81 FR 1455 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule To Amend the Fees Schedule

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 7 (January 12, 2016)

[Federal Register Volume 81, Number 7 (Tuesday, January 12, 2016)]
[Notices]
[Pages 1455-1457]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-00337]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76842; File No. SR-CBOE-2015-117)


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule To Amend the Fees Schedule

January 6, 2016.
    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 December 23, 2015, Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Fees Schedule. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's 
Office of the Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its Fees Schedule, effective 
December 23, 2015. Specifically, the Exchange proposes to waive 
transaction fees incurred as a result of transactions that compress or 
reduce certain Clearing Trading Permit Holder (``TPH'') open positions.
    By way of background, SEC Rule 15C3-1 [sic], Net Capital 
Requirements for Brokers or Dealers (``Net Capital Rules''), requires 
that every registered broker-dealer maintain certain specified minimum 
levels of capital. The primary purpose of these rules is to regulate 
the ability of broker-dealers to meet their financial obligations to 
customers and other creditors. All of the broker-dealers that are 
clearing members of the Options Clearing Corporation (``OCC'') are 
subject to the Net Capital Rules. However, a subset of OCC's clearing 
members are subsidiaries of U.S. bank holding companies. As such, these 
broker-dealers, through their affiliation with their parent U.S. bank 
holding companies, must comply with bank regulatory capital 
requirements pursuant to rule-making required under the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank''). New rule-
making recently enacted under Dodd-Frank will require U.S. bank holding 
companies to hold substantially more bank regulatory capital than would 
otherwise be required under the Net Capital Rules. The Exchange is 
aware that, due to the large contract size of S&P 500 Index (``SPX'') 
options, open interest in certain series will result in extremely large 
bank regulatory capital requirements but have minimal requirements 
under the Net Capital Rules. Transactions that would result in the 
closing of this open interest would have a beneficial impact on the 
bank regulatory capital requirements of the Clearing TPH's parent 
company with a minimal impact on regulatory capital required under the 
capital rules. The Exchange notes that most of these open positions are 
in out-of-the-money options and certain spread positions that are 
essentially riskless strategies because they have little or no market 
exposure. Particularly, the Exchange notes that given the nature of 
these options, there is minimal chance for large losses to occur, yet 
these positions will still be subject to large bank regulatory capital 
requirements. Exchange transaction fees, however, discourage market 
participants from closing these positions out even though those market 
participants may also prefer to close them rather than carry them to 
expiration.\3\
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    \3\ For example, an out-of-the-money SPX option market-maker 
transaction may be worth only a few pennies per contract, but would 
cost approximately $0.33 per contract ($0.20 transaction fee plus 
$0.13 SPX Index License Surcharge) to close out.
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    In order to encourage the compression of certain out-of-the-money 
and riskless option positions, the Exchange proposes to rebate all 
transactions fees for transactions that close these positions, provided 
they meet certain criteria, as described more fully below. The Exchange 
believes compression of these positions would improve market liquidity 
by freeing capital currently tied up in positions for which there is a 
minimal chance that a significant loss would occur.
    The Exchange proposes to limit rebating transaction fees to those 
transactions that the Exchange believes would have the greatest impact 
on bank regulatory capital requirements but are also constrained to 
those positions that have little economic risk associated with them. 
Specifically, to be eligible for a rebate, a transaction must be: (i) 
For a complex order with at least five

[[Page 1456]]

