83 FR 13316 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Section (a) of Exchange Rule 1001, Position Limits, To Increase the Position Limits for Options
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 60 (March 28, 2018)
Federal Register Volume 83, Issue 60 (March 28, 2018)
| Page Range | 13316-13322 | |
| FR Document | 2018-06140 |
[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)] [Notices] [Pages 13316-13322] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-06140] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-82932; File No. SR-Phlx-2018-24] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Section (a) of Exchange Rule 1001, Position Limits, To Increase the Position Limits for Options March 22, 2018. 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 March 9, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1). \2\17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend Section (a) of Exchange Rule 1001, Position Limits, to increase the position limits for options on the following exchange traded funds (``ETFs''): iShares China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares MSCI Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF (``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year Treasury Bond Fund ETF (``TLT''), PowerShares QQQ Trust (``QQQQ''), and iShares MSCI Japan Index (``EWJ''). The text of the proposed rule change is available on the Exchange's website at http://nasdaqphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Position Limit Increase Position limits for options on ETFs such as those subject to this proposal are determined pursuant to Exchange Rule 1001, and, with certain exceptions, vary by tier according to the number of outstanding shares and the trading volume of the underlying security.\3\ Options in the highest tier--i.e., options that overlie securities with the largest numbers of outstanding shares and trading volumes--have a standard option position limit of 250,000 contracts (with adjustments for splits, re-capitalizations, etc.) on the same side of the market. In addition, Rule 1001 currently sets forth separate position limits for options on certain ETFs, including 500,000 contracts for options on EEM and IWM, and 900,000 contracts for options on QQQQ. --------------------------------------------------------------------------- \3\ Pursuant to Exchange Rule 1002, which provides that the exercise limits for ETF options are equivalent to their position limits, the exercise limits for each of these options would be increased to the level of the new position limits. --------------------------------------------------------------------------- The Exchange proposes to revise Rule 1001 to increase the position limits for options on certain ETFs, as described more fully below. The Exchange believes that increasing the position limits for these options will lead to a more liquid and competitive market environment for these options that will benefit customers interested in these products. First, the Exchange proposes to increase the position limits for options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the highest standard tier set forth in Exchange Rule 1001(g)(i). Rule 1001(a) would be amended to increase the current [[Page 13317]] position limit of 250,000 contracts for options on these securities to 500,000 contracts. Second, the Exchange proposes to increase the position limits for options on EEM and IWM from 500,000 contracts to 1,000,000 contracts.\4\ --------------------------------------------------------------------------- \4\ The Exchange is also amending Rule 1001(a) to update and correct the names of IWM and EEM, which are currently referred to in that rule as the iShares[supreg] Russell 2000[supreg] Index and iShares MSCI Emerging Markets Index Fund, respectively. --------------------------------------------------------------------------- Finally, the Exchange proposes to increase the position limits on options on QQQQ from 900,000 contracts to 1,800,000 contracts. In support of this proposal, the Exchange represents that the above listed ETFs qualify for either: (i) The initial listing criteria set forth in Exchange Rule 1009 Commentary .06 for ETFs holding non-U.S. component securities; or (ii) for ETFs listed pursuant to generic listing standards for series of portfolio depository receipts and index fund shares based on international or global indexes under which a comprehensive surveillance agreement (``CSA'') is not required.\5\ FXI tracks the performance of the FTSE China 50 Index, which is composed of the 50 largest Chinese stocks.\6\ EEM tracks the performance of the MSCI Emerging Markets Index, which is composed of approximately 800 component securities.\7\ The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of the Russell 2000 Index, which is composed of 2,000 small-cap domestic stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has over 900 component securities.\10\ The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is composed of shares of large and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S. Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100 Index, which is composed of 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the performance of large and mid-sized companies in Japan.\15\ --------------------------------------------------------------------------- \5\ The Exchange notes that the initial listing criteria for options on ETFs that hold non-U.S. component securities are more stringent than the maintenance listing criteria for those same ETF options. See Exchange Rule 1009 Commentary .06; Exchange Rule 1010, Commentary .08. \6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf. \7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm. \8\ See http://www.msci.com/products/indices/tools/index.html#EM. \9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf. \10\ See https://www.ishares.com/us/products/239623/. \11\ See https://www.msci.com/eafe. \12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf. \13\ See https://www.ishares.com/us/products/239454/. \14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq. \15\ See https://www.ishares.com/us/products/239665/EWJ. --------------------------------------------------------------------------- The Exchange represents that more than 50% of the weight of the securities held by the options subject to this proposal are also subject to a CSA.\16\ Additionally, the component securities of the MSCI Emerging Markets Index on which EEM is based for which the primary market is in any one country that is not subject to a CSA do not represent 20% or more of the weight of the MSCI Emerging Markets Index.\17\ Finally, the component securities of the MSCI Emerging Markets Index on which EEM is based, for which the primary market is in any two countries that are not subject to CSAs do not represent 33% o2 [sic] more of the weight of the MSCI Emerging Markets Index.\18\ --------------------------------------------------------------------------- \16\ See Exchange Rule 1009 Commentary .06. \17\ See Exchange Rule 1009 Commentary .06(b)(ii)(B). \18\ See Exchange Rule 1009 Commentary .06(b)(ii)(C). --------------------------------------------------------------------------- Market participants have increased their demand for options on FXI, EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the Exchange believes the current position limits are too low and may be a deterrent to successful trading of options on these securities. The CBOE Analysis The Commission has recently approved a proposed rule change of the Chicago Board Options Exchange (``CBOE'') to increase position limits for these same options.\19\ The discussion that follows is based upon the CBOE's analysis presented in that proposal. --------------------------------------------------------------------------- \19\ See Securities Exchange Act Release No. 82770 (February 23, 2018) (approving SR-CBOE-2017-057). --------------------------------------------------------------------------- In its proposal, CBOE stated that it had collected the following trading statistics on the ETFs that are subject to this proposal: ---------------------------------------------------------------------------------------------------------------- Shares ETF 2017 ADV (Mil. 2017 ADV (option outstanding Fund market cap Shares) contracts) (Mil.) ($Mil.) ---------------------------------------------------------------------------------------------------------------- FXI..................................... 15.08 71,944 78.6 $3,343.6 EEM..................................... 52.12 287,357 797.4 34,926.1 IWM..................................... 27.46 490,070 253.1 35,809.1 EFA..................................... 19.42 98,844 1178.4 78,870.3 EWZ..................................... 17.08 95,152 159.4 6,023.4 TLT..................................... 8.53 80,476 60.0 7,442 QQQQ.................................... 26.25 579,404 351.6 50,359.7 EWJ..................................... 6.06 4,715 303.6 16,625.1 SPY..................................... 64.63 2,575,153 976.23 240,540.0 ---------------------------------------------------------------------------------------------------------------- SGPO Galley End:?> In support of its proposal to increase the position limits for QQQQ to 1,800,000 contracts, CBOE compared the trading characteristics of QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position limits. As shown in the above table, the average daily trading volume through August 14, 2017 for QQQQ was 26.25 million shares compared to 64.63 million shares for SPY. The total shares outstanding for QQQQ are 351.6 million compared to 976.23 million for SPY. The fund market cap for QQQQ is $50,359.7 million compared to $240,540 million [[Page 13318]] for SPY. SPY is one of the most actively trading ETFs and is, therefore, subject to no position limits. QQQQ is also very actively traded, and while not to the level of SPY, should be subject to the proposed higher position limits based on its trading characteristics when compared to SPY. The proposed position limit coupled with QQQQ's trading behavior would continue to address potential manipulative schemes and adverse market impact surrounding the use of options and trading in its [sic] underlying the options. In support of its proposal to increase the position limits for EEM and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also compared the trading characteristics of EEM and IWM to that of QQQQ, which currently has a position limit of 900,000 contracts. As shown in the above table, the average daily trading volume through July 31, 2017 for EEM was 52.12 million shares and IWM was 27.46 million shares compared to 26.25 million shares for QQQQ. The total shares outstanding for EEM are 797.4 million and for IWM are 253.1 million compared to 351.6 million for QQQQ. The fund market cap for EEM is $34,926.1 million and IWM is $35,809 million compared to $50,359.7 million for QQQQ. EEM, IWM and QQQQ have similar trading characteristics and subjecting EEM and IWM to the proposed higher position limit would continue be designed to address potential manipulate [sic] schemes that may arise from trading in the options and their underlying securities. These above trading characteristics for QQQQ when compared to EEM and IWM also justify increasing the position limit for QQQQ. QQQQ has a higher options ADV than EEM and IWM, a higher numbers [sic] of shares outstanding than IWM and a much higher market cap than EEM and IWM which justify doubling the position limit for QQQQ. CBOE concluded that, based on these statistics, and as stated above, the proposed position limit coupled with QQQQ's trading behavior would continue to address potential manipulative schemes and adverse market impact surrounding the use of options and trading in the securities underlying the options. In support of its proposal to increase the position limits for FXI, EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts, CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and EWJ to that of EEM and IWM, both of which currently have a position limit of 500,000 contracts. As shown in the above table, the average daily trading volume through July 31, 2017 for FXI is 15.08 million shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT is 8.53 million shares, and EWJ is 6.06 million shares compared to 52.12 million shares for EEM and 27.46 million shares for IWM. The total shares outstanding for FXI is 78.6 million, EFA is 1178.4 million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6 million compared to 797.4 million for EEM and 253.1 million for IWM. The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3 million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is $16,625.1 million compared to $34,926.1 million for EEM and $35,809.1 million for IWM. In Partial Amendment No. 1 to its proposed rule change, CBOE provided additional analysis and support for its proposed rule change.