Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Increase Position Limits for Options on Apple Inc. Stock, 12705-12710 [2023-04032]
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Federal Register / Vol. 88, No. 39 / Tuesday, February 28, 2023 / Notices
Estimated Time per Respondent: 140
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Stephen Hickman,
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[FR Doc. 2023–04106 Filed 2–27–23; 8:45 am]
BILLING CODE 6325–66–P
POSTAL REGULATORY COMMISSION
[Docket Nos. MC2023–113 and CP2023–116]
New Postal Products
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Notice.
AGENCY:
ACTION:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
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notice informs the public of the filing,
invites public comment, and takes other
administrative steps.
DATES: Comments are due: March 1,
2023.
SUMMARY:
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SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
ddrumheller on DSK120RN23PROD with NOTICES
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the Market Dominant or
the Competitive product list, or the
modification of an existing product
currently appearing on the Market
Dominant or the Competitive product
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Section II identifies the docket
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request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
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proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
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pertaining to each request.
The public portions of the Postal
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the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3011.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern Market Dominant product(s),
applicable statutory and regulatory
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U.S.C. 3642, 39 CFR part 3030, and 39
CFR part 3040, subpart B. For request(s)
that the Postal Service states concern
Competitive product(s), applicable
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II. Docketed Proceeding(s)
1. Docket No(s).: MC2023–113 and
CP2023–116; Filing Title: USPS Request
to Add Priority Mail Express
International, Priority Mail International
& First-Class Package International
Service Contract 14 to Competitive
Product List and Notice of Filing
Materials Under Seal; Filing Acceptance
Date: February 22, 2023; Filing
Authority: 39 U.S.C. 3642, 39 CFR
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3035.105; Public Representative:
Jennaca D. Upperman; Comments Due:
March 1, 2023.
This Notice will be published in the
Federal Register.
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a Priority
Mail Express International, Priority Mail
International & First-Class Package
International Service contract to the list
of Negotiated Service Agreements in the
Competitive Product List in the Mail
Classification Schedule.
SUMMARY:
DATES:
Date of notice: February 28,
2023.
FOR FURTHER INFORMATION CONTACT:
Christopher C. Meyerson, (202) 268–
7820.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on February 22,
2023, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Express International,
Priority Mail International & First-Class
Package International Service Contract
14 to Competitive Product List.
Documents are available at
www.prc.gov, Docket Nos. MC2023–113
and CP2023–116.
SUPPLEMENTARY INFORMATION:
Tram T. Pham,
Attorney, Ethics and Legal Compliance.
[FR Doc. 2023–04077 Filed 2–27–23; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96965; File No. SR–CBOE–
2022–057]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Increase Position
Limits for Options on Apple Inc. Stock
Erica A. Barker,
Secretary.
February 22, 2023.
[FR Doc. 2023–04053 Filed 2–27–23; 8:45 am]
I. Introduction
BILLING CODE 7710–FW–P
POSTAL SERVICE
International Product Change—Priority
Mail Express International, Priority Mail
International & First-Class Package
International Service Agreement
Postal ServiceTM.
Notice.
AGENCY:
ACTION:
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
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On November 7, 2022, Cboe
Exchange, Inc. (‘‘Exchange’’ or ‘‘Cboe
Options’’) filed with the Securities and
Exchange Commission (‘‘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 amend Cboe
Rules 8.30 and 8.42 to increase the
position and exercise limits for options
on Apple Inc. (‘‘AAPL’’) stock. The
proposed rule change was published for
comment in the Federal Register on
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 88, No. 39 / Tuesday, February 28, 2023 / Notices
Currently, Exchange Rule 8.30
establishes position limits for equity
options of 25,000 contracts, 50,000
contracts, 75,000 contracts, 200,000
contracts, or 250,000 contracts on the
same side of the market or such other
number of option contracts as may be
fixed from time to time by the
Exchange.7 The position limit
applicable to a class is determined
based on the trading volume and
outstanding shares of the underlying
security.8 Based on the criteria in
Exchange Rule 8.30, Interpretation and
Policy .02, the position limit for AAPL
options currently is 250,000 contracts
and, pursuant to Exchange Rule 8.42,
the exercise limit for AAPL options is
also 250,000 contracts.9
The Exchange states that when an
underlying security undergoes a stock
split, the number of outstanding options
is proportionately increased and the
exercise price is proportionately
decreased.10 For example, if a security
undergoes a 4–1 stock split, an investor
that held one option with an exercise
price of $100 on 100 shares of stock
ABC prior to the stock split would hold
four ABC options, each on 100 shares
and each with an exercise price of $25,
following the stock split.11 In response
to the increase in option positions that
results from a stock split, the position
(and exercise) limit for the option
overlying that security is multiplied by
the number of shares issued per single
outstanding share as part of the stock
split.12 For example, using the same 4–
1 example, if the position limit for an
option before a 4–1 stock split is
250,000 contracts, the position limit for
the option overlying that security will
be multiplied by four to 1,000,000
contracts.13 The Exchange states that
this increase prevents investors holding
the maximum positions from
immediately being over the position
limit at the time of the stock split.14 The
Exchange further states that this
position limit increase is temporary and
lasts until the last outstanding option
position at the time of the stock split has
expired, at which time the position limit
reverts to the pre-stock-split level.15
The Exchange states that the position
and exercise limits for AAPL options
were 250,000 contracts at the time of the
AAPL 4–1 stock split on August 31,
2020.16 Following the stock split, the
position limit was increased to
1,000,000 contracts.17 The position limit
for AAPL options remained at 1,000,000
contracts until September 16, 2022
(when the last option position that was
outstanding at the time of the stock split
expired), when the position limit
reverted back to 250,000 contracts.18
The Exchange states that, given the
significant activity in AAPL options
(and the underlying security), it
understands that numerous customers
held more than 250,000 AAPL option
contracts at that time, putting their
holdings above the position limit.19 The
Exchange further states that it
understands from these customers that
the reduced position limit may be
impeding trading activity and their
ability to implement investment
strategies in AAPL options, including
the use of effective hedging vehicles or
income generating strategies (e.g., buywrite or put-write strategies), and the
ability of market-makers to make liquid
markets with tighter spreads in AAPL
options, potentially causing the transfer
of volume to the over-the-counter
(‘‘OTC’’) market.20 The Exchange states
that OTC transactions, which are not
publicly disclosed, do not contribute to
the price discovery process on a public
exchange or other lit markets.21
The Exchange believes that it is
appropriate to increase the AAPL option
position limit to 1,000,000 contracts so
market participants may continue to
trade AAPL options in the same manner
and at the same levels as they have for
the prior two years, which could enable
liquidity providers to maintain liquidity
levels on the Exchange and allow other
market participants to continue to trade
on the Exchange rather than shift their
volume to the OTC market.22 The
Exchange believes the larger market
capitalization of AAPL stock, as well as
the highly liquid market for AAPL stock
and the overlying options since the
stock split, reduces the concerns
regarding potential market manipulation
and/or disruption in the underlying
market following an increase in the
position limit.23 The Exchange states
that the continued demand for trading
AAPL options for legitimate economic
purposes despite the reduced position
limit warrants a reversion to the
1,000,000-contract position limit that
existed for the prior two years.24
The Exchange further states that the
proposed position limit of 1,000,000
contracts for AAPL options, which was
the AAPL option position limit for two
years, is the same as existing position
limits for options on the iShares Russell
2000 ETF (‘‘IWM’’), the iShares MSCI
Emerging Markets ETF (‘‘EEM’’), iShares
China Large-Cap ETF (‘‘FXI’’), and
iShares MSCI EAFE ETF (‘‘EFA’’).25 The
Exchange states that, to support the
proposed position limit increase, it
considered the liquidity of the
underlying security, the value of the
underlying security and relevant
marketplace, the AAPL share and option
volume, and the liquidity of the noted
exchange-traded products (‘‘ETPs’’).26
The Exchange provided the
information in the table below regarding
the average daily volume (‘‘ADV’’) for
AAPL shares and options on AAPL
stock traded during specified time
periods prior to the 2020 stock split,
between the stock split and the position
limit reversion, and since the position
limit reversion: 27
3 See Securities Exchange Act Release No. 96353
(November 18, 2022), 87 FR 72568 (November 25,
2022) (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 96570
(December 22, 2022), 87 FR 80212 (December 29,
2022). The Commission designated February 23,
2023, 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 15 U.S.C. 78s(b)(2)(B).
