Notice2021-18677
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7240-1
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Published
August 31, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 166 (Tuesday, August 31, 2021)</title>
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[Federal Register Volume 86, Number 166 (Tuesday, August 31, 2021)]
[Notices]
[Pages 48775-48778]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-18677]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92755; File No. SR-BOX-2021-18]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7240-
1
August 25, 2021.
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 August 13, 2021, BOX Exchange LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule 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
The Exchange proposes to amend IM-7240-1. The text of the proposed
rule change is available from the principal office of the Exchange, at
the Commission's Public Reference Room and also on the Exchange's
internet website at <a href="http://boxoptions.com">http://boxoptions.com</a>.
[[Page 48776]]
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 self-regulatory organization
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 self-regulatory organization
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 purpose of the proposed rule change is to amend IM-7240-1. In
May 2018, the Securities and Exchange Commission (``SEC'') noticed for
immediate effectiveness BOX's filing to adopt protections for Complex
Orders.\3\ As background, the Exchange implemented its Debit/Credit
Check which helps prevent the execution of Complex Orders at erroneous
prices.\4\ Specifically, the system will reject a Complex Limit Order
for a credit strategy with a net debit price or a Complex Limit Order
for a debit strategy with a net credit price. The Debit/Credit Check
mechanism is designed to value strategies using options pricing theory.
At its simplest, options pricing theory refers to estimating the fair
value of an options contract. Pricing models take into account
variables such as current market price, strike price, and time to
expiration. All else equal, longer-dated options are more valuable
because of their greater time to expiration. Additionally, holding
everything constant, including expiration date, a put option with a
higher strike price will be more valuable than a put option with a
lower strike price because the higher strike price allows the holder to
sell the underlying security at a higher price. Conversely, a call
option with a lower strike price is more expensive than a call option
with a higher strike price because the lower strike price allows the
holder to buy the underlying security at a lower price. Taking these
principles into account, the Exchange designed the Debit/Credit Check
as a way to identify strategies as credit or debit and only accept
appropriate prices based on that determination.
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\3\ See Securities Exchange Release No. 34-83163 (May 3, 2018),
83 FR 21320 (May 9, 2018) (SR-BOX-2018-13 Noticed for Immediate
Effectiveness).
\4\ IM-7240-1(a).
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The Exchange notes that it included text in its Debit/Credit Check
rule that does not completely reflect how the price protection
mechanism functions.\5\ In particular, IM-7240-1(a)(1) provides that
``the trading system will attempt to identify a strategy as a debit or
credit based on the potential profit or loss of the Complex Order. The
system first groups the legs of a Complex Order by expiration date. The
system then calculates the potential profit or loss of each group for a
range of price levels of the underlying security. Specifically, the
system calculates the profit or loss for each group at price levels
equal to the strike price of each leg in the group.'' As such, the rule
as it is currently reads, suggests that the system only calculates the
profit or loss for each group of price levels equal to the strike price
of each leg in the group for a particular strategy.
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\5\ BOX IM-7240-1(a) Debit/Credit Check.
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Through internal review, the Exchange came to the conclusion that
the system's Debit/Credit Check does not only utilize price levels
equal to the strike price of each leg in the groups of a Complex Order,
but instead employs a broader range of prices for the underlying
security to make a more accurate determination as to whether a
particular strategy is a debit or credit. As such, the Exchange is
proposing to delete the following language from the rule text:
``Specifically, the system calculates the profit or loss for each group
at price levels equal to the strike price of each leg in the group.''
The Exchange believes this removes the contradiction within its current
rule text and accurately reflects the current operation of its Debit/
Credit Check mechanism by stating that the system will calculate a
debit or credit strategy by using a ``range of price levels.''
The following example illustrates the situation that the Exchange
is remedying with this proposed rule change.
Example
Assume a Complex Order to buy 2 JAN 2990 puts and sell 1 JAN 3000
put. Evaluating the strategy at only the strike prices (i.e., 2990 and
3000) would yield a result that the strategy is a credit strategy and
therefore the system should not accept net debit prices. This is
because if the underlying security had a price of 2990 or 3000 the
potential profit or loss for the strategy would be:
<bullet> When the price of the underlying security is 2990, the
first leg (buy 2 JAN 2990 puts) would yield an estimated profit or loss
of $0 (i.e., break-even) and the second leg (sell 1 JAN 3000 put) would
yield an estimated loss of $10.
