Net Asset Values
(‘‘NAV’’), as well as for the comparative ETFs
presented below, are as of April 5, 2021 for all
ETFs.
11 Fund Market Capitalization data, as well as for
the comparative ETFs presented below, are as of
January 14, 2021.
12 See note 10 above.
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ADV (ETF
shares
millions)
Product
lotter on DSK11XQN23PROD with NOTICES1
HYG ...................................................
ADV (options
contract)
30.5
The Exchange believes that, overall,
the liquidity in the shares of the
Underlying ETFs and in their overlying
options, the larger market
capitalizations for each of the
Underlying ETFs, and the overall
market landscape relevant to each of the
Underlying ETFs support the proposal
to increase the position limits for each
option class. Given the robust liquidity
in and value of the Underlying ETFs
and their components, 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.
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.13 Cboe noted 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
Shares
outstanding
(millions)
261,600
254.5
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, Cboe
noted that, although there are currently
no options listed for trading on the
IBOXIG Index, the components 14 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.15 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.16 Cboe noted
ADV in GDX options 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. Cboe
noted that ADV in GDX shares did not
increase from 2019 to 2020. GDX
Investment grade corporate bonds.
See note 13 above.
16 See VanEck Vectors Gold Miners ETF,
available at https://www.vaneck.com/library/
vaneck-vectors-etfs/gdx-fact-sheet-pdf/ (January 14,
2021).
14
See Markit iBoxx USD Liquid Investment
Grade Index, available at https://
cdn.ihsmarkit.com/www/pdf/MKT-iBoxx-USDLiquid-Investment-GradeIndex-factsheet.pdf
(January 14, 2021).
13
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Fund market
cap (USD
millions)
15
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
Share value
(USD)
24,067.5
86.86 (NAV)
Current
position
limits
500,000
options also experienced an ADV of
approximately 287,800 option contracts
in the first quarter of 2021. Cboe noted
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 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. Cboe
noted that many of the Brazil-based gold
mining constituents included in GDX
are also included in EWZ, which tracks
the investment results of an index
composed of Brazilian equities, and that
Cboe had not identified any issues with
the continued listing and trading of
EWZ options or any adverse market
impact on EWZ in connection with the
current 500,000 position limit in place
for EWZ options. 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.
Creation and Redemption for ETFs
The Exchange believes that the
creation and redemption process for the
ETFs subject to this proposal will lessen
the potential for manipulative activity
with options on the Underlying ETFs.
When an ETF provider wants to create
more shares, it looks to an Authorized
Participant (‘‘AP’’) (generally a market
maker or other large financial
institution) to acquire the underlying
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components the ETF is to hold. For
instance, when an ETF is designed to
track the performance of an index, the
AP 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 AP 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. The creation and
redemption processes for the
Underlying ETFs creates a direct link to
the underlying components of the ETF
and serves to mitigate potential price
impact of the ETF shares that might
otherwise result from increased position
limits for the options on the Underlying
ETFs.
The Exchange understands that the
ETF creation and redemption processes
seek to keep an ETF’s share price
trading in line with the product’s
underlying net asset value. Because an
ETF trades like a stock, its share price
will fluctuate during the trading day,
due to simple supply and demand. If
demand to buy an ETF is high, for
instance, an ETF’s share price might rise
above the value of its underlying
components. When this happens, the
AP or issuer believes the ETF may now
be overpriced, so it may buy shares of
the component securities or assets and
then sell ETF shares in the open market.
This may drive the ETF’s share price
back toward the underlying net asset
value. Likewise, if an ETF share price
starts trading at a discount to the
component securities or assets it holds,
the AP or issuer can buy shares of the
ETF and redeem them for the
underlying components. Buying
undervalued ETF shares may drive the
share price of an ETF back toward fair
value. This arbitrage process helps to
keep an ETF’s share price in line with
the value of its underlying portfolio.
Surveillance and Reporting
Requirements
The Exchange believes that increasing
the position limits (and exercise limits)
for the options on the Underlying ETFs
would lead to a more liquid and
competitive market environment for
these options, which will benefit
customers interested in trading these
products. The reporting requirement for
the options on the Underlying ETFs
would remain unchanged. Thus, the
Exchange would still require that each
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Member that maintains positions in the
options on the same side of the market,
for its own account or for the account
of a customer, report certain information
to the Exchange. This information
would include, but would not be
limited to, the options’ positions,
whether such positions are hedged and,
if so, a description of the hedge(s).
