81 FR 95219 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Compression of S&P 500(R) Index Options Positions
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 248 (December 27, 2016)
Federal Register Volume 81, Issue 248 (December 27, 2016)
| Page Range | 95219-95225 | |
| FR Document | 2016-31102 |
[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)] [Notices] [Pages 95219-95225] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-31102] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79610; File No. SR-CBOE-2016-090] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Compression of S&P 500(R) Index Options Positions December 20, 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 15, 2016, Chicago Board Options Exchange, Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt Rule 6.56 regarding ``compression forums.'' 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt Rule 6.56 (Compression Forums) to describe the Exchange's ``compression forum'' process. Under proposed Rule 6.56, the Exchange would facilitate closing-only transactions in series of S&P 500(R) Index (``SPX'') options on the final three trading days of each calendar month as described below. Background The Exchange's proposal is intended to provide a procedure for Trading Permit Holders (``TPHs'') to efficiently reduce open positions in series of SPX options at the end of each calendar month in order to mitigate the effects of capital constraints on market participants and help ensure continued depth of liquidity in the SPX options market. SEC Rule 15c3-1 (Net Capital Requirements for Brokers or Dealers) (``Net Capital Rules'') requires that every registered broker-dealer maintain certain specified minimum levels of capital.\3\ The Net Capital Rules are designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand, at all times, to meet their financial obligations. Notably, hedged positions, including offsetting futures and options contract positions, result in certain net capital requirement reductions under the Net Capital Rules.\4\ --------------------------------------------------------------------------- \3\ 17 CFR 240.15c3-1. \4\ In addition, the Net Capital Rules permit various offsets under which a percentage of an option position's gain at any one valuation point is allowed to offset another position's loss at the same valuation point (e.g. vertical spreads). --------------------------------------------------------------------------- All Options Clearing Corporation (``OCC'') clearing members are subject to the Net Capital Rules. However, a subset of clearing members are subsidiaries of U.S. bank holding companies, which, due to their affiliations with their parent U.S. bank holding companies, must comply with additional bank regulatory capital requirements pursuant to rulemaking required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.\5\ Pursuant to this mandate, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation [[Page 95220]] have approved a comprehensive regulatory capital framework for subsidiaries of U.S. bank holding company clearing firms.\6\ Generally, these rules impose higher minimum capital requirements, more restrictive capital eligibility standards, and higher asset risk weights than were previously mandated for clearing members that are subsidiaries of U.S. bank holding companies under the Net Capital Rules. Furthermore, the new rules do not permit deductions for hedged securities or offsetting options positions.\7\ Rather, capital charges under these standards are based on the aggregate notional value of short positions regardless of offsets. As a result, Clearing Trading Permit Holders (``CTPHs'') generally must hold substantially more bank regulatory capital than would otherwise be required under the Net Capital Rules. The impact of these regulatory capital rules are compounded in the SPX options market due to the large notional value of SPX contracts. --------------------------------------------------------------------------- \5\ H.R. 4173 (amending section 3(a) of the Act) (15 U.S.C. 78c(a))). \6\ 12 CFR 50; 79 FR 61440 (Liquidity Coverage Ratio: Liquidity Risk Measurement Standards). \7\ Many options strategies, including relatively simple strategies often used by retail customers and more sophisticated strategies used by market-makers and institutions, are risk-limited strategies or options spread strategies that employ offsets or hedges to achieve certain investment outcomes. Such strategies typically involve the purchase and sale of multiple options (and may be coupled with purchases or sales of the underlying assets), executed simultaneously as part of the same strategy. In many cases, the potential market exposure of these strategies is limited and defined. Whereas regulatory capital requirements have historically reflected the risk-limited nature of carrying offsetting positions, these positions may now be subject to large regulatory capital requirements. Various factors, including administration costs; transaction fees; and limited market demand or counterparty interest, however, discourage market participants from closing these positions even though many market participants likely would prefer to close the positions rather than carry them to expiration. --------------------------------------------------------------------------- The Exchange believes that these regulatory capital requirements could impede efficient use of capital and undermine the critical liquidity role that Market-Makers play in the SPX options market by limiting the amount of capital CTPHs can allocate to clearing member transactions. Specifically, the rules may cause CTPHs to impose stricter position limits on their clearing members. These stricter position limits may impact the liquidity Market-Makers might supply in the SPX market, and this impact may be compounded when a CTPH has multiple Market-Maker client accounts, each having largely risk-neutral portfolio holdings.\8\ --------------------------------------------------------------------------- \8\ Several TPHs have indicated to the Exchange that these rules could hamper their ability to provide consistent liquidity in the SPX options market unless they reduce their positions in SPX by the end of the year. --------------------------------------------------------------------------- The Exchange believes that permitting TPHs to reduce open interest in offsetting SPX options positions would have a beneficial effect on the bank regulatory capital requirements of CTPHs' parent companies without adversely affecting the quality of the SPX options market. Accordingly, the Exchange seeks to codify a process in the rules to encourage the compression of open interest in SPX at the end of each calendar month. The Exchange believes that periodic reductions in open interest would likely contribute additional liquidity and continued competitiveness to the SPX market. In addition, the Exchange believes that the proposed rule change will promote more efficient capital deployment in light of the regulatory capital requirements rules and help ensure depth of liquidity in the SPX options market. Proposal Currently, TPHs seeking to reduce open interest in SPX options for regulatory capital purposes could simply trade out of positions at the end of each month as they would trade any open positions. However, the Exchange believes that wide-scale reduction of open interest in SPX options in such a manner is burdensome. First, the range of positions held by different TPHs in SPX varies greatly. In some cases, a TPH may hold positions in thousands of series of SPX. With no way of efficiently determining whether opposite (long/short) open interest is present in the trading crowd or whether there is counterparty interest for a particular closing transaction across multiple series, in order to close a position, a TPH would need to represent an order and wait for a response, if any. Second, given that there are more than 10,000 series of SPX held by numerous TPHs, attempting to close positions during normal trading is inefficient and sometimes ineffective. Accordingly, the Exchange proposes to adopt a procedure to facilitate these types of transactions on the Exchange in proposed Rule 6.56. The Exchange believes that its proposal would allow TPHs seeking to close positions in SPX options to more easily identify counterparty interest and efficiently conduct closing transactions in SPX options on the Exchange without interfering with normal SPX trading. In general, the process described in proposed Rule 6.56 would permit TPHs to submit lists of open positions to the Exchange that they wish to close against opposing (long/short) positions of other TPHs, which the Exchange would then aggregate into a single list that would allow TPHs to more easily identify those positions with counterparty interest on the Exchange. The Exchange would then provide a forum in the SPX trading crowd during which TPHs could conduct closing-only transactions in series of SPX options. The procedure for conducting a compression forum would be set forth in paragraph (a) to proposed Rule 6.56. Under paragraph (a)(1), prior to the close of Regular Trading Hours on the fourth to last business day of each calendar month, in a manner and format determined by the Exchange, a TPH could provide the Exchange with a list of open SPX options positions with either a required capital charge equal to the minimum capital charge pursuant to the risk-based haircut (``RBH'') calculator in OCC's rules \9\ or comprised of option series with a delta of ten \10\ (i.e. [[Page 95221]] 0.1 or -0.1) or less that it would like to close during the compression forum for that calendar month (``compression-list positions''). Compression-list positions may consist of multi-legged positions in series of SPX options, which satisfy the conditions set forth in this paragraph of the proposed rule. The Exchange proposes to limit compression-list positions to those positions, the closing of which the Exchange believes would have the greatest impact on bank regulatory capital requirements and which also have little economic risk associated with them.\11\ 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.