(5) different series in S&P 500 Index (SPX) options, SPX Weeklys (SPXW) 
options or p.m.-settled SPX options (SPXPM), (ii) a closing-only 
transaction or, if the transaction involves a Firm order (origin code 
``F''), an opening transaction executed to facilitate a compression of 
option positions for a market-maker or joint-back office (``JBO'') 
account; (iii) for a position with a required capital charge equal to 
the minimum capital charge under OCC rules RBH Calculator \4\ or a 
position comprised of option series with a delta of ten (10) or less 
and (iv) entered between the first business day following a quarterly 
expiration through the last business day of that quarter.\5\ The 
Exchange notes that while Clearing TPHs may request that their clients 
holding the out-of-the-money and riskless positions permit the Clearing 
TPHs to attempt to close these positions out, firms are not required to 
do so (i.e., these transactions are voluntary and within the discretion 
of the Clearing TPHs' clients). The Exchange also proposes to provide 
that to obtain a rebate,\6\ a TPH must request the rebate with 
supporting documentation within three (3) days of the transactions.
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    \4\ Under OCC rules, the required capital charge is equal to 
either the minimum capital charge or an amount equal to the largest 
potential loss pursuant to OCC's Risk-Based Haircut (``RBH'') 
calculator. The RBH methodology may be used to calculate 
theoretically based capital charges as set forth within the SEC net 
capital rule http://apps.theocc.com/pmc/pmc.do. For example, a 
Market-Maker has the following eight-leg position: Long 1000 Jan 
1000 SPX calls, short 1000 Jan 2000 SPX calls, short 842 Jan 2500 
SPX calls, short 89 Jan 2600 SPX calls, long 200 Jan 700 puts, short 
200 Jan 750 SPX puts, short 1000 Jan 1000 SPX puts, and long 1000 
Jan 2000 SPX puts. Under OCC rules, the minimum capital charge for 
this position is $128,435. Using the RBH calculator, there is no 
potential loss that is greater than this amount; in fact, under each 
of the 10 equidistant theoretical valuation points of the underlying 
index, this strategy would net a profit. Therefore, the clearing 
firm incurs a charge of $128,435. However, as the RBH calculator 
values demonstrate, this is essentially a riskless position for 
which there is a minimal chance that a theoretical loss of $128,435 
could ever occur. Therefore, this position is eligible for the 
rebate (assuming all requirements are satisfied), because the OCC 
theoretical minimum capital charge is larger than any potential loss 
that may result within the range of an 8% decrease to a 6% increase 
in the underlying index value. Alternatively, a Market-Maker has the 
following five-leg strategy position: Short 892 Jan 1400 SPX calls, 
short 80 Jan 1500 SPX calls, long 200 Jan 1950 SPX puts, short 200 
Jan 2000 SPX puts, and long 165 Jan 2100 SPX puts. Under OCC rules, 
the minimum capital charge for this position is $38,425. Using the 
RBH calculator, an increase in the underlying index value of 6% 
could cause this position to lose $12,801,718 (which is the highest 
potential loss under each of the 10 equidistant theoretical 
valuation points of the underlying index). Because this potential 
loss is larger than the theoretical minimum charge, the actual 
capital requirement is this amount of $12,801,718. This position is 
therefore not eligible for the proposed rebate, as there is a risk 
of a potential large loss on this position.
    \5\ For example, the fourth quarter of 2015 standard-Friday 
expiration occurred on December 18, 2015. For that quarter, 
qualifying transactions would need to be entered no earlier than 
December 23, 2015 and no later than December 31, 2015.
    \6\ Rebate of transaction fees would include the transaction fee 
assessed along with any other surcharges assessed per contract 
(e.g., the Index License Surcharge).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of section 6(b) of the Act.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitation 
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 
section 6(b)(4) of the Act,\9\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes providing a rebate of fees for transactions 
that compress certain out-of-the-money and riskless options positions 
is reasonable, equitable and not unfairly discriminatory because these 
positions will result in extremely large bank regulatory capital 
requirements for Clearing TPHs even though there is minimal chance for 
large losses to occur. Additionally, these positions have little or no 
economic benefit to the TPHs that hold the positions, who would likely 
prefer to close them but for the associated transaction fees. The fee 
rebate would therefore allow TPHs to close out of these positions that 
are needlessly burdensome on themselves and Clearing TPHs.
    The Exchange believes it is reasonable and not unfairly 
discriminatory to limit the rebate to transactions that are done to 
close a position with (i) a required capital charge equal to the 
minimum capital charge under OCC's RBH Calculator or (ii) option series 
with a delta of ten (10) or less, because this criteria identifies 
option positions that are truly out-of-the-money or spread positions 
that are essentially riskless strategies. Particularly, the Exchange 
notes theoretically riskless positions can be identified when the 
required capital charge equals the minimum capital charge under OCC's 
RBH Calculator. Transactions comprised of option series with a delta of 
no greater than 10 would indicate that an option position is by 
definition out-of-the-money. For the reasons discussed above, the 
Exchange wishes to limit the fee rebate to these types of transactions.
    The Exchange believes it's reasonable, equitable and not unfairly 
discriminatory to limit the rebate to SPX options (including SPXW and 
SPXPM) because SPX has a substantially higher notional value than other 
options classes. As such, open interest in SPX has a much greater 
effect on a bank's regulatory capital requirements. Compressing out-of-
the-money and riskless SPX option positions therefore has a greater 
impact on reducing a bank regulatory capital requirement.
    The Exchange believes it's reasonable, equitable and not unfairly 
discriminatory to limit the rebate to complex orders that involve 5 
different series of SPX because the Exchange believes transactions with 
5 legs or more would have the most material impact on a bank's 
regulatory capital requirements.
    The Exchange believes it's reasonable to limit the rebate of 
transaction fees to closing-only transactions (other than Firm ``F'' 
orders). Particularly, if a transaction were to open interest, it would 
defeat the purpose of the proposed rebate, which is to encourage the 
closing of positions that are creating high bank regulatory capital 
requirements for positions that are of low economic benefit and risk 
and could otherwise be offset. The Exchange believes it's equitable and 
not unfairly discriminatory to allow Firm (``F'') orders to result in 
opening transactions because, in these instances, the Firm would be 
facilitating the closing out of these positions for their clients. The 
Exchange notes that it already waives transaction fees for facilitation 
orders in all products other than those listed in Underlying Symbol 
List A.\10\
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    \10\ See CBOE Fees Schedule, Equity Options Rate Table, ETF and 
ETN Options Rate Table and Index Options Rate Table--All Index 
Products Excluding Underlying Symbol List A Rate Table.
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    The Exchange believes it's reasonable, equitable and not unfairly 
discriminatory to limit the rebate to