Market Makers 17 would continue to be
exempt from this reporting requirement,
however, the Exchange may access
Market Maker position information.18
Moreover, the Exchange’s requirement
that Members file reports with the
Exchange for any customer who held
aggregate large long or short positions
on the same side of the market of 200
or more 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.19
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange
and other SROs are capable of properly
identifying disruptive and/or
manipulative trading activity. The
Exchange also represents that it has
adequate surveillances in place to detect
potential manipulation, as well as
reviews in place to identify potential
changes in composition of the
Underlying ETFs and continued
compliance with the Exchange’s listing
standards. These procedures utilize
daily monitoring of market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlyings, as applicable.20
The Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
17 The term ‘‘Market Makers’’ refers to
‘‘Competitive Market Makers’’ and ‘‘Primary Market
Makers’’ collectively. See Options 1, Section
1(a)(21). The term ‘‘Competitive Market Maker’’
means a Member that is approved to exercise
trading privileges associated with CMM Rights. See
Options 1, Section 1(a)(12). The term ‘‘Primary
Market Maker’’ means a Member that is approved
to exercise trading privileges associated with PMM
Rights. See Options 1, Section 1(a)(36).
18 The Options Clearing Corporation (‘‘OCC’’)
through the Large Option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for compliance with position reporting
requirements by collecting data from each Member,
consolidating the information, and ultimately
providing detailed listings of each Member’s report
to the Exchange, as well as Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’), acting as its
agent pursuant to a regulatory services agreement
(‘‘RSA’’) with the Exchange.
19 See Options 9, Section 16, Reports Related to
Position Limits.
20 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.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
68021
or 13G,21 which are used to report
ownership of stock which exceeds 5%
of a company’s total stock issue and
may assist in providing information in
monitoring for any potential
manipulative schemes.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
the options on the Underlying ETFs.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
or capital that a Member must maintain
for a large position held by itself or by
its customer.22 In addition, Rule
15c3–1 23 imposes a capital charge on
Members to the extent of any margin
deficiency resulting from the higher
margin requirement.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section
6(b) 24 of the Act,25 in general, and
furthers the objectives of Section 6(b)(5)
of the Act. Specifically, the Exchange
believes the proposed rule change is
consistent with the Section 6(b)(5) 26
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) 27 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that the
proposed increase in position limits for
options on the Underlying ETFs will
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest, because it will provide market
participants with the ability to more
17 CFR 240.13d–1.
See Options 6C, Section 3, Margin
Requirements.
23 17 CFR 240.15c3–1.
24 15 U.S.C. 78f(b)(5).
25 15 U.S.C. 78f(b).
26 15 U.S.C. 78f(b)(5).
27 15 U.S.C. 78f(b)(5).
21
22
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68022
Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
effectively execute their trading and
hedging activities. The proposed
increases will allow market participants
to more fully implement hedging
strategies in related derivative products
and to further use options to achieve
investment strategies (e.g., there are
other exchange-traded products
(‘‘ETPs’’) that use options on the ETFs
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 OTC
markets onto the Exchange, which will
enhance the process of price discovery
conducted on the Exchange through
increased order flow.
In addition, the Exchange believes
that the structure of the Underlying
ETFs, the considerable market
capitalization of the funds and
underlying components, and the
liquidity of the markets for the
applicable options and underlying
components 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 the underlying
components 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 ETFs (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.28
28 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE–2005–41), at 62149.
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18:17 Nov 29, 2021
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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.29 Furthermore, the
Exchange again notes that that the
proposed position limits for options on
LQD and GDX are consistent with
existing position limits for options on
comparable ETFs in Options 9, Section
13.
The Exchange’s surveillance and
reporting safeguards continue to be
designed to deter and detect possible
manipulative behavior that might arise
from increasing or eliminating position
and exercise limits in certain classes.
The Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged position in
the options on the Underlying ETFs,
further promoting just and equitable
principles of trading, the maintenance
of a fair and orderly market, and the
protection of investors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition 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
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
increased position limits (and exercise
limits) will be available to all market
participants and apply to each in the
same manner. The Exchange believes
that the proposed rule change will
provide additional opportunities for
market participants to more efficiently
achieve their investment and trading
objectives of market participants.
The Exchange does not believe that
the proposed rule change will impose
any burden on inter-market 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
29 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).