<bullet> Alternatively, when the price of the underlying security
is 3000, the first leg would yield an estimated profit or loss of $0,
and the second leg would yield an estimated profit or loss of $0.
If the system only evaluated underlying prices equal to the strike
prices, then the profit or loss for the group would be break-even or
loss because when the underlying price is 2990 the strategy has a
potential loss of $10 and when the underlying price is 3000, the
potential profit or loss is break-even. Therefore, the system would
consider the strategy a credit strategy and reject any net debit
prices.\6\ However, when you consider a wider range of prices for the
underlying security, specifically those that are less than 2990 you
conclude that the strategy has a tendency to be a debit strategy when
the underlying price is less than 2990 and, in turn, net debit prices
should be accepted for the strategy. As such, the strategy is neither a
credit nor debit strategy and any price should be accepted.\7\ To
illustrate this, using an underlying price of 2970, the system would
evaluate the strategy as follows:
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\6\ See IM-7240-1(a)(1)(ii).
\7\ See IM-7240-1(a)(4).
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<bullet> The first leg would yield an estimated profit of $40, and
the second leg would yield an estimated loss of $30.
<bullet> This would yield a net profit of $10 for the strategy
meaning it is a debit strategy at this underlying price.\8\
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\8\ See IM-7240-1(a)(1)(i).
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This means that that depending on the underlying security price the
strategy may be a credit or debit strategy so the system should accept
credit and debit prices for the strategy.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\9\ in general, and Section
6(b)(5) of the Act,\10\ in particular, the Exchange believes that the
proposed rule change will remove impediments to and perfect the
mechanisms of a free and open market by clarifying the operation of the
Debit/Credit Check for Complex Orders, which would assist Participants
in calibrating their systems with the Exchange's, and thereby enable
Participants to make full use of the price protection mechanisms
offered by the Exchange. The Exchange believes this proposal removes a
potential
[[Page 48777]]
impediment to, and would contribute to perfecting, the mechanism for a
free and open market and a national market system, and, in general,
would protect investors and the public interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market and
a national market system by ensuring that market participants can
understand the Exchange's rulebook. The Exchange believes that the
proposed rule change enables the Exchange to continue to enforce the
Exchange's rules. The Exchange does not believe that the proposed
change discussed herein alters the application of any rules, or how the
trading system currently functions. The proposed change merely
clarifies the operation of the Debit/Credit Check for Complex Orders.
As such, the proposed rule change will foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and would remove impediments to and perfect the mechanism of
a free and open market and a national exchange system. Further, the
Exchange believes that, by ensuring the rulebook accurately reflects
the operation of the Exchange's rules, the proposed rule change reduces
potential investor or market participant confusion.
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. In this regard and as indicated
above, the Exchange notes that the proposed changes will not alter the
substance or application of any of the Exchange's rules. Therefore, the
proposed change will have no impact on competition as it is not
designed to address any competitive issues but rather is designed to
make clarifying changes to the existing BOX rules.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has 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 \11\ and Rule 19b-4(f)(6) thereunder.\12\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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\11\ 15 U.S.C. 78s(b)(3)(A)(iii).
\12\ 17 CFR 240.19b-4(f)(6).
\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's 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) \15\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ 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 proposal
may become operative immediately upon filing. The Exchange believes the
proposed rule change adds clarity to the Exchange's rulebook. The
Commission believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest
because the proposal revises BOX's rules to more accurately describe
the operation of the Debit/Credit Check for Complex Orders, which
should help investors understand how BOX's Debit/Credit Check will
apply to their orders. Accordingly, the Commission hereby waives the
30-day operative delay and designates the proposal operative upon
filing.\17\
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\15\ 17 CFR 240.19b-4(f)(6).
\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ For purposed 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 this 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 will 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
<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#becccbd2db93ddd1d3d3dbd0cacdfecddbdd90d9d1c8"><span class="__cf_email__" data-cfemail="3745425b521a54585a5a525943447744525419505841">[email protected]</span></a>. Please include
File Number SR-BOX-2021-18 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-BOX-2021-18. 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 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-BOX-2021-18, and should be submitted on
or before September 21, 2021.
[[Page 48778]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18677 Filed 8-30-21; 8:45 am]
BILLING CODE 8011-01-P
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