83 FR 50721 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Approving a Proposed Rule Change To Adopt Rule 6.57, Risk-Weighted Asset (“RWA”) Packages

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 195 (October 9, 2018)

Page Range		50721-50722
FR Document		2018-21784
Federal Register, Volume 83 Issue 195 (Tuesday, October 9, 2018)
[Federal Register Volume 83, Number 195 (Tuesday, October 9, 2018)]
[Notices]
[Pages 50721-50722]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-21784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84344; File No. SR-CBOE-2018-056]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change To Adopt Rule 6.57, Risk-Weighted 
Asset (``RWA'') Packages

October 2, 2018.

I. Introduction

    On August 8, 2018, the Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to adopt Rule 6.57, Risk-Weighted Assets (``RWA'') 
Transactions. The proposed rule change was published for comment in the 
Federal Register on August 23, 2018.\3\ The Commission did not receive 
any comment letters on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83870 (August 17, 
2018), 83 FR 42725 (August 23, 2018) (``Notice'').
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II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\4\ the Exchange proposes 
to adopt Rule 6.57 to provide a mechanism for Cboe Options market 
makers to submit an on-floor risk-weighted asset package (``RWA 
Package'') \5\ in the SPX trading crowd for the purpose of reducing 
risk-weighted asset (``RWA'') exposure in

[[Page 50722]]

open SPX positions across numerous series. RWA Packages may be executed 
in the SPX crowd on the trading floor if they meet certain conditions 
specified in Rule 6.57, including that they be initiated for the 
account(s) of a Cboe Options market maker, result in a change in 
beneficial ownership, and include a certification concerning the 
attributable net reduction of RWA.\6\
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    \4\ See id.
    \5\ An RWA Package is a set of SPX options positions with at 
least: 50 options series; 10 contracts per options series; and 
10,000 total contracts. See id. at 42726.
    \6\ See id. at 42726-27.
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    Further, Rule 6.57(c) sets forth a trading procedure that requires 
the entering firm to submit a list of the individual SPX options 
series, their size, and any net debit or credit bid price received, as 
well as contact information for the order.\7\ Cboe will thereafter post 
a list of the individual components of the RWA Package, the proposed 
net price for the RWA Package (if available), the contact information, 
and the time at which the two-hour request-for-quote period (``RFQ 
Period'') concludes.\8\
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    \7\ See id. at 42727.
    \8\ See id. The Exchange believed that this two-hour period was 
sufficient to allow members to review, price, and bid/offer for the 
RWA Package, because the RWA Package will be available in an 
electronic format and the Exchange believed that firms had access to 
electronic systems that will aid them in evaluating and pricing the 
SPX positions contained in an RWA Package. See id.
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    Rule 6.57(c) further specifies that the response that represents 
the best bid or offer on a net debit or credit basis for the RWA 
Package has priority.\9\ In the event that equal bids or offers are 
received, the first RFQ response at the best bid or offer on a net 
debit or credit basis for the RWA Package has priority.\10\ If 
executed, the representing party must report the details of the 
execution to the Exchange.\11\
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    \9\ See id.
    \10\ See id. at 42727.
    \11\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act,\12\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\13\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest and that the 
rules are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f.
    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change is designed to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by providing a mechanism to facilitate the reduction of SPX 
options positions and concomitant RWA.\15\ Specifically, the Exchange 
represented that such a mechanism would help market makers to continue 
to provide critical liquidity in the options market by reducing RWA to 
comply with ``bank capital regulations that . . . are negatively 
impacting the ability of [market makers] clearing through bank-
affiliated clearing firms to provide liquidity.'' \16\ In reducing RWA, 
bank-affiliated clearing firms will be able to clear more market maker 
activity during periods of increased volume and volatility.\17\ In 
turn, market makers may be better able to continue quoting during those 
periods, lessening the risk of market dislocations or excess volatility 
that could occur if market makers needed to reduce their quoting 
activity during such periods to the detriment of investors.
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    \15\ See Notice, supra note 3, at 42726, 42730.
    \16\ Id. at 42726.
    \17\ See id.
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    Further, with respect to trading, the Exchange's rule is based on 
Rule 6.49A, which establishes a similar process for on-floor transfers, 
but improves upon that rule by adding certifications to assure 
compliance and increases transparency by electronically disseminating 
the list of series in a proposed RWA Package. All Cboe members will be 
given notice of and the ability to participate in the RWA Package 
trading process.
    Finally, the Commission notes the narrow scope of proposed Rule 
6.57. The proposed rule change would apply only to SPX options, which 
are particularly impacted by current bank-capital regulations, and any 
transaction must result in a net reduction of RWA. Furthermore, the 
proposed rule change is only effective for a limited term, ending two 
years from the approval date.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-2018-056) be, and 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21784 Filed 10-5-18; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 83, No. 195 / Tuesday, October 9, 2018 / Notices 50721