7 Pursuant to Exchange Rule 8.42, the exercise
limit for an equity option is the same as the position
limit established in Exchange Rule 8.30 for that
equity option. See id. at n. 3.
8 See Notice, 87 FR at 72568 and Exchange Rule
8.30, Interpretation and Policy .02.
9 See Notice, 87 FR at 72569.
10 See id. (citing Options Clearing Corporation
(‘‘OCC’’) Bylaws, Article VI, Section 11A(a); and
Characteristics and Risks of Standardized Options
at 19).
11 See Notice, 87 FR at 72569.
12 See id.
13 See id.
14 See id.
15 See id.
16 See id.
17 See id.
18 See id. The Commission understands that this
type of temporary position limit increase following
a stock split occurs pursuant to the direction of the
OCC.
19 See id.
20 See id.
21 See id.
22 See id.
23 See id.
24 See id.
25 See id. and Exchange Rule 8.30, Interpretation
and Policy .07.
26 See Notice, 87 FR at 72569.
27 See id.
November 25, 2022.3 On December 22,
2022, 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
approve or disapprove the proposed
rule change.5 This order institutes
proceedings pursuant to Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change.
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II. Description of the Proposal
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January 3, 2020 through August 31, 2020 (date of the stock split) ...........................................................
September 1, 2020 through December 31, 2021 .......................................................................................
January 1, 2022 through September 16, 2022 (date of the position limit reversion) .................................
September 17, 2022 through October 24, 2022 (time since the position limit reversion) ..........................
In addition, the Exchange states that
as of October 24, 2022, AAPL had a
market capitalization of $2.4 trillion
(16.07 billion shares outstanding with a
share price of $149.45).28 For
comparison, the Exchange provided the
ADV
(ETF shares)
Product
IWM ......................................................................................
EEM .....................................................................................
FXI ........................................................................................
EFA ......................................................................................
The Exchange states that while these
are ETPs, rather than stocks, ETP shares
trade in the same manner as stocks and,
except for those set forth in Exchange
Rule 8.30, Interpretation and Policy .07,
position limits on ETP options are
determined in the same manner as the
position limits for options on stocks.30
The Exchange believes that the
liquidity in the AAPL shares and their
overlying options, AAPL’s significantly
large market capitalization, and the
overall market landscape for AAPL
stock and options support the proposal
to increase its position limit.31 The
Exchange states that, given the robust
liquidity in and value of AAPL stock,
the Exchange does not anticipate that
the proposed increase in the position
limit would create significant price
movements because the relevant market
is large enough to adequately absorb
potential price movements that may be
caused by larger trades.32 To reduce the
chances of potential manipulation if
trading in AAPL stock declines,
proposed Exchange Rule 8.30,
Interpretation and Policy .02(g) provides
that if the most recent six-month trading
28 See
id.
id. at 72570.
30 See id. Exchange Rule 8.30, Interpretation and
Policy .07 provides that the position limits under
Exchange Rule 8.30 applicable to options on shares
or other securities that represent interests in
registered investment companies (or series thereof)
organized as open-end management investment
companies, unit investment trusts or similar entities
that satisfy the criteria set forth in Exchange Rule
4.3.06 shall be the same as the position limits
applicable to equity options under Exchange Rule
8.30 and Interpretations and Policies thereunder,
except for the position limits established in
Exchange Rule 8.30, Interpretation and Policy .07
for specified securities, including IWM, EEM, FXI,
and EFA.
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29 See
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ADV
(option
contracts)
31,358,610
47,767,767
39,007,654
29,953,566
840,721
183,342
159,703
123,262
volume of AAPL stock totals less than
200,000,000 shares or the most recent
six-month trading volume of AAPL
stock totals less than 150,000,000 shares
and AAPL stock has fewer than
600,000,000 shares currently
outstanding, the position limit for AAPL
options will be determined as set forth
in paragraphs (a) through (e) of
Interpretation and Policy .02.33 The
Exchange states that these proposed
levels are twice the current volume and
share levels of an underlying security
for the overlying option to be eligible for
the 250,000-contract option position
limit.34
The Exchange states that the reporting
requirements for AAPL options will
remain unchanged under the
proposal.35 The Exchange states that it
will continue to require that each
Trading Permit Holder (‘‘TPH’’) or TPH
organization that maintains positions in
AAPL 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, including
the options’ positions, whether such
positions are hedged and, if so, a
31 See
id.
id.