\12\ --------------------------------------------------------------------------- \9\ 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 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 submission to the Exchange as a compression-list position, 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 submission to the Exchange as a compression-list position, as there is a risk of a potential large loss on this position. \10\ Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1, the option will rise by $0.65, all else equal. Delta values can be positive or negative depending on the type of option. For example, the delta for a call option always ranges from 0 to 1, because as the underlying asset increases in price, call options increase in price. Put option deltas always range from -1 to 0 because as the underlying security increases, the value of put options decrease. For example, if a put option has a delta of -0.33, if the price of the underlying asset increases by $1, the price of the put option will decrease by $0.33. Generally speaking, an at- the-money option usually has a delta of approximately 0.5 or -0.5. \11\ As further discussed below, positions on this list as well as other open SPX positions may be closed during a compression forum. \12\ This definition of compression-list positions is similar to the transaction fee rebate described in SR-CBOE-2015-117, which was adopted for reasons similar to those underlying this proposal. See Securities Exchange Act Release No. 76842 (January 6, 2016), 81 FR 1455 (January 12, 2016) (Notice of Filing and Immediate Effectiveness of a Proposed Rule To Amend the Fees Schedule) (SR- CBOE-2015-117). --------------------------------------------------------------------------- Under paragraph (a)(1) to proposed Rule 6.56, TPHs may also permit their CTPHs or the Clearing Corporation to submit a list of these positions to the Exchange on their behalf.\13\ The Exchange recognizes that a CTPH or OCC may more easily identify all of the positions that are held across a TPH firm as well as those that will have the largest impact with respect to regulatory capital reductions. The Exchange believes that such assistance would help to facilitate the compression forum process further. --------------------------------------------------------------------------- \13\ The Exchange notes that while CTPHs may request that their clients holding the out-of-the-money and riskless positions permit the CTPHs 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 CTPHs' clients). --------------------------------------------------------------------------- Under paragraph (a)(2) of proposed Rule 6.56, prior to the open of Regular Trading Hours on the third to last business day of each calendar month, the Exchange would make available \14\ to all TPHs an aggregate two-sided (long/short) list of compression-list positions for which open interest has been submitted to the Exchange on both sides pursuant to paragraph (a)(1), including the aggregate size of open interest on each side of each series (``compression-list positions file'').\15\ This aggregate two-sided list may also include multi- legged positions of SPX options with opposite open interest submitted to the Exchange according to the parameters described in paragraph (a)(1) to proposed Rule 6.56. This would allow the Exchange to identify multi-leg strategy orders with opposing interest of particular TPHs in the various series of the strategy (e.g. vertical spreads, calendar spreads, butterflies, iron condors). The Exchange believes that a list containing such multi-leg or complex positions may help facilitate a more efficient forum by facilitating closing transactions in multiple series at a time. --------------------------------------------------------------------------- \14\ The Exchange expects to publish this list on its Web site. \15\ This list would not identify which TPH holds these positions. --------------------------------------------------------------------------- Under paragraph (a)(3) to proposed Rule 6.56, in addition to making the compression-list positions file available to all TPHs, the Exchange would electronically send the compression-list positions file to the TPHs that submitted compression-list positions to the Exchange pursuant to paragraph (a)(1), including a list of those TPHs that contributed to the compression-list positions file. The list will not include the name of any TPH that requests its name be excluded from this list. Pursuant to paragraph (a)(3), TPHs would be identified as having contributed to the list only and would not be identified as holding any specific position. The Exchange believes this process to identify TPHs that seek to close compression-list positions in advance of a compression forum will increase opportunities for TPHs to ultimately close compression- list positions during a compression forum while, at the same time, providing the opportunity for anonymity. TPHs that do not want to be listed as having contributed compression-list positions may inform the Exchange and will not be included in the listed TPHs. Under paragraph (a)(4) of proposed Rule 6.56, the Exchange would conduct an open outcry ``compression forum'' in which all TPHs may participate \16\ on each of the last three business days of every calendar month at a location on the trading floor determined by the Exchange. Compression forums would be held for four (4) hours during Regular Trading Hours on each of the last three business days of every calendar month, or three (3) hours if any of those days is an abbreviated trading day (such as the day before a holiday), at times determined by the Exchange. All such notices would be provided to TPHs reasonably in advance of any forum as announced via Regulatory Circular in accordance with paragraph (d) to proposed Rule 6.56 discussed below. The Exchange believes that multiple hours across multiple trading days will allow TPHs to close as many positions as possible during this process without interfering with normal SPX trading. In some cases, an appropriate counterparty may not be present in the crowd at [sic] particular time on a particular day when a TPH with an opposite position represents the position in the crowd. In other cases, a TPH may wish to break up a complex order into single legs after trying unsuccessfully to close the multi-leg positions or may have residual positions that could not be closed in full. Additionally, news may be reported causing a high amount of activity preventing TPHs for [sic] participating in the forum at certain times. The Exchange believes that the three-day format will provide TPHs sufficient time to close these positions in a forum without interfering with normal trading. --------------------------------------------------------------------------- \16\ As compression forums will be conducted in open outcry, TPHs that may participate include Floor Brokers and Market-Makers with SPX appointments. --------------------------------------------------------------------------- Under paragraph (b) of proposed Rule 6.56, trades executed during compression forums would be subject to trading rules applicable to trading in SPX during Regular Trading Hours, including manner of bids and offers and allocation and priority rules, except: (1) Only closing transactions in SPX options (including compression-list positions) may be executed during a compression forum; and (2) the minimum increment for all series will be $0.01 during a compression forum. In other words, although trades executed during a compression forum may only be closing transactions and may be in penny increments within a specified timeframe and at a specific location on the trading floor, trades executing during a compression forum will occur in the same manner as all other open outcry SPX trades, including in accordance with systemization requirements under Rule 6.24, and order allocation and priority rules under Rule 6.45B(b). The purpose of the compression forum would simply be to facilitate closing transactions in series of SPX options so that TPHs would have the opportunity to free up capital and eliminate riskless and low delta positions that they may otherwise hold until expiration. Notably, TPHs would not be required to submit a list of positions to the Exchange pursuant to paragraph (a)(1) in order to participate in a compression forum, and positions SPX series other [[Page 95222]] than compression-list positions may be closed during a compression forum, as long as it involves only closing transactions. The compression forums will be limited to closing only transactions, because if opening transactions were permitted during a compression forum, it would defeat the purpose of the proposed rule, which is to encourage the closing of positions that are creating high bank regulatory capital requirements, often with positions that are of low economic benefit and risk and could otherwise be offset. Similarly, the minimum increment for series traded during a compression forum will be $0.01 to further encourage closing of these positions. Because many series the Exchange expects to trade during the compression forum will be out-of-the-money, and essentially worthless, TPHs may not otherwise close positions in these series if a higher minimum increment causes the price to be too much higher than the option's value. Under paragraph (c) to proposed Rule 6.56, and as noted above in the example, TPHs would be permitted to communicate with other TPHs to determine: A TPH's open single-legged or multi-legged SPX positions and/or (2) whether a TPH anticipates participating in a compression forum at a particular date and time. During these communications, TPHs may not discuss the price of a potential transaction involving these positions during a compression forum. Trades executed during a compression forum pursuant to proposed Rule 6.56 and otherwise in compliance with the Rules would not be deemed prearranged trades in violation of the Rules.