Notice2021-14901
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rule 6.10 To Introduce a Voluntary Multilateral Compression Service for SPX Options
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Published
July 14, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 132 (Wednesday, July 14, 2021)</title>
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[Federal Register Volume 86, Number 132 (Wednesday, July 14, 2021)]
[Notices]
[Pages 37197-37200]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-14901]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92354; File No. SR-CBOE-2021-020]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rule
6.10 To Introduce a Voluntary Multilateral Compression Service for SPX
Options
July 8, 2021.
I. Introduction
On March 24, 2021, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt new Cboe Rule 6.10 to introduce a voluntary compression service
for market makers. The proposed rule change was published for comment
in the Federal Register on April 12, 2021.\3\ On May 25, 2021, the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\4\ On July 7, 2021, the Exchange filed Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change in its entirety.\5\ The Commission is publishing this notice to
solicit comments on the Exchange's proposal, as modified by Amendment
No. 1, from interested persons and is approving the Exchange's
proposal, as
[[Page 37198]]
modified by Amendment No. 1, on an accelerated basis.
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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. 91482 (April 6,
2021), 86 FR 19067. Comments on the proposed rule change can be
found on the Commission's website at: <a href="https://www.sec.gov/comments/sr-cboe-2021-020/srcboe2021020.htm">https://www.sec.gov/comments/sr-cboe-2021-020/srcboe2021020.htm</a>.
\4\ See Securities Exchange Act Release No. 92011, 86 FR 29334
(June 1, 2021). The Commission designated July 11, 2021, as the date
by which it should approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule change.
\5\ In Amendment No. 1, the Exchange: (1) Narrowed the list of
index options that could be compressed to include only SPX options
and limited the compression service to closing positions only, (2)
expanded eligibility from only market makers to all TPHs, (3) added
detail to the participation requirements to ensure that the proposed
compression service is limited to legitimate compression purposes,
(4) added further detail regarding the proposed compression service,
and (5) added additional justification for the proposed rule change.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange proposes to adopt new Cboe Rule 6.10 to provide
Trading Permit Holders (``TPHs'') with an additional voluntary
compression tool that they can use to reduce required capital
attributable to their S&P 500 Index (``SPX'') options holdings.\6\ The
Exchange's proposal is designed to address the impact on liquidity
providers of the limited amount of capital available from clearing
broker-dealers that is a consequence of, among other things, the fact
that a number of clearing TPHs are now subsidiaries of U.S. bank
holding companies that must, as a result of this affiliation, comply
with additional bank capital regulatory requirements. In particular,
bank capital rules do not currently permit deductions for hedged
securities or offsetting options positions to the same extent that the
federal securities laws and self-regulatory organization rules do for
securities. The impact of this dynamic most acutely impacts SPX options
due to the popularity of SPX options and the significant number of open
index options positions combined with their large notional value.
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\6\ Currently, the Exchange offers other methods by which TPHs
can compress certain types of options holdings, including (1) Cboe
Rule 5.6, which allows for compression orders in SPX options and (2)
Cboe Rule 6.8, which allows TPHs to transfer positions off-exchange
if the transfer does not result in a change of ownership and reduced
the risk-weighted assets associated with those positions.
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In its filing, the Exchange explains that it has observed that
these bank capital rules have caused clearing broker-dealers to impose
stricter position limits on their clearing members, which can impact
the liquidity that TPHs, notably market makers who are frequently the
counterparties to a significant portion of SPX option trades, might be
able to supply.\7\ This impact would be most pronounced when markets
are volatile, precisely at the time when the market would benefit from
increased liquidity provision.
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\7\ See Amendment No. 1, at 8-10.
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The bank regulatory agencies have approved replacing the Current
Exposure Method (``CEM'') with the Standardized Approach to
Counterparty Credit Risk (``SA-CCR'') in the near future, and the
Exchange believes SA-CCR will be ``less punitive'' to clearing broker-
dealers because SA-CCR ``will help correct many of CEM's flaws by
incorporating risk-sensitive principles, such as delta weighting
options positions and more beneficial netting of derivative contracts
that have economically meaningful relationships.'' \8\ Nevertheless,
the Exchange believes that SA-CCR ``will not eliminate [TPHs'] need for
compression'' as the ability to compress SPX positions can ``enable
them to provide more meaningful liquidity to the market, particularly
during times of volatility when the market needs this liquidity most.''
\9\ The Exchange further asserts that ``this additional liquidity may
result in tighter spreads and more execution opportunities, which
benefits all investors.'' \10\
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\8\ See id. at 10.
\9\ See id. at 11.
\10\ See id.
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As described more fully in the Notice, as modified by Amendment No.
1, in order to be able to participate in the new multilateral
compression service, a TPH must request access to the service and
complete a standard test to demonstrate its capacity to participate.