and consulting with any other of the Thus, annually, in the aggregate, the Office Building, Washington, DC 20503,
fund’s advisers that is a principal staff estimates that funds spend a total or by sending an email to: Shagufta_
underwriter or affiliated person of a of approximately 472 hours 7 on Ahmed@omb.eop.gov; and (ii) Charles
principal underwriter concerning the monitoring and revising rule 10f–3 Riddle, Acting Director/Chief
fund’s securities transactions. procedures. Information Officer, Securities and
These requirements provide a Based on an analysis of fund filings, Exchange Commission, c/o Candace
mechanism for fund boards to oversee the staff estimates that approximately Kenner, 100 F Street NE, Washington,
compliance with the rule. The required 299 fund portfolios enter into DC 20549 or send an email to: PRA_
recordkeeping facilitates the subadvisory agreements each year.8 Mailbox@sec.gov. Comments must be
Commission staff’s review of rule 10f– Based on discussions with industry submitted to OMB within 30 days of
3 transactions during routine fund representatives, the staff estimates that this notice.
inspections and, when necessary, in it will require approximately 3 attorney Dated: October 3, 2018.
connection with enforcement actions. hours to draft and execute additional
Eduardo A. Aleman,
The staff estimates that approximately clauses in new subadvisory contracts in
Assistant Secretary.
236 funds engage in a total of order for funds and subadvisers to be
able to rely on the exemptions in rule [FR Doc. 2018–21832 Filed 10–5–18; 8:45 am]
approximately 2,928 rule 10f–3
transactions each year.1 Rule 10f–3 10f–3. Because these additional clauses BILLING CODE 8011–01–P

requires that the purchasing fund create are identical to the clauses that a fund
a written record of each transaction that would need to insert in their
subadvisory contracts to rely on rules SECURITIES AND EXCHANGE
includes, among other things, from
12d3–1, 17a–10, and 17e–1, and because COMMISSION
whom the securities were purchased
and the terms of the transaction. The we believe that funds that use one such [Release No. 34–84344; File No. SR–CBOE–
staff estimates 2 that it takes an average rule generally use all of these rules, we 2018–056]
fund approximately 30 minutes per apportion this 3 hour time burden
transaction and approximately 1,464 equally to all four rules. Therefore, we Self-Regulatory Organizations; Cboe
hours 3 in the aggregate to comply with estimate that the burden allocated to Exchange, Inc.; Order Approving a
rule 10f–3 for this contract change Proposed Rule Change To Adopt Rule
this portion of the rule.
The funds also must maintain and would be 0.75 hours.9 Assuming that all 6.57, Risk-Weighted Asset (‘‘RWA’’)
preserve these transactional records in 299 funds that enter into new Packages
accordance with the rule’s subadvisory contracts each year make October 2, 2018.
recordkeeping requirement, and the staff the modification to their contract
estimates that it takes a fund required by the rule, we estimate that I. Introduction
approximately 20 minutes per the rule’s contract modification On August 8, 2018, the Cboe
transaction and that annually, in the requirement will result in 224 burden Exchange, Inc. (the ‘‘Exchange’’ or
aggregate, funds spend approximately hours annually.10 ‘‘Cboe Options’’) filed with the
976 hours 4 to comply with this portion The staff estimates, therefore, that rule Securities and Exchange Commission
of the rule. 10f–3 imposes an information collection (the ‘‘Commission’’), pursuant to
In addition, fund boards must, no less burden of 4,080 hours.11 Section 19(b)(1) of the Securities
than quarterly, examine each of these The collection of information required Exchange Act of 1934 (the ‘‘Act’’) 1 and
transactions to ensure that they comply by rule 10f–3 is necessary to obtain the Rule 19b–4 thereunder,2 a proposal to
with the fund’s policies and procedures. benefits of the rule. Responses will not adopt Rule 6.57, Risk-Weighted Assets
The information or materials upon be kept confidential. An agency may not (‘‘RWA’’) Transactions. The proposed
which the board relied to come to this conduct or sponsor, and a person is not rule change was published for comment
determination also must be maintained required to respond to, a collection of in the Federal Register on August 23,
and the staff estimates that it takes a information unless it displays a 2018.3 The Commission did not receive
fund 1 hour per quarter and, in the currently valid OMB control number. any comment letters on the proposed
aggregate, approximately 944 hours 5 The public may view the background rule change. This order approves the
annually to comply with this rule documentation for this information proposed rule change.
requirement. collection at the following website,
www.reginfo.gov. Comments should be II. Description of the Proposed Rule
The staff estimates that reviewing and
directed to: (i) Desk Officer for the Change
revising as needed written procedures
for rule 10f–3 transactions takes, on Securities and Exchange Commission, As described in more detail in the
average for each fund, two hours of a Office of Information and Regulatory Notice,4 the Exchange proposes to adopt
compliance attorney’s time per year.6 Affairs, Office of Management and Rule 6.57 to provide a mechanism for
Budget, Room 10102, New Executive Cboe Options market makers to submit
1 These estimates are based on staff extrapolations an on-floor risk-weighted asset package
from filings with the Commission. or no time modifying procedures and in other years, (‘‘RWA Package’’) 5 in the SPX trading
2 Unless stated otherwise, the information they spend significant time doing so.
crowd for the purpose of reducing risk-
collection burden estimates are based on 7 This estimate is based on the following