\17\ The purpose of the compression forum process is to facilitate closing transactions in series of SPX options between counterparties holding opposite open positions. The proposed rule is intended to help counterparties find one another so they can more efficiently trade out of open positions at the end of each calendar month. Communications between one another as to what positions they hold and when they will be available to potentially trade out of such positions will provide this efficiency and increase opportunities for TPHs to close these positions. Without communications regarding these logistics, it would be left to chance whether TPH with opposite positions would be present to close those positions during a compression forum, making it more difficult to close these positions. As long as communications are limited to which positions are held and timing of participation in a compression forum and do not include discussions of other elements of a potential trade, such as the price, the Exchange would not deem such communications to form the basis of a prearranged trade. The Exchange notes again all orders placed during a compression forum must be represented in the crowd and executed against the best responsive bid or offer, as they would during normal trading. Additionally, as noted above, all TPHs that are able to trade SPX on the trading floor may participate in a compression forum in accordance with the proposed procedure. TPHs participating in a compression forum must continue to comply with all other trading rules. --------------------------------------------------------------------------- \17\ Under Section 9(a)(1) of the Act, it shall be unlawful for any member of a national securities exchange, for the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange or a false or misleading appearance with respect to the market for any such security, (A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties. Prearranged trading could result in also result in [sic] a violation of CBOE Rule 4.1, which prohibits conduct inconsistent with just and equitable principles of trade, Rule 6.45A or 6.45B which addresses the priority of bids and offers, and/or Rule 10b-5 of the Act, which prohibits any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security, respectively. See Regulatory Circular RG16-190 (Prearranged Trades) (December 6, 2016). --------------------------------------------------------------------------- Finally, paragraph (d) to proposed Rule 6.56 states the Exchange will announce to TPHs determinations it makes pursuant to the proposed rule via Regulatory Circular with reasonable notice. The following is an example of how the compression forum process would work under paragraph (a) of proposed Rule 6.56. On December 20, 2016, the Exchange issues a regulatory circular stating a compression forum will be held on December 28 and 29 between 10:00 a.m. and 2:00 p.m. each day, and on December 30 between 9:00 a.m. and 12:00 p.m. The circular and [sic] invites all TPHs to submit a password protected .CSV file containing SPX positions with either a required capital charge equal to the minimum capital charge under Clearing Corporation rules risk-based haircut calculator and/or positions in series of SPX options with a delta of ten (10) or less via email with appropriate security measures containing the following fields: MARKET PARTICIPANT; SYMBOL, EXPIRATION DATE, STRIKE, CALL/PUT (either call or put), and SIZE (negative size denoting short size). The circular notes that all submissions must be received by the Exchange no later than December 27, 2016 at 3:15 p.m. Additionally, the circular notes a TPH should state in its email to CBOE if it does not want its name with the other submitting TPHs. Additionally, each submitting TPH must designate a point person. Prior to 3:15 p.m. on December 27, 2016, the Exchange receives the following .CSV files: XYZ closing postions.csv; ABC closing trades.csv; and 123 compression.csv.\18\ --------------------------------------------------------------------------- \18\ For purposes of this example, it is assumed that all the positions submitted to the Exchange by XYZ Trading, ABC Trading, and 123 Trading are either positions with a delta of ten or less or positions with a required capital charge equal to the minimum capital charge under the risk-based haircut calculator in the Clearing Corporation rules. ---------------------------------------------------------------------------------------------------------------- Expiration Market participant Symbol date Strike Call/put Size ---------------------------------------------------------------------------------------------------------------- XYZ TRADING.................... SPXW 12/30/2016 1500 C -125 XYZ TRADING.................... SPXW 12/30/2016 1505 P 25 XYZ TRADING.................... SPX 1/20/2017 1610 P -75 XYZ TRADING.................... SPX 1/20/2017 1700 P -166 XYZ TRADING.................... SPXW 1/8/2016 1800 C 250 XYZ TRADING.................... SPXW 1/8/2016 1850 C 500 XYZ TRADING.................... SPXW 1/8/2016 1900 C 250 XYZ TRADING.................... SPXW 12/30/2016 2350 C -652 XYZ TRADING.................... SPXW 12/30/2016 2460 C -1425 ---------------------------------------------------------------------------------------------------------------- [[Page 95223]] ---------------------------------------------------------------------------------------------------------------- Expiration Market participant Symbol date Strike Call/put Size ---------------------------------------------------------------------------------------------------------------- ABC TRADING.................... SPXW 12/30/2016 1500 C -76 ABC TRADING.................... SPXW 12/30/2016 1505 P -105 ABC TRADING.................... SPX 2/17/2017 1850 P -166 ABC TRADING.................... SPXW 12/30/2016 2350 C -62 ABC TRADING.................... SPXW 12/30/2016 2460 C 322 ABC TRADING.................... SPX 2/17/2017 2500 P -50 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Expiration Market participant Symbol date Strike Call/put Size ---------------------------------------------------------------------------------------------------------------- 123 TRADING.................... SPXW 12/30/2016 1500 C 50 123 TRADING.................... SPX 1/20/2017 1610 P -105 123 TRADING.................... SPXW 1/8/2016 1800 C -200 123 TRADING.................... SPXW 1/8/2016 1850 P -400 123 TRADING.................... SPX 2/17/2017 1850 C -107 123 TRADING.................... SPXW 1/8/2016 1900 C -200 123 TRADING.................... SPXW 12/30/2016 2350 P -62 123 TRADING.................... SPXW 12/30/2016 2460 C 25 123 TRADING.................... SPXW 12/30/2017 2500 P -300 ---------------------------------------------------------------------------------------------------------------- The email identify the following point people: XYZ Trading Firm-- John Smith; ABC Trading Firm--Jane Doe; and 123 Trading Company--Sam Jones. No TPH requests to remain anonymous. The Exchange then aggregates the closing positions and publishes the aggregated position data on its Web site for series of SPX options with two-sided compression-list positions submitted to the Exchange. Additionally, it distributes the list, as well as the TPHs that submitted individual position lists, to those TPHs: ---------------------------------------------------------------------------------------------------------------- Symbol Expiration date Strike Call/put Long size Short size ---------------------------------------------------------------------------------------------------------------- SPXW........................... 12/30/2016........ 1500 C 50 -201 SPXW........................... 12/30/2016........ 1505 P 25 -105 SPXW........................... 1/8/2016.......... 1800 C 250 -200 SPXW........................... 1/8/2016.......... 1850 P 500 -400 SPXW........................... 1/8/2016.......... 1900 C 250 -200 SPXW........................... 12/30/2016........ 2350 P 0 -62 SPXW........................... 12/30/2016........ 2460 C 347 -1425 ---------------------------------------------------- Market participants Designated lead ---------------------------------------------------- XYZ TRADING.................... John Smith ABC TRADING.................... Jane Doe 123 TRADING.................... Sam Jones ---------------------------------------------------------------------------------------------------------------- Following the dissemination of the .CSV file, TPHs discuss the positions included in the disseminated .CSV file with the designated leads in order to determine when each intended to participate in an upcoming compression forum. Each TPH coordinates with another TPH that holds an opposite position when they will be present at one of the upcoming compression forums. During the compression forums held on December 28 through 30, these three TPHs conducted the following trades: \19\ --------------------------------------------------------------------------- \19\ This example assumes: (1) No customer orders are on the book at the same or better price of the compression forum transaction; (2) if two TPHs respond to an order represented in the compression forum, they do so at the same price and time and, thus, the order is allocated equally among them; and (3) no other TPHs enter the compression forum to attempt to participate in the trades. --------------------------------------------------------------------------- 1. 123 Trading sells 25 SPXW 12/30/16 1500 C to each of ABC Trading and XYZ Trading. 2. XYZ Trading sells 25 SPXW 12/30/16 1505 P to ABC Trading. 3. XYZ Trading sells 200 butterflies consisting of 200 SPXW 1/8/ 2016 1800 C, 400 SPXW 1/8/2016 1850 C, and 200 SPXW 1/8/16 1900 C to 123 Trading. 4. 123 Trading sells 12 SPXW 12/30/2016 2460 C to each of ABC Trading and XYZ Trading (and the parties determine which of ABC Trading and XYZ Trading receive the extra contract). 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.