\20\ According to CBOE, market participants' trading activity has been adversely impacted by the current position limits as such limits have caused options trading in the symbols subject to the proposed rule change to move from exchanges to the over-the-counter market. CBOE stated it had submitted the proposed rule change at the request of market participants whose on-exchange activity has been hindered by the existing position limits causing them to be unable to provide additional liquidity not just on CBOE, but also on other options exchanges on which they participate. --------------------------------------------------------------------------- \20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22, 2017). --------------------------------------------------------------------------- CBOE stated it understood that certain market participants wishing to make trades involving a large number of options contracts in the symbols subject to the proposed rule change are opting to execute those trades in the over-the-counter market, that the over-the counter transactions occur via bi-lateral agreements the terms of which are not publicly disclosed to other market participants, and that therefore, these large trades do not contribute to the price discovery process performed on a lit market. It stated that position limits are designed to address potential manipulative schemes and adverse market impact surrounding the use of options, such as disrupting the market in the security underlying the options, and that the potential manipulative schemes and adverse market impact are balanced against the potential of setting the limits so low as to discourage participation in the options market. It stated that the level of those position limits must be balanced between curtailing potential manipulation and the cost of preventing potential hedging activity that could be used for legitimate economic purposes. CBOE observed that the ETFs that underlie options subject to the proposed rule change are highly liquid, and are based on a broad set of highly liquid securities and other reference assets, and noted that the Commission has generally looked through to the liquidity of securities comprising an index in establishing position limits for cash-settled index options. It further noted that options on certain broad-based security indexes have no position limits. CBOE observed that the Commission has recognized the liquidity of the securities comprising the underlying interest of the SPDR S&P 500 ETF (``SPY'') in permitting no position limits on SPY options since 2012,\21\ and expanded position limits for options on EEM, IWM and QQQQ. --------------------------------------------------------------------------- \21\ See Securities Exchange Act Release No. 67937 (September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091). --------------------------------------------------------------------------- CBOE stated that the creation and redemption process for these ETFs also lessen the potential for manipulative activity, explaining that when an ETF company wants to create more ETF shares, it looks to an Authorized Participant, which is a market maker or other large financial institution, to acquire the securities the ETF is to hold. For instance, IWM is designed to track the performance of the Russell 2000 Index, the Authorized Participant will purchase all the Russell 2000 constituent securities in the exact same weight as the index, then deliver those shares to the ETF provider. In exchange, the ETF provider gives the Authorized Participant a block of equally valued ETF shares, on a one-for-one fair value basis. The price is based on the net asset value, not the market value at which the ETF is trading. The creation of new ETF units can be conducted all trading day and is not subject to position limits. This process can also work in reverse where the ETF company seeks to decrease the number of shares that are available to trade. The creation and redemption process, therefore, creates a direct link to the underlying components of the ETF, and serves to mitigate potential price impact of the ETF shares that might otherwise result from increased position limits. The ETF creation and redemption seeks to keep ETF share prices trading in line with the ETF's underlying net asset value. Because an ETF trades like a stock, its price will fluctuate during the trading day, due to simple supply and demand. If demand to buy an ETF is high, for instance, the ETF's share price might rise above the value of its underlying [[Page 13319]] securities. When this happens, the Authorized Participant believes the ETF may now be overpriced, and can buy the underlying shares that compose the ETF and then sell ETF shares on the open market. This should help drive the ETF's share price back toward fair value. Likewise, if the ETF starts trading at a discount to the securities it holds, the Authorized Participant can buy shares of the ETF and redeem them for the underlying securities. Buying undervalued ETF shares should drive the price of the ETF back toward fair value. This arbitrage process helps to keep an ETF's price in line with the value of its underlying portfolio. CBOE stated that in proposing the increased position limits, the Exchange considered the availability of economically equivalent products and their respective position limits. For instance, some of the ETFs underlying options subject to the proposed rule change are based on broad-based indices that underlie cash settled options that are economically equivalent to the ETF options that are the subject of the proposed rule change and have no position limits. Other ETFs are based on broad-based indexes that underlie cash-settled options with position limits reflecting notional values that are larger than the current position limits for ETF analogues (EEM, EFA). Where there was no approved index analogue, CBOE stated its belief, based on the liquidity, breadth and depth of the underlying market, that the index referenced by the ETF would be considered a broad-based index.\22\ CBOE argued that if certain position limits are appropriate for the options overlying the same index or is an analogue to the basket of securities that the ETF tracks, then those same economically equivalent position limits should be appropriate for the option overlying the ETF. In addition, CBOE observed, the market capitalization of the underlying index or reference asset is large enough to absorb any price movements that may be caused by an oversized trade. Also, the Authorized Participant or issuer may look to the stocks comprising the analogous underlying index or reference asset when seeking to create additional ETF shares are part of the creation/redemption process to address supply and demand or to mitigate the price movement the price of the ETF. CBOE offered the following specific examples to illustrate: --------------------------------------------------------------------------- \22\ CBOE Rule 24.4 and Exchange Rule 1001A(a) set forth the CBOE and the Phlx position limits for broad-based index options. --------------------------------------------------------------------------- QQQQ For example, the PowerShares QQQ Trust or QQQQ is an ETF that tracks the Nasdaq 100 Index or NDX, which is an index composed of 100 of the largest non-financial securities listed on Nasdaq. Options on NDX are currently subject to no position limits but share similar trading characteristics as QQQQ. Based on QQQQ's share price of $154.54 \23\ and NDX's index level of 6,339.14, approximately 40 contracts of QQQQ equals one contract of NDX. Assume that NDX was subject to the standard position limit of 25,000 contracts for broad-based index options. Based on the above comparison of notional values, this would result in a positon [sic] limit equivalent to 1,000,000 contracts for QQQQ as NDX's analogue. However, NDX is not subject to position limits and has an average daily trading volume of 15,300 contracts. QQQQ is currently subject to a position limit of 900,000 contracts but has a much higher average daily trading volume of 579,404 contracts. Furthermore, NDX currently has a market capitalization of $17.2 trillion and QQQQ has a market capitalization of $50,359.7 million, and the component securities of NDX, in aggregate, have traded an average of 440 million shares per day in 2017, both large enough to absorb any price movement cause by a large trade in the QQQQ. The Commission has also approved no position limit for NDX, although it has a much lower average daily trading volume than its analogue, the QQQQ. Therefore, CBOE concluded and the Exchange agrees it was reasonable to increase the positon [sic] limit for options on the QQQQ from 900,000 to 1,800,000 contracts. --------------------------------------------------------------------------- \23\ CBOE stated that all share prices used in its analysis were based on the closing price of the security on November 16, 2017 and cited Yahoo Finance as the source. --------------------------------------------------------------------------- IWM The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the Russell 2000 Index or RUT, which is an index that is composed of 2,000 small-cap domestic companies in the Russell 3000 index. Options on RUT are currently subject to no position limits but share similar trading characteristics as IWM. Based on IWM's share price of $144.77 and RUT's index level of 1,486.88, approximately 10 contracts of IWM equals one contract of RUT. Assume that RUT was subject to the standard position limit of 25,000 contracts for broad-based index options under Exchange Rule 24.4(a). Based on the above comparison of notional values, this would result in a positon [sic] limit equivalent to 250,000 contracts for IWM as RUT's analogue. However, RUT is not subject to position limits and has an average daily trading volume of 66,200 contracts. IWM is currently subject to a position limit of 500,000 contracts but has a much higher average daily trading volume of 490,070 contracts. The Commission has approved no position limit for RUT, although it has a much lower average daily trading volume than its analogue, the IWM. Furthermore, RUT currently has a market capitalization of $2.4 trillion and IWM has a market capitalization of $35,809.1 million, and the component securities of RUT, in aggregate, have traded an average of 270 million shares per day in 2017, both large enough to absorb any price movement cause by a large trade in the IWM. Therefore, CBOE concluded and the Exchange agrees it is reasonable to increase the positon [sic] limit for options on the IWM from 500,000 to 1,000,000 contracts. EEM EEM tracks the performance of the MSCI Emerging Markets Index or MXEF, which is composed of approximately 800 component securities following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of $47.06 and MXEF's index level of 1,136.45, approximately 24 contracts of EEM equals one contract of MXEF. MXEF is currently subject to the standard position limit of 25,000 contracts for broad-based index options. Based on the above comparison of notional values, this would result in a position limit economically equivalent to 604,000 contracts for EEM as MXEF's analogue. However, MXEF has an average daily trading volume of 180 contracts. EEM is currently subject to a position limit of 500,000 contracts but has a much higher average daily trading volume of 287,357 contracts. Furthermore, MXEF currently has a market capitalization of $5.18 trillion and EEM has a market capitalization of $34,926.1 million, and the component securities of MXEF, in aggregate, have traded an average of 33.6 billion shares per day in 2017, both large enough to absorb any price movement cause by a large trade in the EEM. Therefore, based on the comparison of average daily trading volume, CBOE believed and the Exchange agrees that it is reasonable to increase the positon [sic] limit for [[Page 13320]] options on the IWM from 500,000 to 1,000,000 contracts. EFA EFA tracks the performance of MSCI EAFE Index or MXEA, which has over 900 component securities designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. Based on EFA's share price of $69.16 and MXEA's index level of 1,986.15, approximately 