While the Exchange initially proposed that only registered market
makers would be eligible to participate and a larger number of index
options would be eligible for inclusion, the Exchange has modified its
proposal to allow any TPH to request access and to limit the service to
SPX options only, where the need for compression is most present.\11\
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\11\ See generally Amendment No. 1.
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The Exchange will offer multilateral compression periodically,
initially twice per month, in order to allow TPHs to respond to intra-
month reviews of regulatory capital for their positions by their
clearing broker-dealers.\12\ To participate, a TPH must submit a
``position list'' after the close of trading on the specified day that
details all of the open SPX positions it would like to close out and
compress. The list must specify the amount of capital reduction
associated with each closing position, the theoretical value of each
position, the maximum cost the TPH is willing to accept to compress all
of the positions (in the aggregate), the maximum cost per unit of
capital reduction the TPH is willing to accept, and at least one risk
constraint of the TPH's choosing including a minimum and maximum value.
TPHs have flexibility in choosing these values as specified in the
proposed rule.\13\
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\12\ See Amendment No. 1, at 17.
\13\ See, e.g., proposed Cboe Rule 6.10(b)(2) (concerning a
theoretical value ``calculated in a manner of the compression
participant's choosing'').
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After the deadline for submission of the position lists, the
Exchange runs an automated process to match offsetting positions in an
anonymized manner. The process identifies the outcome that would result
in the maximum aggregate capital reduction among all participating TPHs
(picking at random from among equal outcomes). The Exchange determines
the compression price for each option, which will be ``as close as
possible to the midpoint of the [national best bid and offer] at the
close of the trading day or the daily marking time, subject to
adjustment using generally accepted volatility and options pricing
models in the event of wide markets, market volatility, or other
unusual circumstances.'' \14\
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\14\ Proposed Cboe Rule 6.10(c)(2).
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The Exchange then notifies the TPH participants of each TPH's
individual compression proposal.\15\ Each TPH with at least one
offsetting position must notify the Exchange whether it accepts its
individual proposal.\16\ If all compression participants accept their
individual proposals, then the Exchange effects the transactions at the
specified prices off the exchange.\17\ If one compression participant
declines, then no compression transactions are effected.\18\
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\15\ See id.
\16\ See proposed Cboe Rule 6.10(d).
\17\ See id. In Amendment No. 1, the Exchange represented that
it will disseminate compression transaction information to OPRA. The
Exchange further states that it has completed system work to apply
an indicator to such information and is working with OPRA so that
OPRA is able to incorporate that indicator. The Exchange expects
OPRA to complete its work in 2021, but notes that the indicator may
not be available upon implementation of the compression service. See
Amendment No. 1, at 27.
\18\ See id.
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III. Discussion and Commission Findings
After careful review of the proposal and the comments received, all
of which supported the proposal and recommended that the Commission
approve it, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the Act and the rules
and regulations thereunder applicable to a national securities
exchange.\19\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act,\20\ which requires, among other things, that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove
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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.
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\19\ 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).
\20\ 15 U.S.C. 78f(b)(5).
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In support of its proposal, the Exchange states that compression
transactions under Cboe Rule 6.10 will have a narrow scope and are
intended and designed to achieve the limited purpose of capital
reduction.\21\ The Exchange further explains that it understands that
TPHs have no need for price discovery or price improvement for
compression transactions, because the purpose of the transfer is to
reduce capital requirements attributable to the TPHs' positions and the
price of the compression transaction is a secondary concern.\22\ The
Exchange further states that its proposal is needed because liquidity
providers accumulate SPX positions to accommodate executions of
customer orders, and do so at increasing levels during times of market
volatility.\23\ While TPHs hold these positions prior to expiration,
many may have little to no value and closure of these positions may
have little impact on the risk exposure of the TPH's portfolio.\24\
Yet, maintenance of these positions requires ongoing risk management
and capital, which can impact the capital the TPHs have available to
trade.\25\ The Exchange asserts that its proposal will limit the use of
the compression service to legitimate compression purposes and provide
an objective process to allow TPHs to manage capital and margin
requirements so that they have sufficient capital available to provide
to the markets, which will benefit all market participants.\26\
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\21\ See Amendment No. 1, at 37.
\22\ See id.
\23\ See id. at 38.
\24\ See id.
\25\ See id.
\26\ See id. at 41. Two commenters supported the proposed rule
change, asserting that the proposed compression service procedure
would provide an additional risk management tool that can be used by
Cboe market makers to efficiently manage the capital and margin
requirements of their portfolios. See Letters to Vanessa Countryman,
Secretary, Commission, from Joanna Mallers, Secretary, FIA Principal
Traders Group, dated May 3, 2021, at 2; and Michael Golding, Head of
Trading, Optiver US LLC and Aldo van Audenaerde, Head of Trading,
AMS Derivatives B.V., dated April 22, 2021, at 1.