\20\ Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \21\ requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with [[Page 95224]] the Section 6(b)(5) \22\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \20\ 15 U.S.C. 78f(b). \21\ 15 U.S.C. 78f(b)(5). \22\ Id. --------------------------------------------------------------------------- In particular, the Exchange believes the proposed rule change is reasonable, equitable, and does not unfairly discriminate against any market participants. The Exchange notes that all TPHs with open SPX positions may participate in a compression forum in accordance with the proposed procedure. Other market participants with open SPX positions may participate through CBOE floor brokers, as they would for any other SPX trading. Participation in compression forums, as well as advanced submission of compression-list positions, is optional, and TPHs may continue to attempt to trade open SPX positions during normal trading. The Exchange believes it is reasonable, equitable and not unfairly discriminatory to limit compression-list positions to certain riskless and low delta positions and trading in compression forums to closing only transactions because these types of positions and transactions will result in large bank regulatory capital requirements impacts for CTPHs even though there is minimal chance for large losses to occur. The Exchange notes that if opening transactions were permitted during a compression forum, it would defeat the purpose of the proposed rule, which is to encourage the closing of positions that are creating high bank regulatory capital requirements, often with positions that are of low economic benefit and risk and could otherwise be offset. The Exchange notes that there are other circumstances involving liquidity concerns in which the Exchange limits transactions in particular securities to closing only transactions. For example, the Exchange [sic] transactions in restricted option classes to [sic] closing only (subject to certain exceptions).\23\ Additionally, cabinet trades are limited to closing only (subject to certain exceptions).\24\ Similarly, the minimum increment for series traded during a compression forum will be $0.01 to further encourage closing of these positions. Because many series the Exchange expects to trade during the compression forum will be out-of-the-money, and essentially worthless, TPHs may not otherwise close positions in these series if a higher minimum increment causes the price to be too much higher than the option's value. --------------------------------------------------------------------------- \23\ See Rule 5.4. \24\ See Rule 6.54. --------------------------------------------------------------------------- In addition, the Exchange believes it's reasonable, equitable and not unfairly discriminatory to limit the compression forum process 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. Furthermore, the Exchange believes that its proposal is consistent with the Act in that it seeks to mitigate the potentially negative effects of the bank capital requirements on liquidity in the SPX options market. As described above, the Exchange believes that the new regulatory capital requirements could potentially impede efficient use of capital and undermine the critical liquidity role that Market-Makers play in the SPX options market by limiting the amount of capital CTPHs an [sic] allocate to clearing member transactions. Specifically, the rules may cause CTPHs to impose stricter position limits on their clearing members. In turn, this could force Market-Makers to reduce the size of their quotes in SPX and result in reduced liquidity in the market. The Exchange believes that permitting TPHs to reduce open interest in offsetting SPX options positions would likely contribute to the availability of liquidity in the SPX options market and help ensure that the SPX options market retains its competitive balance. The Exchange believes that the proposed rule would serve to protect investors by helping to ensure consistent continued depth of liquidity in the SPX options market. The Exchange also believes the proposed rule change is consistent with the Act, because the proposed procedure is consistent with its current rules. The proposed rule would direct that all trading during compression forums be conducted in accordance with normal SPX trading rules and thus, all transactions that would occur during compression forums would occur in the same manner as transactions during normal SPX trading, except transactions must be closing only and may be in penny increments. This process is narrowly tailored for a for [sic] the specific purpose of facilitating the closing of positions in the SPX options market, which the Exchange believes will serve to protect investors by helping to ensure continued depth of liquidity in the SPX options market. The Exchange also notes the proposed provisions regarding the position lists are optional procedures to help facilitate compression transactions. Submission of lists of positions for compression is completely voluntary, open to all TPHs, and non-binding, in that submission of a list does not require a TPH to trade any position or even represent any position in a trading crowd. Furthermore, the list of positions will be made available to all market participants and contain very limited information regarding open interest in positions in SPX. The list will not advantage or disadvantage any TPH, but rather simply alert TPHs to certain SPX positions that other TPHs are interested in closing at the end of each calendar month. B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on 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, which, once closed, would alleviate the capital requirement constraints on TPHs and improve overall market liquidity by freeing capital currently tied up in certain unwanted SPX 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 the trading of SPX options, which are exclusively-listed on CBOE. To the extent that the proposed changes make the Exchange a more attractive marketplace for market participants at other exchanges, such market participants are welcome to become CBOE market participants. Furthermore, as stated in Item 3(b) above, submission of lists of positions for compression is completely voluntary, open to all TPHs, and non-binding, in that submission of a list does not require a TPH to trade any position or even represent any position in a trading crowd. Lists of positions will be made available to all TPHs and contain very limited information regarding open interest in positions in SPX. The list will simply alert TPHs to certain SPX positions that other TPHs are interested in closing at the end of each calendar month. [[Page 95225]] 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 written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\ Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b- 4(f)(6)(iii) thereunder. --------------------------------------------------------------------------- \25\ 15 U.S.C. 78s(b)(3)(A)(iii). \26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. --------------------------------------------------------------------------- The Exchange has asked the Commission to waive the 30-day operative delay to allow the compression forum process to begin in December 2016 and trading to take place on the final three days of trading in 2016. The Exchange stated that it is requesting this waiver because it believes that bank capital requirements will have substantial adverse consequences on some CTPHs if TPHs are not able to sufficiently reduce their open interest in SPX by the end of the year. The Exchange understands that bank-imposed capital limits for TPHs, measured at the end of the year and based on the aggregate notional value of short positions regardless of offsets, may impact CTPHs and the firms for which they clear depending on the open interest they hold. CBOE believes, as it explained above, that the impact of these rules uniquely affects the SPX options market due to the large notional value of SPX contracts. In response, CTPHs may impose stricter position limits on the firms for which they clear and, to the extent they do so, it may effectively limit the amount of liquidity that some TPHs, notably Market-Makers, will be able to provide in SPX options. The Exchange believes that it is in the best interest of investors to use this new compression forum process to help foster continued liquidity in the SPX options market by allowing firms to free up capital by finding opportunities to trade out of relatively worthless positions. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because this waiver will enable the Exchange to hold compression forums for SPX options prior to the end of the year, thereby helping to facilitate transactions and remove impediments to year-end trading in SPX options, through a limited process designed to protect investors and the public interest. The Commission notes that CBOE's compression forum rule is limited in its application, involves no material changes to how trading is conducted on the Exchange, creates a process in which participation is voluntary and open to all, and is provided as a means to help Market Makers and other market participants, as well as their clearing brokers, avoid the need to limit their activities as a result of out-of-the-money positions on SPX options that such firms wish to exit. For this reason, the Commission hereby waives the 30-day operative delay requirement and designates the proposed rule change as operative upon filing.\27\ --------------------------------------------------------------------------- \27\ For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) \28\ of the Act to determine whether the proposed rule change should be approved or disapproved. --------------------------------------------------------------------------- \28\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- 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 CommentsUse 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-2016-090 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2016-090. 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 such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; 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-2016-090, and should be submitted on or before January 17, 2017. --------------------------------------------------------------------------- \29\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\29\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016-31102 Filed 12-23-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices 95219
to determine whether the proposed rule For the Commission, by the Division of the most significant aspects of such
should be approved or disapproved. Trading and Markets, pursuant to delegated statements.
authority.20
IV. Solicitation of Comments Eduardo A. Aleman, A. Self-Regulatory Organization’s
Assistant Secretary.
