Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase Position Limits for Options on Certain Exchange-Traded Funds, 68024-68029 [2021-25991]
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Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
days from that date, and January 28,
2022 is 240 days from that date. The
Commission finds it appropriate to
designate a longer period within which
to issue an order approving or
disapproving the proposed rule change
so that it has sufficient time to consider
the proposed rule change and the issues
raised in the comment letters that have
been submitted in connection therewith.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,10
designates January 28, 2022 as the date
by which the Commission shall either
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1 (File No. SR–BOX–2021–06).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–25987 Filed 11–29–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93659; File No. SR–BOX–
2021–27]
Self-Regulatory Organizations; BOX
Exchange 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.
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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
16, 2021, BOX Exchange LLC
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend IM–
3120–2 to permit [sic] increase position
limits for options on certain exchangetraded funds (‘‘ETFs’’). The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
10 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
18:17 Nov 29, 2021
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization 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 amend IM–
3120–2 to increase position limits for
options on certain exchange-traded
funds (‘‘ETFs’’). This is a competitive
filing that is based on a proposal
recently submitted by Cboe Exchange,
Inc. (‘‘Cboe’’) and approved by the
Commission.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.
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.
In its filing, Cboe states that it has
observed an ongoing increase in
demand, for both trading and hedging
purposes, in options on the following
exchange-traded products (‘‘ETPs’’): (1)
iShares iBoxx $ Investment Grade
Corporate Bond ETF (‘‘LQD’’) and (2)
VanEck Vectors Gold Miners ETF
(‘‘GDX’’). Though the demand for these
options appears to have increased,
position limits for options on LQD and
GDX have remained the same. The
3 See Securities Exchange Act Release No. 93525
(November 4, 2021) (Notice of Filing of Amendment
Nos. 2 and 3 and Order Granting Accelerated
Approval of SR–CBOE–2021–029).
11 17
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Room and also on the Exchange’s
internet website at https://
boxoptions.com.
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Exchange believes these unchanged
position limits may have impeded, and
may continue to impede, trading
activity and strategies of investors, such
as use of effective hedging vehicles or
income generating strategies (e.g., buywrite or put-write), and the ability of
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 LQD and
GDX 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 LQD
and GDX, 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
LQD and GDX for legitimate economic
purposes compels an increase in
position limits.
Proposed Position Limits for Options on
LQD and GDX
Position limits for options on ETFs
are determined pursuant to Rule 3120
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 Rule 3120,
the largest in capitalization and the
most frequently traded stocks and ETFs
have an option position limit of 250,000
contracts (with adjustments for splits,
re-capitalizations, etc.) on the same side
of the market; and smaller capitalization
stocks and ETFs have position limits of
200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits,
re-capitalizations, 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 Rule 3120. IM–3120–2 sets forth
separate, higher position limits for
specific equity options (including
options on specific ETFs).4 The
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
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Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
Exchange proposes to amend IM–3120–
2 to increase the position limits and, as
a result, exercise limits, for options on
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 .........................................................................................................................................................................
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’’), iShares iBoxx High
Yield Corporate Bond Fund (‘‘HYG’’)
and Financial Select Sector SPDR Fund
[sic] (‘‘XLF’’). The Exchange represents
that LQD and GDX qualify for either (1)
the initial listing criteria set forth in
Rule 5020(h)(2) for ETFs holding nonU.S. component securities, or (2) the
generic listing standards for series of
portfolio depository receipts and index
fund shares based on international or
global indexes under which a
comprehensive surveillance agreement
(‘‘CSA’’) is not required, as well as (3)
the continued listing criteria in Rule
5030 (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 LQD and GDX.7
Composition and Growth Analysis for
LQD and GDX
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
ADV 9
(ETF shares)
(millions)
Product
LQD ................................................................................
GDX ...............................................................................
Cboe also collected the same trading
statistics, where applicable, as above
regarding a sample of other ETFs, as
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EWZ ...................................................