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
those orders.30 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 ETFs.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 31 and Rule 19b–
4(f)(6) thereunder.32
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 33 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 34
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
30 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 ETFs will increase at
those exchanges. For example, The Nasdaq Options
Market LLC (‘‘NOM’’) and Nasdaq BX, Inc. (‘‘BX’’)
position limits are determined by the position
limits established by Cboe. See NOM and BX
Options 9, Section 13, Position Limits.
31 15 U.S.C. 78s(b)(3)(A).
32 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
33 17 CFR 240.19b–4(f)(6).
34 17 CFR 240.19b–4(f)(6)(iii).
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Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
ISE Members that are also members at
Cboe where these increased position
limits are currently in place. For this
reason, the Commission believes that
waiver of the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal as operative
upon filing.35
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2021–25 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2021–25. 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
For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
35
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18:17 Nov 29, 2021
Jkt 256001
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2021–25, and should
be submitted on or before December 21,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–25990 Filed 11–29–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93649; File No. SR–BOX–
2021–06]
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt rules governing the listing and
trading of equity securities on the
Exchange through a facility of the
Exchange to be known as BSTX LLC.
The proposed rule change was
published for comment in the Federal
Register on June 2, 2021.3 On July 13,
2021, pursuant to Section 19(b)(2) of the
Act,4 the Commission designated a
longer period within which to approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
On August 18, 2021, the Exchange filed
Amendment No. 1 to the proposed rule
change, which replaced and superseded
the proposed rule change as originally
filed.6 On August 27, 2021, the
Commission published the proposed
rule change, as modified by Amendment
No. 1, for notice and comment and
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 1.7
Section 19(b)(2) of the Act 8 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of filing
of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for notice and
comment in the Federal Register on
June 2, 2021.9 November 29, 2021 is 180
1 15
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Designation
of Longer Period for Commission
Action on Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt Rules
Governing the Trading of Equity
Securities on the Exchange Through a
Facility of the Exchange Known as
BSTX LLC
November 23, 2021.
On May 12, 2021, BOX Exchange LLC
(‘‘Exchange’’ or ‘‘BOX’’) filed with the
Securities and Exchange Commission
36
PO 00000
17 CFR 200.30–3(a)(12).
Frm 00125
Fmt 4703
Sfmt 4703
68023
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 92017
(May 25, 2021), 86 FR 29634 (‘‘Notice’’). Comments
on the proposed rule change can be found at:
https://www.sec.gov/comments/sr-box-2021-06/
srbox202106.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 92387,
86 FR 38140 (July 19, 2021). The Commission
designated August 31, 2021 as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
6 Amendment No. 1 is available on the
Commission’s website at: https://www.sec.gov/
comments/sr-box-2021-06/srbox202106-9159349247726.pdf.
7 See Securities Exchange Act Release No. 92796,
86 FR 49416 (September 2, 2021).
8 15 U.S.C. 78s(b)(2).
9 See Notice, supra note 3.
2 17
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]]>Agencies
[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 68018-68023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25990]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93658; File No. SR-ISE-2021-25]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Increase
Position Limits for Options on Certain Exchange-Traded Funds
November 23, 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 November 19, 2021, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to increase position limits for options on
certain exchange-traded funds (``ETFs'').
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
ISE proposes to increase certain position and exercise limits
within Options 9, Section 13 and 15, respectively, similar to the Cboe
Options Exchange, Inc. (``Cboe'').\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 93525 (November 4,
2021), 86 FR 62584 (November 10, 2021) (SR-Cboe-2021-029) (Notice of
Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1,
2, and 3, To Increase Position Limits for Options on Two Exchange-
Traded Funds).
---------------------------------------------------------------------------
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 funds (``ETFs''): (1) iShares iBoxx $ Investment Grade Corporate
Bond ETF (``LQD''); and (2) VanEck Vectors Gold Miners ETF (``GDX''),
(collectively ``Underlying ETFs''). Though the demand for these options
appears to have increased, position limits for options on the
Underlying ETFs have remained the same. The Exchange believes these
unchanged position limits may have impeded, and may continue to impede,
trading activity and strategies of investors, such as use of effective
hedging vehicles or income generating strategies (e.g., buy-write or
put-write), and the ability of 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 position limits for options on the Underlying ETFs may
enable liquidity providers to provide additional liquidity to the
Exchange and other market participants to transfer their liquidity
demands from OTC markets to the Exchange. As described in further
detail below, the Exchange believes that the continuously increasing
market capitalization of the Underlying ETFs, ETF components, as well
as the highly liquid markets for each, reduces the concerns for
potential market manipulation and/or disruption in the underlying
markets upon increasing position limits, while the rising demand for
trading options on the Underlying ETFs for legitimate economic purposes
compels an increase in position limits.