Statement of the Purpose of, and the
Interested persons are invited to Statutory Basis for, the Proposed Rule
submit written data, views, and [FR Doc. 2016–31117 Filed 12–23–16; 8:45 am]
Change
arguments concerning the foregoing, BILLING CODE 8011–01–P
including whether the proposed rule 1. Purpose
change is consistent with the Act. The Exchange proposes to adopt Rule
Comments may be submitted by any of SECURITIES AND EXCHANGE 6.56 (Compression Forums) to describe
the following methods: COMMISSION the Exchange’s ‘‘compression forum’’
process. Under proposed Rule 6.56, the
Electronic Comments [Release No. 34–79610; File No. SR–CBOE– Exchange would facilitate closing-only
2016–090] transactions in series of S&P 500(R)
• Use the Commission’s Internet
Index (‘‘SPX’’) options on the final three
comment form (http://www.sec.gov/ Self-Regulatory Organizations;
trading days of each calendar month as
rules/sro.shtml); or Chicago Board Options Exchange,
described below.
• Send an email to rule-comments@ Incorporated; Notice of Filing and
sec.gov. Please include File Number SR– Immediate Effectiveness of a Proposed Background
ISEGemini–2016–24 on the subject line. Rule Change Relating to Compression The Exchange’s proposal is intended
of S&P 500(R) Index Options Positions to provide a procedure for Trading
Paper Comments Permit Holders (‘‘TPHs’’) to efficiently
December 20, 2016.
• Send paper comments in triplicate reduce open positions in series of SPX
Pursuant to Section 19(b)(1) of the
to Secretary, Securities and Exchange options at the end of each calendar
Securities Exchange Act of 1934
Commission, 100 F Street NE., month in order to mitigate the effects of
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
capital constraints on market
Washington, DC 20549–1090. notice is hereby given that on December
participants and help ensure continued
15, 2016, Chicago Board Options
All submissions should refer to File depth of liquidity in the SPX options
Exchange, Incorporated (‘‘CBOE’’ or the
Number SR–ISEGemini–2016–24. This market.
‘‘Exchange’’) filed with the Securities SEC Rule 15c3–1 (Net Capital
file number should be included on the
and Exchange Commission Requirements for Brokers or Dealers)
subject line if email is used. To help the
(‘‘Commission’’) the proposed rule (‘‘Net Capital Rules’’) requires that every
Commission process and review your
change as described in Items I and II registered broker-dealer maintain
comments more efficiently, please use
below, which Items have been prepared certain specified minimum levels of
only one method. The Commission will
by the Exchange. The Commission is capital.3 The Net Capital Rules are
post all comments on the Commission’s
publishing this notice to solicit designed to protect securities customers,
Internet Web site (http://www.sec.gov/ comments on the proposed rule change
rules/sro.shtml). Copies of the counterparties, and creditors by
from interested persons. requiring that broker-dealers have
submission, all subsequent
amendments, all written statements I. Self-Regulatory Organization’s sufficient liquid resources on hand, at
with respect to the proposed rule Statement of the Terms of Substance of all times, to meet their financial
change that are filed with the the Proposed Rule Change obligations. Notably, hedged positions,
Commission, and all written including offsetting futures and options
The Exchange proposes to adopt Rule contract positions, result in certain net
communications relating to the 6.56 regarding ‘‘compression forums.’’
proposed rule change between the capital requirement reductions under
The text of the proposed rule change is the Net Capital Rules.4
Commission and any person, other than available on the Exchange’s Web site All Options Clearing Corporation
those that may be withheld from the (http://www.cboe.com/AboutCBOE/ (‘‘OCC’’) clearing members are subject to
public in accordance with the CBOELegalRegulatoryHome.aspx), at the Net Capital Rules. However, a subset
provisions of 5 U.S.C. 552, will be the Exchange’s Office of the Secretary, of clearing members are subsidiaries of
available for Web site viewing and and at the Commission’s Public U.S. bank holding companies, which,
printing in the Commission’s Public Reference Room. due to their affiliations with their parent
Reference Room, 100 F Street NE., U.S. bank holding companies, must
Washington, DC 20549, on official II. Self-Regulatory Organization’s
Statement of the Purpose of, and comply with additional bank regulatory
business days between the hours of capital requirements pursuant to
10:00 a.m. and 3:00 p.m. Copies of the Statutory Basis for, the Proposed Rule
Change rulemaking required under the Dodd–
filing also will be available for Frank Wall Street Reform and Consumer
inspection and copying at the principal In its filing with the Commission, the Protection Act.5 Pursuant to this
office of the Exchange. All comments Exchange included statements mandate, the Board of Governors of the
received will be posted without change; concerning the purpose of and basis for Federal Reserve System, the Office of
the Commission does not edit personal the proposed rule change and discussed the Comptroller of the Currency, and the
identifying information from any comments it received on the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Federal Deposit Insurance Corporation
submissions. You should submit only proposed rule change. The text of these
information that you wish to make statements may be examined at the 3 17 CFR 240.15c3–1.
available publicly. All submissions places specified in Item IV below. The 4 In addition, the Net Capital Rules permit various
should refer to File Number SR– Exchange has prepared summaries, set offsets under which a percentage of an option
ISEGemini–2016–24 and should be forth in sections A, B, and C below, of position’s gain at any one valuation point is
allowed to offset another position’s loss at the same
submitted on or before January 17, 2017. valuation point (e.g. vertical spreads).
1 15 U.S.C. 78s(b)(1). 5 H.R. 4173 (amending section 3(a) of the Act) (15
20 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4. U.S.C. 78c(a))).
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![Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices 95221
0.1 or ¥0.1) or less that it would like the aggregate size of open interest on the day before a holiday), at times
to close during the compression forum each side of each series (‘‘compression- determined by the Exchange. All such
for that calendar month (‘‘compression- list positions file’’).15 This aggregate notices would be provided to TPHs
list positions’’). Compression-list two-sided list may also include multi- reasonably in advance of any forum as
positions may consist of multi-legged legged positions of SPX options with announced via Regulatory Circular in
positions in series of SPX options, opposite open interest submitted to the accordance with paragraph (d) to
which satisfy the conditions set forth in Exchange according to the parameters proposed Rule 6.56 discussed below.