29 contracts of EFA equals one contract of MXEA. MXEA is currently subject to the standard position limit of 25,000 contracts for broad-based index options. Based on the above comparison of notional values, this would result in a positon [sic] limit economically equivalent to 721,000 contracts for EFA as MXEA's analogue. Furthermore, MXEA currently has a market capitalization of $18.7 trillion and EFA has a market capitalization of $78,870.3 million, and the component securities of MXEA, in aggregate, have traded an average of 4.6 billion shares per day in 2017, both large enough to absorb any price movement cause by a large trade in the EEM. However, MXEA has an average daily trading volume of 270 contracts. EFA is currently subject to a position limit of 250,000 contracts but has a much higher average daily trading volume of 98,844 contracts. Based on the above comparisons, CBOE believed and the Exchange agrees that it is reasonable to increase the positon [sic] limit for options on the EFA from 250,000 to 500,000 contracts. FXI FXI tracks the performance of the FTSE China 50 Index, which is composed of the 50 largest Chinese stocks. There is currently no index analogue for FXI approved for options trading. However, the FTSE China 50 Index currently has a market capitalization of $1.7 trillion and FXI has a market capitalization of $2,623.18 million, both large enough to absorb any price movement cause by a large trade in FXI. The components of the FTSE China 50 Index, in aggregate, have an average daily trading volume of 2.3 billion shares. FXI is currently subject to a position limit of 250,000 contracts but has a much higher average daily trading volume of 15.08 million shares. Based on the above comparisons, CBOE believed, and that Exchange agrees, that it is reasonable to increase the positon [sic] limit for options on the FXI from 250,000 to 500,000 contracts. EWZ EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is composed of shares of large and mid-size companies in Brazil. There is currently no index analogue for EWZ approved for options trading. However, the MSCI Brazil 25/50 Index currently has a market capitalization of $700 billion and EWZ has a market capitalization of $6,023.4 million, both large enough to absorb any price movement cause by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index, in aggregate, have an average daily trading volume of 285 million shares. EWZ is currently subject to a position limit of 250,000 contracts but has a much higher average daily trading volume of 17.08 million shares. Based on the above comparisons, CBOE believed and the Exchange agrees that it is reasonable to increase the positon [sic] limit for options on the EWZ from 250,000 to 500,000 contracts. TLT TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S. Treasury bonds. There is currently no index analogue for TLT approved for options trading. However, the U.S. Treasury market is one of the largest and most liquid markets in the world, with over $14 trillion outstanding and turnover of approximately $500 billion per day. TLT currently has a market capitalization of $7,442.4 million, both large enough to absorb any price movement cause by a large trade in TLT. Therefore, the potential for manipulation will not increase solely due the increase in position limits as set forth in the proposed rule change. Based on the above comparisons, CBOE believed and the Exchange agrees it is reasonable to increase the positon [sic] limit for options on the TLT from 250,000 to 500,000 contracts. EWJ EWJ tracks the MSCI Japan Index, which tracks the performance of large and mid-sized companies in Japan. There is currently no index analogue for EWJ approved for options trading. However, the MSCI Japan Index has a market capitalization of $3.5 trillion and EWJ has a market capitalization of $16,625.1 million, and the component securities of the MSCI Japan Index, in aggregate, have traded an average of 1.1 billion shares per day in 2017, both large enough to absorb any price movement cause by a large trade in EWJ. EWJ is currently subject to a position limit of 250,000 contracts and has an average daily trading volume of 6.6 million shares. Based on the above comparisons, CBOE believed and the Exchange agrees that it is reasonable to increase the positon [sic] limit for options on EWJ from 250,000 to 500,000 contracts. Phlx Analysis and Conclusions Phlx has reviewed the CBOE analysis set forth above. On the basis of that analysis Phlx believes that market participants' trading activity could be adversely impacted by the current position limits for FXI, EFA, EWZ, TLT and EWJ and such limits may cause options trading in these symbols to move from exchanges to the over-the-counter market. The above trading characteristics of FXI, EFA, EWZ, TLT and EWJ are either similar to those of EEM and IWM or sufficiently active so that the proposed limit would continue to address potential manipulation that may arise. Specifically, EFA has far more shares outstanding and a larger fund market cap than EEM, IWM, and QQQQ. EWJ has more shares outstanding than IWM and only slightly fewer shares outstanding than QQQQ. On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or QQQQ in any of the specified areas, they are all actively trading so that market participants' trading activity has been impacted by them being restricted by the current position limits. The Exchange believes that the trading activity and these securities being based on a broad basket of underlying securities alleviates concerns as to any potential manipulative activity that may arise. In addition, as discussed in more detail below, the Exchange's existing surveillance procedures and reporting requirements at the Exchange, at other options exchanges, and at the several clearing firms are capable of properly identifying unusual and/or illegal trading activity. On the basis of CBOE's analysis Phlx also believes that market participants' trading activity could be adversely impacted by the current position limits for EEM, IWM and QQQQ. As discussed above, EEM, IWM and QQQQ have similar trading characteristics. Subjecting EEM and IWM to the proposed higher position limit would continue be designed to address potential manipulate [sic] schemes that may arise from trading in the options and their underlying securities. The trading characteristics for QQQQ described above, when compared to EEM and IWM, also justify increasing the position limit for QQQQ. QQQQ has a higher options ADV than EEM and IWM, a higher numbers [sic] of shares [[Page 13321]] outstanding than IWM and a much higher market cap than EEM and IWM which justify doubling the positon [sic] limit for QQQQ. Based on these statistics, the proposed position limit coupled with QQQQ's trading behavior would continue to address potential manipulative schemes and adverse market impact surrounding the use of options and trading in its [sic] underlying the options. The Exchange believes that increasing the position limits for the options subject to this proposal would lead to a more liquid and competitive market environment for these options, which will benefit customers interested in this product. Under the proposal, the reporting requirement for the above options would be unchanged. Thus, the Exchange would still require that each member and member organization that maintains a position in the options on the same side of the market, for its own account or for the account of a customer, report certain information to the Exchange. This information would include, but would not be limited to, the options' position, whether such position is hedged and, if so, a description of the hedge, and the collateral used to carry the position, if applicable. Registered option traders (``ROTs'') and specialists would continue to be exempt from this reporting requirement, as ROT and specialist information can be accessed through the Exchange's market surveillance systems. In addition, the general reporting requirement for customer accounts that maintain an aggregate position of 200 or more options contracts would remain at this level for the options subject to this proposal.\24\ --------------------------------------------------------------------------- \24\ See Exchange Rule 1003 for reporting requirements. --------------------------------------------------------------------------- The Exchange believes that the existing surveillance procedures and reporting requirements at the Exchange, other options exchanges, and at the several clearing firms are capable of properly identifying unusual and/or illegal trading activity. In addition, routine oversight inspections of the Exchange's regulatory programs by the Commission have not uncovered any material inconsistencies or shortcomings in the manner in which the Exchange's market surveillance is conducted. These procedures utilize daily monitoring of market movements via automated surveillance techniques to identify unusual activity in both options and underlying stocks.\25\ --------------------------------------------------------------------------- \25\ These procedures have been effective for the surveillance of trading the options subject to this proposal and will continue to be employed. --------------------------------------------------------------------------- Furthermore, large stock holdings must be disclosed to the Commission by way of Schedules 13D or 13G.\26\ The positions for options subject to this proposal are part of any reportable positions and, thus, cannot be legally hidden. Moreover, the Exchange's requirement that members and member organizations file reports with the Exchange for any customer who held aggregate large long or short positions of any single class for the previous day will continue to serve as an important part of the Exchange's surveillance efforts. --------------------------------------------------------------------------- \26\ 17 CFR 240.13d-1. --------------------------------------------------------------------------- The Exchange believes that the current financial requirements imposed by the Exchange and by the Commission adequately address concerns that a member organization or its customer may try to maintain an inordinately large un-hedged position in the options subject to this proposal. Current margin and risk-based haircut methodologies serve to limit the size of positions maintained by any one account by increasing the margin and/or capital that a member organization must maintain for a large position held by itself or by its customer.\27\ In addition, Rule 15c3-1 \28\ imposes a capital charge on member organizations to the extent of any margin deficiency resulting from the higher margin requirement. --------------------------------------------------------------------------- \27\ See Exchange Rule 721 for a description of margin requirements. \28\ 17 CFR 240.15c3-1. --------------------------------------------------------------------------- 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,\29\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\30\ in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. As noted above, the Commission has recently approved increasing position limits to the levels proposed herein on the same ETF options on the CBOE. The Exchange believes that the proposed position limits would continue to address potential manipulative activity while allowing for potential hedging activity for appropriate economic purposes. --------------------------------------------------------------------------- \29\ 15 U.S.C. 78f(b). \30\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The current position limits for the options subject to this proposal have inhibited the ability of ROTs and specialists to make markets on the Exchange. Specifically, the proposal is designed to encourage ROTs and specialists to shift liquidity from over the counter markets onto the Exchange, which will enhance the process of price discovery conducted on the Exchange through increased order flow. The proposal will also benefit institutional investors as well as retail traders, and public customers, by providing them with a more effective trading and hedging vehicle. In addition, the Exchange believes that the structure of the ETFs subject to this proposal and the considerable liquidity of the market for options on those ETFs diminishes the opportunity to manipulate this product and disrupt the underlying market that a lower position limit may protect against. Increased position limits for select actively traded options, such as that proposed herein, is not novel and has been previously approved by the Commission. For example, the Commission has previously approved, on a pilot basis, eliminating position limits for certain options.