Proposed Position Limits for Options on the Underlying ETFs
Proposed Position Limits for options on ETFs are determined
pursuant to Options 9, Section 13 and vary according to the number of
outstanding shares and the trading volumes of the underlying equity
security (which includes ETFs) over the past six months. Pursuant to
Options 9, Section 13, the
[[Page 68019]]
largest in capitalization and the most frequently traded ETFs have an
option position limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization stocks and ETFs have position limits of 200,000,
75,000, 50,000 or 25,000 contracts (with adjustments for splits,
recapitalizations, etc.) on the same side of the market. Options on LQD
and GDX are currently subject to the standard position limit of 250,000
contracts as set forth in Options 9, Section 13. Supplementary .01 to
Options 9, Section 13 sets forth separate, higher position limits for
specific equity options (including options on specific ETFs).\4\ The
Exchange proposes to amend Supplementary .01 to Options 9, Section 13
to increase the position limits and [sic] for options on each of LQD
and GDX.\5\ The table below represents the current, and proposed,
position limits for options on the ETFs subject to this proposal:
---------------------------------------------------------------------------
\4\ Adjusted option series, in which one option contract in the
series represents the delivery of other than 100 shares of the
underlying security as a result of a corporate action by the issuer
of the security underlying such option series, do not impact the
notional value of the underlying security represented by those
options. When an underlying security undergoes a corporate action
resulting in adjusted series, the Exchange lists new standard option
series across all appropriate expiration months the day after the
existing series are adjusted. The adjusted series are generally
actively traded for a short period of time following adjustment, but
orders to open options positions in the underlying security are
almost exclusively placed in the new standard option series
contracts.
\5\ Similar amendments are being proposed for the exercise
limits for LQD and GDX options within Options 9, Section 15.
Exercise limits have been established for the corresponding options
at the same levels as the corresponding security's position limits.
------------------------------------------------------------------------
Current Proposed
Product position limit position limit
------------------------------------------------------------------------
LQD..................................... 250,000 500,000
GDX..................................... 250,000 500,000
------------------------------------------------------------------------
The Exchange notes that the proposed position limit for options on
LQD 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''), and iShares
iBoxx High Yield Corporate Bond Fund (``HYG''). The Exchange represents
that the Underlying ETFs qualify for either (1) the initial listing
criteria set forth in Options 4, Section 3(h) for ETFs holding non-U.S.
component securities, (2) the generic listing standards for series of
portfolio depository receipts and index fund shares based on
international or global indexes under which a comprehensive
surveillance agreement (``CSA'') is not required, as well as (3) the
continued listing criteria in Options 4, Section 4(b) (for ETFs).\6\ In
compliance with its listing rules, the Exchange also represents that
non-U.S. component securities that are not subject to a comprehensive
surveillance agreement (``CSA'') do not, in the aggregate, represent
more than more than 50% of the weight of any of the Underlying ETFs.\7\
---------------------------------------------------------------------------
\6\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Options 4, Section 3(h); Options 4, Section 4(b).
\7\ See Options 4, Section 3(h).
---------------------------------------------------------------------------
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 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.\8\ The Underlying ETFs, as well as the
ETF components, are highly liquid and are based on a broad set of
highly liquid securities and other reference assets, as demonstrated
through the trading statistics presented in this proposal. To support
the proposed position limit increases, the Exchange considered the
liquidity of the Underlying ETFs, the value of the Underlying. ETFs,
their components and the relevant marketplace, the share and option
volume for the Underlying ETFs, and, where applicable, the availability
or comparison of economically equivalent products to options on the
Underlying ETFs.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
---------------------------------------------------------------------------
Cboe demonstrated the below trading statistics regarding shares of
and options on the Underlying ETFs and the values of the Underlying
ETFs and their components:
----------------------------------------------------------------------------------------------------------------
Shares
ADV \9\ (ETF ADV (options outstanding Fund market Share value \12\
Product shares contracts) (millions) cap (USD (USD)
millions) \10\ millions)\11\
----------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------
Cboe collected the same trading statistics as above regarding a
sample of other ETFs, as well as the current position limits for
options on such ETFs pursuant to its Rule 13.07, to draw comparisons in
support of the proposed position limit increases for options on the
Underlying ETFs (see further discussion below).
