[Federal Register Volume 85, Number 66 (Monday, April 6, 2020)]
[Notices]
[Pages 19182-19184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07090]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88530; File No. SR-CBOE-2020-031]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Rule 5.24
March 31, 2020.
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 31, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 5.24.\3\ The text of the proposed rule change is provided
in Exhibit 5.
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\3\ The Exchange originally submitted a substantially similar
rule change on March 30, 2020 (SR-CBOE-2020-030). On March 31, 2020,
the Exchange withdrew that filing and submitted this filing.
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The text of the proposed rule change is also available on the
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 5.24 regarding the Exchange's
business continuity and disaster recovery plans. Rule 5.24 describes
which Trading Permit Holders (``TPHs'') are required to connect to the
Exchange's backup systems as well as certain actions the Exchange may
take as part of its business continuity plans so that it may maintain
fair and orderly markets if unusual circumstances occurred that could
impact the Exchange's ability to conduct business. This includes what
actions the Exchange would take if its trading floor became inoperable.
Specifically, Rule 5.24(e) states if the Exchange trading floor becomes
inoperable, the Exchange will continue to operate in a screen-based
only environment using a floorless configuration of the System that is
operational while the trading floor facility is inoperable. The
Exchange would operate using that configuration only until the
Exchange's trading floor facility became operational. Open outcry
trading would not be available in the event the trading floor becomes
inoperable.\4\ Rule 5.24(e)(1) also currently states in the event that
the trading floor becomes inoperable, trading will be conducted
pursuant to all applicable System Rules, except that open outcry Rules
would not be in force, including but not limited to the Rules (or
applicable portions) in Chapter 5, Section G,\5\ and that all non-
trading rules of the Exchange would continue to apply. The Exchange
recently proposed additional exceptions to Rules that would not apply
during a time in which the trading floor in inoperable.\6\
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\4\ Pursuant to Rule 5.26, the Exchange may enter into a back-up
trading arrangement with another exchange, which could allow the
Exchange to use the facilities of a back-up exchange to conduct
trading of certain of its products. The Exchange currently has no
back-up trading arrangement in place with another exchange.
\5\ Chapter 5, Section G of the Exchange's rulebook sets forth
the rules and procedures for manual order handling and open outcry
trading on the Exchange.
\6\ See Securities Exchange Act Release Nos. 88386 (March 13,
2020), 85 FR 15823 (March 19, 2020) (SR-CBOE-2020-019); and 88447
(March 20, 2020) (SR-CBOE-2020-023). The rule changes adopted in
that filing are effective until May 15, 2020, unless extended. See
Rule 5.24(e)(1).
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As of March 16, 2020, the Exchange suspended open outcry trading to
help prevent the spread of the novel coronavirus and is currently
operating in an all-electronic configuration. While the trading floor
was open, the Exchange facilitated compression forums on the trading
floor at the end of each calendar week, month, and quarter in which
Trading Permit Holders reduce open positions in series of SPX options
in order to mitigate the effects of capital constraints on market
participants and help ensure continued depth of liquidity in the SPX
options market.
The Exchange recently adopted Rule 5.24(e)(1)(E) to permit the
Exchange to offer electronic compression forums while the trading floor
is closed.\7\ Pursuant to Rule 5.24(e)(1)(E), the Exchange will make
available an electronic ``compression forum'' in the same manner as an
open outcry ``compression forum'' as set forth in Rule 5.88, except as
provided in subparagraph (E). In both electronic and open outcry
compression forums, TPHs may submit lists of open positions to the
Exchange that they wish to close against opposing (long/short)
positions of other TPHs, which the Exchange would then aggregate into a
single list that would allow TPHs to more easily identify those
positions with counterparty interest on the Exchange. The list provided
by the Exchange includes a complete list of all possible combinations
of offsetting multi-leg positions to each TPH that submitted
compression-list positions to the Exchange.\8\
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\7\ See Securities Exchange Act Release No. 88490 (March 26,
2020) (SR-CBOE-2020-026).
\8\ See Rule 5.88(a)(4); see also Rule 5.24(e)(1)(E)(ii).
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Rule 5.88, Interpretation and Policy .01 provides that for purposes
of Rule 5.88, multi-leg positions include vertical call spreads,
vertical put spreads, and box spreads, which interpretation and policy
applies to both electronic and open outcry compression forums. The
proposed rule change would add Rule 5.24(e)(1)(E)(iv), which states
that notwithstanding Interpretation and Policy .01 in Rule 5.88, for
purposes of subparagraph (E) (and thus for purposes of electronic
compression forums held while the trading floor is inoperable), multi-
leg positions include vertical call spreads, vertical put spreads,
combos (i.e., purchase (sale) of a call and a sale (purchase) of a put
with the same expiration date and strike price), and box spreads.