33 See id.
34 See id.
35 See id.
36 See id.
37 A Market-Maker is a ‘‘Trading Permit Holder
registered with the Exchange pursuant to Rule 3.52
for the purpose of making markets in option
contracts traded on the Exchange and that has the
rights and responsibilities set forth in Chapter 5,
Section D of the Rules.’’ A Designated Primary
Market-Maker is a ‘‘TPH organization that is
approved by the Exchange to function in allocated
securities as a Market-Maker (as defined in Rule
8.1) and is subject to the obligations under Rule
32 See
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ADV
(option
contracts)
ADV
(shares)
Date range
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170,468,316
101,001,141
88,458,041
91,683,969
870,304
1,661,627
1,354,430
1,425,372
information below for IWM, EEM, FXI,
and EFA from January 1, 2022, through
October 24, 2022: 29
Shares
outstanding
(millions)
291.10
578.25
176.70
705.60
Fund market
cap
(USD)
(billions)
50.49
19.62
3.80
41.83
Share
value
(USD)
173.44
33.93
21.53
59.28
description of the hedge(s).36 Although
Market-Makers, including Designated
Primary Market-Makers,37 will continue
to be exempt from the reporting
requirement, the Exchange states that it
may access Market-Maker position
information.38 In addition, the Exchange
states that its requirement that TPHs file
reports with the Exchange for any
customer who held aggregate large long
or short positions on the same side of
the market of 200 or more option
contracts of any single class for the
previous day will remain at this level
for AAPL options and will continue to
serve as an important part of the
Exchange’s surveillance efforts.39
The Exchange believes that its and
other SROs’ existing surveillance
procedures and reporting requirements
are capable of properly identifying
disruptive and/or manipulative trading
activity.40 The Exchange represents that
it has adequate surveillances in place to
detect potential manipulation, as well as
reviews in place to identify continued
compliance with the Exchange’s listing
standards.41 According to the Exchange,
these procedures utilize daily
5.54 or as otherwise provided under the rules of the
Exchange.’’ See Exchange Rule 1.1.
38 The Exchange states that the OCC, through the
Large Option Position Reporting system, acts as a
centralized service provider for TPH compliance
with position reporting requirements by collecting
data from each TPH or TPH organization,
consolidating the information, and ultimately
providing detailed listings of each TPH’s report to
the Exchange and to the Financial Industry
Regulatory Authority, Inc., acting as its agent
pursuant to a regulatory services agreement. See
Notice, 87 FR at 72570, n. 11.
39 See Notice, 87 FR at 72570. See also Exchange
Rule 8.43.
40 See Notice, 87 FR at 72570.
41 See id.
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monitoring of market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlying securities, as
applicable.42 In addition, the Exchange
states that the disclosures in Schedules
13D or 13G,43 which are used to report
ownership of stock that exceeds 5% of
a company’s total stock issue, could
assist in providing information in
monitoring for potential manipulative
schemes.44
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
AAPL options.45 The Exchange states
that current margin and risk-based
haircut methodologies serve to limit the
size of positions maintained by any one
account by increasing the margin and/
or capital that a TPH must maintain for
a large position held by itself or by its
customer.46 In addition, the Exchange
states that Rule 15c3–1 under the Act 47
imposes a capital charge on TPHs to the
extent of any margin deficiency
resulting from the higher margin
requirement.48
III. Proceedings To Determine Whether
To Approve or Disapprove SR–CBOE–
2022–057 and Grounds for Disapproval
Under Consideration
ddrumheller on DSK120RN23PROD with NOTICES
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 49 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of proceedings is appropriate
at this time in view of the legal and
policy issues raised by the proposal, as
discussed below. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comment on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,50 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
42 See id. The Exchange believes these procedures
have been effective for the surveillance of AAPL
option trading and the Exchange will continue to
employ them. See id. at n. 13.
43 17 CFR 240.13d–1.
44 See Notice, 87 FR at 72570.
45 See id.
46 See id. at 72570, n. 15 (citing Exchange Rule
10.3 regarding margin requirements).
47 17 CFR 240.15c3–1.
48 See Notice, 87 FR at 72570.
49 15 U.S.C. 78s(b)(2)(B).
50 Id.
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instituting proceedings to allow for
additional analysis of, and input from
commenters with respect to, the
consistency of the proposed rule change
with the Act and, in particular, Section
6(b)(5) of the Act,51 which requires that
the rules of a national securities
exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, 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, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] and the rules
and regulations issued thereunder . . .
is on the self-regulatory organization
that proposed the rule change.’’ 52 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,53 and any failure of a selfregulatory organization to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Act and the applicable rules
and regulations.54
As discussed above, the Exchange has
proposed to increase the position and
exercise limits for AAPL options from
250,000 contracts to 1,000,000 contracts.
Following the AAPL 4–1 stock split on
August 31, 2020, the AAPL option
position limit temporarily increased
from 250,000 contracts to 1,000,000
contracts until September 16, 2022,
when the position limit reverted to
250,000 contracts.55 The Exchange
states that it understands from
customers that the reduced position
limit may be impeding trading activity
and their ability to implement
investment strategies in AAPL options,
including the use of effective hedging
vehicles or income generating strategies,
and the ability of market-makers to
make liquid markets with tighter
spreads in AAPL options.56 The
Exchange believes that it is appropriate
51 15
U.S.C. 78f(b)(5).
700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
53 See id.
54 See id.
55 See Notice, 87 FR at 72569.
56 See id.
52 Rule
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to increase the AAPL position limit to
1,000,000 option contracts so market
participants may continue to trade
AAPL options in the same manner and
at the same levels as they did when the
position limit temporarily was
1,000,000 contracts.57
Position and exercise limits serve as
a regulatory tool designed to address
manipulative schemes and adverse
market impact surrounding the use of
options.58 The proposal is novel in that
currently, outside of exceptions to
accommodate temporary OCC-initiated
adjustments, the maximum stock option
position and exercise limits permitted
under exchange rules are 250,000
contracts. In addition to being novel, the
proposed fourfold increase in the
position and exercise limits for AAPL
options would be a substantial increase
from current levels, and raises the
potential for adverse impacts in the
underlying market for AAPL stock.
According to the Exchange, the larger
market capitalization of AAPL stock, as
well as the highly liquid market for
AAPL stock and the overlying options
since the stock split, mitigates these
concerns.59
The trading volume of the stock
underlying a stock option is one of the
two metrics that determines a stock
option’s position limit.60 As set forth in
the proposal, AAPL stock ADV declined
significantly during the post-split period
when the AAPL option position limit
temporarily was 1,000,000 contracts,
and as of October 24, 2022, AAPL
stock’s ADV had decreased almost by
half from its ADV prior to the stock
split.61 While the Exchange states that
57 See
id.
e.g., Securities Exchange Act Release No.