conversations between the staff and representatives calculation: (236 funds × 2 hours = 472 hours). weighted asset (‘‘RWA’’) exposure in
of funds. 8 Based on information in Commission filings, we
3 This estimate is based on the following 1 15 U.S.C. 78s(b)(1).
estimate that 38 percent of funds are advised by
calculation: (0.5 hours × 2,928 = 1,464 hours).
amozie on DSK3GDR082PROD with NOTICES1

subadvisers. 2 17 CFR 240.19b–4.
4 This estimate is based on the following 9 This estimate is based on the following 3 See Securities Exchange Act Release No. 83870

calculations: (20 minutes × 2,928 transactions = calculation (3 hours ÷ 4 rules = .75 hours). (August 17, 2018), 83 FR 42725 (August 23, 2018)
58,560 minutes; 58,560 minutes/60 = 976 hours). 10 These estimates are based on the following (‘‘Notice’’).
5 This estimate is based on the following calculations: (0.75 hours × 299 portfolios = 224 4 See id.

calculation: (1 hour per quarter × 4 quarters × 236 burden hours). 5 An RWA Package is a set of SPX options
funds = 944 hours). 11 This estimate is based on the following positions with at least: 50 options series; 10
6 These averages take into account the fact that in calculation: (1,464 hours + 976 hours + 944 hours contracts per options series; and 10,000 total
most years, fund attorneys and boards spend little + 472 + 244 hours = 4,080 total burden hours). contracts. See id. at 42726.

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50722 Federal Register / Vol. 83, No. 195 / Tuesday, October 9, 2018 / Notices