\31\ Additionally, the Commission has approved similar proposed rule changes to increase position limits for options on highly liquid, actively- traded ETFs,\32\ including a proposal to permanently eliminate the position and exercise limits for options overlaying the S&P 500 Index, S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the Russell 2000(R) Index (``RUT'').\33\ In approving the permanent elimination of position and exercise limits for these index options, the Commission relied heavily upon the Exchange's surveillance capabilities, and the Commission expressed trust in the enhanced surveillance and reporting safeguards that the Exchange took in order to detect and deter possible manipulative behavior which might [[Page 13322]] arise from eliminating position and exercise limits.\34\ Furthermore, as described more fully above, options on other ETFs have the position limits proposed herein and those ETFs have trading characteristics and trading volumes that are similar to those of the ETFs subject to this proposed rule change. --------------------------------------------------------------------------- \31\ See Securities Exchange Act Release Nos. 67672 (August 15, 2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937 (September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012- 091). \32\ See Securities Exchange Act Release Nos. 68086 (October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928 (July 20, 2011), 76 FR 44633 (July 26, 2011) (SR-CBOE-2011-065); 64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011- 58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017) (SR-CBOE- 2007-008.). \33\ See Securities Exchange Act Release Nos. 44994 (October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination of position and exercise limits on SPX, OEX, and DJX options) (``SPX, OEX, and DJX Position Limit Elimination Approval Order''); 52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE- 2005-41) (elimination of position and exercise limits on NDX options) (``NDX Position Limit Elimination Approval Order''); 56651 (October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71) (``RUT Position Limit Elimination Approval Order''). \34\ Id. --------------------------------------------------------------------------- Last, the Commission has expressed the belief that removing position and exercise limits may bring additional depth and liquidity without increasing concerns regarding intermarket manipulation or disruption of the options or the underlying securities.\35\ The Exchange's enhanced surveillance and reporting safeguards continue to be designed to deter and detect possible manipulative behavior which might arise from eliminating position and exercise limits. --------------------------------------------------------------------------- \35\ Id. --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. On the contrary, the Exchange believes that the proposed rule change will result in additional opportunities to achieve the investment and trading objectives of market participants seeking efficient trading and hedging vehicles, to the benefit of investors, market participants, and the marketplace in general. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act \36\ and Rule 19b-4(f)(6) thereunder.\37\ --------------------------------------------------------------------------- \36\ 15 U.S.C. 78s(b)(3)(A). \37\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b- 4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the 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. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act \38\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \39\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposed rule change may become effective and operative upon filing. The Exchange states that waiver of the operative delay would permit the Exchange to immediately implement the proposed rule change to increase the position limits as proposed herein and thereby seamlessly continue to offer traders and the investing public the ability to use these products as effective hedging and trading vehicles. The Exchange further states that waiver would allow the Exchange to remain competitive with other exchanges. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the operative delay and designates the proposal as operative upon filing.\40\ --------------------------------------------------------------------------- \38\ 17 CFR 240.19b-4(f)(6). \39\ 17 CFR 240.19b-4(f)(6)(iii). \40\ For purposes only of waiving the 30-day operative delay, the Commission has also 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 the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to rule-comments@sec.gov. Please include File Number SR-Phlx-2018-24 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-Phlx-2018-24. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (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 website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2018-24, and should be submitted on or before April 18, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\41\ --------------------------------------------------------------------------- \41\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-06140 Filed 3-27-18; 8:45 am] BILLING CODE 8011-01-P
![13316 Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
Section 806(e)(1)(G) of the Clearing Accordingly, the Commission, and at the Commission’s Public
Supervision Act provides that OCC may pursuant to Section 806(e)(1)(H) of the Reference Room.
implement the changes if it has not Clearing Supervision Act, extends the
II. Self-Regulatory Organization’s
received an objection to the proposed review period for an additional 60 days
Statement of the Purpose of, and
changes within 60 days of the later of (i) so that the Commission shall have until Statutory Basis for, the Proposed Rule
the date that the Commission receives May 23, 2018 to issue an objection or Change
the Advance Notice, or (ii) the date that non-objection to the Advance Notice
any additional information requested by (File No. SR–OCC–2017–811). In its filing with the Commission, the
the Commission is received,6 unless Exchange included statements
By the Commission.
extended as described below. concerning the purpose of and basis for
Brent J. Fields, the proposed rule change and discussed
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act, the Secretary. any comments it received on the
Commission may extend the review [FR Doc. 2018–06160 Filed 3–27–18; 8:45 am] proposed rule change. The text of these
period of an advance notice for an BILLING CODE 8011–01–P statements may be examined at the
additional 60 days, if the changes places specified in Item IV below. The
proposed in the advance notice raise Exchange has prepared summaries, set
novel or complex issues, subject to the SECURITIES AND EXCHANGE forth in sections A, B, and C below, of
Commission providing the clearing COMMISSION the most significant aspects of such
agency with prompt written notice of [Release No. 34–82932; File No. SR–Phlx–
statements.
the extension.7 2018–24] A. Self-Regulatory Organization’s
On January 11, 2018, the Commission
Statement of the Purpose of, and
requested OCC provide it with Self-Regulatory Organizations; Nasdaq Statutory Basis for, the Proposed Rule
additional information regarding the PHLX LLC; Notice of Filing and Change
proposal,8 tolling the Commission’s 60- Immediate Effectiveness of Proposed
day review period for the Advance Rule Change To Amend Section (a) of 1. Purpose
Notice.9 On January 23, 2018, OCC Exchange Rule 1001, Position Limits, Position Limit Increase
provided the Commission with a To Increase the Position Limits for
response to its request for information. Position limits for options on ETFs
Options
Accordingly, the new 60-day review such as those subject to this proposal
period commenced on January 23, 2018 March 22, 2018. are determined pursuant to Exchange
and runs through March 24, 2018. Pursuant to Section 19(b)(1) of the Rule 1001, and, with certain exceptions,
However, the Commission finds the Securities Exchange Act of 1934 vary by tier according to the number of
Advance Notice complex because OCC (‘‘Act’’),1 and Rule 19b–4 thereunder,2 outstanding shares and the trading
proposes to make detailed, substantial, notice is hereby given that on March 9, volume of the underlying security.3
and numerous changes to its margin 2018, Nasdaq PHLX LLC (‘‘Phlx’’ or Options in the highest tier—i.e., options
methodology, the System for Theoretical ‘‘Exchange’’) filed with the Securities that overlie securities with the largest
Analysis and Numerical Simulations, and Exchange Commission (‘‘SEC’’ or numbers of outstanding shares and
used to calculate clearing member ‘‘Commission’’) the proposed rule trading volumes—have a standard
margin requirements. Therefore, the change as described in Items I and II option position limit of 250,000
Commission finds it appropriate to below, which Items have been prepared contracts (with adjustments for splits,
extend the review period of the by the Exchange. The Commission is re-capitalizations, etc.) on the same side
Advance Notice for an additional 60 publishing this notice to solicit of the market. In addition, Rule 1001
days pursuant to Section 806(e)(1)(H) of comments on the proposed rule change currently sets forth separate position
the Clearing Supervision Act.10 from interested persons. limits for options on certain ETFs,
including 500,000 contracts for options
Secretary, Commission, available at https://
I. Self-Regulatory Organization’s on EEM and IWM, and 900,000
www.sec.gov/comments/sr-occ-2017-022/ Statement of the Terms of the Substance contracts for options on QQQQ.
occ2017022.htm. Since the proposal contained in of the Proposed Rule Change The Exchange proposes to revise Rule
the Proposed Rule Change was also filed as an
Advance Notice, all public comments received on The Exchange proposes to amend 1001 to increase the position limits for
the proposal are considered regardless of whether Section (a) of Exchange Rule 1001, options on certain ETFs, as described
the comments are submitted to the Proposed Rule Position Limits, to increase the position more fully below. The Exchange
Change or the Advance Notice. believes that increasing the position
6 12 U.S.C. 5465(e)(1)(G).
limits for options on the following
7 12 U.S.C. 5465(e)(1)(H). exchange traded funds (‘‘ETFs’’): limits for these options will lead to a
8 See Memorandum from Office of Clearance and iShares China Large-Cap ETF (‘‘FXI’’), more liquid and competitive market
Settlement, Division of Trading and Markets, dated iShares MSCI EAFE ETF (‘‘EFA’’), environment for these options that will
January 12, 2018, available at https://www.sec.gov/ iShares MSCI Emerging Markets ETF benefit customers interested in these
comments/sr-occ-2017–811/occ2017811.htm. products.
9 See Section 806(e)(1) of the Clearing
(‘‘EEM’’), iShares Russell 2000 ETF
(‘‘IWM’’), iShares MSCI Brazil Capped First, the Exchange proposes to
Supervision Act (stating that the Commission’s
period for review of an advance notice was tolled ETF (‘‘EWZ’’), iShares 20+ Year increase the position limits for options
and shall be 60 days from the date the information Treasury Bond Fund ETF (‘‘TLT’’), on FXI, EFA, EWZ, TLT, and EWJ, each
requested by the Commission is received by the
PowerShares QQQ Trust (‘‘QQQQ’’), of which fall into the highest standard
Commission). tier set forth in Exchange Rule
and iShares MSCI Japan Index (‘‘EWJ’’).
daltland on DSKBBV9HB2PROD with NOTICES
10 The proposal in the Proposed Rule Change and
the Advance Notice shall not take effect until all The text of the proposed rule change 1001(g)(i). Rule 1001(a) would be
regulatory actions required with respect to the is available on the Exchange’s website at amended to increase the current
proposal are completed. http://nasdaqphlx.cchwallstreet.com/,
A Notice of Designation of Longer Period for 3 Pursuant to Exchange Rule 1002, which
Commission Action on the Proposed Rule Change
at the principal office of the Exchange, provides that the exercise limits for ETF options are
was published in the Federal Register on January equivalent to their position limits, the exercise
115 U.S.C. 78s(b)(1).
24, 2018. Exchange Act Release No. 82534 (Jan. 18, limits for each of these options would be increased
2018), 83 FR 3376 (Jan. 24, 2018). 217 CFR 240.19b–4. to the level of the new position limits.