TLT .....................................................
EWJ ....................................................
HYG ...................................................
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ADV
(option
contracts)
29.2
11.5
8.2
30.5
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.
30,300
166,000
Shares
outstanding
(millions)
139,400
111,800
15,500
261,600
Frm 00127
Fmt 4703
54,113.7
16,170.5
Share value
(USD)
130.13 (NAV)
33.80 (NAV)
position limit increases for options on
LQD and GDX (see further discussion
below):
Fund market
cap
(USD)
(millions)
173.8
103.7
185.3
254.5
Sfmt 4703
Fund market
cap
(USD)
(millions) 11
308.1
419.8
5 By virtue of Rule 3120(d), which is not being
amended by this filing, the exercise limits for LQD
and GDX options would be similarly increased.
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 Rule 5020(h)(2).
7 See Rule 5020(h)(2).
8 See Securities Exchange Act Release No. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29).
9 Average daily volume (ADV) data for ETF shares
and option contracts, as well as for ETF shares and
PO 00000
500,000
500,000
well as serve to reduce the possibility
for disruption of the options market
itself, especially in illiquid classes.8
LQD and GDX, 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, Cboe considered the liquidity
of LQD and GDX, the value of LQD and
GDX, their components and the relevant
marketplace, the share and option
volume for LQD and GDX, and, where
applicable, the availability or
comparison of economically equivalent
products to options on LQD and GDX.
Cboe collected the following trading
statistics regarding shares of and options
on LQD and GDX and the values of LQD
and GDX and their components:
Shares
outstanding
(USD)
(millions) 10
well as the current position limits for
options on such ETFs, to draw
comparisons in support of proposed
ADV
(ETF shares)
(millions)
Product
14.1
39.4
ADV
(option
contracts)
250,000
250,000
Proposal
position limit
Share value
(USD)
6,506.8
17,121.3
13,860.7
24,067.5
33.71
136.85
69.72
86.86
(NAV)
(NAV)
(NAV)
(NAV)
Current
position
limits
500,000
500,000
500,000
500,000
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.
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Federal Register / Vol. 86, No. 227 / Tuesday, November 30, 2021 / Notices
The Exchange believes that, overall,
the liquidity in the shares of LQD and
GDX and in their overlying options, the
larger market capitalizations for each
[sic] LQD and GDX, and the overall
market landscape relevant to each [sic]
LQD and GDX support the proposal to
increase the position limits for each
option class. Given the robust liquidity
in and value of LQD and GDX 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.12 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 13
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.14 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.15 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
and 261,600 option contracts), each of
which is currently subject to a position
limit of 500,000 option contracts—the
13 Investment
12 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).
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grade corporate bonds.
supra note 13.
15 See VanEck Vectors Gold Miners ETF, available
at https://www.vaneck.com/library/vaneck-vectorsetfs/gdx-fact-sheet-pdf\ (January 14, 2021).
14 See
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proposed limit for options on GDX. GDX
also experiences a comparable, or
higher, market capitalization
(approximately $16.2 billion) than EWZ,
TLT and EWZ. The Exchange
particularly notes 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 the
Exchange has 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 LQD and GDX. 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
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 LQD and GDX
creates a direct link to the underlying
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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 LQD and GDX.
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.
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Surveillance and Reporting
Requirements
The Exchange believes that increasing
the position limits for the options on
LQD and GDX 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 LQD and
GDX would remain unchanged. Thus,
the Exchange would still require that
each Participant that maintains
positions in the options on the same
side of the market, for its own account
or for the account of a customer, report
certain information to the Exchange.