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066).
59 See Notice, 87 FR at 72569.
60 See id. at 72568 and Exchange Rule 8.30,
Interpretation and Policy .02.
61 See Notice, 87 FR at 72569. The Commission
cannot discern whether the post-stock-split ADV
figures for AAPL stock set forth in the proposal are
adjusted for the split; here, the Commission
assumes that they are not. In addition, a Cboe study
on the impact of stock splits on trading activities
finds that split-adjusted volume in megacapitalization stocks increased slightly one-week
post-split but, in the two-week to six-month period
post-split, the median executed share volume
decreased about 48%, compared to volume a week
pre-split. See Cboe study on the impact of stock
split on trading activities at: https://www.cboe.com/
insights/posts/stock-splits-lead-to-split-results-intrading/. This study also finds that the median
number of options contracts traded in megacapitalization stocks decreased approximately 49%
one week post-split and remained down through
the six-month period post-split. In the case of
option contracts in AAPL, the study finds that the
split-adjusted number of AAPL option contracts
traded decreased about 52%, averaging 0.9 million
contracts traded daily post-split compared to 1.9
million contracts traded daily pre-split. Also, while
58 See,
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the market for AAPL stock and the
overlying options is highly liquid,62 the
proposal does not adequately explain
why a fourfold position (and exercise)
limit increase is warranted given the
significant decrease in AAPL stock ADV
described in the proposal.
In addition, the proposal does not
explain why, in light of the AAPL stock
trading volume decrease described in
the proposal, a 1,000,000-contract
position limit for AAPL options is
necessary for market participants to
trade in the same manner and at the
same levels as they did when the
position limit temporarily was
1,000,000 contracts. Although the
Exchange states that the 250,000contract position limit for AAPL options
may be impeding customers’ trading
activity and their ability to implement
investment and hedging strategies, the
proposal provides no detail to support
these assertions, such as the number of
customers affected or the hedging or
investment strategies that these
customers are unable to execute because
of the lower position limit.63 Similarly,
the Exchange states that the 250,000contract positon limit may be impeding
the ability of market makers to make
liquid markets with tighter spreads in
AAPL options, but the proposal
provides no information indicating that
market makers’ quoted spreads have
widened or that they have reduced the
size associated with their quotes.
Further, market makers’ positions in
AAPL options would not count towards
the current position limit to the extent
covered by existing equity hedge or
other exemptions.64
Further, the proposal justifies the
proposed position limit, in part, through
a comparison to options on certain
broad-based index exchange-traded
funds (‘‘ETF(s)’’) that currently have a
1,000,000-contract position limit,65 but
the Exchange’s proposal focuses on AAPL, the
Commission understands that some evidence
suggests that, as a general matter, share trading
volume may be unchanged or decrease after a stock
split. See, e.g., Patrick Dennis, Stock Splits and
Liquidity: The Case of the Nasdaq –100 Index
Tracking Stock, the Financial Review, 38, 2003,
415–433; Thomas E. Copeland, Liquidity Changes
Following Stock Splits, the Journal of Finance, 34,
1, 1979, 115–141.
62 See Notice, 87 FR at 72569; see also id. at
72571 (stating that, while the ADV of AAPL stock
is lower than it was prior to the 2020 stock split,
it is still more than 50% of the pre-stock-split ADV,
and that the ADV of AAPL options since the 2020
stock split is almost double the ADV prior to the
stock split).
63 Some hedging transactions and positions are
exempt from position limits. See Exchange Rule
8.30, Interpretation and Policy .04(a).
64 See, e.g., Exchange Rule 8.30, Interpretation
and Policy .04.
65 See Notice, 87 FR at 72571 (stating that AAPL
stock ADV is currently approximately two to three
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Jkt 259001
does not provide sufficient information
to explain why the underlying markets
for the broad-based index ETFs are
sufficiently comparable to the market
for AAPL stock, or sufficient
information to independently support a
finding that the proposed position limit
increase would not have an adverse
market impact. Unlike an ETF, a stock,
such as AAPL, is not subject to the
creation and redemption processes that
apply to ETFs, nor to the issuer arbitrage
mechanisms that help to keep an ETF’s
price in line with the value of its
underlying portfolio when overpriced or
trading at a discount to the securities on
which it is based. The Commission
previously has considered how these
processes and mechanisms may serve to
mitigate the potential price impact that
might otherwise result from increased
position limits for an ETF option.66
Accordingly, the proposal does not
provide an adequate basis for the
Commission to conclude that the
proposal would be consistent with
Section 6(b)(5) of the Act.
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their data, views, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposed rule change is consistent with
Section 6(b)(5), or any other provision of
the Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval which would
be facilitated by an oral presentation of
data, views, and arguments, the
Commission will consider, pursuant to
Rule 19b–4 under the Act,67 any request
for an opportunity to make an oral
presentation.68
time higher than the ADV of IWM, EEM, FXI, and
EFA, and that AAPL option ADV is currently
anywhere from almost twice to more than ten times
the ADV of options on IWM, EEM, FXI, and EFA).
66 See Securities Exchange Act Release No. 93525
(November 4, 2021), 86 FR 62584, 62587 (November
10, 2021) (order approving File No. SR–Cboe–2021–
029).
67 17 CFR 240.19b–4.
68 Section 19(b)(2) of the Act, as amended by the
Securities Acts Amendments of 1975, Public Law
94–29 (June 4, 1975), grants to the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
12709
The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal in addition to
any other comments they may wish to
submit about the proposed rule change.
In particular, the Commission seeks
comment on its concerns expressed
above regarding the proposal’s
consistency with the Act, and seeks
commenters’ views as to whether the
proposed position and exercise limits
for AAPL options could have an adverse
market impact.
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change should be
approved or disapproved by March 21,
2023. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
April 4, 2023. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
CBOE–2022–057 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 No.
SR–CBOE–2022–057. The file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
E:\FR\FM\28FEN1.SGM
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12710
Federal Register / Vol. 88, No. 39 / Tuesday, February 28, 2023 / Notices
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 No.
SR–CBOE–2022–057 and should be
submitted by March 21, 2023. Rebuttal
comments should be submitted by April
4, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–04032 Filed 2–27–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96963; File No. SR–
NASDAQ–2022–079]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Rule Change To Amend Rules
4702(b)(14) and (b)(15) Concerning
Dynamic M–ELO Holding Periods
Sherry R. Haywood,
Assistant Secretary.
February 22, 2023.