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![Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices 13317
position limit of 250,000 contracts for Indonesia, Korea, Malaysia, Mexico, of the MSCI Emerging Markets Index on
options on these securities to 500,000 Morocco, Peru, Philippines, Poland, which EEM is based for which the
contracts. Russia, South Africa, Taiwan, Thailand, primary market is in any one country
Second, the Exchange proposes to and Turkey.8 IWM tracks the that is not subject to a CSA do not
increase the position limits for options performance of the Russell 2000 Index, represent 20% or more of the weight of
on EEM and IWM from 500,000 which is composed of 2,000 small-cap the MSCI Emerging Markets Index.17
contracts to 1,000,000 contracts.4 domestic stocks.9 EFA tracks the Finally, the component securities of the
Finally, the Exchange proposes to performance of MSCI EAFE Index, MSCI Emerging Markets Index on which
increase the position limits on options which has over 900 component EEM is based, for which the primary
on QQQQ from 900,000 contracts to securities.10 The MSCI EAFE Index is market is in any two countries that are
1,800,000 contracts. designed to represent the performance not subject to CSAs do not represent
In support of this proposal, the of large and mid-cap securities across 21 33% o2 [sic] more of the weight of the
Exchange represents that the above developed markets, including countries MSCI Emerging Markets Index.18
listed ETFs qualify for either: (i) The in Europe, Australasia and the Far East,
initial listing criteria set forth in Market participants have increased
excluding the U.S. and Canada.11 EWZ their demand for options on FXI, EFA,
Exchange Rule 1009 Commentary .06 for tracks the performance of the MSCI
ETFs holding non-U.S. component EWZ, TLT, and EWJ for hedging and
Brazil 25/50 Index, which is composed trading purposes and the Exchange
securities; or (ii) for ETFs listed of shares of large and mid-size
pursuant to generic listing standards for believes the current position limits are
companies in Brazil.12 TLT tracks the too low and may be a deterrent to
series of portfolio depository receipts performance of ICE U.S. Treasury 20+
and index fund shares based on successful trading of options on these
Year Bond Index, which is composed of
international or global indexes under securities.
long-term U.S. Treasury bonds.13 QQQQ
which a comprehensive surveillance tracks the performance of the Nasdaq- The CBOE Analysis
agreement (‘‘CSA’’) is not required.5 FXI 100 Index, which is composed of 100 of
tracks the performance of the FTSE the largest domestic and international The Commission has recently
China 50 Index, which is composed of nonfinancial companies listed on the approved a proposed rule change of the
the 50 largest Chinese stocks.6 EEM Nasdaq Stock Market LLC (‘‘Nasdaq’’).14 Chicago Board Options Exchange
tracks the performance of the MSCI EWJ tracks the MSCI Japan Index, which (‘‘CBOE’’) to increase position limits for
Emerging Markets Index, which is tracks the performance of large and mid- these same options.19 The discussion
composed of approximately 800 sized companies in Japan.15 that follows is based upon the CBOE’s
component securities.7 The MSCI The Exchange represents that more analysis presented in that proposal.
Emerging Markets Index consists of the than 50% of the weight of the securities In its proposal, CBOE stated that it
following 21 emerging market country held by the options subject to this had collected the following trading
indices: Brazil, Chile, China, Colombia, proposal are also subject to a CSA.16 statistics on the ETFs that are subject to
Czech Republic, Egypt, Hungary, India, Additionally, the component securities this proposal:
Shares Fund market
2017 ADV 2017 ADV
ETF outstanding cap
(Mil. Shares) (option contracts) (Mil.) ($Mil.)
FXI ................................................................................................... 15.08 71,944 78.6 $3,343.6
EEM ................................................................................................. 52.12 287,357 797.4 34,926.1
IWM .................................................................................................. 27.46 490,070 253.1 35,809.1
EFA .................................................................................................. 19.42 98,844 1178.4 78,870.3
EWZ ................................................................................................. 17.08 95,152 159.4 6,023.4
TLT ................................................................................................... 8.53 80,476 60.0 7,442
QQQQ .............................................................................................. 26.25 579,404 351.6 50,359.7
EWJ ................................................................................................. 6.06 4,715 303.6 16,625.1
SPY .................................................................................................. 64.63 2,575,153 976.23 240,540.0
In support of its proposal to increase which has no position limits. As shown SPY. The total shares outstanding for
the position limits for QQQQ to in the above table, the average daily QQQQ are 351.6 million compared to
1,800,000 contracts, CBOE compared trading volume through August 14, 2017 976.23 million for SPY. The fund
the trading characteristics of QQQQ to for QQQQ was 26.25 million shares market cap for QQQQ is $50,359.7
that of the SPDR S&P 500 ETF (‘‘SPY’’), compared to 64.63 million shares for million compared to $240,540 million
4 The Exchange is also amending Rule 1001(a) to 7 See http://us.ishares.com/product_info/fund/ 14 See https://www.invesco.com/portal/site/us/
update and correct the names of IWM and EEM, overview/EEM.htm. financial-professional/etfs/productdetail?
which are currently referred to in that rule as the 8 See http://www.msci.com/products/indices/ productId=QQQ&ticker=QQQ&title=powershares-
iShares® Russell 2000® Index and iShares MSCI tools/index.html#EM. qqq.
15 See https://www.ishares.com/us/products/
Emerging Markets Index Fund, respectively. 9 See https://www.ishares.com/us/products/
239665/EWJ.
daltland on DSKBBV9HB2PROD with NOTICES
5 The Exchange notes that the initial listing 239710/ishares-russell-2000-etf. 16 See Exchange Rule 1009 Commentary .06.
criteria for options on ETFs that hold non-U.S. 10 See https://www.ishares.com/us/products/
17 See Exchange Rule 1009 Commentary
component securities are more stringent than the 239623/.
.06(b)(ii)(B).
maintenance listing criteria for those same ETF 11 See https://www.msci.com/eafe.
18 See Exchange Rule 1009 Commentary
options. See Exchange Rule 1009 Commentary .06; 12 See https://www.ishares.com/us/products/
.06(b)(ii)(C).
Exchange Rule 1010, Commentary .08. 239612/ishares-msci-brazil-capped-etf. 19 See Securities Exchange Act Release No. 82770
6 See https://www.ishares.com/us/products/ 13 See https://www.ishares.com/us/products/
(February 23, 2018) (approving SR–CBOE–2017–
239536/ishares-china-largecap-etf. 239454/. 057).
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![13318 Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
for SPY. SPY is one of the most actively 2017 for FXI is 15.08 million shares, activity that could be used for legitimate
trading ETFs and is, therefore, subject to EFA is 19.42 million shares, EWZ is economic purposes.
no position limits. QQQQ is also very 17.08 million shares, TLT is 8.53 CBOE observed that the ETFs that
actively traded, and while not to the million shares, and EWJ is 6.06 million underlie options subject to the proposed
level of SPY, should be subject to the shares compared to 52.12 million shares rule change are highly liquid, and are
proposed higher position limits based for EEM and 27.46 million shares for based on a broad set of highly liquid
on its trading characteristics when IWM. The total shares outstanding for securities and other reference assets,
compared to SPY. The proposed FXI is 78.6 million, EFA is 1178.4 and noted that the Commission has
position limit coupled with QQQQ’s million, EWZ is 159.4 million, TLT is 60 generally looked through to the liquidity
trading behavior would continue to million, and EWJ is 303.6 million of securities comprising an index in
address potential manipulative schemes compared to 797.4 million for EEM and establishing position limits for cash-
and adverse market impact surrounding 253.1 million for IWM. The fund market settled index options. It further noted
the use of options and trading in its [sic] cap for FXI is $3,343.6 million, EFA is that options on certain broad-based
underlying the options. $78,870.3 million, EWZ is $6,023.4 security indexes have no position limits.