---------------------------------------------------------------------------
\9\ Average daily volume (ADV) data for ETF 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 ETF shares and ETF options, and indexes herein this
proposal are for all of calendar year 2020, unless otherwise
indicated.
\10\ Shares Outstanding and Net Asset Values (``NAV''), as well
as for the comparative ETFs presented below, are as of April 5, 2021
for all ETFs.
\11\ Fund Market Capitalization data, as well as for the
comparative ETFs presented below, are as of January 14, 2021.
\12\ See note 10 above.
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (ETF Shares Fund market Current
Product shares ADV (options outstanding cap (USD Share value (USD) position
millions) contract) (millions) millions) limits
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
[[Page 68020]]
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 ETFs and in their overlying options, the larger market
capitalizations for each of the Underlying ETFs, and the overall market
landscape relevant to each of the Underlying ETFs support the proposal
to increase the position limits for each option class. Given the robust
liquidity in and value of the Underlying ETFs and their components, 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.
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.\13\ Cboe noted 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, Cboe
noted that, although there are currently no options listed for trading
on the IBOXIG Index, the components \14\ 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.\15\ 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.
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\13\ 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).
\14\ Investment grade corporate bonds.
\15\ See note 13 above.
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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.\16\ Cboe noted ADV in GDX options 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. Cboe noted 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. Cboe noted 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 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. Cboe noted that many of the Brazil-
based gold mining constituents included in GDX are also included in
EWZ, which tracks the investment results of an index composed of
Brazilian equities, and that Cboe had not identified any issues with
the continued listing and trading of EWZ options or any adverse market
impact on EWZ in connection with the current 500,000 position limit in
place for EWZ options. 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.
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\16\ See VanEck Vectors Gold Miners ETF, available at https://www.vaneck.com/library/vaneck-vectors-etfs/gdx-fact-sheet-pdf/
(January 14, 2021).
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Creation and Redemption for ETFs
The Exchange believes that the creation and redemption process for
the ETFs subject to this proposal will lessen the potential for
manipulative activity with options on the Underlying ETFs. When an ETF
provider wants to create more shares, it looks to an Authorized
Participant (``AP'') (generally a market maker or other large financial
institution) to acquire the underlying
[[Page 68021]]
components the ETF is to hold. For instance, when an ETF is designed to
track the performance of an index, the AP 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 AP 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. The creation
and redemption processes for the Underlying ETFs creates a direct link
to the underlying components of the ETF and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits for the options on the Underlying ETFs.
The Exchange understands that the ETF creation and redemption
processes seek to keep an ETF's share price trading in line with the
product's underlying net asset value. Because an ETF trades like a
stock, its share price will fluctuate during the trading day, due to
simple supply and demand. If demand to buy an ETF is high, for
instance, an ETF's share price might rise above the value of its
underlying components. When this happens, the AP or issuer believes the
ETF may now be overpriced, so it may buy shares of the component
securities or assets and then sell ETF shares in the open market. This
may drive the ETF's share price back toward the underlying net asset
value. Likewise, if an ETF share price starts trading at a discount to
the component securities or assets it holds, the AP or issuer can buy
shares of the ETF and redeem them for the underlying components. Buying
undervalued ETF shares may drive the share price of an ETF back toward
fair value. This arbitrage process helps to keep an ETF's share price
in line with the value of its underlying portfolio.
Surveillance and Reporting Requirements
The Exchange believes that increasing the position limits (and
exercise limits) for the options on the Underlying ETFs would lead to a
more liquid and competitive market environment for these options, which
will benefit customers interested in trading these products. The
reporting requirement for the options on the Underlying ETFs would
remain unchanged. Thus, the Exchange would still require that each
Member that maintains positions in the options on the same side of the
market, for its own account or for the account of a customer, report
certain information to the Exchange. This information would include,
but would not be limited to, the options' positions, whether such
positions are hedged and, if so, a description of the hedge(s). Market
Makers \17\ would continue to be exempt from this reporting
requirement, however, the Exchange may access Market Maker position
information.\18\ Moreover, the Exchange's requirement that Members file
reports with the Exchange for any customer who held aggregate large
long or short positions on the same side of the market of 200 or more
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.\19\
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\17\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(21). The term ``Competitive Market Maker'' means a
Member that is approved to exercise trading privileges associated
with CMM Rights. See Options 1, Section 1(a)(12). The term ``Primary
Market Maker'' means a Member that is approved to exercise trading
privileges associated with PMM Rights. See Options 1, Section
1(a)(36).