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The Commission believes that the Exchange's proposal will provide a
narrowly-tailored, objective, and not unfairly discriminatory mechanism
for TPHs to efficiently compress open SPX positions for the purpose of
reducing required capital. As the Commission has previously observed,
the affiliation of clearing brokers with bank holding companies has
introduced the need for liquidity providers and their clearing firms to
more conservatively manage holdings to comply with applicable bank
regulatory capital requirements.\27\ The ability to compress positions
in an efficient, cost-effective manner can help liquidity providers and
their clearing firms manage associated bank capital constraints.
Tailored compression tools that are carefully designed to directly
address the greatest need for compression, where portfolio holdings
have a material impact on available capital, can have beneficial
effects on the market and available liquidity especially during periods
of volatile trading without impacting trading or conferring any
inappropriate benefits on any market participant.
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\27\ See, e.g., Securities Exchange Act Release No. 91079
(October 14, 2020), 85 FR 66590 (October 20, 2020) (order granting
approval of proposed rule change to adopt position compression cross
orders in SPX options).
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The proposal's focus on closing positions in SPX options
appropriately recognizes the role SPX options play as major component
of the capital impact felt by clearing broker-dealers and the TPHs for
whom they clear, which results from the large notional value and
popularity of SPX options as a frequently traded product with large
open interest. Compression trades are unlike arm's length transactions
as their sole purpose is to close open positions to compress SPX
portfolio positions to reduce required capital charges. The Exchange's
proposal is a narrowly-tailored means of doing so and, as a result,
should facilitate the ability of compression participants to provide
liquidity and trade, especially during volatile periods. As such, the
Exchange's proposal removes impediments to and perfects the mechanism
of a free and open market and a national market system, and, in
general, protects investors and the public interest.
Further, the mechanics of the compression service are reasonably
designed to provide an objective process by which TPHs can avail
themselves of the ability to potentially compress their open SPX
positions for capital reduction purposes. The proposed process does not
prioritize any TPH but rather aims to find the greatest aggregate
capital reduction among the SPX options submitted for consideration,
and honors each TPH's customized risk constraints in doing so.
Ultimately, however, all TPHs selected for participation must approve
of the compression transaction proposed by the Exchange and if any one
TPH declines the proposed transaction then the compression transaction
for all TPHs will not occur. If approved, transactions take place after
the close of regular trading hours and the trades will be reported to
OPRA with an indicator attached to note they are compression
trades,\28\ thus providing public transparency of these compression
trades.
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\28\ See supra note 17.
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Accordingly, for the reasons discussed above, the Commission finds
that the proposed rule change, as modified by Amendment No. 1, is
consistent with the Act, including Section 6(b)(5) of the Act \29\ and
the rules and regulations thereunder applicable to a national
securities exchange.
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\29\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#99ebecf5fcb4faf6f4f4fcf7edead9eafcfab7fef6ef"><span class="__cf_email__" data-cfemail="1664637a733b75797b7b737862655665737538717960">[email protected]</span></a>. Please include
File Number SR-CBOE-2021-020 on the subject line.
Paper Comments
<bullet> 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-2021-020. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
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business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. 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-2021-020, and should be submitted on or before August 4, 2021.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the 30th day after the
date of publication of notice of the filing of Amendment No. 1 in the
Federal Register. Amendment No. 1 narrowed the scope of parts of the
proposed rule change and also provided additional rationale and support
for the proposed rule change. Specifically, in Amendment No. 1, the
Exchange: (1) Narrowed the list of index options that could be
compressed to include only SPX options and limited the compression
service to closing positions only, (2) expanded eligibility from only
market makers to all TPHs, (3) added detail to the participation
requirements to ensure that the proposed compression service is limited
to legitimate compression purposes, (4) added further detail regarding
the proposed compression service, and (5) added additional
justification for the proposed rule change.
The changes to the proposal and additional information provided in
Amendment No. 1 focus the proposal on SPX and closing-only positions,
expand eligibility to the compression service, and add necessary detail
to the rule text to more fully and clearly reflect the applicable
requirements and describe how the compression service will operate.
Collectively, these changes, supported by the additional and clarified
rationale, better calibrate the proposal to the greatest need for
compression and remove potential ambiguity about how the service will
work without introducing material new concepts over the original
proposal. The changes in Amendment No. 1 assist the Commission in
evaluating the Exchange's proposal and in determining that it is
consistent with the Act. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\30\ to approve the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
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\30\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule change (SR-CBOE-2021-020), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\31\ Id.
\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-14901 Filed 7-13-21; 8:45 am]
BILLING CODE 8011-01-P
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