This information would include, but
would not be limited to, the options’
positions, whether such positions are
hedged and, if so, a description of the
hedge(s). Market-Makers would
continue to be exempt from this
reporting requirement, however, the
Exchange may access Market-Maker
position information.16 Moreover, the
16 The Options Clearing Corporation (‘‘OCC’’)
through the Large option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for Participant compliance with position
reporting requirements by collecting data from each
Participant, consolidating the information, and
ultimately providing detailed listings of each
Participant’s report to the Exchange, as well as
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Exchange’s requirement that
Participants 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.17
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 LQD and
GDX 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.18 The
Exchange also notes that large stock
holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,19 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 LQD and GDX. 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 Participant must
maintain for a large position held by
itself or by its customer.20 In addition,
Rule 15c3–1 21 imposes a capital charge
on Participants to the extent of any
margin deficiency resulting from the
higher margin requirement.
Financial Industry Regulatory Authority, Inc.
(‘‘FINRA’’), acting as its agent pursuant to a
regulatory services agreement (‘‘RSA’’).
17 See Rule 3150 for reporting requirements.
18 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.
19 17 CFR 240.13d–1.
20 See Rule 10100 for a description of margin
requirements.
21 17 CFR 240.15c3–1.
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68027
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),22 in general, and Section 6(b)(5)
of the Act,23 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest. Additionally, the
Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 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 LQD and GDX 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
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 LQD and GDX, the
considerable market capitalization of
the funds and underlying components,
22 15
23 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
24 Id.
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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
LQD and GDX (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.25
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 to increase
position limits for options on similar,
highly liquid and actively traded
ETPs.26 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 other
ETFs in IM–3120–2.
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 LQD and GDX, further
promoting just and equitable principles
of trading, the maintenance of a fair and
25 See Securities Exchange Act Release No. 62147
(October 28, 2005) (SR–CBOE– 2005–41), at 62149.
26 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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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 not
necessary or appropriate in furtherance
of the purposes of the Act. In this regard
and as indicated above, the Exchange
notes that the rule change is being
proposed as a competitive response to a
filing submitted by Cboe that was
approved by the Commission.27 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. 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
LQD and GDX.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
27 See
PO 00000
supra, note 3.
Frm 00130
Fmt 4703
Sfmt 4703
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 28 and Rule 19b–
4(f)(6) thereunder.29
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 30 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 31
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it will ensure fair competition
among the exchanges by allowing the
Exchange to immediately increase the
position limits for the products subject
to this proposal, which the Exchange
believes will provide consistency for
BOX Participants that are also members
at Cboe where these increased position
limits are currently in place. For this
reason, the Commission believes that
waiver of the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal as operative
upon filing.32
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
28 15
U.S.C. 78s(b)(3)(A).
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.
30 17 CFR 240.19b–4(f)(6).
31 17 CFR 240.19b–4(f)(6)(iii).
32 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).
29 17
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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.
Number SR–BOX–2021–27, and should
be submitted on or before December 21,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
J. Matthew DeLesDernier,
Assistant Secretary.
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:
[FR Doc. 2021–25991 Filed 11–29–21; 8:45 am]
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–
BOX–2021–27 on the subject line.
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Increase Position
Limits for Options on Certain
Exchange-Traded Funds
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–BOX–2021–27. 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
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 PHLX LLC (‘‘Phlx’’ 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.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93661; File No. SR–Phlx–
2021–70]
November 23, 2021.
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/phlx/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
33 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
68029
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
Phlx 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.
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
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).
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]]>Agencies
[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 68024-68029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25991]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93659; File No. SR-BOX-2021-27]
Self-Regulatory Organizations; BOX Exchange 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 16, 2021, BOX Exchange LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend IM-3120-2 to permit [sic] increase
position limits for options on certain exchange-traded funds
(``ETFs''). The text of the proposed rule change is available from the
principal office of the Exchange, at the Commission's Public Reference
Room and also on the Exchange's internet website at https://boxoptions.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 amend IM-3120-2 to increase position
limits for options on certain exchange-traded funds (``ETFs''). This is
a competitive filing that is based on a proposal recently submitted by
Cboe Exchange, Inc. (``Cboe'') and approved by the Commission.\3\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 93525 (November 4,
2021) (Notice of Filing of Amendment Nos. 2 and 3 and Order Granting
Accelerated Approval of SR-CBOE-2021-029).