\18\ The Options Clearing Corporation (``OCC'') through the
Large Option Position Reporting (``LOPR'') system acts as a
centralized service provider for compliance with position reporting
requirements by collecting data from each Member, consolidating the
information, and ultimately providing detailed listings of each
Member's report to the Exchange, as well as Financial Industry
Regulatory Authority, Inc. (``FINRA''), acting as its agent pursuant
to a regulatory services agreement (``RSA'') with the Exchange.
\19\ See Options 9, Section 16, Reports Related to Position
Limits.
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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 ETFs and
continued compliance with the Exchange's listing standards. These
procedures utilize daily monitoring of market activity via automated
surveillance techniques to identify unusual activity in both options
and the underlyings, as applicable.\20\ The Exchange also notes that
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G,\21\ 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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\20\ 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.
\21\ 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 ETFs. Current margin and risk-based haircut
methodologies serve to limit the size of positions maintained by any
one account by increasing the margin and/or capital that a Member must
maintain for a large position held by itself or by its customer.\22\ In
addition, Rule 15c3-1 \23\ imposes a capital charge on Members to the
extent of any margin deficiency resulting from the higher margin
requirement.
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\22\ See Options 6C, Section 3, Margin Requirements.
\23\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) \24\ of the Act,\25\ in general, and furthers the objectives of
Section 6(b)(5) of the Act. Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \26\
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) \27\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\24\ 15 U.S.C. 78f(b)(5).
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed increase in position limits
for options on the Underlying ETFs will remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because it will provide market participants with the ability to more
[[Page 68022]]
effectively execute their trading and hedging activities. The proposed
increases will allow market participants to more fully implement
hedging strategies in related derivative products and to further use
options to achieve investment strategies (e.g., there are other
exchange-traded products (``ETPs'') that use options on the ETFs
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 OTC markets onto the Exchange, which
will enhance the process of price discovery conducted on the Exchange
through increased order flow.
In addition, the Exchange believes that the structure of the
Underlying ETFs, the considerable market capitalization of the funds
and underlying components, and the liquidity of the markets for the
applicable options and underlying components 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 the underlying components 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
ETFs (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.\28\
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\28\ See Securities Exchange Act Release No. 62147 (October 28,
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.\29\ Furthermore, the Exchange again
notes that that the proposed position limits for options on LQD and GDX
are consistent with existing position limits for options on comparable
ETFs in Options 9, Section 13.
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\29\ 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 ETFs, further promoting just and equitable
principles of trading, the maintenance of a fair and orderly market,
and the protection of investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition 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 intra-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act because the increased position limits (and exercise
limits) will be available to all market participants and apply to each
in the same manner. The Exchange believes that the proposed rule change
will provide additional opportunities for market participants to more
efficiently achieve their investment and trading objectives of market
participants.
The Exchange does not believe that the proposed rule change will
impose any burden on inter-market 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.\30\ 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
ETFs.
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\30\ 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 ETFs will increase at those exchanges.
For example, The Nasdaq Options Market LLC (``NOM'') and Nasdaq BX,
Inc. (``BX'') position limits are determined by the position limits
established by Cboe. See NOM and BX Options 9, Section 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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \31\ and Rule 19b-
4(f)(6) thereunder.\32\
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\31\ 15 U.S.C. 78s(b)(3)(A).
\32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \33\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \34\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon
[[Page 68023]]
filing. The Exchange states that waiver of the operative delay would be
consistent with the protection of investors and the public interest
because it will ensure fair competition among the exchanges by allowing
the Exchange to immediately increase the position limits for the
products subject to this proposal, which the Exchange believes will
provide consistency for ISE Members that are also members at Cboe where
these increased position limits are currently in place. For this
reason, the Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Therefore, the Commission hereby waives the operative delay
and designates the proposal as operative upon filing.\35\
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\33\ 17 CFR 240.19b-4(f)(6).
\34\ 17 CFR 240.19b-4(f)(6)(iii).
\35\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2021-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2021-25. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are cautioned that we do not redact or
edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-ISE-2021-25,
and should be submitted on or before December 21, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25990 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P