this paragraph of the proposed rule. The described in paragraph (a)(1) to The Exchange believes that multiple
Exchange proposes to limit proposed Rule 6.56. This would allow hours across multiple trading days will
compression-list positions to those the Exchange to identify multi-leg allow TPHs to close as many positions
positions, the closing of which the strategy orders with opposing interest of as possible during this process without
Exchange believes would have the particular TPHs in the various series of interfering with normal SPX trading. In
greatest impact on bank regulatory the strategy (e.g. vertical spreads, some cases, an appropriate counterparty
capital requirements and which also calendar spreads, butterflies, iron may not be present in the crowd at [sic]
have little economic risk associated condors). The Exchange believes that a particular time on a particular day when
with them.11 The Exchange believes list containing such multi-leg or a TPH with an opposite position
compression of these positions would complex positions may help facilitate a represents the position in the crowd. In
improve market liquidity by freeing more efficient forum by facilitating other cases, a TPH may wish to break up
capital currently tied up in positions for closing transactions in multiple series at a complex order into single legs after
which there is a minimal chance that a a time. trying unsuccessfully to close the multi-
significant loss would occur.12 Under paragraph (a)(3) to proposed leg positions or may have residual
Under paragraph (a)(1) to proposed Rule 6.56, in addition to making the positions that could not be closed in
Rule 6.56, TPHs may also permit their compression-list positions file available full. Additionally, news may be
CTPHs or the Clearing Corporation to to all TPHs, the Exchange would reported causing a high amount of
submit a list of these positions to the electronically send the compression-list activity preventing TPHs for [sic]
Exchange on their behalf.13 The positions file to the TPHs that submitted participating in the forum at certain
Exchange recognizes that a CTPH or compression-list positions to the times. The Exchange believes that the
OCC may more easily identify all of the Exchange pursuant to paragraph (a)(1), three-day format will provide TPHs
positions that are held across a TPH including a list of those TPHs that sufficient time to close these positions
firm as well as those that will have the contributed to the compression-list in a forum without interfering with
largest impact with respect to regulatory positions file. The list will not include normal trading.
capital reductions. The Exchange the name of any TPH that requests its Under paragraph (b) of proposed Rule
believes that such assistance would help name be excluded from this list. 6.56, trades executed during
to facilitate the compression forum Pursuant to paragraph (a)(3), TPHs compression forums would be subject to
process further. would be identified as having trading rules applicable to trading in
Under paragraph (a)(2) of proposed contributed to the list only and would SPX during Regular Trading Hours,
Rule 6.56, prior to the open of Regular not be identified as holding any specific including manner of bids and offers and
Trading Hours on the third to last position. The Exchange believes this allocation and priority rules, except: (1)
business day of each calendar month, process to identify TPHs that seek to Only closing transactions in SPX
the Exchange would make available 14 to close compression-list positions in options (including compression-list
all TPHs an aggregate two-sided (long/ advance of a compression forum will positions) may be executed during a
short) list of compression-list positions increase opportunities for TPHs to compression forum; and (2) the
for which open interest has been ultimately close compression-list minimum increment for all series will
submitted to the Exchange on both sides positions during a compression forum be $0.01 during a compression forum. In
pursuant to paragraph (a)(1), including while, at the same time, providing the other words, although trades executed
opportunity for anonymity. TPHs that during a compression forum may only
from ¥1 to 0 because as the underlying security do not want to be listed as having be closing transactions and may be in
increases, the value of put options decrease. For contributed compression-list positions penny increments within a specified
example, if a put option has a delta of ¥0.33, if the
price of the underlying asset increases by $1, the may inform the Exchange and will not timeframe and at a specific location on
price of the put option will decrease by $0.33. be included in the listed TPHs. the trading floor, trades executing
Generally speaking, an at-the-money option usually Under paragraph (a)(4) of proposed during a compression forum will occur
has a delta of approximately 0.5 or ¥0.5. Rule 6.56, the Exchange would conduct in the same manner as all other open
11 As further discussed below, positions on this
list as well as other open SPX positions may be
an open outcry ‘‘compression forum’’ in outcry SPX trades, including in
closed during a compression forum. which all TPHs may participate 16 on accordance with systemization
12 This definition of compression-list positions is each of the last three business days of requirements under Rule 6.24, and order
similar to the transaction fee rebate described in every calendar month at a location on allocation and priority rules under Rule
SR–CBOE–2015–117, which was adopted for the trading floor determined by the 6.45B(b). The purpose of the
reasons similar to those underlying this proposal.
See Securities Exchange Act Release No. 76842 Exchange. Compression forums would compression forum would simply be to
(January 6, 2016), 81 FR 1455 (January 12, 2016) be held for four (4) hours during Regular facilitate closing transactions in series of
(Notice of Filing and Immediate Effectiveness of a Trading Hours on each of the last three SPX options so that TPHs would have
Proposed Rule To Amend the Fees Schedule) (SR– business days of every calendar month,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
the opportunity to free up capital and
CBOE–2015–117).
13 The Exchange notes that while CTPHs may
or three (3) hours if any of those days eliminate riskless and low delta
request that their clients holding the out-of-the- is an abbreviated trading day (such as positions that they may otherwise hold
money and riskless positions permit the CTPHs to until expiration.
attempt to close these positions out, firms are not 15 This list would not identify which TPH holds Notably, TPHs would not be required
required to do so (i.e., these transactions are these positions. to submit a list of positions to the
voluntary and within the discretion of the CTPHs’ 16 As compression forums will be conducted in
clients). open outcry, TPHs that may participate include
Exchange pursuant to paragraph (a)(1)
14 The Exchange expects to publish this list on its Floor Brokers and Market-Makers with SPX in order to participate in a compression
Web site. appointments. forum, and positions SPX series other
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![95222 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices
than compression-list positions may be compression forum process is to makes pursuant to the proposed rule via
closed during a compression forum, as facilitate closing transactions in series of Regulatory Circular with reasonable
long as it involves only closing SPX options between counterparties notice.
transactions. The compression forums holding opposite open positions. The The following is an example of how
will be limited to closing only proposed rule is intended to help
the compression forum process would
transactions, because if opening counterparties find one another so they
work under paragraph (a) of proposed
transactions were permitted during a can more efficiently trade out of open
compression forum, it would defeat the positions at the end of each calendar Rule 6.56. On December 20, 2016, the
purpose of the proposed rule, which is month. Communications between one Exchange issues a regulatory circular
to encourage the closing of positions another as to what positions they hold stating a compression forum will be
that are creating high bank regulatory and when they will be available to held on December 28 and 29 between
capital requirements, often with potentially trade out of such positions 10:00 a.m. and 2:00 p.m. each day, and
positions that are of low economic will provide this efficiency and increase on December 30 between 9:00 a.m. and
benefit and risk and could otherwise be opportunities for TPHs to close these 12:00 p.m. The circular and [sic] invites
offset. Similarly, the minimum positions. Without communications all TPHs to submit a password
increment for series traded during a regarding these logistics, it would be left protected .CSV file containing SPX
compression forum will be $0.01 to to chance whether TPH with opposite positions with either a required capital
further encourage closing of these positions would be present to close charge equal to the minimum capital
positions. Because many series the those positions during a compression charge under Clearing Corporation rules
Exchange expects to trade during the forum, making it more difficult to close risk-based haircut calculator and/or
compression forum will be out-of-the- these positions. As long as positions in series of SPX options with
money, and essentially worthless, TPHs communications are limited to which a delta of ten (10) or less via email with
may not otherwise close positions in positions are held and timing of appropriate security measures
these series if a higher minimum participation in a compression forum containing the following fields:
increment causes the price to be too and do not include discussions of other MARKET PARTICIPANT; SYMBOL,
much higher than the option’s value. elements of a potential trade, such as
Under paragraph (c) to proposed Rule EXPIRATION DATE, STRIKE, CALL/
the price, the Exchange would not deem
6.56, and as noted above in the example, such communications to form the basis PUT (either call or put), and SIZE
TPHs would be permitted to of a prearranged trade. The Exchange (negative size denoting short size). The
communicate with other TPHs to notes again all orders placed during a circular notes that all submissions must
determine: A TPH’s open single-legged compression forum must be represented be received by the Exchange no later
or multi-legged SPX positions and/or (2) in the crowd and executed against the than December 27, 2016 at 3:15 p.m.