---------------------------------------------------------------------------
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.
In its filing, Cboe states that it has observed an ongoing increase
in demand, for both trading and hedging purposes, in options on the
following exchange-traded products (``ETPs''): (1) iShares iBoxx $
Investment Grade Corporate Bond ETF (``LQD'') and (2) VanEck Vectors
Gold Miners ETF (``GDX''). Though the demand for these options appears
to have increased, position limits for options on LQD and GDX 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
LQD and GDX 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 LQD and GDX, 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 LQD and GDX for legitimate economic purposes compels
an increase in position limits.
Proposed Position Limits for Options on LQD and GDX
Position limits for options on ETFs are determined pursuant to Rule
3120 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 Rule 3120, the largest in
capitalization and the most frequently traded stocks and ETFs have an
option position limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization stocks and ETFs have position limits of 200,000,
75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, 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 Rule 3120. IM-3120-2 sets forth separate,
higher position limits for specific equity options (including options
on specific ETFs).\4\ The
[[Page 68025]]
Exchange proposes to amend IM-3120-2 to increase the position limits
and, as a result, exercise limits, for options on 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\ By virtue of Rule 3120(d), which is not being amended by
this filing, the exercise limits for LQD and GDX options would be
similarly increased.
------------------------------------------------------------------------
Current Proposal
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''), iShares
iBoxx High Yield Corporate Bond Fund (``HYG'') and Financial Select
Sector SPDR Fund [sic] (``XLF''). The Exchange represents that LQD and
GDX qualify for either (1) the initial listing criteria set forth in
Rule 5020(h)(2) for ETFs holding non-U.S. component securities, or (2)
the generic listing standards for series of portfolio depository
receipts and index fund shares based on international or global indexes
under which a comprehensive surveillance agreement (``CSA'') is not
required, as well as (3) the continued listing criteria in Rule 5030
(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 LQD and
GDX.\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 Rule 5020(h)(2).
\7\ See Rule 5020(h)(2).
---------------------------------------------------------------------------
Composition and Growth Analysis for LQD and GDX
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.\8\ LQD and GDX, 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, Cboe considered the liquidity of LQD and GDX, the
value of LQD and GDX, their components and the relevant marketplace,
the share and option volume for LQD and GDX, and, where applicable, the
availability or comparison of economically equivalent products to
options on LQD and GDX.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
---------------------------------------------------------------------------
Cboe collected the following trading statistics regarding shares of
and options on LQD and GDX and the values of LQD and GDX and their
components:
---------------------------------------------------------------------------
\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.
----------------------------------------------------------------------------------------------------------------
Shares
ADV \9\ (ETF outstanding Fund market
Product shares) ADV (option (USD) cap (USD) Share value (USD)
(millions) contracts) (millions) (millions)
\10\ \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 also collected the same trading statistics, where applicable,
as above regarding a sample of other ETFs, as well as the current
position limits for options on such ETFs, to draw comparisons in
support of proposed position limit increases for options on LQD and GDX
(see further discussion below):
--------------------------------------------------------------------------------------------------------------------------------------------------------
ADV (ETF Shares Fund market Current
Product shares) ADV (option outstanding cap (USD) Share value (USD) position
(millions) contracts) (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
HYG.................................................. 30.5 261,600 254.5 24,067.5 86.86 (NAV) 500,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 68026]]
The Exchange believes that, overall, the liquidity in the shares of
LQD and GDX and in their overlying options, the larger market
capitalizations for each [sic] LQD and GDX, and the overall market
landscape relevant to each [sic] LQD and GDX support the proposal to
increase the position limits for each option class. Given the robust
liquidity in and value of LQD and GDX 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.\12\ 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 \13\ 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.\14\ 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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\12\ 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).