[FR Doc. 2023–04031 Filed 2–27–23; 8:45 am]
On December 21, 2022, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘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
replace the static holding period
requirements for Midpoint Extended
Life Orders and Midpoint Extended Life
Orders Plus Continuous Book with
dynamic holding periods. The proposed
rule change was published for comment
in the Federal Register on January 10,
2023.3 The Commission received
comments on the proposed rule
change.4
Section 19(b)(2) of the Act 5 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days (i) as the Commission may
BILLING CODE 8011–01–P
69 17
ddrumheller on DSK120RN23PROD with NOTICES
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission shall either
approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether the proposed rule change
should be disapproved. The 45th day
after publication of the notice for this
proposed rule change is February 24,
2023. The Commission is extending this
45-day time period.
The Commission finds that it is
appropriate to designate a longer period
within which to take action on the
proposed rule change so that it has
sufficient time to consider the proposed
rule change and comments received.
Accordingly, pursuant to Section
19(b)(2) of the Act,6 the Commission
designates April 10, 2023, as the date by
which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–NASDAQ–2022–079).
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.7
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 92844
(January 4, 2023), 88 FR 1438.
4 All comments received by the Commission on
the proposed rule change are available on the
Commission’s website at: https://www.sec.gov/
comments/sr-nasdaq-2022-079/
srnasdaq2022079.htm.
5 15 U.S.C. 78s(b)(2).
1 15
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18:37 Feb 27, 2023
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96966; File No. SR–
NASDAQ–2023–004]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the
Fees the Exchange Charges
Companies Seeking Review of a
Delisting Determination, Public
Reprimand Letter, or Written Denial of
an Initial Listing Application
February 22, 2023.
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 February
10, 2023, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, which Items have been prepared by
6 Id.
7 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
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Sfmt 4703
the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to modify the
fees the Exchange charges companies
seeking review of a delisting
determination, public reprimand letter,
or written denial of an initial listing
application.
*
*
*
*
*
The Nasdaq Stock Market LLC Rules
*
*
*
*
*
5815. Review of Staff Determinations by
Hearings Panel
When a Company receives a Staff
Delisting Determination or a Public
Reprimand Letter issued by the Listing
Qualifications Department, or when its
application for initial listing is denied,
it may request in writing that the
Hearings Panel review the matter in a
written or an oral hearing. This section
sets forth the procedures for requesting
a hearing before a Hearings Panel,
describes the Hearings Panel and the
possible outcomes of a hearing, and sets
forth Hearings Panel procedures.
(a) Procedures for Requesting and
Preparing for a Hearing.
(1)–(2) No changes.
(3) Fees.
Within 15 calendar days of the date of
the Staff Delisting Determination, Public
Reprimand Letter, or written denial of
an initial listing application, the
Company must submit a hearing fee of
[$10,000] $20,000. However, if the
hearing request relates to a Staff
Delisting Determination dated on or
before February 10, 2023, the Company
must submit a hearing fee of $10,000.
(4)–(6) No changes.
(b)–(d) No changes.
5820. Appeal to the Nasdaq Listing and
Hearing Review Council
A Company may appeal a Panel
Decision to the Listing Council. The
Listing Council may also call for review
a Panel Decision on its own initiative.
This Rule 5820 describes the procedures
applicable to appeals and calls for
review.
(a) Procedure for Requesting Appeal.
A Company may appeal any Panel
Decision to the Listing Council by
submitting a written request for appeal
and a fee of [$10,000] $15,000 to the
Nasdaq Office of Appeals and Review
within 15 calendar days of the date of
the Panel Decision. However, if the
appeal relates to a Panel Decision dated
E:\FR\FM\28FEN1.SGM
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]]>Agencies
[Federal Register Volume 88, Number 39 (Tuesday, February 28, 2023)]
[Notices]
[Pages 12705-12710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04032]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96965; File No. SR-CBOE-2022-057]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Increase Position Limits for Options on Apple
Inc. Stock
February 22, 2023.
I. Introduction
On November 7, 2022, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``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 amend Cboe Rules 8.30 and 8.42 to increase the
position and exercise limits for options on Apple Inc. (``AAPL'')
stock. The proposed rule change was published for comment in the
Federal Register on
[[Page 12706]]
November 25, 2022.\3\ On December 22, 2022, 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
approve or disapprove the proposed rule change.\5\ This order
institutes proceedings pursuant to Section 19(b)(2)(B) of the Act \6\
to determine whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 96353 (November 18,
2022), 87 FR 72568 (November 25, 2022) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 96570 (December 22,
2022), 87 FR 80212 (December 29, 2022). The Commission designated
February 23, 2023, 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\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
Currently, Exchange Rule 8.30 establishes position limits for
equity options of 25,000 contracts, 50,000 contracts, 75,000 contracts,
200,000 contracts, or 250,000 contracts on the same side of the market
or such other number of option contracts as may be fixed from time to
time by the Exchange.\7\ The position limit applicable to a class is
determined based on the trading volume and outstanding shares of the
underlying security.\8\ Based on the criteria in Exchange Rule 8.30,
Interpretation and Policy .02, the position limit for AAPL options
currently is 250,000 contracts and, pursuant to Exchange Rule 8.42, the
exercise limit for AAPL options is also 250,000 contracts.\9\
---------------------------------------------------------------------------
\7\ Pursuant to Exchange Rule 8.42, the exercise limit for an
equity option is the same as the position limit established in
Exchange Rule 8.30 for that equity option. See id. at n. 3.
\8\ See Notice, 87 FR at 72568 and Exchange Rule 8.30,
Interpretation and Policy .02.
\9\ See Notice, 87 FR at 72569.
---------------------------------------------------------------------------
The Exchange states that when an underlying security undergoes a
stock split, the number of outstanding options is proportionately
increased and the exercise price is proportionately decreased.\10\ For
example, if a security undergoes a 4-1 stock split, an investor that
held one option with an exercise price of $100 on 100 shares of stock
ABC prior to the stock split would hold four ABC options, each on 100
shares and each with an exercise price of $25, following the stock
split.\11\ In response to the increase in option positions that results
from a stock split, the position (and exercise) limit for the option
overlying that security is multiplied by the number of shares issued
per single outstanding share as part of the stock split.\12\ For
example, using the same 4-1 example, if the position limit for an
option before a 4-1 stock split is 250,000 contracts, the position
limit for the option overlying that security will be multiplied by four
to 1,000,000 contracts.\13\ The Exchange states that this increase
prevents investors holding the maximum positions from immediately being
over the position limit at the time of the stock split.\14\ The
Exchange further states that this position limit increase is temporary
and lasts until the last outstanding option position at the time of the
stock split has expired, at which time the position limit reverts to
the pre-stock-split level.\15\
---------------------------------------------------------------------------
\10\ See id. (citing Options Clearing Corporation (``OCC'')
Bylaws, Article VI, Section 11A(a); and Characteristics and Risks of
Standardized Options at 19).