In support of its proposal to increase million, TLT is $7,442.4 million, and CBOE observed that the Commission
the position limits for EEM and IWM EWJ is $16,625.1 million compared to has recognized the liquidity of the
from 500,000 contracts to 1,000,000 $34,926.1 million for EEM and securities comprising the underlying
contracts, CBOE also compared the $35,809.1 million for IWM. interest of the SPDR S&P 500 ETF
trading characteristics of EEM and IWM In Partial Amendment No. 1 to its (‘‘SPY’’) in permitting no position limits
to that of QQQQ, which currently has a proposed rule change, CBOE provided on SPY options since 2012,21 and
position limit of 900,000 contracts. As additional analysis and support for its expanded position limits for options on
shown in the above table, the average proposed rule change.20 According to EEM, IWM and QQQQ.
daily trading volume through July 31, CBOE stated that the creation and
CBOE, market participants’ trading
2017 for EEM was 52.12 million shares redemption process for these ETFs also
activity has been adversely impacted by
and IWM was 27.46 million shares lessen the potential for manipulative
the current position limits as such limits
compared to 26.25 million shares for activity, explaining that when an ETF
have caused options trading in the
QQQQ. The total shares outstanding for company wants to create more ETF
symbols subject to the proposed rule
EEM are 797.4 million and for IWM are shares, it looks to an Authorized
change to move from exchanges to the
253.1 million compared to 351.6 million Participant, which is a market maker or
over-the-counter market. CBOE stated it
for QQQQ. The fund market cap for other large financial institution, to
had submitted the proposed rule change
EEM is $34,926.1 million and IWM is acquire the securities the ETF is to hold.
at the request of market participants
$35,809 million compared to $50,359.7 For instance, IWM is designed to track
whose on-exchange activity has been
million for QQQQ. EEM, IWM and the performance of the Russell 2000
hindered by the existing position limits
QQQQ have similar trading Index, the Authorized Participant will
characteristics and subjecting EEM and causing them to be unable to provide
purchase all the Russell 2000
IWM to the proposed higher position additional liquidity not just on CBOE,
constituent securities in the exact same
limit would continue be designed to but also on other options exchanges on
weight as the index, then deliver those
address potential manipulate [sic] which they participate.
shares to the ETF provider. In exchange,
schemes that may arise from trading in CBOE stated it understood that certain the ETF provider gives the Authorized
the options and their underlying market participants wishing to make Participant a block of equally valued
securities. These above trading trades involving a large number of ETF shares, on a one-for-one fair value
characteristics for QQQQ when options contracts in the symbols subject basis. The price is based on the net asset
compared to EEM and IWM also justify to the proposed rule change are opting value, not the market value at which the
increasing the position limit for QQQQ. to execute those trades in the over-the- ETF is trading. The creation of new ETF
QQQQ has a higher options ADV than counter market, that the over-the units can be conducted all trading day
EEM and IWM, a higher numbers [sic] counter transactions occur via bi-lateral and is not subject to position limits.
of shares outstanding than IWM and a agreements the terms of which are not This process can also work in reverse
much higher market cap than EEM and publicly disclosed to other market where the ETF company seeks to
IWM which justify doubling the participants, and that therefore, these decrease the number of shares that are
position limit for QQQQ. CBOE large trades do not contribute to the available to trade. The creation and
concluded that, based on these price discovery process performed on a redemption process, therefore, creates a
statistics, and as stated above, the lit market. It stated that position limits direct link to the underlying
proposed position limit coupled with are designed to address potential components of the ETF, and serves to
QQQQ’s trading behavior would manipulative schemes and adverse mitigate potential price impact of the
continue to address potential market impact surrounding the use of ETF shares that might otherwise result
manipulative schemes and adverse options, such as disrupting the market from increased position limits. The ETF
market impact surrounding the use of in the security underlying the options, creation and redemption seeks to keep
options and trading in the securities and that the potential manipulative ETF share prices trading in line with the
underlying the options. schemes and adverse market impact are ETF’s underlying net asset value.
In support of its proposal to increase balanced against the potential of setting Because an ETF trades like a stock, its
the position limits for FXI, EFA, EWZ, the limits so low as to discourage price will fluctuate during the trading
TLT, and EWJ from 250,000 contracts to participation in the options market. It day, due to simple supply and demand.
daltland on DSKBBV9HB2PROD with NOTICES
500,000 contracts, CBOE compared the stated that the level of those position If demand to buy an ETF is high, for
trading characteristics of FXI, EFA, limits must be balanced between instance, the ETF’s share price might
EWZ, TLT, and EWJ to that of EEM and curtailing potential manipulation and rise above the value of its underlying
IWM, both of which currently have a the cost of preventing potential hedging
position limit of 500,000 contracts. As 21 See Securities Exchange Act Release No. 67937
shown in the above table, the average 20 SeeSR–CBOE–2017–057, Partial Amendment (September 27, 2012), 77 FR 60489 (October 3,
daily trading volume through July 31, No. 1 (November 22, 2017). 2012) (SR–CBOE–2012–091).
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![Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices 13319
securities. When this happens, the QQQQ values, this would result in a positon
Authorized Participant believes the ETF For example, the PowerShares QQQ [sic] limit equivalent to 250,000
may now be overpriced, and can buy the Trust or QQQQ is an ETF that tracks the contracts for IWM as RUT’s analogue.
underlying shares that compose the ETF Nasdaq 100 Index or NDX, which is an However, RUT is not subject to position
and then sell ETF shares on the open index composed of 100 of the largest limits and has an average daily trading
market. This should help drive the non-financial securities listed on volume of 66,200 contracts. IWM is
ETF’s share price back toward fair Nasdaq. Options on NDX are currently currently subject to a position limit of
value. Likewise, if the ETF starts trading subject to no position limits but share 500,000 contracts but has a much higher
at a discount to the securities it holds, similar trading characteristics as QQQQ. average daily trading volume of 490,070
the Authorized Participant can buy Based on QQQQ’s share price of contracts. The Commission has
shares of the ETF and redeem them for $154.54 23 and NDX’s index level of approved no position limit for RUT,
the underlying securities. Buying 6,339.14, approximately 40 contracts of although it has a much lower average
undervalued ETF shares should drive QQQQ equals one contract of NDX. daily trading volume than its analogue,
the price of the ETF back toward fair Assume that NDX was subject to the the IWM. Furthermore, RUT currently
value. This arbitrage process helps to standard position limit of 25,000 has a market capitalization of $2.4
keep an ETF’s price in line with the contracts for broad-based index options. trillion and IWM has a market
Based on the above comparison of capitalization of $35,809.1 million, and
value of its underlying portfolio.
notional values, this would result in a the component securities of RUT, in
CBOE stated that in proposing the aggregate, have traded an average of 270
positon [sic] limit equivalent to
increased position limits, the Exchange million shares per day in 2017, both
1,000,000 contracts for QQQQ as NDX’s
considered the availability of large enough to absorb any price
analogue. However, NDX is not subject
economically equivalent products and to position limits and has an average movement cause by a large trade in the
their respective position limits. For daily trading volume of 15,300 IWM. Therefore, CBOE concluded and
instance, some of the ETFs underlying contracts. QQQQ is currently subject to the Exchange agrees it is reasonable to
options subject to the proposed rule a position limit of 900,000 contracts but increase the positon [sic] limit for
change are based on broad-based indices has a much higher average daily trading options on the IWM from 500,000 to
that underlie cash settled options that volume of 579,404 contracts. 1,000,000 contracts.
are economically equivalent to the ETF Furthermore, NDX currently has a EEM
options that are the subject of the market capitalization of $17.2 trillion
proposed rule change and have no EEM tracks the performance of the
and QQQQ has a market capitalization
position limits. Other ETFs are based on MSCI Emerging Markets Index or MXEF,
of $50,359.7 million, and the
broad-based indexes that underlie cash- which is composed of approximately
component securities of NDX, in
settled options with position limits 800 component securities following 21
aggregate, have traded an average of 440 emerging market country indices: Brazil,
reflecting notional values that are larger million shares per day in 2017, both Chile, China, Colombia, Czech Republic,
than the current position limits for ETF large enough to absorb any price Egypt, Hungary, India, Indonesia, Korea,
analogues (EEM, EFA). Where there was movement cause by a large trade in the Malaysia, Mexico, Morocco, Peru,
no approved index analogue, CBOE QQQQ. The Commission has also Philippines, Poland, Russia, South
stated its belief, based on the liquidity, approved no position limit for NDX, Africa, Taiwan, Thailand, and Turkey.
breadth and depth of the underlying although it has a much lower average Based on EEM’s share price of $47.06
market, that the index referenced by the daily trading volume than its analogue, and MXEF’s index level of 1,136.45,
ETF would be considered a broad-based the QQQQ. Therefore, CBOE concluded approximately 24 contracts of EEM
index.22 CBOE argued that if certain and the Exchange agrees it was equals one contract of MXEF. MXEF is
position limits are appropriate for the reasonable to increase the positon [sic] currently subject to the standard
options overlying the same index or is limit for options on the QQQQ from position limit of 25,000 contracts for
an analogue to the basket of securities 900,000 to 1,800,000 contracts. broad-based index options. Based on the
that the ETF tracks, then those same IWM above comparison of notional values,
economically equivalent position limits this would result in a position limit
should be appropriate for the option The iShares Russell 2000 ETF or
economically equivalent to 604,000
overlying the ETF. In addition, CBOE IWM, is an ETF that also tracks the
contracts for EEM as MXEF’s analogue.
observed, the market capitalization of Russell 2000 Index or RUT, which is an
However, MXEF has an average daily
the underlying index or reference asset index that is composed of 2,000 small-
trading volume of 180 contracts. EEM is
is large enough to absorb any price cap domestic companies in the Russell
currently subject to a position limit of
3000 index. Options on RUT are 500,000 contracts but has a much higher
movements that may be caused by an
currently subject to no position limits average daily trading volume of 287,357
oversized trade. Also, the Authorized
but share similar trading characteristics contracts. Furthermore, MXEF currently
Participant or issuer may look to the
as IWM. Based on IWM’s share price of has a market capitalization of $5.18
stocks comprising the analogous
$144.77 and RUT’s index level of trillion and EEM has a market
underlying index or reference asset
1,486.88, approximately 10 contracts of capitalization of $34,926.1 million, and
when seeking to create additional ETF IWM equals one contract of RUT.