whether a TPH anticipates participating best responsive bid or offer, as they Additionally, the circular notes a TPH
in a compression forum at a particular would during normal trading. should state in its email to CBOE if it
date and time. During these Additionally, as noted above, all TPHs does not want its name with the other
communications, TPHs may not discuss that are able to trade SPX on the trading submitting TPHs. Additionally, each
the price of a potential transaction floor may participate in a compression submitting TPH must designate a point
involving these positions during a forum in accordance with the proposed person.
compression forum. Trades executed procedure. TPHs participating in a Prior to 3:15 p.m. on December 27,
during a compression forum pursuant to compression forum must continue to 2016, the Exchange receives the
proposed Rule 6.56 and otherwise in comply with all other trading rules.
compliance with the Rules would not be Finally, paragraph (d) to proposed following .CSV files: XYZ closing
deemed prearranged trades in violation Rule 6.56 states the Exchange will postions.csv; ABC closing trades.csv;
of the Rules.17 The purpose of the announce to TPHs determinations it and 123 compression.csv.18
Market participant Symbol Expiration date Strike Call/ Size
put
XYZ TRADING ................................................................................... SPXW 12/30/2016 1500 C ¥125
XYZ TRADING ................................................................................... SPXW 12/30/2016 1505 P 25
XYZ TRADING ................................................................................... SPX 1/20/2017 1610 P ¥75
XYZ TRADING ................................................................................... SPX 1/20/2017 1700 P ¥166
XYZ TRADING ................................................................................... SPXW 1/8/2016 1800 C 250
XYZ TRADING ................................................................................... SPXW 1/8/2016 1850 C 500
XYZ TRADING ................................................................................... SPXW 1/8/2016 1900 C 250
XYZ TRADING ................................................................................... SPXW 12/30/2016 2350 C ¥652
XYZ TRADING ................................................................................... SPXW 12/30/2016 2460 C ¥1425
17 Under Section 9(a)(1) of the Act, it shall be of substantially the same size, at substantially the would operate as a fraud or deceit upon any person,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
unlawful for any member of a national securities same time, and at substantially the same price, for in connection with the purchase or sale of any
exchange, for the purpose of creating a false or the sale of any such security, has been or will be security, respectively. See Regulatory Circular
misleading appearance of active trading in any entered by or for the same or different parties. RG16–190 (Prearranged Trades) (December 6, 2016).
security registered on a national securities exchange Prearranged trading could result in also result in 18 For purposes of this example, it is assumed that
or a false or misleading appearance with respect to [sic] a violation of CBOE Rule 4.1, which prohibits all the positions submitted to the Exchange by XYZ
the market for any such security, (A) to effect any conduct inconsistent with just and equitable Trading, ABC Trading, and 123 Trading are either
transaction in such security which involves no principles of trade, Rule 6.45A or 6.45B which positions with a delta of ten or less or positions
change in the beneficial ownership thereof, or (B) addresses the priority of bids and offers, and/or with a required capital charge equal to the
to enter an order or orders for the purchase of such Rule 10b–5 of the Act, which prohibits any act, minimum capital charge under the risk-based
security with the knowledge that an order or orders practice or course of business which operates or haircut calculator in the Clearing Corporation rules.
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![95224 Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices
the Section 6(b)(5) 22 requirement that In addition, the Exchange believes it’s are optional procedures to help facilitate
the rules of an exchange not be designed reasonable, equitable and not unfairly compression transactions. Submission
to permit unfair discrimination between discriminatory to limit the compression of lists of positions for compression is
customers, issuers, brokers, or dealers. forum process to SPX options (including completely voluntary, open to all TPHs,
In particular, the Exchange believes SPXW and SPXPM) because SPX has a and non-binding, in that submission of
the proposed rule change is reasonable, substantially higher notional value than a list does not require a TPH to trade
equitable, and does not unfairly other options classes. As such, open any position or even represent any
discriminate against any market interest in SPX has a much greater effect position in a trading crowd.
participants. The Exchange notes that on a bank’s regulatory capital Furthermore, the list of positions will be
all TPHs with open SPX positions may requirements. Compressing out-of-the- made available to all market
participate in a compression forum in money and riskless SPX option participants and contain very limited
accordance with the proposed positions therefore has a greater impact
information regarding open interest in
procedure. Other market participants on reducing a bank regulatory capital
positions in SPX. The list will not
with open SPX positions may requirement.
Furthermore, the Exchange believes advantage or disadvantage any TPH, but
participate through CBOE floor brokers, rather simply alert TPHs to certain SPX
as they would for any other SPX trading. that its proposal is consistent with the
Act in that it seeks to mitigate the positions that other TPHs are interested
Participation in compression forums, as in closing at the end of each calendar
well as advanced submission of potentially negative effects of the bank
capital requirements on liquidity in the month.
compression-list positions, is optional,
and TPHs may continue to attempt to SPX options market. As described B. Self-Regulatory Organization’s
trade open SPX positions during normal above, the Exchange believes that the Statement on Burden on Competition
trading. new regulatory capital requirements
could potentially impede efficient use of The Exchange does not believe that
The Exchange believes it is capital and undermine the critical
reasonable, equitable and not unfairly the proposed rule change will impose
liquidity role that Market-Makers play any burden on intramarket competition
discriminatory to limit compression-list in the SPX options market by limiting
positions to certain riskless and low that is not necessary or appropriate in
the amount of capital CTPHs an [sic] furtherance of the Act because it applies
delta positions and trading in allocate to clearing member
compression forums to closing only to all market participants in the same
transactions. Specifically, the rules may manner with positions that meet the
transactions because these types of cause CTPHs to impose stricter position
positions and transactions will result in eligible criteria. The proposed change
limits on their clearing members. In
large bank regulatory capital would encourage the closing of
turn, this could force Market-Makers to
requirements impacts for CTPHs even positions that needlessly result in
reduce the size of their quotes in SPX
though there is minimal chance for large and result in reduced liquidity in the burdensome capital requirements,
losses to occur. The Exchange notes that market. The Exchange believes that which, once closed, would alleviate the
if opening transactions were permitted permitting TPHs to reduce open interest capital requirement constraints on TPHs
during a compression forum, it would in offsetting SPX options positions and improve overall market liquidity by
defeat the purpose of the proposed rule, would likely contribute to the freeing capital currently tied up in
which is to encourage the closing of availability of liquidity in the SPX certain unwanted SPX positions. The
positions that are creating high bank options market and help ensure that the Exchange does not believe that the
regulatory capital requirements, often SPX options market retains its proposed rule changes will impose any
with positions that are of low economic competitive balance. The Exchange burden on intermarket competition that
benefit and risk and could otherwise be believes that the proposed rule would is not necessary or appropriate in
offset. The Exchange notes that there are serve to protect investors by helping to furtherance of the purposes of the Act
other circumstances involving liquidity ensure consistent continued depth of because the proposed rule change
concerns in which the Exchange limits liquidity in the SPX options market. applies only to the trading of SPX
transactions in particular securities to The Exchange also believes the options, which are exclusively-listed on
closing only transactions. For example, proposed rule change is consistent with CBOE. To the extent that the proposed
the Exchange [sic] transactions in the Act, because the proposed changes make the Exchange a more
restricted option classes to [sic] closing procedure is consistent with its current attractive marketplace for market
only (subject to certain exceptions).23 rules. The proposed rule would direct participants at other exchanges, such
Additionally, cabinet trades are limited that all trading during compression market participants are welcome to
to closing only (subject to certain forums be conducted in accordance become CBOE market participants.