open SPX positions across numerous system, and, in general, to protect For the Commission, by the Division of
series. RWA Packages may be executed investors and the public interest and Trading and Markets, pursuant to delegated
in the SPX crowd on the trading floor that the rules are not designed to permit authority.19
if they meet certain conditions specified unfair discrimination between Eduardo A. Aleman,
in Rule 6.57, including that they be customers, issuers, brokers, or dealers. Assistant Secretary.
initiated for the account(s) of a Cboe The proposed rule change is designed [FR Doc. 2018–21784 Filed 10–5–18; 8:45 am]
Options market maker, result in a to remove impediments to and perfect BILLING CODE 8011–01–P
change in beneficial ownership, and the mechanism of a free and open
include a certification concerning the
market and a national market system by SECURITIES AND EXCHANGE
attributable net reduction of RWA.6
Further, Rule 6.57(c) sets forth a providing a mechanism to facilitate the COMMISSION
trading procedure that requires the reduction of SPX options positions and
entering firm to submit a list of the concomitant RWA.15 Specifically, the Submission for OMB Review;
individual SPX options series, their Exchange represented that such a Comment Request
size, and any net debit or credit bid mechanism would help market makers
to continue to provide critical liquidity Upon Written Request, Copies Available
price received, as well as contact From: Securities and Exchange
information for the order.7 Cboe will in the options market by reducing RWA
to comply with ‘‘bank capital Commission, Office of FOIA Services,
thereafter post a list of the individual 100 F Street NE, Washington, DC
components of the RWA Package, the regulations that . . . are negatively
impacting the ability of [market makers] 20549–2736
proposed net price for the RWA Package
(if available), the contact information, clearing through bank-affiliated clearing Extension:
firms to provide liquidity.’’ 16 In Electronic Data Collection System; SEC
and the time at which the two-hour
reducing RWA, bank-affiliated clearing File No. 270–621, OMB Control No.
request-for-quote period (‘‘RFQ Period’’) 3235–0672
concludes.8 firms will be able to clear more market
Rule 6.57(c) further specifies that the maker activity during periods of Notice is hereby given that, pursuant
response that represents the best bid or increased volume and volatility.17 In to the Paperwork Reduction Act of 1995
offer on a net debit or credit basis for the turn, market makers may be better able (44 U.S.C. 3501 et seq.), the Securities
RWA Package has priority.9 In the event to continue quoting during those and Exchange Commission
that equal bids or offers are received, the periods, lessening the risk of market (‘‘Commission’’) is soliciting comments
first RFQ response at the best bid or dislocations or excess volatility that on the collection of information
offer on a net debit or credit basis for the could occur if market makers needed to summarized below. The Commission
RWA Package has priority.10 If reduce their quoting activity during plans to submit an extension for this
executed, the representing party must such periods to the detriment of current collection of information to the
report the details of the execution to the investors. Office of Management and Budget for
Exchange.11 Further, with respect to trading, the approval.
The Commission invites comment on
III. Discussion and Commission Exchange’s rule is based on Rule 6.49A,
updates to its Electronic Data Collection
Findings which establishes a similar process for
System database (the Database), which
on-floor transfers, but improves upon
After careful review, the Commission will support information provided by
that rule by adding certifications to
finds that the proposed rule change is members of the public who would like
assure compliance and increases
consistent with the requirements of the to file an online tip, complaint or
transparency by electronically
Act,12 and the rules and regulations referral (TCR) to the Commission. The
disseminating the list of series in a
thereunder applicable to a national Database will be a web based e-filed
proposed RWA Package. All Cboe
securities exchange.13 In particular, the dynamic report based on technology
members will be given notice of and the
Commission finds that the proposed that pre-populates and establishes a
ability to participate in the RWA
rule change is consistent with Section series of questions based on the data
Package trading process.
6(b)(5) of the Act,14 which requires, that the individual enters. The
among other things, that the rules of a Finally, the Commission notes the individual will then complete specific
national securities exchange be narrow scope of proposed Rule 6.57. information on the subject(s) and nature
designed to remove impediments to and The proposed rule change would apply of the suspicious activity, using the data
perfect the mechanism of a free and only to SPX options, which are elements appropriate to the type of
open market and a national market particularly impacted by current bank- complaint or subject. The information
capital regulations, and any transaction collection is voluntary. The public
6 See id. at 42726–27. must result in a net reduction of RWA. interface to the Database will be
7 See id. at 42727. Furthermore, the proposed rule change available using the agency’s website,
8 See id. The Exchange believed that this two-
is only effective for a limited term, www.sec.gov. The Commission
hour period was sufficient to allow members to
review, price, and bid/offer for the RWA Package,
ending two years from the approval estimates that it takes a complainant, on
because the RWA Package will be available in an date. average, 30 minutes to submit a TCR
electronic format and the Exchange believed that through the Database. Based on the
firms had access to electronic systems that will aid IV. Conclusion
them in evaluating and pricing the SPX positions receipt of an average of approximately
contained in an RWA Package. See id. It is therefore ordered, pursuant to 16,000 annual TCRs for the past three
9 See id.
Section 19(b)(2) of the Act,18 that the fiscal years, the Commission estimates
amozie on DSK3GDR082PROD with NOTICES1

10 See id. at 42727.
proposed rule change (SR–CBOE–2018– that the annual reporting burden is
11 See id.
056) be, and hereby is, approved. 8,000 hours.
12 15 U.S.C. 78f.
Written comments are invited on: (a)
13 In approving this proposed rule change, the

Commission has considered the proposed rule’s
15 See Notice, supra note 3, at 42726, 42730. Whether this collection of information
impact on efficiency, competition, and capital 16 Id.at 42726. is necessary for the proper performance
formation. See 15 U.S.C. 78c(f). 17 See id.
14 15 U.S.C. 78f(b)(5). 18 15 U.S.C. 78s(b)(2). 19 17 CFR 200.30–3(a)(12).

VerDate Sep<11>2014 19:13 Oct 05, 2018 Jkt 247001 PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 E:\FR\FM\09OCN1.SGM 09OCN1
Document Created: 2018-10-06 00:59:28
Document Modified: 2018-10-06 00:59:28
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 50721