\13\ Investment grade corporate bonds.
\14\ See supra note 13.
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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.\15\ 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 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. The Exchange particularly notes 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 the Exchange has 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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\15\ 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 LQD and GDX. 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 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 LQD and
GDX creates a direct link to the underlying
[[Page 68027]]
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 LQD and GDX.
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 for the
options on LQD and GDX 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 LQD and GDX would remain unchanged. Thus, the Exchange would
still require that each Participant that maintains positions in the
options on the same side of the market, for its own account or for the
account of a customer, report certain information to the Exchange. This
information would include, but would not be limited to, the options'
positions, whether such positions are hedged and, if so, a description
of the hedge(s). Market-Makers would continue to be exempt from this
reporting requirement, however, the Exchange may access Market-Maker
position information.\16\ Moreover, the Exchange's requirement that
Participants 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.\17\
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\16\ The Options Clearing Corporation (``OCC'') through the
Large option Position Reporting (``LOPR'') system acts as a
centralized service provider for Participant compliance with
position reporting requirements by collecting data from each
Participant, consolidating the information, and ultimately providing
detailed listings of each Participant'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'').
\17\ See Rule 3150 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 LQD and GDX 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.\18\ The Exchange also notes that large
stock holdings must be disclosed to the Commission by way of Schedules
13D or 13G,\19\ 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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\18\ 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.
\19\ 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 LQD and GDX. 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 Participant must maintain
for a large position held by itself or by its customer.\20\ In
addition, Rule 15c3-1 \21\ imposes a capital charge on Participants to
the extent of any margin deficiency resulting from the higher margin
requirement.
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\20\ See Rule 10100 for a description of margin requirements.
\21\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\22\ in general, and Section 6(b)(5) of the Act,\23\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general to protect investors and the
public interest. Additionally, the Exchange believes the proposed rule
change is consistent with the Section 6(b)(5) \24\ requirement that the
rules of an exchange not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
\24\ Id.
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The Exchange believes that the proposed increase in position limits
for options on LQD and GDX 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 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 LQD and
GDX, the considerable market capitalization of the funds and underlying
components,
[[Page 68028]]
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 LQD and GDX (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.\25\
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\25\ 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 to
increase position limits for options on similar, highly liquid and
actively traded ETPs.\26\ 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 other ETFs in
IM-3120-2.
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\26\ 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 LQD and GDX, 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 not necessary or appropriate in
furtherance of the purposes of the Act. In this regard and as indicated
above, the Exchange notes that the rule change is being proposed as a
competitive response to a filing submitted by Cboe that was approved by
the Commission.\27\ 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.
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\27\ See supra, note 3.
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The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. On the contrary, the Exchange
believes the proposal promotes competition because it may attract
additional order flow from the OTC market to exchanges, which would in
turn compete amongst each other for those orders. The Exchange believes
market participants would benefit from being able to trade options with
increased position limits in an exchange environment in several ways,
including but not limited to the following: (1) Enhanced efficiency in
initiating and closing out 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 LQD and GDX.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \28\ and Rule 19b-
4(f)(6) thereunder.\29\
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\28\ 15 U.S.C. 78s(b)(3)(A).
\29\ 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 \30\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \31\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it will ensure
fair competition among the exchanges by allowing the Exchange to
immediately increase the position limits for the products subject to
this proposal, which the Exchange believes will provide consistency for
BOX Participants that are also members at Cboe where these increased
position limits are currently in place. For this reason, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest. Therefore, the
Commission hereby waives the operative delay and designates the
proposal as operative upon filing.\32\
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\30\ 17 CFR 240.19b-4(f)(6).
\31\ 17 CFR 240.19b-4(f)(6)(iii).
\32\ 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
[[Page 68029]]
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-BOX-2021-27 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-BOX-2021-27. 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-BOX-2021-27, and should be submitted on
or before December 21, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25991 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P