shares are part of the creation/ the component securities of MXEF, in
Assume that RUT was subject to the aggregate, have traded an average of 33.6
redemption process to address supply standard position limit of 25,000
and demand or to mitigate the price billion shares per day in 2017, both
daltland on DSKBBV9HB2PROD with NOTICES
contracts for broad-based index options large enough to absorb any price
movement the price of the ETF. CBOE under Exchange Rule 24.4(a). Based on
offered the following specific examples movement cause by a large trade in the
the above comparison of notional EEM. Therefore, based on the
to illustrate:
23 CBOE stated that all share prices used in its
comparison of average daily trading
22 CBOE Rule 24.4 and Exchange Rule 1001A(a) analysis were based on the closing price of the
volume, CBOE believed and the
set forth the CBOE and the Phlx position limits for security on November 16, 2017 and cited Yahoo Exchange agrees that it is reasonable to
broad-based index options. Finance as the source. increase the positon [sic] limit for
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![13320 Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
options on the IWM from 500,000 to EWZ average daily trading volume of 6.6
1,000,000 contracts. EWZ tracks the performance of the million shares. Based on the above
MSCI Brazil 25/50 Index, which is comparisons, CBOE believed and the
EFA Exchange agrees that it is reasonable to
composed of shares of large and mid-
EFA tracks the performance of MSCI size companies in Brazil. There is increase the positon [sic] limit for
EAFE Index or MXEA, which has over options on EWJ from 250,000 to 500,000
currently no index analogue for EWZ
900 component securities designed to contracts.
approved for options trading. However,
represent the performance of large and the MSCI Brazil 25/50 Index currently Phlx Analysis and Conclusions
mid-cap securities across 21 developed has a market capitalization of $700 Phlx has reviewed the CBOE analysis
markets, including countries in Europe, billion and EWZ has a market set forth above. On the basis of that
Australasia and the Far East, excluding capitalization of $6,023.4 million, both analysis Phlx believes that market
the U.S. and Canada. Based on EFA’s large enough to absorb any price participants’ trading activity could be
share price of $69.16 and MXEA’s index movement cause by a large trade in adversely impacted by the current
level of 1,986.15, approximately 29 EWZ. The components of the MSCI position limits for FXI, EFA, EWZ, TLT
contracts of EFA equals one contract of Brazil 25/50 Index, in aggregate, have an and EWJ and such limits may cause
MXEA. MXEA is currently subject to the average daily trading volume of 285 options trading in these symbols to
standard position limit of 25,000 million shares. EWZ is currently subject move from exchanges to the over-the-
contracts for broad-based index options. to a position limit of 250,000 contracts counter market. The above trading
Based on the above comparison of but has a much higher average daily characteristics of FXI, EFA, EWZ, TLT
notional values, this would result in a trading volume of 17.08 million shares. and EWJ are either similar to those of
positon [sic] limit economically Based on the above comparisons, CBOE EEM and IWM or sufficiently active so
equivalent to 721,000 contracts for EFA believed and the Exchange agrees that it that the proposed limit would continue
as MXEA’s analogue. Furthermore, is reasonable to increase the positon to address potential manipulation that
MXEA currently has a market [sic] limit for options on the EWZ from may arise. Specifically, EFA has far
capitalization of $18.7 trillion and EFA 250,000 to 500,000 contracts. more shares outstanding and a larger
has a market capitalization of $78,870.3 TLT fund market cap than EEM, IWM, and
million, and the component securities of QQQQ. EWJ has more shares
MXEA, in aggregate, have traded an TLT tracks the performance of ICE outstanding than IWM and only slightly
average of 4.6 billion shares per day in U.S. Treasury 20+ Year Bond Index, fewer shares outstanding than QQQQ.
2017, both large enough to absorb any which is composed of long-term U.S. On the other hand, while FXI, EWZ
price movement cause by a large trade Treasury bonds. There is currently no and TLT do not exceed EEM, IWM or
in the EEM. However, MXEA has an index analogue for TLT approved for QQQQ in any of the specified areas,
average daily trading volume of 270 options trading. However, the U.S. they are all actively trading so that
contracts. EFA is currently subject to a Treasury market is one of the largest and market participants’ trading activity has
position limit of 250,000 contracts but most liquid markets in the world, with been impacted by them being restricted
has a much higher average daily trading over $14 trillion outstanding and by the current position limits. The
volume of 98,844 contracts. Based on turnover of approximately $500 billion Exchange believes that the trading
the above comparisons, CBOE believed per day. TLT currently has a market activity and these securities being based
and the Exchange agrees that it is capitalization of $7,442.4 million, both on a broad basket of underlying
reasonable to increase the positon [sic] large enough to absorb any price securities alleviates concerns as to any
limit for options on the EFA from movement cause by a large trade in TLT. potential manipulative activity that may
250,000 to 500,000 contracts. Therefore, the potential for arise. In addition, as discussed in more
manipulation will not increase solely detail below, the Exchange’s existing
FXI due the increase in position limits as set surveillance procedures and reporting
forth in the proposed rule change. Based requirements at the Exchange, at other
FXI tracks the performance of the on the above comparisons, CBOE options exchanges, and at the several
FTSE China 50 Index, which is believed and the Exchange agrees it is clearing firms are capable of properly
composed of the 50 largest Chinese reasonable to increase the positon [sic] identifying unusual and/or illegal
stocks. There is currently no index limit for options on the TLT from trading activity.
analogue for FXI approved for options 250,000 to 500,000 contracts. On the basis of CBOE’s analysis Phlx
trading. However, the FTSE China 50 also believes that market participants’
Index currently has a market EWJ trading activity could be adversely
capitalization of $1.7 trillion and FXI EWJ tracks the MSCI Japan Index, impacted by the current position limits
has a market capitalization of $2,623.18 which tracks the performance of large for EEM, IWM and QQQQ. As discussed
million, both large enough to absorb any and mid-sized companies in Japan. above, EEM, IWM and QQQQ have
price movement cause by a large trade There is currently no index analogue for similar trading characteristics.
in FXI. The components of the FTSE EWJ approved for options trading. Subjecting EEM and IWM to the
China 50 Index, in aggregate, have an However, the MSCI Japan Index has a proposed higher position limit would
average daily trading volume of 2.3 market capitalization of $3.5 trillion and continue be designed to address
billion shares. FXI is currently subject to EWJ has a market capitalization of potential manipulate [sic] schemes that
a position limit of 250,000 contracts but $16,625.1 million, and the component may arise from trading in the options
daltland on DSKBBV9HB2PROD with NOTICES
has a much higher average daily trading securities of the MSCI Japan Index, in and their underlying securities. The
volume of 15.08 million shares. Based aggregate, have traded an average of 1.1 trading characteristics for QQQQ
on the above comparisons, CBOE billion shares per day in 2017, both described above, when compared to
believed, and that Exchange agrees, that large enough to absorb any price EEM and IWM, also justify increasing
it is reasonable to increase the positon movement cause by a large trade in EWJ. the position limit for QQQQ. QQQQ has
[sic] limit for options on the FXI from EWJ is currently subject to a position a higher options ADV than EEM and
250,000 to 500,000 contracts. limit of 250,000 contracts and has an IWM, a higher numbers [sic] of shares
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![Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices 13321
outstanding than IWM and a much Furthermore, large stock holdings designed to encourage ROTs and
higher market cap than EEM and IWM must be disclosed to the Commission by specialists to shift liquidity from over
which justify doubling the positon [sic] way of Schedules 13D or 13G.26 The the counter markets onto the Exchange,
limit for QQQQ. Based on these positions for options subject to this which will enhance the process of price
statistics, the proposed position limit proposal are part of any reportable discovery conducted on the Exchange
coupled with QQQQ’s trading behavior positions and, thus, cannot be legally through increased order flow. The
would continue to address potential hidden. Moreover, the Exchange’s proposal will also benefit institutional
manipulative schemes and adverse requirement that members and member investors as well as retail traders, and
market impact surrounding the use of organizations file reports with the public customers, by providing them
options and trading in its [sic] Exchange for any customer who held with a more effective trading and
underlying the options. aggregate large long or short positions of hedging vehicle. In addition, the
any single class for the previous day Exchange believes that the structure of
The Exchange believes that increasing
will continue to serve as an important the ETFs subject to this proposal and
the position limits for the options the considerable liquidity of the market
subject to this proposal would lead to a part of the Exchange’s surveillance
efforts. for options on those ETFs diminishes
more liquid and competitive market the opportunity to manipulate this
The Exchange believes that the
environment for these options, which product and disrupt the underlying
current financial requirements imposed
will benefit customers interested in this market that a lower position limit may
by the Exchange and by the Commission
product. Under the proposal, the protect against.
adequately address concerns that a
reporting requirement for the above Increased position limits for select
member organization or its customer
options would be unchanged. Thus, the actively traded options, such as that
may try to maintain an inordinately
Exchange would still require that each proposed herein, is not novel and has
large un-hedged position in the options
member and member organization that been previously approved by the
subject to this proposal. Current margin
maintains a position in the options on Commission. For example, the
and risk-based haircut methodologies
the same side of the market, for its own Commission has previously approved,
serve to limit the size of positions
account or for the account of a on a pilot basis, eliminating position
maintained by any one account by
customer, report certain information to limits for certain options.31
increasing the margin and/or capital
the Exchange. This information would Additionally, the Commission has
that a member organization must
include, but would not be limited to, the approved similar proposed rule changes
maintain for a large position held by
options’ position, whether such position to increase position limits for options on
itself or by its customer.27 In addition,
is hedged and, if so, a description of the highly liquid, actively-traded ETFs,32
Rule 15c3–1 28 imposes a capital charge
hedge, and the collateral used to carry including a proposal to permanently
on member organizations to the extent
the position, if applicable. Registered eliminate the position and exercise
of any margin deficiency resulting from
option traders (‘‘ROTs’’) and specialists limits for options overlaying the S&P
the higher margin requirement.