\11\ See Notice, 87 FR at 72569.
\12\ See id.
\13\ See id.
\14\ See id.
\15\ See id.
---------------------------------------------------------------------------
The Exchange states that the position and exercise limits for AAPL
options were 250,000 contracts at the time of the AAPL 4-1 stock split
on August 31, 2020.\16\ Following the stock split, the position limit
was increased to 1,000,000 contracts.\17\ The position limit for AAPL
options remained at 1,000,000 contracts until September 16, 2022 (when
the last option position that was outstanding at the time of the stock
split expired), when the position limit reverted back to 250,000
contracts.\18\ The Exchange states that, given the significant activity
in AAPL options (and the underlying security), it understands that
numerous customers held more than 250,000 AAPL option contracts at that
time, putting their holdings above the position limit.\19\ The Exchange
further states that it understands from these customers that the
reduced position limit may be impeding trading activity and their
ability to implement investment strategies in AAPL options, including
the use of effective hedging vehicles or income generating strategies
(e.g., buy-write or put-write strategies), and the ability of market-
makers to make liquid markets with tighter spreads in AAPL options,
potentially causing the transfer of volume to the over-the-counter
(``OTC'') market.\20\ The Exchange states that OTC transactions, which
are not publicly disclosed, do not contribute to the price discovery
process on a public exchange or other lit markets.\21\
---------------------------------------------------------------------------
\16\ See id.
\17\ See id.
\18\ See id. The Commission understands that this type of
temporary position limit increase following a stock split occurs
pursuant to the direction of the OCC.
\19\ See id.
\20\ See id.
\21\ See id.
---------------------------------------------------------------------------
The Exchange believes that it is appropriate to increase the AAPL
option position limit to 1,000,000 contracts so market participants may
continue to trade AAPL options in the same manner and at the same
levels as they have for the prior two years, which could enable
liquidity providers to maintain liquidity levels on the Exchange and
allow other market participants to continue to trade on the Exchange
rather than shift their volume to the OTC market.\22\ The Exchange
believes the larger market capitalization of AAPL stock, as well as the
highly liquid market for AAPL stock and the overlying options since the
stock split, reduces the concerns regarding potential market
manipulation and/or disruption in the underlying market following an
increase in the position limit.\23\ The Exchange states that the
continued demand for trading AAPL options for legitimate economic
purposes despite the reduced position limit warrants a reversion to the
1,000,000-contract position limit that existed for the prior two
years.\24\
---------------------------------------------------------------------------
\22\ See id.
\23\ See id.
\24\ See id.
---------------------------------------------------------------------------
The Exchange further states that the proposed position limit of
1,000,000 contracts for AAPL options, which was the AAPL option
position limit for two years, is the same as existing position limits
for options on the iShares Russell 2000 ETF (``IWM''), the iShares MSCI
Emerging Markets ETF (``EEM''), iShares China Large-Cap ETF (``FXI''),
and iShares MSCI EAFE ETF (``EFA'').\25\ The Exchange states that, to
support the proposed position limit increase, it considered the
liquidity of the underlying security, the value of the underlying
security and relevant marketplace, the AAPL share and option volume,
and the liquidity of the noted exchange-traded products (``ETPs'').\26\
---------------------------------------------------------------------------
\25\ See id. and Exchange Rule 8.30, Interpretation and Policy
.07.
\26\ See Notice, 87 FR at 72569.
---------------------------------------------------------------------------
The Exchange provided the information in the table below regarding
the average daily volume (``ADV'') for AAPL shares and options on AAPL
stock traded during specified time periods prior to the 2020 stock
split, between the stock split and the position limit reversion, and
since the position limit reversion: \27\
---------------------------------------------------------------------------
\27\ See id.
[[Page 12707]]
------------------------------------------------------------------------
ADV (option
Date range ADV (shares) contracts)
------------------------------------------------------------------------
January 3, 2020 through August 31, 170,468,316 870,304
2020 (date of the stock split)...
September 1, 2020 through December 101,001,141 1,661,627
31, 2021.........................
January 1, 2022 through September 88,458,041 1,354,430
16, 2022 (date of the position
limit reversion).................
September 17, 2022 through October 91,683,969 1,425,372
24, 2022 (time since the position
limit reversion).................
------------------------------------------------------------------------
In addition, the Exchange states that as of October 24, 2022, AAPL
had a market capitalization of $2.4 trillion (16.07 billion shares
outstanding with a share price of $149.45).\28\ For comparison, the
Exchange provided the information below for IWM, EEM, FXI, and EFA from
January 1, 2022, through October 24, 2022: \29\
---------------------------------------------------------------------------
\28\ See id.
\29\ See id. at 72570.
----------------------------------------------------------------------------------------------------------------
Shares Fund market
Product ADV (ETF ADV (option outstanding cap (USD) Share value
shares) contracts) (millions) (billions) (USD)
----------------------------------------------------------------------------------------------------------------
IWM............................. 31,358,610 840,721 291.10 50.49 173.44
EEM............................. 47,767,767 183,342 578.25 19.62 33.93
FXI............................. 39,007,654 159,703 176.70 3.80 21.53
EFA............................. 29,953,566 123,262 705.60 41.83 59.28
----------------------------------------------------------------------------------------------------------------
The Exchange states that while these are ETPs, rather than stocks,
ETP shares trade in the same manner as stocks and, except for those set
forth in Exchange Rule 8.30, Interpretation and Policy .07, position
limits on ETP options are determined in the same manner as the position
limits for options on stocks.\30\
---------------------------------------------------------------------------
\30\ See id. Exchange Rule 8.30, Interpretation and Policy .07
provides that the position limits under Exchange Rule 8.30
applicable to options on shares or other securities that represent
interests in registered investment companies (or series thereof)
organized as open-end management investment companies, unit
investment trusts or similar entities that satisfy the criteria set
forth in Exchange Rule 4.3.06 shall be the same as the position
limits applicable to equity options under Exchange Rule 8.30 and
Interpretations and Policies thereunder, except for the position
limits established in Exchange Rule 8.30, Interpretation and Policy
.07 for specified securities, including IWM, EEM, FXI, and EFA.