[[Page 1457]]

transactions effected after the quarterly expiration through the end of 
that month because the universe of transactions are not fully known 
until after the quarterly expiration. Additionally, in order for TPHs 
to realize the benefit of the transactions under the bank capital 
regulatory requirements, all transactions must be settled by the end of 
the financial reporting quarter.
    The Exchange believes requiring TPHs to submit a request for a 
rebate within three business days of the transactions clarifies the 
manner in which the rebate can be accomplished in a timely manner and 
will eliminate any confusion and provide a clear procedure for 
applicants to get a rebate for their compression transactions, removing 
impediments to and perfecting the mechanism of a free and open market. 
Additionally, the Exchange notes that such requirement will apply to 
all market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that are not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the Act because it applies to all market participants in 
the same manner with positions that meet the eligible criteria. The 
proposed change would encourage the closing of positions that 
needlessly result in burdensome capital requirements that, once closed, 
would alleviate the capital requirement constraints on TPHs and improve 
overall market liquidity by freeing capital currently tied up in 
certain out-of-the-money and riskless positions. The Exchange does not 
believe that the proposed rule changes will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the proposed rule change 
applies only to CBOE. To the extent that the proposed changes make CBOE 
a more attractive marketplace for market participants at other 
exchanges, such market participants are welcome to become CBOE market 
participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \11\ and paragraph (f) of Rule 19b-4 \12\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
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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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2015-117 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2015-117. 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 Web site (http://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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2015-117 and should be 
submitted on or before February 2, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-00337 Filed 1-11-16; 8:45 am]
BILLING CODE 8011-01-P