would continue to be exempt from this 500 Index, S&P 100 Index, Dow Jones
reporting requirement, as ROT and 2. Statutory Basis Industrial Average, Nasdaq 100 Index,
specialist information can be accessed The Exchange believes that its and the Russell 2000(R) Index
through the Exchange’s market proposal is consistent with Section 6(b) (‘‘RUT’’).33 In approving the permanent
surveillance systems. In addition, the of the Act,29 in general, and furthers the elimination of position and exercise
general reporting requirement for objectives of Section 6(b)(5) of the Act,30 limits for these index options, the
customer accounts that maintain an in particular, in that it is designed to Commission relied heavily upon the
aggregate position of 200 or more promote just and equitable principles of Exchange’s surveillance capabilities,
options contracts would remain at this trade, to remove impediments to and and the Commission expressed trust in
level for the options subject to this perfect the mechanism of a free and the enhanced surveillance and reporting
proposal.24 open market and a national market safeguards that the Exchange took in
The Exchange believes that the system, and, in general to protect order to detect and deter possible
existing surveillance procedures and investors and the public interest. As manipulative behavior which might
reporting requirements at the Exchange, noted above, the Commission has 31 See Securities Exchange Act Release Nos.
other options exchanges, and at the recently approved increasing position 67672 (August 15, 2012), 77 FR 50750 (August 22,
several clearing firms are capable of limits to the levels proposed herein on 2012) (SR–NYSEAmex–2012–29); 67937
properly identifying unusual and/or the same ETF options on the CBOE. The (September 27, 2012), 77 FR 60489 (October 3,
illegal trading activity. In addition, 2012) (SR–CBOE–2012–091).
Exchange believes that the proposed 32 See Securities Exchange Act Release Nos.
routine oversight inspections of the position limits would continue to 68086 (October 23, 2012), 77 FR 65600 (October 29,
Exchange’s regulatory programs by the address potential manipulative activity 2012) (SR–CBOE–2012–066); 64928 (July 20, 2011),
Commission have not uncovered any while allowing for potential hedging 76 FR 44633 (July 26, 2011) (SR–CBOE–2011–065);
material inconsistencies or 64695 (June 17, 2011), 76 FR 36942 (June 23, 2011)
activity for appropriate economic (SR–PHLX–2011–58); and 55176 (January 25, 2007),
shortcomings in the manner in which purposes. 72 FR 4741 (February 1, 2017) (SR–CBOE– 2007–
the Exchange’s market surveillance is The current position limits for the 008.).
conducted. These procedures utilize options subject to this proposal have 33 See Securities Exchange Act Release Nos.
daily monitoring of market movements 44994 (October 26, 2001), 66 FR 55722 (November
inhibited the ability of ROTs and 2, 2001) (SR–CBOE–2001–22) (elimination of
via automated surveillance techniques specialists to make markets on the position and exercise limits on SPX, OEX, and DJX
daltland on DSKBBV9HB2PROD with NOTICES
to identify unusual activity in both Exchange. Specifically, the proposal is options) (‘‘SPX, OEX, and DJX Position Limit
options and underlying stocks.25 Elimination Approval Order’’); 52650 (October 21,
26 17CFR 240.13d–1. 2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
27 See
2005–41) (elimination of position and exercise
24 See Exchange Rule 1003 for reporting Exchange Rule 721 for a description of limits on NDX options) (‘‘NDX Position Limit
requirements. margin requirements. Elimination Approval Order’’); 56651 (October 12,
25 These procedures have been effective for the 28 17 CFR 240.15c3–1.
2007), 72 FR 59130 (October 18, 2007) (SR–Phlx–
29 15 U.S.C. 78f(b).
surveillance of trading the options subject to this 2007–71) (‘‘RUT Position Limit Elimination
proposal and will continue to be employed. 30 15 U.S.C. 78f(b)(5). Approval Order’’).
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![13322 Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
arise from eliminating position and A proposed rule change filed • Send an email to rule-comments@
exercise limits.34 Furthermore, as pursuant to Rule 19b–4(f)(6) under the sec.gov. Please include File Number SR–
described more fully above, options on Act 38 normally does not become Phlx–2018–24 on the subject line.
other ETFs have the position limits operative for 30 days after the date of its
Paper Comments
proposed herein and those ETFs have filing. However, Rule 19b–4(f)(6)(iii) 39
trading characteristics and trading permits the Commission to designate a • Send paper comments in triplicate
volumes that are similar to those of the shorter time if such action is consistent to Secretary, Securities and Exchange
ETFs subject to this proposed rule with the protection of investors and the Commission, 100 F Street NE,
change. public interest. The Exchange has asked Washington, DC 20549–1090.
Last, the Commission has expressed the Commission to waive the 30-day All submissions should refer to File
the belief that removing position and operative delay so that the proposed Number SR–Phlx–2018–24. This file
exercise limits may bring additional rule change may become effective and number should be included on the
depth and liquidity without increasing operative upon filing. The Exchange subject line if email is used. To help the
concerns regarding intermarket states that waiver of the operative delay Commission process and review your
manipulation or disruption of the would permit the Exchange to comments more efficiently, please use
options or the underlying securities.35 immediately implement the proposed only one method. The Commission will
The Exchange’s enhanced surveillance rule change to increase the position post all comments on the Commission’s
and reporting safeguards continue to be limits as proposed herein and thereby internet website (http://www.sec.gov/
designed to deter and detect possible seamlessly continue to offer traders and rules/sro.shtml). Copies of the
manipulative behavior which might the investing public the ability to use submission, all subsequent
arise from eliminating position and these products as effective hedging and amendments, all written statements
exercise limits. trading vehicles. The Exchange further with respect to the proposed rule
states that waiver would allow the change that are filed with the
B. Self-Regulatory Organization’s
Exchange to remain competitive with Commission, and all written
Statement on Burden on Competition
other exchanges. The Commission communications relating to the
The Exchange does not believe that believes that waiving the 30-day proposed rule change between the
the proposed rule change will impose operative delay is consistent with the Commission and any person, other than
any burden on competition not protection of investors and the public those that may be withheld from the
necessary or appropriate in furtherance interest. Therefore, the Commission public in accordance with the
of the purposes of the Act. On the hereby waives the operative delay and provisions of 5 U.S.C. 552, will be
contrary, the Exchange believes that the designates the proposal as operative available for website viewing and
proposed rule change will result in upon filing.40 printing in the Commission’s Public
additional opportunities to achieve the At any time within 60 days of the Reference Room, 100 F Street NE,
investment and trading objectives of filing of the proposed rule change, the Washington, DC 20549 on official
market participants seeking efficient Commission summarily may business days between the hours of
trading and hedging vehicles, to the temporarily suspend such rule change if 10:00 a.m. and 3:00 p.m. Copies of such
benefit of investors, market participants, it appears to the Commission that such filing also will be available for
and the marketplace in general. action is necessary or appropriate in the inspection and copying at the principal
C. Self-Regulatory Organization’s public interest, for the protection of office of the Exchange. All comments
Statement on Comments on the investors, or otherwise in furtherance of received will be posted without change.
Proposed Rule Change Received From the purposes of the Act. If the Persons submitting comments are
Members, Participants, or Others Commission takes such action, the cautioned that we do not redact or edit
Commission shall institute proceedings personal identifying information from
No written comments were either comment submissions. You should
to determine whether the proposed rule
solicited or received. submit only information that you wish
should be approved or disapproved.
III. Date of Effectiveness of the to make available publicly. All
IV. Solicitation of Comments submissions should refer to File
Proposed Rule Change and Timing for
Commission Action Interested persons are invited to Number SR–Phlx–2018–24, and should
submit written data, views, and be submitted on or before April 18,
Because the proposed rule change
arguments concerning the foregoing, 2018.
does not (i) significantly affect the
protection of investors or the public including whether the proposed rule For the Commission, by the Division of
interest; (ii) impose any significant change is consistent with the Act. Trading and Markets, pursuant to delegated
burden on competition; and (iii) become Comments may be submitted by any of authority.41
operative for 30 days from the date on the following methods: Eduardo A. Aleman,
which it was filed, or such shorter time Electronic Comments Assistant Secretary.
as the Commission may designate, it has [FR Doc. 2018–06140 Filed 3–27–18; 8:45 am]
become effective pursuant to Section • Use the Commission’s internet BILLING CODE 8011–01–P
19(b)(3)(A) of the Act 36 and Rule 19b– comment form (http://www.sec.gov/
4(f)(6) thereunder.37 rules/sro.shtml); or
SECURITIES AND EXCHANGE
34 Id. of filing of the proposed rule change, or such COMMISSION
daltland on DSKBBV9HB2PROD with NOTICES
35 Id. shorter time as designated by the Commission.
36 15U.S.C. 78s(b)(3)(A). 38 17 CFR 240.19b–4(f)(6).
Sunshine Act Meeting; Cancellation
37 17 39 17 CFR 240.19b–4(f)(6)(iii).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the 40 For purposes only of waiving the 30-day
FEDERAL REGISTER CITATION OF PREVIOUS
Commission with written notice of its intent to file operative delay, the Commission has also ANNOUNCEMENT: To be published.
the proposed rule change, along with a brief considered the proposed rule’s impact on
description and the text of the proposed rule efficiency, competition, and capital formation. See
change, at least five business days prior to the date 15 U.S.C. 78c(f). 41 17 CFR 200.30–3(a)(12).
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Document Created: 2018-11-01 08:55:17
Document Modified: 2018-11-01 08:55:17
| 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 | 83 FR 13316 |
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