---------------------------------------------------------------------------
The Exchange believes that the liquidity in the AAPL shares and
their overlying options, AAPL's significantly large market
capitalization, and the overall market landscape for AAPL stock and
options support the proposal to increase its position limit.\31\ The
Exchange states that, given the robust liquidity in and value of AAPL
stock, the Exchange does not anticipate that the proposed increase in
the position limit would create significant price movements because the
relevant market is large enough to adequately absorb potential price
movements that may be caused by larger trades.\32\ To reduce the
chances of potential manipulation if trading in AAPL stock declines,
proposed Exchange Rule 8.30, Interpretation and Policy .02(g) provides
that if the most recent six-month trading volume of AAPL stock totals
less than 200,000,000 shares or the most recent six-month trading
volume of AAPL stock totals less than 150,000,000 shares and AAPL stock
has fewer than 600,000,000 shares currently outstanding, the position
limit for AAPL options will be determined as set forth in paragraphs
(a) through (e) of Interpretation and Policy .02.\33\ The Exchange
states that these proposed levels are twice the current volume and
share levels of an underlying security for the overlying option to be
eligible for the 250,000-contract option position limit.\34\
---------------------------------------------------------------------------
\31\ See id.
\32\ See id.
\33\ See id.
\34\ See id.
---------------------------------------------------------------------------
The Exchange states that the reporting requirements for AAPL
options will remain unchanged under the proposal.\35\ The Exchange
states that it will continue to require that each Trading Permit Holder
(``TPH'') or TPH organization that maintains positions in AAPL 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, including
the options' positions, whether such positions are hedged and, if so, a
description of the hedge(s).\36\ Although Market-Makers, including
Designated Primary Market-Makers,\37\ will continue to be exempt from
the reporting requirement, the Exchange states that it may access
Market-Maker position information.\38\ In addition, the Exchange states
that its requirement that TPHs file reports with the Exchange for any
customer who held aggregate large long or short positions on the same
side of the market of 200 or more option contracts of any single class
for the previous day will remain at this level for AAPL options and
will continue to serve as an important part of the Exchange's
surveillance efforts.\39\
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\35\ See id.
\36\ See id.
\37\ A Market-Maker is a ``Trading Permit Holder registered with
the Exchange pursuant to Rule 3.52 for the purpose of making markets
in option contracts traded on the Exchange and that has the rights
and responsibilities set forth in Chapter 5, Section D of the
Rules.'' A Designated Primary Market-Maker is a ``TPH organization
that is approved by the Exchange to function in allocated securities
as a Market-Maker (as defined in Rule 8.1) and is subject to the
obligations under Rule 5.54 or as otherwise provided under the rules
of the Exchange.'' See Exchange Rule 1.1.
\38\ The Exchange states that the OCC, through the Large Option
Position Reporting system, acts as a centralized service provider
for TPH compliance with position reporting requirements by
collecting data from each TPH or TPH organization, consolidating the
information, and ultimately providing detailed listings of each
TPH's report to the Exchange and to the Financial Industry
Regulatory Authority, Inc., acting as its agent pursuant to a
regulatory services agreement. See Notice, 87 FR at 72570, n. 11.
\39\ See Notice, 87 FR at 72570. See also Exchange Rule 8.43.
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The Exchange believes that its and other SROs' existing
surveillance procedures and reporting requirements are capable of
properly identifying disruptive and/or manipulative trading
activity.\40\ The Exchange represents that it has adequate
surveillances in place to detect potential manipulation, as well as
reviews in place to identify continued compliance with the Exchange's
listing standards.\41\ According to the Exchange, these procedures
utilize daily
[[Page 12708]]
monitoring of market activity via automated surveillance techniques to
identify unusual activity in both options and the underlying
securities, as applicable.\42\ In addition, the Exchange states that
the disclosures in Schedules 13D or 13G,\43\ which are used to report
ownership of stock that exceeds 5% of a company's total stock issue,
could assist in providing information in monitoring for potential
manipulative schemes.\44\
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\40\ See Notice, 87 FR at 72570.
\41\ See id.
\42\ See id. The Exchange believes these procedures have been
effective for the surveillance of AAPL option trading and the
Exchange will continue to employ them. See id. at n. 13.
\43\ 17 CFR 240.13d-1.
\44\ See Notice, 87 FR at 72570.
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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 AAPL
options.\45\ The Exchange states that current margin and risk-based
haircut methodologies serve to limit the size of positions maintained
by any one account by increasing the margin and/or capital that a TPH
must maintain for a large position held by itself or by its
customer.\46\ In addition, the Exchange states that Rule 15c3-1 under
the Act \47\ imposes a capital charge on TPHs to the extent of any
margin deficiency resulting from the higher margin requirement.\48\
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\45\ See id.
\46\ See id. at 72570, n. 15 (citing Exchange Rule 10.3
regarding margin requirements).
\47\ 17 CFR 240.15c3-1.
\48\ See Notice, 87 FR at 72570.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2022-057 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \49\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposal, as discussed below. Institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comment
on the proposed rule change.
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\49\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\50\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the consistency
of the proposed rule change with the Act and, in particular, Section
6(b)(5) of the Act,\51\ which requires that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
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, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\50\ Id.
\51\ 15 U.S.C. 78f(b)(5).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \52\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\53\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\54\
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\52\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\53\ See id.
\54\ See id.
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As discussed above, the Exchange has proposed to increase the
position and exercise limits for AAPL options from 250,000 contracts to
1,000,000 contracts. Following the AAPL 4-1 stock split on August 31,
2020, the AAPL option position limit temporarily increased from 250,000
contracts to 1,000,000 contracts until September 16, 2022, when the
position limit reverted to 250,000 contracts.\55\ The Exchange states
that it understands from customers that the reduced position limit may
be impeding trading activity and their ability to implement investment
strategies in AAPL options, including the use of effective hedging
vehicles or income generating strategies, and the ability of market-
makers to make liquid markets with tighter spreads in AAPL options.\56\
The Exchange believes that it is appropriate to increase the AAPL
position limit to 1,000,000 option contracts so market participants may
continue to trade AAPL options in the same manner and at the same
levels as they did when the position limit temporarily was 1,000,000
contracts.\57\
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\55\ See Notice, 87 FR at 72569.
\56\ See id.
\57\ See id.