Because a combo is essentially a ``synthetic future,'' it is a common
multi-leg strategy among market participants. Market participants
[[Page 19183]]
often establish market neural hedges by purchasing (selling) a number
of combos with an offsetting SPX option position.\9\ As a result,
market participants maintain a significant number of combos in their
portfolios. Additionally, when markets are volatile (as they have been
recently), market participants often take on positions in a larger
range of strikes, which positions can be put together as combos. The
Exchange believes closing combo positions will be advantageous because
such positions can be risk neutral, which means the closing of the
entire combo has little or no impact on a TPH's risk profile. However,
the current compression forum framework limits multi-leg positions to
vertical call \10\ and put \11\ spreads and boxes. The Exchange notes
that just as one put spread and one call spread combine to create a box
spread, two combos similarly create a box spread.\12\ For example, a
box spread would be entered by purchasing 100 DEC 2040 calls and
selling 100 DEC 2070 calls (i.e., bull call spread) and selling 100 DEC
2040 puts and purchasing 100 DEC 2070 puts (i.e., bear put spread). The
purchase of 100 DEC 2040 calls and sale of 100 DEC 2040 puts comprises
a combo (as does the sale of 100 DEC 2070 calls and purchase of 100 DEC
2070 puts). The Exchange believes that providing TPHs with this
additional way to identify multi-leg positions with offsetting interest
will enable more efficient closing of such common strategy positions.
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\9\ See, e.g., Rule 5.85(e).
\10\ A vertical call spread involves the purchasing and selling
of an equal number of call options with the same expiration date but
different strike prices.
\11\ A vertical put spread involves the purchasing and selling
of an equal number of put options with the same expiration date but
different strike prices.
\12\ A box spread involves purchasing (selling) a bull call
spread and purchasing (selling) a bear put spread. In other words, a
box spread is composed of a long (short) call and short (long) put
position at one strike price and a short (long) call and long
(short) put position at another strike price.
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Like the other multi-leg strategies currently covered by the rule,
the Exchange will compile a list of all possible combos. The lists
generated by the Exchange pursuant to Rule 5.24(e)(1)(E) are provided
to TPHs for informational purposes only. Individual TPHs continue to
determine whether to submit compression-list positions; whether to
participate in the compression forum process; and whether to submit
orders for execution in a compression forum. The Exchange's provision
of the list does not constitute advice, guidance, a commitment to
trade, an execution, or a recommendation to trade.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\13\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \14\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ Id..
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In particular, the proposed rule change will 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 by adding a strategy for which the Exchange will make
positions available during compression forums will benefit investors,
which the Exchange believes will increase positions that market
participants may close during compression forums. The Exchange believes
the additional information that may be provided to TPHs in compression
forums may encourage TPHs to close additional positions via the
compression process. The Exchange believes this will enable TPHs to
more efficiently and effectively close positions comprising a common
multi-leg strategy in the SPX market via the compression forums, which,
in general, helps to protect investors and the public interest because
closing positions via the compression process serves to alleviate the
adverse impact of bank capital requirements. As noted above, the
information regarding combo positions is currently included in the
compression position lists the Exchange provides to TPHs, as two combos
create a box spread. The proposed rule change merely provides the
Exchange with the ability to list combo positions separately, as it
currently does for vertical call and put spreads (which also comprise
box spreads).
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change has
no impact on the trading process used in compression forums, but
rather, adds to the information the Exchange may provide to TPHs as
part of its efforts to facilitate market participants' reduction in
open interest. The Exchange does not believe the proposed rule change
will impose any burden on intramarket competition, as compression
forums will continue to be available to all market participants with
SPX open interest. The Exchange will make available a list of all
possible offsetting combos, which will be available to all TPHs that
submit compression-list positions (similar to all other information in
these lists). The Exchange does not believe the proposed rule change
will impose any burden on intermarket competition, as it will apply
only to SPX options, which are currently listed for trading only on the
Exchange. The proposed rule change is intended to permit market
participants to further reduce open SPX interest to free up additional
capital that will permit those parties to continue to provide liquidity
to the market, which the Exchange believes benefits the entire market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\
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, if
[[Page 19184]]
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
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\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 17 CFR 240.19b-4(f)(6).
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b- 4(f)(6)(iii)
under the Act, the Exchange is required to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally
does not become operative for 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\21\ the Commission may
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 operative immediately. As explained above, the
Exchange believes that the proposed rule change has no impact on the
trading process for compression forums. The Exchange believes that
providing the additional information proposed herein with respect to
combos, in addition to the other information the Exchange regularly
provides, may increase the ability of firms to find other firms with
offsetting positions and maximize the impact of the quarter-end
compression forum. Furthermore, the Exchange believes providing TPHs
with separate combo information, as it provides separate vertical
spread information, will provide TPHs with additional flexibility to
locate offsetting positions against which they may execute in
compression forums, which will permit them to further reduce open SPX
interest and free up additional capital, which benefits all investors
in the SPX market. Accordingly, the Exchange asserts that waiver of the
operative delay would permit the Exchange to provide TPHs with this
information in time for them to engage in compression transactions in
connection with the expected first quarter CTPH capital recalculation.
For these reasons, the Commission believes that waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposal operative upon filing.\22\
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\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 change 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 Comments
Use 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-CBOE-2020-031 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2020-031. 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 the filing also will be available for inspection
and copying at the principal offices 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-CBOE-2020-031, and should be submitted
on or before April 27, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07090 Filed 4-3-20; 8:45 am]
BILLING CODE 8011-01-P