exceptions).24 Similarly, the minimum with normal SPX trading rules and thus, Furthermore, as stated in Item 3(b)
increment for series traded during a all transactions that would occur during
above, submission of lists of positions
compression forum will be $0.01 to compression forums would occur in the
for compression is completely
further encourage closing of these same manner as transactions during
positions. Because many series the normal SPX trading, except transactions voluntary, open to all TPHs, and non-
Exchange expects to trade during the must be closing only and may be in binding, in that submission of a list does
compression forum will be out-of-the- penny increments. This process is not require a TPH to trade any position
narrowly tailored for a for [sic] the or even represent any position in a
asabaliauskas on DSK3SPTVN1PROD with NOTICES
money, and essentially worthless, TPHs
may not otherwise close positions in specific purpose of facilitating the trading crowd. Lists of positions will be
these series if a higher minimum closing of positions in the SPX options made available to all TPHs and contain
increment causes the price to be too market, which the Exchange believes very limited information regarding open
much higher than the option’s value. will serve to protect investors by interest in positions in SPX. The list
helping to ensure continued depth of will simply alert TPHs to certain SPX
22 Id. liquidity in the SPX options market. The positions that other TPHs are interested
23 See Rule 5.4. Exchange also notes the proposed in closing at the end of each calendar
24 See Rule 6.54. provisions regarding the position lists month.
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![Federal Register / Vol. 81, No. 248 / Tuesday, December 27, 2016 / Notices 95225
C. Self-Regulatory Organization’s will be able to provide in SPX options. Electronic Comments
Statement on Comments on the The Exchange believes that it is in the
Proposed Rule Change Received From best interest of investors to use this new • Use the Commission’s Internet
Members, Participants, or Others compression forum process to help comment form (http://www.sec.gov/
foster continued liquidity in the SPX rules/sro.shtml); or
The Exchange neither solicited nor
received written comments on the options market by allowing firms to free • Send an email to rule-comments@
proposed rule change. up capital by finding opportunities to sec.gov. Please include File Number SR–
trade out of relatively worthless CBOE–2016–090 on the subject line.
III. Date of Effectiveness of the positions.
Proposed Rule Change and Timing for Paper Comments
Commission Action The Commission believes that
waiving the 30-day operative delay is • Send paper comments in triplicate
The Exchange has filed the proposed consistent with the protection of to Brent J. Fields, Secretary, Securities
rule change pursuant to Section investors and the public interest
19(b)(3)(A)(iii) of the Act 25 and Rule and Exchange Commission, 100 F Street
because this waiver will enable the NE., Washington, DC 20549–1090.
19b–4(f)(6) thereunder.26 Because the Exchange to hold compression forums
proposed rule change does not: (i) for SPX options prior to the end of the All submissions should refer to File
Significantly affect the protection of year, thereby helping to facilitate Number SR–CBOE–2016–090. This file
investors or the public interest; (ii) transactions and remove impediments number should be included on the
impose any significant burden on to year-end trading in SPX options, subject line if email is used. To help the
competition; and (iii) become operative through a limited process designed to Commission process and review your
prior to 30 days from the date on which protect investors and the public interest. comments more efficiently, please use
it was filed, or such shorter time as the The Commission notes that CBOE’s only one method. The Commission will
Commission may designate, if compression forum rule is limited in its post all comments on the Commission’s
consistent with the protection of application, involves no material Internet Web site (http://www.sec.gov/
investors and the public interest, the changes to how trading is conducted on rules/sro.shtml). Copies of the
proposed rule change has become the Exchange, creates a process in submission, all subsequent
effective pursuant to Section 19(b)(3)(A) which participation is voluntary and
of the Act and Rule 19b–4(f)(6)(iii) amendments, all written statements
open to all, and is provided as a means with respect to the proposed rule
thereunder. to help Market Makers and other market
The Exchange has asked the change that are filed with the
participants, as well as their clearing Commission, and all written
Commission to waive the 30-day brokers, avoid the need to limit their
operative delay to allow the communications relating to the
activities as a result of out-of-the-money
compression forum process to begin in proposed rule change between the
positions on SPX options that such
December 2016 and trading to take place Commission and any person, other than
firms wish to exit. For this reason, the
on the final three days of trading in Commission hereby waives the 30-day those that may be withheld from the
2016. The Exchange stated that it is operative delay requirement and public in accordance with the
requesting this waiver because it designates the proposed rule change as provisions of 5 U.S.C. 552, will be
believes that bank capital requirements operative upon filing.27 available for Web site viewing and
will have substantial adverse printing in the Commission’s Public
consequences on some CTPHs if TPHs At any time within 60 days of the
Reference Room, 100 F Street NE.,
are not able to sufficiently reduce their filing of such proposed rule change, the
Washington, DC 20549 on official
open interest in SPX by the end of the Commission summarily may
temporarily suspend such rule change if business days between the hours of
year. The Exchange understands that 10:00 a.m. and 3:00 p.m. Copies of such
bank-imposed capital limits for TPHs, it appears to the Commission that such
action is necessary or appropriate in the filing also will be available for
measured at the end of the year and inspection and copying at the principal
based on the aggregate notional value of public interest, for the protection of
investors, or otherwise in furtherance of office of the Exchange. All comments
short positions regardless of offsets, may received will be posted without change;
impact CTPHs and the firms for which the purposes of the Act. If the
Commission takes such action, the the Commission does not edit personal
they clear depending on the open
Commission shall institute proceedings identifying information from
interest they hold. CBOE believes, as it
under Section 19(b)(2)(B) 28 of the Act to submissions. You should submit only
explained above, that the impact of
these rules uniquely affects the SPX determine whether the proposed rule information that you wish to make
options market due to the large notional change should be approved or available publicly. All submissions
value of SPX contracts. In response, disapproved. should refer to File Number SR–CBOE–
CTPHs may impose stricter position 2016–090, and should be submitted on
IV. Solicitation of Comments
limits on the firms for which they clear or before January 17, 2017.
and, to the extent they do so, it may Interested persons are invited to For the Commission, by the Division of
effectively limit the amount of liquidity submit written data, views, and Trading and Markets, pursuant to delegated
that some TPHs, notably Market-Makers, arguments concerning the foregoing, authority.29
including whether the proposed rule Eduardo A. Aleman,
asabaliauskas on DSK3SPTVN1PROD with NOTICES
25 15 U.S.C. 78s(b)(3)(A)(iii). change is consistent with the Act.
Assistant Secretary.
26 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– Comments may be submitted by any of
4(f)(6)(iii) requires a self-regulatory organization to the following methods: [FR Doc. 2016–31102 Filed 12–23–16; 8:45 am]
give the Commission written notice of its intent to BILLING CODE 8011–01–P
file the proposed rule change, along with a brief
27 For purposes only of waiving the 30-day
description and text of the proposed rule change,
at least five business days prior to the date of filing operative delay, the Commission has considered the
of the proposed rule change, or such shorter time proposed rule’s impact on efficiency, competition,
as designated by the Commission. The Exchange and capital formation. See 15 U.S.C. 78c(f).
has satisfied this requirement. 28 15 U.S.C. 78s(b)(2)(B). 29 17 CFR 200.30–3(a)(12).
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Document Created: 2018-02-14 09:13:41
Document Modified: 2018-02-14 09:13:41
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 95219 |
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