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Position and exercise limits serve as a regulatory tool designed to
address manipulative schemes and adverse market impact surrounding the
use of options.\58\ The proposal is novel in that currently, outside of
exceptions to accommodate temporary OCC-initiated adjustments, the
maximum stock option position and exercise limits permitted under
exchange rules are 250,000 contracts. In addition to being novel, the
proposed fourfold increase in the position and exercise limits for AAPL
options would be a substantial increase from current levels, and raises
the potential for adverse impacts in the underlying market for AAPL
stock. According to the Exchange, the larger market capitalization of
AAPL stock, as well as the highly liquid market for AAPL stock and the
overlying options since the stock split, mitigates these concerns.\59\
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\58\ See, e.g., Securities Exchange Act Release No. 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
\59\ See Notice, 87 FR at 72569.
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The trading volume of the stock underlying a stock option is one of
the two metrics that determines a stock option's position limit.\60\ As
set forth in the proposal, AAPL stock ADV declined significantly during
the post-split period when the AAPL option position limit temporarily
was 1,000,000 contracts, and as of October 24, 2022, AAPL stock's ADV
had decreased almost by half from its ADV prior to the stock split.\61\
While the Exchange states that
[[Page 12709]]
the market for AAPL stock and the overlying options is highly
liquid,\62\ the proposal does not adequately explain why a fourfold
position (and exercise) limit increase is warranted given the
significant decrease in AAPL stock ADV described in the proposal.
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\60\ See id. at 72568 and Exchange Rule 8.30, Interpretation and
Policy .02.
\61\ See Notice, 87 FR at 72569. The Commission cannot discern
whether the post-stock-split ADV figures for AAPL stock set forth in
the proposal are adjusted for the split; here, the Commission
assumes that they are not. In addition, a Cboe study on the impact
of stock splits on trading activities finds that split-adjusted
volume in mega-capitalization stocks increased slightly one-week
post-split but, in the two-week to six-month period post-split, the
median executed share volume decreased about 48%, compared to volume
a week pre-split. See Cboe study on the impact of stock split on
trading activities at: https://www.cboe.com/insights/posts/stock-splits-lead-to-split-results-in-trading/. This study also finds that
the median number of options contracts traded in mega-capitalization
stocks decreased approximately 49% one week post-split and remained
down through the six-month period post-split. In the case of option
contracts in AAPL, the study finds that the split-adjusted number of
AAPL option contracts traded decreased about 52%, averaging 0.9
million contracts traded daily post-split compared to 1.9 million
contracts traded daily pre-split. Also, while the Exchange's
proposal focuses on AAPL, the Commission understands that some
evidence suggests that, as a general matter, share trading volume
may be unchanged or decrease after a stock split. See, e.g., Patrick
Dennis, Stock Splits and Liquidity: The Case of the Nasdaq -100
Index Tracking Stock, the Financial Review, 38, 2003, 415-433;
Thomas E. Copeland, Liquidity Changes Following Stock Splits, the
Journal of Finance, 34, 1, 1979, 115-141.
\62\ See Notice, 87 FR at 72569; see also id. at 72571 (stating
that, while the ADV of AAPL stock is lower than it was prior to the
2020 stock split, it is still more than 50% of the pre-stock-split
ADV, and that the ADV of AAPL options since the 2020 stock split is
almost double the ADV prior to the stock split).
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In addition, the proposal does not explain why, in light of the
AAPL stock trading volume decrease described in the proposal, a
1,000,000-contract position limit for AAPL options is necessary for
market participants to trade in the same manner and at the same levels
as they did when the position limit temporarily was 1,000,000
contracts. Although the Exchange states that the 250,000-contract
position limit for AAPL options may be impeding customers' trading
activity and their ability to implement investment and hedging
strategies, the proposal provides no detail to support these
assertions, such as the number of customers affected or the hedging or
investment strategies that these customers are unable to execute
because of the lower position limit.\63\ Similarly, the Exchange states
that the 250,000-contract positon limit may be impeding the ability of
market makers to make liquid markets with tighter spreads in AAPL
options, but the proposal provides no information indicating that
market makers' quoted spreads have widened or that they have reduced
the size associated with their quotes. Further, market makers'
positions in AAPL options would not count towards the current position
limit to the extent covered by existing equity hedge or other
exemptions.\64\
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\63\ Some hedging transactions and positions are exempt from
position limits. See Exchange Rule 8.30, Interpretation and Policy
.04(a).
\64\ See, e.g., Exchange Rule 8.30, Interpretation and Policy
.04.
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Further, the proposal justifies the proposed position limit, in
part, through a comparison to options on certain broad-based index
exchange-traded funds (``ETF(s)'') that currently have a 1,000,000-
contract position limit,\65\ but does not provide sufficient
information to explain why the underlying markets for the broad-based
index ETFs are sufficiently comparable to the market for AAPL stock, or
sufficient information to independently support a finding that the
proposed position limit increase would not have an adverse market
impact. Unlike an ETF, a stock, such as AAPL, is not subject to the
creation and redemption processes that apply to ETFs, nor to the issuer
arbitrage mechanisms that help to keep an ETF's price in line with the
value of its underlying portfolio when overpriced or trading at a
discount to the securities on which it is based. The Commission
previously has considered how these processes and mechanisms may serve
to mitigate the potential price impact that might otherwise result from
increased position limits for an ETF option.\66\
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\65\ See Notice, 87 FR at 72571 (stating that AAPL stock ADV is
currently approximately two to three time higher than the ADV of
IWM, EEM, FXI, and EFA, and that AAPL option ADV is currently
anywhere from almost twice to more than ten times the ADV of options
on IWM, EEM, FXI, and EFA).
\66\ See Securities Exchange Act Release No. 93525 (November 4,
2021), 86 FR 62584, 62587 (November 10, 2021) (order approving File
No. SR-Cboe-2021-029).
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Accordingly, the proposal does not provide an adequate basis for
the Commission to conclude that the proposal would be consistent with
Section 6(b)(5) of the Act.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 6(b)(5), or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of data, views, and arguments, the
Commission will consider, pursuant to Rule 19b-4 under the Act,\67\ any
request for an opportunity to make an oral presentation.\68\
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\67\ 17 CFR 240.19b-4.
\68\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975,
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75,
94th Cong., 1st Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal in
addition to any other comments they may wish to submit about the
proposed rule change. In particular, the Commission seeks comment on
its concerns expressed above regarding the proposal's consistency with
the Act, and seeks commenters' views as to whether the proposed
position and exercise limits for AAPL options could have an adverse
market impact.
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by March 21, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
April 4, 2023. 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 No. SR-CBOE-2022-057 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 No. SR-CBOE-2022-057. The file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
[[Page 12710]]
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 No. SR-CBOE-2022-057 and should be submitted by
March 21, 2023. Rebuttal comments should be submitted by April 4, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-04032 Filed 2-27-23; 8:45 am]
BILLING CODE 8011-01-P
